V. Recommendations

Implications for Policy
        Policy intervention in the agriculture sector can be categorized into three major areas:  1)  Market mechanisms, 2) Farming production, and 3) Trade controls.  Each category has different implications for the development of the agriculture market and of the farmer; some involve more direct intervention while others take a more hands-off approach.  In the following paragraphs, each category will be reviewed.

Market Mechanisms
        Policy in the "market mechanisms" category is an indirect approach to supporting development in agriculture.  As we saw in the cocoa case, by investing in infrastructure and institutions that allow the free market to work efficiently, the agriculture sector can be most productive in terms of returning gains to the farmer and meeting market demand.  Specific measures include investment in roads and highways to reduce transportation costs among the widely dispersed smallholder farms.  Investment in transportation and communication would also reduce trade risk and transaction costs, and promote entry and competition in marketing.
        Beyond physical infrastructure, development of institutions for the service of market information, such as grading, standardization of measures and weights, commodity exchange, crop forecasting, and regular quotation of market prices, can contribute to reductions in trade risks and transaction costs.  Another service that would help farmers is timely issuance of title certificates for land.  Since land is often used as collateral for bank loans, having title would give farmers easier access to badly needed credit.

Farming Production
        Farming production policy is a more direct approach to assisting farmers, and includes extension services, fertilizer subsidies, new farming technologies, and other crop intensification methodologies.  Equally if not more important than creating a more efficient marketing system is assisting farmers in increasing their yields.  Yields have been steady for all of the crops studied in this paper; coffee, pepper, cinnamon, and nutmeg have all experienced steady or declining yields since the early 1960s.  Since scale economies are vital to the activities of traders and processors of agricultural goods (such as searching for supplies, negotiating contracts, and arranging transportation) the unit marketing cost would be reduced significantly if the marketable surplus per farm were increased.  This would also benefit farmers, as they would increase their marketable surplus (and therefore income) without expanding harvested land.  Thus, government investment in agricultural research and extension geared for increasing crop yield and marketable surplus would reduce marketing costs.  The necessary research includes not only methods to increase productivity, but also identification of new profitable crops (such as those that this paper has attempted to identify) and cropping systems.  This would increase rural incomes and employment opportunities in farm production and marketing, thus making this sector more attractive.
        In several cases, the Suharto-led government has invested in high-tech, capital intensive projects which create global awareness and are meant to impact a large group of people.  However, if the government tries to develop the smallholder agricultural sector through a modern system that requires an intensive use of capital, it would reduce the efficiency of the current system and impair equity by reducing labor income and employment.  Higher-tech processing should be delayed until the real wage rate rises sharply and devices that save labor become socially beneficial.  At current wage rates, it is more economical to utilize labor-intensive processing, and integrate technology on a smaller scale that includes involvement of the smallholder farmer.
        The success of the rice strategy brings to question whether a similar approach would be suitable for development of cash crops.  There are several reasons why the rice strategy is not transferable.  First, the infrastructure needed for each crop is different.  Second, the rice program was a very expensive program.  Last, the area to harvest is limited since rice production accounts for 69% of total area harvested under food crops.  This land includes the most fertile lowlands of Java, Bali, South Sulawesi, and South Sumatra.  This also means that increased productivity (for rice or cash crops) must come from intensification or expansion into marginal lands.

Trade Controls
        A final category of policy intervention includes direct intervention in the market, a nearly opposite approach to the market mechanism policy described above.  Government market interventions, regulations on trade, price controls, quotas, etc. will not prevent the accumulation of middlemen profits and high marketing margins, but will widen it due to the increased cost of evading the regulations.  By reducing competition (i.e. by prohibiting Chinese traders' operating in local towns, as some laws have imposed), the likelihood of monopolistic behavior is increased, contradicting the initial goal of the policy.  To effectively counteract the possible monopoly of middlemen, and to increase prices and incomes received by farmers, the government should invest in physical and institutional infrastructures to promote the free market mechanism.
        Furthermore, we have seen in both the coffee and nutmeg cases that a cartel structure, while boosting prices in the short terms, is not feasible in the long-term.  Accumulation of crops, smuggling, and black market trade are all reactions to a cartel structure that does not let the free market operate.  Trade controls are being liberalized by the Uruguay Round Agreement on Agriculture, through tarrification of non-tariff barriers, reduction of tariffs, and the provision of minimum market-access commitments.  Since the majority of spice crops are exported, elimination of trade controls and compliance with international standards would place Indonesia in a favorable position internationally.

Alternatives for development of rural cash crop farming
    In light of the situation for cash crop farmers, and in particular the cases of coffee and spices, there are several possible alternatives to improve the prospects for the farmer in the value chain.  The most favorable alternative would allow the farmer to use rupiah for local capital and investment, and receive foreign exchange for his exportable crops.  The following suggestions would help to achieve this goal, while transferring more market power to the farmer:


Summary

        Indonesia is experiencing a time of crisis and change, which has hurt many sectors of the economy but helped others.  The rural agricultural sector is one that has benefited from the rupiah's depreciation, as dollar denominated exports translate into many more rupiah.  Additionally, agriculture does not require a large amount of imported inputs; it is a relatively low-input industry.  This has resulted in an uneven crisis; while spending in urban areas fell by 10% in the year to August 1998, it actually rose by more than 10% in middle-class rural households (McBeth, 1998).  In light of these facts, it is an appropriate time for Indonesia to focus on developing the agriculture sector.  This sector is dominated by smallholder farmers; thus, its development serves the dual purposes of stimulating the economy and raising the standard of living for the rural majority.
        In order to take advantage of this phenomenon, the government and national organizations can assist farmers.  One way is through allowing the free market to operate fluidly, by abolishing trade controls, improving transportation and communication infrastructure, and providing market information.  Direct assistance to farmers is also needed to educate farmers on proper cultivation to ensure quality crops, to boost yields, and explore opportunities in value-added processing.  New technologies, such as e-banking and the Internet could also assist farmers in financing and marketing their crops to developed countries.  Crops identified in this paper that could benefit from all of these initiatives include specialty coffee, pepper, cinnamon, and nutmeg.  Further study of these and other crops is warranted, to identify which policies are most appropriate for each crop.  Since all of them have the commonality of smallholder production, intercropping, and fragmented distribution, the creation of cooperatives may be a suitable alternative to generate more power and increased returns to farmers.  The time is ripe for the Indonesian policy-makers and those with national decision-making authority to re-invest in the agriculture sector.  It would be a dramatic reversal from the high-tech and manufacturing developments that the former Suharto-led government, and current Habibie government have been so focused on.  But if the government is able to look outside of Java, into the rural farming masses, it will see a great potential for the development of cash crop exports.