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.