Study on Final Supportive Policies for Maximizing Agricultural Investment in Indonesia

Transcription

1 Study on Final Supportive Report Policies for Maximizing Agricultural Investment in Indonesia Prepared by Brighten Institute WITH SUPPORT FROM Policy and Programme Development Support Division (TCS) of the Food and Agriculture Organization of the United Nations (FAO) UNDER THE FRAMEWORK OF PROJECT Support to Study on Appropriate Policy Measures to Increase Investment in Agriculture and to Stimulate Food Production (GCP/GLO/267/JPN) 2012

2 FOREWORD This document is the final report of the policy study on Supportive Policies for Maximizing Agricultural Investment in Indonesia. The study was carried out as collaboration between Brighten Institute and the Policy and Programme Development Support Division (TCS) of the Food and Agriculture Organization of the United Nations (FAO), under the framework of project Support to study on appropriate policy measures to increase investment in agriculture and to stimulate food production (GCP/GLO/267/JPN) which selecting country to case studies to investigate policies and resource allocation contributing in increased investments in agriculture. Considering the roles, problems and challenges faced by Indonesian agriculture sector, it is highly expected that agricultural investment will play a role beyond productivity and growth. Basically, the important role that should be played by agricultural investment is to support the agriculture sector in enhancing the capacity to deal with today s problems and challenges, especially those related to global environment changes that potentially threaten the capacity of agriculture sector. In this regard, the contribution of capital formation by related agents, especially farmers, is very important. Therefore, supporting policies that raise optimistic expectation, as well as enlarge access to strategic elements are highly needed. I express my sincere thanks to the Food and Agriculture Organization of the United Nations (FAO) for this very timely initiative, valuable support and collaboration with Brighten Institute in undertaking this important policy study (GCP/GLO/267/JPN). My special thanks due to Dr. Syed Saifullah from the FAO for his support and suggestions at various stages of this study. The study team consisted of colleagues in Brighten Institute viz., Prof. Hermanto Siregar, Dr Siti Jahroh, Mr. Dicky Firmansyah, Mr. Tantan Hermansah, Mr. Indra, and Ms. Dina Lianita Sari. I wish to record my appreciations for their hard work and perseverance in conducting the study and producing this report. February, 2012 Dr. Harianto Executive Director Brighten Institute ii

3 TABLE OF CONTENTS I.INTRODUCTION Background Problems Objectives Methods...3 II.INDONESIA S CONTEXT, AN OVERVIEW Indonesian Agriculture Sector: Brief Picture Food Security and Poverty Situation...9 III.AGRICULTURAL INVESTMENT IN INDONESIA: ROLES, PICTURE AND POLICIES Roles Picture of Agricultural Investment in Indonesia Policies and Programs Related to Agricultural Investment in Indonesia...16 IV.AGRICULTURAL INVESTMENT BY FARMERS Overview of Farmers Condition Features of Agricultural Investment by Farmers: Analysis from PATANAS Data General Description Capital Formation On-Farm Investment and Savings Factors Affecting Savings, Productive and Non-Productive Investment: Linear Regression Approach Factors Affecting Agricultural Investment by Farmers: Analysis of Field Survey Data General Description Drivers and Constraints of Agricultural Investment...30 V.MAXIMIZING AGRICULTURAL INVESTMENT IN INDONESIA Key Elements Efforts to Maximize Agricultural Investment in Indonesia 35 VI.CONCLUSIONS AND RECOMMENDATIONS Conclusions Recommendations...38 BIBLIOGRAPHY...40 iii

4 LIST OF TABLES I.INTRODUCTION Background Problems Objectives Methods...3 II.INDONESIA S CONTEXT, AN OVERVIEW Indonesian Agriculture Sector: Brief Picture...6 Table 1. Average GDP Growth by Sector (%)...6 Table 2. Average Growth of Agriculture Sub-Sectors (%)...7 Table 3. Average GDP Shares by Sector (%)...8 Table 4. Average Shares in Agricultural GDP by Sub-Sector (%)...8 Table 5. Employment by Sector (Million People) Food Security and Poverty Situation...9 Table 6. Growth of Rice, Maize and Soybean Production (%)...9 Table 7. Productivity Growth of Rice, Maize and Soybean (%)...9 Table 8. Population and Its Growth...10 Table 9. Poverty Incidence and Shares by Rural and Urban Areas...10 III.AGRICULTURAL INVESTMENT IN INDONESIA: ROLES, PICTURE AND POLICIES Roles Picture of Agricultural Investment in Indonesia...13 Table 10. Domestic and Foreign Agricultural Investment, Table 11. Credit Shares by Sector, Total Credit and Agriculture Credit...14 Table 12. Credit Growth by Sector (%)...15 Table 13. Central Government Expenditures, Policies and Programs Related to Agricultural Investment in Indonesia...16 Table 14. Target of Agricultural Investment, IV.AGRICULTURAL INVESTMENT BY FARMERS Overview of Farmers Condition...19 Figure 1. Farmers Classical Problems...19 Figure 2. Number of Households by Operated Land (%) Features of Agricultural Investment by Farmers: Analysis from PATANAS Data General Description...20 iv

5 Table 15. Average Profile of Farmers in 1997, 2004 and Capital Formation...21 Figure 3. Capital Formation of Farm Households...22 Table 16. Average Assets: Productive, Non Productive and Savings in 1997 and On-Farm Investment and Savings...23 Table 17. Average Investment at Farm Level in Table 18. Average Farm Investment by Farmer Status and Agro-ecosystem in Table 19. Average Farm Investment Land Holdings in Table 20. Average Farm Investment by Farm and Household Incomes in Factors Affecting Savings, Productive and Non-Productive Investment: Linear Regression Approach...24 Table 21. Estimated Parameters of the Saving Model...26 Table 22. Estimated Parameters of the Productive Investment Model...27 Table 23. Estimated Parameters of the Non-Productive Investment Model Factors Affecting Agricultural Investment by Farmers: Analysis of Field Survey Data General Description...28 Table 24. Average Land Holdings and Savings at the Three Villages in Table 25. Source of Income of Farm Households at the Three Villages Table 26. Source of Loan of Farm Households at the Three Villages in Drivers and Constraints of Agricultural Investment...30 Table 27. Constraints and Drivers in Farm Investment at the Three Villages...32 V.MAXIMIZING AGRICULTURAL INVESTMENT IN INDONESIA Key Elements Efforts to Maximize Agricultural Investment in Indonesia 35 VI.CONCLUSIONS AND RECOMMENDATIONS Conclusions Recommendations...38 BIBLIOGRAPHY...40 LIST OF FIGURES I.INTRODUCTION...1 v

6 1.1.Background Problems Objectives Methods...3 II.INDONESIA S CONTEXT, AN OVERVIEW Indonesian Agriculture Sector: Brief Picture...6 Table 1. Average GDP Growth by Sector (%)...6 Table 2. Average Growth of Agriculture Sub-Sectors (%)...7 Table 3. Average GDP Shares by Sector (%)...8 Table 4. Average Shares in Agricultural GDP by Sub-Sector (%)...8 Table 5. Employment by Sector (Million People) Food Security and Poverty Situation...9 Table 6. Growth of Rice, Maize and Soybean Production (%)...9 Table 7. Productivity Growth of Rice, Maize and Soybean (%)...9 Table 8. Population and Its Growth...10 Table 9. Poverty Incidence and Shares by Rural and Urban Areas...10 III.AGRICULTURAL INVESTMENT IN INDONESIA: ROLES, PICTURE AND POLICIES Roles Picture of Agricultural Investment in Indonesia...13 Table 10. Domestic and Foreign Agricultural Investment, Table 11. Credit Shares by Sector, Total Credit and Agriculture Credit...14 Table 12. Credit Growth by Sector (%)...15 Table 13. Central Government Expenditures, Policies and Programs Related to Agricultural Investment in Indonesia...16 Table 14. Target of Agricultural Investment, IV.AGRICULTURAL INVESTMENT BY FARMERS Overview of Farmers Condition...19 Figure 1. Farmers Classical Problems...19 Figure 2. Number of Households by Operated Land (%) Features of Agricultural Investment by Farmers: Analysis from PATANAS Data General Description...20 Table 15. Average Profile of Farmers in 1997, 2004 and Capital Formation...21 vi

7 Figure 3. Capital Formation of Farm Households...22 Table 16. Average Assets: Productive, Non Productive and Savings in 1997 and On-Farm Investment and Savings...23 Table 17. Average Investment at Farm Level in Table 18. Average Farm Investment by Farmer Status and Agro-ecosystem in Table 19. Average Farm Investment Land Holdings in Table 20. Average Farm Investment by Farm and Household Incomes in Factors Affecting Savings, Productive and Non-Productive Investment: Linear Regression Approach...24 Table 21. Estimated Parameters of the Saving Model...26 Table 22. Estimated Parameters of the Productive Investment Model...27 Table 23. Estimated Parameters of the Non-Productive Investment Model Factors Affecting Agricultural Investment by Farmers: Analysis of Field Survey Data General Description...28 Table 24. Average Land Holdings and Savings at the Three Villages in Table 25. Source of Income of Farm Households at the Three Villages Table 26. Source of Loan of Farm Households at the Three Villages in Drivers and Constraints of Agricultural Investment...30 Table 27. Constraints and Drivers in Farm Investment at the Three Villages...32 V.MAXIMIZING AGRICULTURAL INVESTMENT IN INDONESIA Key Elements Efforts to Maximize Agricultural Investment in Indonesia 35 VI.CONCLUSIONS AND RECOMMENDATIONS Conclusions Recommendations...38 BIBLIOGRAPHY...40 vii

8 I. INTRODUCTION 1.1. Background Currently, there are three issues that highly relate to agriculture and rural sector: poverty, food security, and environmental problem. FAO (2010) indicated that persistence of hunger and under nourishment and rising food prices reflect a deep structural problem of agricultural development in many developing countries. To achieve the MDG 1 in particular, a global consensus is emerging with focus on increasing investment in agriculture to enhance agricultural growth and food production. Agricultural sector has a crucial role for the Indonesian economy because of its significant contribution to economic growth, foreign exchange earnings, and in achieving food security. Agriculture has also strategic roles in national economic development, especially in reducing poverty, providing employment, improving farmers welfare and maintaining sustainable utilization of natural resources and environment. In spite of its significant contribution to the national economic development, agriculture in Indonesia is facing many challenges especially in the provision of food to meet the increasing demand due to rapid population growth and increasing income of the population. Meanwhile, Indonesia is also facing the problem of sustaining its food production capacity due the limitation in the natural resources availability. First, our fertile agricultural land as the basis for food production is decreasing due to the rampant conversion of agricultural lands into non-agricultural utilization. Second, the availability of water resources for agriculture is depleting mainly due to the declining of irrigation services and the increasing competition in water use for non agriculture needs. Thirdly, the emerging negative impacts of global climate change certainly complicate existing problems, especially in increasing production risks and uncertainties. Currently, Indonesian agriculture employs almost 40 percent of the workforce. Meanwhile, the agriculture sector contributes about 14 percent to national GDP. This situation implies a relatively low level of labor productivity compared to other sectors (especially manufacture). 1

9 This situation also reflects the fact that more than 60 percent of poor people in Indonesia live in the rural area where they mostly rely on agriculture sector for livelihood. Historically, increases in agricultural productivity are credited with reducing poverty in Indonesia during the 1970s and 1980s. However, as indicated by World Bank (2010), since the 1990s the sector has been characterized by stagnation and low productivity due to years of declining private and public sector investment. In this regard, Fuglie (2004) emphasized that public investments in research and development, rural infrastructure, and irrigation are necessary complements to private investments in the sector. During the 1970s and 1980s period, the development of agriculture sector was directed heavily in order to achieve a self-sufficiency level of food production (especially rice). Thus, mode of agricultural investment, especially that provided by public sector (government), was mostly dedicated to the above objective. By that scheme, Indonesian farmers were provided during the period with various appropriate government support so that they would focus only on how to do farming activities in the best way. Considering the above situation, as well as the role and importance of agriculture sector in the future, the effort to increase productivity in agriculture sector is very important. Therefore, a proper stimulation to agricultural investment is needed, involving related different agents (public and private sectors). Any efforts to achieve sustained, long-term increase in agriculture investment in developing countries require a thorough understanding of the factors that uniquely or jointly drive investments by those agents Problems In order to consolidate resources for agricultural investment effectively and efficiently, the appropriate framework as a basis for the effort must be there. The needed framework is reflected in the following questions: First, what is the situation and framework of Indonesian agriculture sector development both currently as well as in the future? Second, under the above situation and framework, what kind of agricultural investment modes should be promoted in Indonesia? Third, how has the investment behavior been by agents in Indonesia, especially farmers? Fourth, what are the key elements determining success and failure of 2

10 agricultural investment in Indonesia? Fifth, what kind of policy should be put in place to maximize agricultural investment in Indonesia? 1.3. Objectives In addressing the above problems, therefore, the objectives of this paper are as follows: 1. Describe situations and framework of Indonesian agriculture sector development and its relation with food security and poverty reduction 2. Elaborate the role or importance of agricultural investment, as well as Indonesian pictures and policies related to agricultural investment 3. Investigate investment behavior that has been played by agents, especially farmers 4. Identify key elements of the success and failure in increasing agricultural investment in Indonesia 5. Formulate supportive policies needed to maximize agricultural investment in Indonesia 1.4. Methods This study was conducted by employing both primary and secondary data, and also using both quantitative as well as qualitative approaches. Primary data at farm level were collected through questionnaire survey, focus group discussions, and in-depth interviews at three villages in West Java province. The three villages were purposively selected to represent low-land, middle-land and high-land, i.e. Cibungur, Tapos and Cijeruk villages, respectively. The number of households interviewed in Cibungur, Tapos, and Cijeruk villages is 18, 15, and 12 households, respectively. Descriptive statistical method was employed for the farm level data. Secondary farm level data were also collected from PATANAS surveys. PATANAS (Panel Petani Nasional/National Farmer s Panel) is a panel household survey which is conducted serially (time-series) and which retains the same set of respondents over time. 3

11 PATANAS research was initiated in 1983 and conducted until During PATANAS research temporarily ceased but resumed in 1994 until recently. However, only the data starting 1997 could be processed because prior year computer files could not be opened and accessed by the current system. Methodology of PATANAS research consists of census, survey, re-census, and re-survey. The peculiarities of PATANAS are its wide scope and comprehensive data, consistent and systematic data, suitability to be used to evaluate policy impacts and to identify the change in direction of rural socio-economic indicators, and its sufficient accuracy as material for scientific paper. Topics of PATANAS survey include household characteristics, rural economic profile, income structure, land tenure, agricultural and non agricultural asset tenure, employment institution, and labor mobility. PATANAS database is collected at ICASEPS Data Bank and can be accessed by using SAS or Excel program. This investment policy study used data taken from PATANAS surveys in 1997, 2004, and In these years, surveys were done in three provinces, i.e. Central Java, Lampung, and South Sulawesi. Four villages were picked in each province, classified by different agro ecosystems, wet land villages and dry land villages. There were households interviewed in each village. The number of household samples of PATANAS surveys in 1997, 2004, and 2010 are 407, 362, and 360 households, respectively. This study applied PATANAS data in 1997, 2004, and 2010 because they have specific information about the investment condition of households at farm level, i.e. productive asset, non-productive asset, and savings data. However, there was a little difference in data sets. Investment data in 1997 and 2010 showed the asset position of each household at that time, while investment data in 2004 showed the asset number of each household in a year. The analysis of PATANAS data employed descriptive statistics as well as econometric model, i.e. regression. The regression model used PATANAS data in However, there were many households which reported no asset (null data), so such households had to be counted out and discarded from the regression analysis. Of 362 households surveyed in PATANAS 4

12 2004, only 19 households were used to model the savings and productive asset, and 12 households to model the non-productive asset. Other secondary data used in this study were macroeconomic data, i.e. GDP, production and productivity of food commodities, population, poverty, domestic and foreign investment, government expenditure, agricultural investment, and credit. The sources of secondary data were BPS (Statistics Indonesia), which covered information on 2003 Agriculture Census, Bank of Indonesia, BAPPENAS (National Development Planning Agency), Ministry of Agriculture, and other relevant institutions. The analysis employed descriptive statistical methods, i.e. cross-tabulation analyses, graphs, picture, and diagram interpretations. Data analysis used simple formulas to calculate the mean values, growth rates, shares, and other statistical measures. 5

13 II. INDONESIA S CONTEXT, AN OVERVIEW 2.1. Indonesian Agriculture Sector: Brief Picture Agricultural GDP increased sharply in the late 1960s and reached its peak in the early 1980s. It must be noted that the Government put large investment in the 1960s such as irrigation systems, agricultural extension and subsidy in order to achieve the goal of rice selfsufficiency. These large investments finally bore fruit in 1984 when the country achieved rice self-sufficiency. However, in the 1990s there was the declining growth of GDP of agriculture which reached its lowest point in the late 1990s which might be due to the Asia Financial Crisis in Since the beginning of the new century, agriculture sector began to increase again. During the period of , the growth of agriculture sector GDP averaged 3.7 percent (Table 1). Given the more rapid growth of the manufacturing sectors, the agricultural sector s share of Indonesia s GDP fell from 45 percent in 1970 to 15.3 percent in The agriculture sector s share of employment currently stands at 40%, having declined from a 1980 share of 56%. Nevertheless, agriculture still plays an important role in the national economy and is an important livelihood for the rural population. In fact, the vast majority of Indonesia s rural poor still depends on agriculture for employment and income as well as their own food supply. Sector 1. Agriculture, Livestock, Forestry Table 1. Average GDP Growth by Sector (%) and Fishery 2. Mining and Quarrying (2.1) (0.6) Manufacturing Industry Trade, Hotel & Restaurants Others Gross Domestic Product Source: BPS (Processed) Looking at the growth rates of agriculture sub-sectors, there was a tendency that the growth 6

14 2010 the growth of food crops ranked second out of five sub-sectors. This might be due to the government policy that changed from rice self-sufficiency to rice self-sufficiency on trend. The former refers to absolute rice self-sufficiency where all rice domestically consumed is produced in the country and no rice import is allowed. The latter refers to permitting rice imports in case of insufficiency in rice production in the country vis-à-vis consumption due to harvest failures caused by natural disasters or pest and disease attack. Table 2. Average Growth of Agriculture Sub-Sectors (%) of food crops to be lower compared to other sub-sectors (Table 2). During the period of Sector Food Crops Estate Crops (0.6) Livestock and its product Forestry (7.9) 16.8 (6.7) 2.7 (9.3) (0.2) Fishery 11.6 (1.1) Agriculture, Livestock, Forestry and Fishery Source: BPS (Processed) Table 3 shows structural change in Indonesian economic development, reflected in the share of agriculture sector to GDP that was reduced from almost 60 percent in the period down to only about 14 percent in The reduction of agricultural share to GDP was accompanied by the increasing of shares other sectors to GDP, i.e. manufacturing, trade, and other sector such as services and telecommunication and transportation. Furthermore, looking inside the agriculture sector, the food crops sub sector still dominates in contributing to agriculture sector GDP in Indonesia. Table 4 shows that the share of food crops to agricultural GDP has remained dominant compared to other sub-sectors. In the period , the share of food crops to agricultural GDP exceeded 60 percent, while in the period, its share was still about 50 percent of agricultural GDP. It reflects that the performance of Indonesian agriculture sector in the near future will still rely on the food crops sub sector. 7

15 Table 3. Average GDP Shares by Sector (%) Sector Agriculture, Livestock, Forestry and Fishery Mining and Quarrying Manufacturing Industry Trade, Hotel & Restaurants Others Source: BPS (Processed) Table 4. Average Shares in Agricultural GDP by Sub-Sector (%) Sector Food Crops Estate Crops Livestock and its product Forestry Fishery Source: BPS (Processed) The reduction of agricultural share in national GDP as described above was not associated with a proportionate decline or change in employment structure among sectors. In terms of employment, agriculture still accounts for quite a large proportion, about 40 percent, of the population who are dependent on it for livelihood despite the reduction in the share of agriculture in the national economic picture. Table 5 shows that along the period the employment structure among sectors was relatively stagnant compared to the changing GDP shares. For the agriculture sector, the situation also brought a resulting decrease in labor productivity. Thus, its impact means that farmers welfare has decreased relative to those in other sectors. 8

16 1. Agriculture, Livestock, Forestry and Fishery Table 5. Employment by Sector (Million People) Sector Mining and Quarrying Manufacturing Industry Trade, Hotel & Restaurants Others Total Source: BPS (Processed) 2.2. Food Security and Poverty Situation In terms of production and productivity, two major crops as staple foods, i.e. rice and maize, as a matter of fact have shown an increasing trend. The average production growth of rice, maize and soybean in the period was around 4.2 %, 8.4 %, and 4.3 % per year, respectively (Table 6). This production performance was still much higher than the average population growth of 1.5 % per year during the same period (Table 8). Assuming the government can maintain the population growth of 1.5% per year, while also maintaining the future production growth at around the level, domestic staple food production can still meet the population demand. Table 6. Growth of Rice, Maize and Soybean Production (%) Commodity Paddy Maize Soybean (8.91) (3.62) 4.26 Source: Ministry of Agriculture (2010=2 nd forecast; 2011=Preliminary) (5.1 0) (9.6 6) Table 7. Productivity Growth of Rice, Maize and Soybean (%) Commodity

17 1. Paddy Maize Soybean Source: Ministry of Agriculture (2010=2 nd forecast; 2011=Preliminary) Table 8. Population and Its Growth Population (million) Growth (Annual, %) ( ) ( ) ( ) ( ) ( ) Source: BPS (Processed) In terms of poverty, the number of poor people, who live under poverty line, has been decreasing in the last decade. It was around 21.1% of total population during the period and decreased to around 15.4% during the period As a matter of fact, the number of poor people who live under poverty line in the rural area is much higher than the number of poor people in the urban area (Table 9). In other words, around two-thirds of poor people live in the rural area. As mentioned above, the majority of poor people who live in rural areas, in fact, mostly depend on the agriculture sector as their source of income, especially food crops. Thus, it is a challenge how to improve food security, by increasing food crops production and productivity, which in turn can reduce poverty at the same time. Existing problems of agriculture like low productivity, small operational holding, low level of farmers welfare, etc. need solutions. Proper agricultural investment policies and initiatives constitute a strategic solution in coping with these problems and challenges. Table 9. Poverty Incidence and Shares by Rural and Urban Areas Poverty Incidence ( %) Rural Urban

18 Poverty (million people) Rural (share in %) Urban (share in %) Source: BPS (Processed) 11

19 III. AGRICULTURAL INVESTMENT IN INDONESIA: ROLES, PICTURE AND POLICIES 3.1. Roles As we have learnt from both macroeconomic and microeconomic perspectives, the contribution of investment is very important in promoting growth. Investment is important both in promoting capital formation, as well as in order to replace or compensate capital depreciation. To support the promotion of sustained and quality of economic growth, the appropriate level, sustained, and well-design investment scheme will be needed. The above lesson is also relevant to agriculture sector in Indonesia, with its uniqueness, and crucial roles for Indonesian economy. In relation to the above, some empirical studies us that low level of agricultural investment both by private and public sector is one of the important factors that caused stagnation of Indonesian agricultural productivity and growth. Fuglie (2004) and World Bank (2010) found that low levels of both private and public investment have caused Indonesian agricultural productivity to stagnate since the 1990 s. Furthermore, the decline in total factor productivity (especially during the period) in Indonesia was due to the downward trend in public spending for agricultural development since the mid 1980s (Fuglie, 2003 in Simatupang et. al., 2004). Hadi, et. Al. (2010) reported that agricultural investment has positive impacts on agricultural sector GDP and new labor absorption; meanwhile, agricultural investment by farmers also has a beneficial impact on income. Considering the problems and challenges facing the Indonesian agriculture sector, it is highly expected that the agricultural investment will play a role beyond productivity and growth. Basically, the important role that should be played by agricultural investment is to support the agriculture sector in enhancing its capacity to deal with the current problems as well as challenges. 12

20 3.2. Picture of Agricultural Investment in Indonesia In terms of private investment, the realization of domestic agricultural investment in the period tended to increase (Table 10). Meanwhile, the foreign agricultural investment increased between 2005 and 2006, but slightly decreased in Both domestic and foreign agricultural investment then significantly decreased in This probably resulted as an impact of the global financial crisis which also hit some parts of Indonesian economy. Ministry of Agriculture (2010) pointed out that the 2009 figures reflected a recovery in domestic agricultural investment in Indonesia. Table 10. Domestic and Foreign Agricultural Investment, * Domestic (billion Rp) 3, , , , ,739.3 Foreign (million USD) Source: Ministry of Agriculture (2010) *Note: 2009 up to September Domestic and foreign investment in agricultural sector ranked second after manufacturing sector, meaning that the agricultural sector is attractive for investors. During , however, the actual domestic and foreign investment fluctuated. On average, actual annual domestic investment was higher than foreign investment. In food and estate crop subsector, domestic investment was larger than foreign investment, while in livestock subsector, the reverse situation prevailed. (Hadi, et. al., 2010) Credit is known as one of the sources for investment. In this respect, Table 11 indicated that the allocation of credit for agriculture sector is relatively low. During the period , credit for agriculture was only around 5-6 % of the total credit. Within the period , especially in 1999, the share of agriculture credit reached more than 10 percent but this arose from a significant decrease in the 1999 total credit compared to 1998, from about 519 trillion rupiah (1998) to about 225 trillion rupiah (1999). The significant reduction of total credit happened as the impact of 1997/1998 crisis. 13

21 Year Table 11. Credit Shares by Sector, Total Credit and Agriculture Credit Credit Shares (%) Agriculture Mining Manufacture Trade Others Total Credit (Trillion IDR) Agriculture Credit (Trillion IDR) Source: Bank Indonesia (Proceed) Although agriculture credit was relatively small during the period , the average growth of agriculture credit was higher compared to the manufacturing sectors. Calculations from data in Table 12 show the average growth of agriculture credit during the period was about 21.1 percent, and that of manufacture was only 12.8 percent. Meanwhile, the growth of total credit was 22.3 percent. 14

22 Table 12. Credit Growth by Sector (%) Year Agriculture Mining Manufacture Trade Total Credit Source: Bank Indonesia With respect to public investment for agriculture, World Bank (2010) argued that the increase (in real terms) in public spending on agriculture after 2000 was largely a reflection of poorly targeted subsidies. Agricultural production did not increase despite increased public spending in real terms. Between 2001 and 2008, national spending on agriculture increased from Rp 11 trillion to Rp 53 trillion, an average growth of 11 percent annually, in real terms. Agriculture s share of total government spending doubled from three percent in 2001 to six percent by 2008, reaching one percent of GDP mostly due to increased subsidies. World Bank (2010) also indicated that over the past three decades Indonesia s capacity in agricultural R&D has increased significantly, but still remains low by middle-income country standards. By 2007, public spending on R&D was only half that expended on the seed subsidy. After adding in private sector agricultural R&D spending, the intensity with which Indonesia invested in agricultural research (0.27 percent) was roughly the same as Lao PDR s (0.24 percent) and much lower than Malaysia s (1.92 percent) or the Philippines (0.46 percent). Further public investments in R&D, rural infrastructure and irrigation are necessary complements to private investments in agriculture. 15

23 During the period , an average of about 1.5 % of public budget was allocated for agriculture (Table 13). If the public budget for irrigation were included, then the percentage (average) would become about 2.5 %. Table 13. Central Government Expenditures, *) COD FUNCTION/SUBFUNCTIO E N Audite Audite Audite Audite Audite Audite Budget d d d d d d 01 GENERAL PUBLIC SERVICES 255, , , , , , , DEFENSE 21, , , , , , , PUBLIC ORDER AND SAFETY 15, , , , , , , ECONOMIC AFFAIRS 23, , , , , , , Commercial, cooperation 1, , , , , , ,279.5 and small medium enterprise Labor affairs , , , , Agriculture, forestry, fishing, and marine 4, , , , , , , Irrigation 3, , , , , , , Fuel and energy 2, , , , , , , Mining , , , , , , Industries and construction , , , , , , Transport 9, , , , , , , Telecommunication , R & D defense , Economic affairs n.e.c , , ENVIRONMENTAL 1, , , , , , ,069.6 PROTECTION 06 HOUSING AND 4, , , , , , ,425.3 COMMUNITIES AMMENITIES 07 HEALTH 5, , , , , , , TOURISM AND CULTURE , , , , , RELIGION 1, , , , EDUCATION 29, , , , , , , SOCIAL PROTECTION 2, , , , , , ,585.5 T O T A L 361, , , , , , ,578.2 Source: Ministry of Finance 3.3. Policies and Programs Related to Agricultural Investment in Indonesia As the Minister of Agriculture (2011) stated, Government of Indonesia places its highest development priority on achieving food security and poverty alleviation. Food security should be envisaged in the national development policy and strategies of all countries. To this end, agricultural policies need to be revisited at the national, regional and international level to place sustainable agriculture as key to development strategy. He also pointed out that to 16

24 anticipate global environment changes, Indonesia implements the comprehensive agricultural policy which are focused in the efforts to achieve sustainable food self-sufficiency, to promote food diversification, to improve value added and competitiveness of agricultural products, as well as to increase of farmers welfare. As food is a strategic commodity that could affect social economic and political situation, the dependency for food on other countries can endanger political stability and even more, national sovereignty. For this reason, government places five strategic commodities which include rice, corn, soybean, sugar and beef as the targets for self-sufficiency program. In relation to this matter, Ministry of Agriculture set up four main targets in to achieve: o Self-sufficiency (soybean, sugar, meat) and sustainable self-sufficiency (rice, maize) o Enhancing food diversification o Enhancing value added, competitiveness, and export o Enhancing farmers welfare In order to achieve the targets, the estimated needed agricultural investment is approximately 1,021,907 billion rupiah of domestic investment and 377,071 billion rupiah of foreign investment (Table 14). Therefore, the annual domestic and foreign investment would have to increase annually by more than 75% and 70%, respectively. Table 14. Target of Agricultural Investment, Year Domestic Investment Foreign Investment (Billion Rp) Growth (%) (Billion Rp) Growth (%) , , , , , , , , , , Source: Ministry of Agriculture In order to enhance food security at household level, the government has formulated general policy in food security. Some of the policies include: 1. Sustainable increase in production and productivity of strategic food commodity to 17

25 reach food resilience levels; 2. Increase in efficiency and effectiveness of food distribution through monitoring and stabilization of staple food price and development government and community food reserves; 3. Community/farmer empowerment which is implemented among others through Development of Village Agribusiness Development Program (PUAP), Development of Food Self-Reliance Village Program (Desa Mandiri Pangan), Supporting Funding- Village Economic Enterprises (DPM-LUEP), and Development of Informal Community Institution (LM3); 4. Acceleration of Food (consumption) Diversification (P2KP); and 5. Food Vulnerability Management which is implemented by the development of early warning system through Nutrition and Food Awareness System (SKPG) and Emergency Response Program such as food provision, seed subsidy and agricultural production means for harvest failure and transient food vulnerability area. According to Ministry of Agriculture (2009), agricultural investment both by government (public) and private in the period is directed to the following: (1) Service in cultivation and livestock financing; (2) Development and Education of farmers institution and providing supporting scheme for farming/business development through, for instance, PUAP or Rural Agribusiness Development, LM3 or Development of Autonomous and People-Based Institution; (3) Optimization of permits and investment service in cultivation and livestock; (4) Endorse efforts in the involvement across sectors to increase production of main crops; and (5) Enhance the capacity of farming road, rural irrigation (JITUT and JIDES). 18

26 IV. AGRICULTURAL INVESTMENT BY FARMERS 4.1. Overview of Farmers Condition The general conditions of farmers in Indonesia are characterized by small landholding, limited capital, low skills and management, low formal education, commodity selection mainly for daily consumption, low use of modern inputs, low productivity and efficiency, low income, price taking and low bargaining position. Figure 1 represents the general condition of small landholdings which lead to low production, thus, implying low income. This condition accordingly causes low capacity in making investment/saving. Low level of capital formation obtains. Thus, it is a vicious cycle. In order to transform the cycle from vicious into benefit cycle for farmers, the effort to increase the land area for farmers is important. This can open the opportunity for farmers to increase the production, and accordingly followed by improved income levels, and at the end, increasing the capacity for capital formation. Another option is injecting the investment, such as in technology to enhance the capacity to increase production on the same land area. Figure 1. Farmers Classical Problems Actually, small landholding has become a critical problem in Indonesia where the number of households operating small-scale farms has increased over time (Figure 2). Based on 19

27 agricultural census in 1983 there were around 39% of households operating land less than 0.5 ha. Ten years later, it increased to 48% (Agricultural Census 1993). The trend was still increasing in 2003 when the percentage of households operating land less than 0.5 ha was 55% (Agricultural Census 2003). Figure 2. Number of Households by Operated Land (%) Despite the above condition, according to Ministry of Agriculture (2010), the share of agricultural investment in Indonesia is basically dominated by farmers, although until today, there has not been a rigorous assessment yet which is dedicated to show evidence of farmers investment. What can be done is to investigate the nature and characteristic of agricultural investment by farmers. The following parts of this chapter report two analyses: (1) basic feature of farmers investment in agriculture based on PATANAS data; and (2) basic factors affecting farmers investment in agriculture based on field survey data Features of Agricultural Investment by Farmers: Analysis from PATANAS Data General Description In this part, the analysis of agricultural investment by farmers was based on PATANAS Survey 1997, 2004 and The data showed that among the farm households surveyed in Central Java, East Java and South Sulawesi provinces, the average operated landholding was 20

28 getting smaller and smaller, from 1.68 ha (1997) to 0.89 ha (2004), and finally to 0.56 ha (2010) (Table 15). The average number of family members was stable at around 5 persons so that it became a rising problem to support family needs when the operational holding decreased sharply by 2010 to one-third that in Considering the small operational holding, there was a tendency to depend and earn more from non-farm work in order to support family needs. Table 15. Average Profile of Farmers in 1997, 2004 and 2010 Items n Family member (person) Operated land area (ha) Owned-land (ha) Rented-in land (ha) Irrigated rice fields (ha) Rain-fed rice fields (ha) Upland (ha) Revenue from on-farm (000 Rp) 1,332 8,787 20,155 Cost of production (000 Rp) 456 4,179 7,017 Net Income from on farm (000 Rp) 876 4,608 13,138 Off-farm income (000 Rp) 37 1,268 7,452 Non-farm income (000 Rp) 1,966 2,403 15,402 Household income (000 Rp) 2,879 8,656 28,540 Food expenditures (000 Rp) 1,484 1,424 10,421 Non-food expenditure (000 Rp) 996 5,512 1,925 Source: PATANAS 1997, 2004 and 2010 (annual basis, current price) Capital Formation Based on PATANAS data in 1997 and 2010, farmers assets in Central Java, East Java and South Sulawesi were classified into three kinds: productive, non productive and savings. Meanwhile, PATANAS 2004 more specifically was designed to reflect the investment by farmers annually, which was also classified into three kinds of investments: productive, nonproductive and savings. 21

29 Basically, it was common that farm households earned their income mainly through on-farm, off-farm, and non-agriculture activities. In turn, their income would be allocated mainly into several types of household expenses, such as: food and non-food expenditures, expenses in productive and non-productive assets, and savings. Productive asset is durable goods used to earn household income, for instance, to be sold or to be rented. Meanwhile, non-productive asset is durable goods used in supporting daily household activities. Savings is an amount in cash kept for emergency expenses. The investment expenses would then accumulate into capital formation (Figure 3). Figure 3. Capital Formation of Farm Households Table 16 describes the position in productive asset, non-productive asset, and savings owned by households in 2007 and In 2007, average productive asset owned by households was around Rp 1.65 million whereas in 2010, it was around Rp 6.12 million. Although the total assets increased in 2010, the amount of non-productive assets in 2010 comparatively increased extremely rapidly. Table 16. Average Assets: Productive, Non Productive and Savings in 1997 and 2010 Assets (000 Rp)

30 Productive 1,649 6,115 Non Productive ,771 Savings 632 1,988 Note: n=407 (1997); and n=360 (2010); Source: PATANAS 1997 and On-Farm Investment and Savings Table 17 describes the average investment by farmers during one year in Farmers spent more than Rp 250 thousand for productive investment. Meanwhile, for non-productive asset and savings farmers spent almost Rp 150 thousand and Rp 160 thousand, respectively. Productive asset was about 44 percent of average total investment by farmer in Table 17. Average Investment at Farm Level in 2004 Investment Rp Productive 250,649 Non Productive 147,597 Savings 159,898 Note: n=362 Source: PATANAS 2004 Based on farmer status and agro-ecosystem, the average investment at the farm level can be seen in Table 18. In terms of farmer status, it seemed that owner-farmers and owner-tenant farmers spent higher on productive asset compared to non-productive investment. On the other hand, tenant farmers spent more on non-productive asset compared to productive investment. This might be largely due land ownership, where owner or owner-tenant farmers tended to spend more on productive investment because they felt assured that their productive investment would bring more income in their owned land. In contrast, tenant farmers whose operated land was rented in, there was the probability that the land owner would take back the land in the future. Table 18. Average Farm Investment by Farmer Status and Agro-ecosystem in 2004 Investment Farmer Status Agro-ecosystem Owner-Farmers Tenant Owner-Tenant Irrigated Upland Farmers Farmers Rice Fields Productive 227, , , , ,765 Non 111, , , ,667 69,882 23

31 Productive Savings 114, , , ,490 54,882 Source: PATANAS 2004 In terms of agro-ecosystem, farmers in irrigated rice fields spent more on productive investment compared to farmers in upland. This might be due the fact more stable condition, i.e. water supply, means lower risks where the yield in irrigated rice fields is more stable compared to upland. Table 19 shows the average investment at the farm level by land holdings in There was a tendency that the larger the operated land the higher the productive investment. Table 20 presents the average investment at the farm level by farm income and household income. There was a tendency that the higher the income the higher was the productive investment. Table 19. Average Farm Investment Land Holdings in 2004 Investment <0.5 ha ha ha ha >2.0 ha Productive 53, , , , ,833 Non Productive 208,907 63,138 83,019 14, ,722 Savings 180, ,511 58, , ,667 Source: PATANAS 2004 Table 20. Average Farm Investment by Farm and Household Incomes in 2004 Investment Farm Income Household Income Below Above Below Above Average Average Average Average Productive 154, , , ,252 Non Productive 133, ,815 42, ,933 Savings 102, ,444 81, ,664 Source: PATANAS Factors Affecting Savings, Productive and Non-Productive Investment: Linear Regression Approach In the previous part, some farmers characteristics were found to affect the mode of 24