Effects of agricultural policy reform in Indonesia on its food security and environment

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The ongoing socioeconomic crisis enveloping Indonesia has dramatically reversed decades of rapid economic growth, steady progress in poverty reduction, and substantial improvements in food security. Before the crisis, Indonesia was frequently cited as one of the highest performing Asian economies with per capita GDP growth in the top 10 percent of all developing countries. Since the crisis began in August 1997, however, the rupiah's value dropped by as much as 80 percent before a partial recovery. In 1998, inflation soared to an estimated 100 percent; and GDP fell by an estimated 14 percent in 1998 (World Bank, 1998). Indonesia's poor are especially vulnerable to the falling incomes, increasing prices and rising unemployment and underemployment brought on by these crisisinduced events. World Bank simulations suggest a 12 percent decline in real GDP in 1998 would add some 9 million people to the more than 20 million living in poverty before the crisis began (World Bank, 1998). Indonesia's capacity to address the crisis initially was complicated by forest fires, drought, floods and a sharp decline in crude oil prices. During 1997, one million hectares of forest fires in Kalimantan and Sumatra damaged ecosystems, destroyed crops, disrupted transport and tourism, increased the incidence of respiratory problems and strained Indonesia's relations with neighbouring Singapore and Malaysia (Solahuddin, 1998). Estimates of the economic damage to Indonesia's logging and timber industries (excluding environmental and health costs) are set at more than US$900 million (Tay, 1998). © Kym Anderson, Randy Stringer, Erwidodo and Tubagus Feridhanusetyawan 2002.

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... It was reported that after the crisis, the number of those living in absolute poverty in Indonesia increased. Estimates show that the crisis caused an increase of 8 million urban poor and 23 million rural poor (Erwidodo, et al. 2001). ...
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In this analysis of public policy to reduce poverty, the authors point out, among other things, that typically the highest incidence and severity of poverty are still found in rural areas, especially if ill-watered. For many of the rural poor, the only immediate route out of poverty is by migration to towns, to face a higher expected income, although often a more uncertain one. This may or may not reduce aggregate poverty. We can be more confident that growth in agricultural output -- fueled by investment in human and physical infrastructure -- is pro-poor, though not because the poor own much land. The policies pursued by most developing countries up to the mid-1980s -- and by many still -- have been biased against the rural sector in various ways. The same is true -- although different policies are involved -- of the other major sectoral concentration of poor, namely, the urban informal sector. There are clear prospects for reducing poverty by removing these biases. Looking ahead (far ahead, in some cases), it is less clear how much further gain to the poor can be expected from introducing a bias in the opposite direction. Neutrality should be the aim. We need good data and measurement to identify which public actions are effective in fighting poverty. There have been a number of advances in household data and analytic capabilities for poverty analysis over the last ten years. We are in a better position than ever to devise well-informed policies. The authors identify two important roles for public action. One is to foster the conditions for pro-poor growth, particularly by providing wide access to the necessary physical and human assets, including public infrastructure. The other is to help those who cannot participate fully in the benefits of such growth, or who do so with continued exposure to unacceptable risks. Here there is an important role for aiming interventions by various means to improve the distribution of the benefits of public spending on social services and safety nets in developing countries. Those means range from the selection of key categories of public spending (such as primary education and basic health care) to more finely targeted transfers (including nutrition and health interventions) based on poverty indicators, or some self-targeting mechanism. Though disappointing outcomes abound, many countries have demonstrated what is possible with timely and well-conceived interventions.
Do the economic gains brought by technological innovation and commercialization in agriculture work their way through to the poor? The prevailing optimistic view is that they do. But this view is not universal: some hold that these forces for change can interact with, or even induce, institutional and market failure, with adverse consequences for the poor. Adherents of the pessimistic view point to real-world instances in which the poor have failed to reap the benefits, or even have lost, from the technological change or commercialization. Where these effects have occurred we find that they are mostly attributable to inelastic demand or adverse institutional features; often, when technology or commercialization has been blamed for the decline in income of the poor, other—not necessarily connected—policies have in fact been responsible for the damage. This article contends that the optimistic view is, by and large, correct: normally, technology and commercialization stimulate agricultural growth, improve employment opportunities, and expand food supply—all central to the alleviation of poverty. The evidence does not offer much encouragement to an extension of this view—that through “social engineering” the benefits from technology and commercialization can easily be targeted toward the poor; the limited opportunities for such targeting should of course be seized.
A Computable General Equilibrium (CGE) model of Indonesia is developed in which total factor productivity growth in manufacturing is endogenously determined. Productivity growth is conceptualized as human and social capital accumulation, mediated by learning and institutional development stimulated by the trade regime. These factors are modeled as externalities determined by export growth and capital equipment imports. The model is used to analyze the gains deriving from the externalities, and subsidies that amplify their effects, leading Indonesia to acquire Korea-like institutions sooner. The growth and fiscal implications of such counterfactual simulations are analyzed in a realistic general equilibrium framework with a fully articulated public sector.
This paper reviews three stages of thought about the role of agriculture in economic development. The first, dating back to the 1950s and 1960s but having its origins in Soviet industrialization policies in the 1920s and 1930s, advocated extensive discrimination against agriculture as a way to mobilize labor and resources for investment in a modern industrial sector. Massive intervention by government into investment decisions and resource allocations was thought to be necessary to utilize effectively the resources extracted from agriculture. Even if all key economic decisions were not controlled by a central planning agency, as in socialist countries, most developing countries actively sought to displace market forces in favor of government decisions and activities. The second school of thought, dating to the 1970s and 1980s, sought a market-oriented balance between the agricultural and industrial sectors. This balance was needed to stimulate a more effective and dynamic role of agriculture in economic development, such as providing labor for an industrial workforce, food for an expanding population witth higher incomes, savings for industrial investments, a market for industrial output, export earnings to pay for imported capital goods, and raw materials for agro-processing industries. These contributions form the core of modern economic analysis of the relationship between agriculture and the modern sector. In this market-oriented approach to development, special measures to extract resources from agriculture to force the pace of industrialization are not warranted. Equally, however, when markets are working well and the economy is open to international trade, no special government policies are needed for these linkages to operate efficiently. Although this market-oriented development strategy has done much to redress the ‘urban bias’ that discriminated against agriculture in early development plans, this paper argues that it does not go far enough. Evidence is presented that a set of important links between agriculture and the rest of the economy is not well mediated by market forces. Sensitive interventions by government are required if agriculture is to play its optimal stimulative role in economic development. Several examples are discussed in the paper. First, there are non-market contributions of agriculture to economic growth, which operate through three poorly understood mechanisms: the impact of food price stability on investment decisions: the contribution of agricultural growth to growth in total factor productivity for the entire economy; and ‘learning by doing’ on the part of governments, which helps them understand their appropriate role in the development process, especially in mobilizing resources for investment in public goods, such as rural infrastructure. Second, the agricultural sector plays a special role in alleviating poverty. Third, agriculture serves to protect certain environmental amenities, such as green space and concentrations of greenhouse gases. Strategies for agricultural development that rely solely on market forces perform much better than strategies that systematically displace the market. But to ignore the important non-market contributions of agriculture is to undervalue significantly the sector's role in economic development.
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