Review of Indonesian development corridors - Bustanul Arafin

Review of Indonesian Development Corridors:

An Inclusion of Agricultural Research

Bustanul Arifin [email protected]

Professor of Agricultural Economics at the University of Lampung

Head of Expert Group for the National Food Security Council

The 11th Meeting of the Independent Science and Partnership Council (ISPC), 30 March – 1 April 2015 in Bogor

Presentation Outline

1. Indonesia in the Future: Optimistic View?

2. New Government Strategy: Economic Self-Reliance

3. Wither Development Corridor? Java pragmatism

4. Major issues: Economies of scale and inefficiency

5. Future Challenges of Agricultural Research

6. Concluding Remarks: Policy recommendations

Indonesia TODAY Indonesia in 2030

Sources: McKinsey Global Institute, 2012

President Yudhoyono: Inclusion Issues

• Triple-track strategy (pro-growth, pro-jobs, pro-poor) has

achieved some progress in the first term (2004-2009).

Quadruple-track strategy (adding pro-environment) in the

second term focused also to Outside Java development.

• The engine of Outside Java economy: Mining, plantation

and some service sectors; decentralization and regional

autonomy speed up the economic growth of Outside Java

although economic inequality has widen in recent years.

• If infrastructure development is targeted Outside Java,

these regions will become the sources of Indonesia’s

economic growth in the near future. But, how to start?

Production centers and processing of agricultural and resource-based products and national energy stocks Production centers and

processing of agriculture and mining-based products, national-energy socks

Production centers and processing of agriculture, plantations, and fisheries, and the oil and gas mining

Sumatra Corridor

Kalimantan Corridor

Sulawesi Corridor

Entry point of tourisms and national support system for food production

Supporters of manufacturing and service sectors

Development center of food, fisheries, national energy and mining.

Java Corridor

Bali-Nusra Corridor

Papua-Maluku Corridor

MP3EI 2025: Economic Development Corridors

President Widodo: Economic Self-Reliance

• Food sovereignty: manifested through the power and

freedom to manage the national food issues, supported by:

1. Food security, ability to fulfill food needs domestically;

2. Food policy is formulated and by the Indonesians;

3. Ability to protect and empower the main actors of food

system, particularly farmers & fishermen.

• Maritime economy: major improvement on infrastructure,

ports, vessels, interconnectivity, and all logistic systems;

• Sustainability: Economically viable, socially acceptable and

ecologically sound. Public-private partnership is encouraged.

Strategic Food Production and Future Target

Foods

2004

2014

Growth

(%/year)

Target

(%/year)

2015

2016

2017

2018

2019

Rice 54.1 70.6 2.70 3.03 72.74 74.94 77.21 79.55 81.96

Maize 11.23 19.1 5.45 4.70 20.00 20.94 21.92 22.95 24.03

Soybean 0.723 0.923 2.47 22.70 1.13 1.39 1.71 2.09 2.57

Sugar 2.05 2.55 2.21 8.30 2.76 2.99 3.24 3.51 3.80

Source: Calculated from BPS (2014), Indonesian Sugar Council (2014) and Mid-term Development Plan 2015-2019

(million ton)

TFP: Slow Growth of Indonesian Agriculture • The current growth rate of agricultural sector is 3.4 percent, which is

not adequate to improve the growth quality of the Indonesian economy;

• Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. TFP is determined by how efficiency and intensely the inputs are utilized in production.

• A recent TFP study of ASEAN agriculture (Suo, et al. 2014) has found 1.4 percent growth, where all 8 countries have positive TFP, except Laos and Myanmar having negative TFP growth.

• The study applies decomposing the TFP into technical efficiency change (TEC) and technological change (TC), using Malmquist Index-DEA Methodology. Variations in TFP growth is primarily driven by technological change. Low technological change leads to low growth.

• The declining shift of labor productivity in Indonesia and Philippines is not surprising, given that supply response in major agricultural commodities in these two countries is quite slow, in spite of increasing demand for foods and agricultural products.

Slow Productivity Growth in Strategic Foods Strategic Food 2010 2011 2012 2013 2014*

Rice: Harvested Area (ha) 13,244,184 13,203,643 13,445,524 13,835,252 13,768,319

Productivity (ton/ha) 5.01 4.98 5.14 5.15 5.12

Production(ton GKG) 66,411,469 65,756,904 69,056,126 71,279,709 70,607,231

Rice Import (ton) 527,772 2,201,564 1,416,226 **472,000 500,000

Maize: Harvested Area (ha) 4,131,676 3,864,692 3,957,595 3,821,504 3,880,221

Productivity (ton/ha) 4.43 4.56 4.90 4.84 4.93

Production(ton dry grains) 18,327,636 17,643,250 19,387,022 18,506,287 19,127,409

Maize Import (ton) 3,041,000 1,724,000 2,719,000 3,500,000 3,150,000

Soybean: Harvested Area (ha) 660,823 622,254 567,624 550,793 611,805

Productivity (ton/ha) 1,24 1.37 1.48 1.42 1.51

Production (ton dry beans) 907,031 851,286 843,153 779,992 921,336

Soybean Import (ton) 1,620,000 1,890,000 1,990,000 1,787,000 1,882,000

Sugar: Harvested Area (ha) 432,714 450,298 451,191 460,496 479,000

Productivity (ton/ha) 5.29 4.95 5.74 5.19 5.32

Production (ton sugar) 2,290,117 2,228,259 2,591,687 2,390,000 2,550,000

Sugar Import (ton) 2,300.000 2,200.000 2,590.000 2,550,000 3,650,000

Sources: BPS, Data 2014* is second forecast. Import data: From commodity associations. Sugar Data : From AGI (Gula Insight, 2014)

Shifting production to Outside Java? Not Easy

• Next 5 years, new government would not take the risks by shifting the basis of strategic food production to Outside Java; – Rice 2009: 34.9 million ton (54.2%) 2014: 36.4 million ton (51.6%)

– Maize 2009: 9.5 million ton (53.6%) 2014: 10.2 million ton (53.1%)

– Soybean 2009: 645 thous.ton (66.4%) 2014: 595 thous.ton (64.6%)

– Sugar 2009: 1.5 million ton (67.3%) 2014: 1.65 million ton (64.7%);

• Preventing land conversion in Java by enforcing law & regulations;

• Strengthening the foundation of food production of Outside Java.

Economies of Scale and Efficiency Issues

• The majority of food-crop farmers (about 54%) is smallholders,

about 49.5% living in Java and 18.7% in Outside Java. From 28.6

million poor people, about 62.8 percent of them is farmers.

• The new government reinstalls the programs of agrarian reforms

and spatial planning and development, to increase the farm-

holding size and improve the market access.

• Major public investment has been allocated to build new ports,

rehabilitate infrastructures, develop “sea-toll” transportation as

the empty back-haul has lowered the efficiency of logistic system.

• New approach on corporate farming and food estates has been

developed, especially outside Java, both for area expansion and

production intensification to maintain food security in the country.

Land-Holding Size: Small Farms Increased

Land Holding m2 2003 % 2013 %

<1,000 2,187,774 37.91 865,987 20.18

1,000-1,999 912,343 15.81 921,001 21.47

2,000-4,999 1,602,712 27.77 1,553,181 36.20

5,000-9,999 759,977 13.17 681,252 15.88

10,000-19,999 247,838 4.29 214,041 4.99

20,000-29,999 39,684 0.69 35,017 0.82

>30,000 20,473 0.35 2,014 0.05

Total 5,770,801 100.00 4,290,619 100.00

Sources: Agricultural Census 2003 and 2013

Access to Land Utilization: Farmers vs Firms

FO

RE

ST

RY

P

LA

NT

AT

ION

26.000.000 ha

10.300.000 ha

Community-

Based Forest

Management

11.499 hh 240.000 ha

Farmers (having

no access to land)

Farmers

Plantation

Companies:

13.572.000 hh

23.728.000 hh

0 ha

21.500.000 ha

16.000.000 ha

hold

hold

hold

hold

hold

hold

Forest Concession

Right: 304

Industrial Timber

Plantation: 227

2.178

Source: Jamal (2014), from Sirait et al (2014)

Farmers’ Access to Banking System

Source: Ikhsan, 2014

Java farmers have a better banking access

Source: Ikhsan, 2014

Food Insecurity and Vulnerability Atlas

Source: Agency for Food Security and WFP, 2010

Food Insecurity due to Climate Change in Indonesia

West Java, Bali and North Sumatra are food production centers that

have high priorities for adaptation and mitigation of climate change Source: DNPI, 2012

Research Intensity in Agriculture: Declining

RI = -3E-05t + 0.0014

0

0.0002

0.0004

0.0006

0.0008

0.001

0.0012

0.0014

0.0016

0.0018

1972 1976 1980 1984 1988 1992 1996 2000 2004

Rati

o

Research intensity

Linear (Research

intensity)

Source: Warr, 2011

W=weak, M=medium

R&D Funding

Strengthening the Innovation Ecosystem

Concluding Remarks: Policy Changes

• Land-holding size remains problematic for the farmers’ welfare, unless agricultural policies are supported by a high quality rural development and agrarian reforms, and by rapid pace of "upward diversification” from low-to high value local foods, horticulture, and estate crops, etc.

• Priorities to close the gap between ideal and actual yield level; Improve capacity building of researchers and research institute;

• Reduce poverty (subsidizing the needy and empowering the active poor), implementing concrete actions to combat children malnutrition and preventing its future occurrence by promoting food diversification based on local endowments and food technology development;

• R&D policies should increase budget allocation at least 1 percent of the GDP, from the public funds, SOEs and private sectors, empower food-innovation networks, involving ABGC partnership.

• Complement on-going bureaucracy reforms at the institution level with a modernized regulatory framework, easily implemented at both central, provincial and local government.