Agricultural development aims to beat poverty

Agricultural development aims to beat poverty
By Bungaran Saragih, Minister of Agriculture

The agricultural sector, often ignored during the heyday
of high economic growth, has again proven its resilience and
demonstrated its vital role in preventing poverty in rural areas
from worsening.
It is no exaggeration to say that agriculture has been the savior
of the economy over the past years of a lingering
multidimensional crisis.
In 1999, for example, when the economy was flat at zero
growth, agriculture still expanded by 2.08 percent. Its
contribution to the gross domestic product even increased to
almost 17.50 percent in 2002 from 16.99 percent in 2001, and the
biggest locomotive in this sector is food commodities, generating
more than 50 percent of the value added in agriculture.
However, since food farming, despite its vital role in
maintaining food security, is insufficient to significantly
improve farmers' welfare, the government has adopted a new
strategy whereby food farming is supported with the development
of integrated agribusiness.
The biggest challenge in food farming now is the erosion
of the competitiveness of local food commodities against foreign
food products, due partly to unfair foreign trade.
Therefore, the government continues to develop food and
horticulture commodities through more concerted efforts to expand
planted acreage, increase yield through better seed varieties,
reduce losses in harvests and processing, improve irrigation
networks and raise farmers' share of the retail price of food
commodities through better marketing infrastructures.
While the decentralization of government since 2001
initially caused complications and problems in other sectors,
agricultural development gained a boost from this reform because
the sector is best developed through area-specific policies and
technologies.
Even during the system of centralized government until
1999, local administrations in provincial and regency levels had
set up their own agricultural services, adequately staffed with
capable human resources.
Unfortunately, their initiatives were stifled as their
operations were dictated by the central government through
nationally packaged programs.
But the local autonomy has given freedom to regional
agricultural services to take initiatives to pursue area-specific
policies, while the central government, through the agriculture
ministry, is responsible only for designing and managing the
strategy, national policies and standards.
Supported with larger budget appropriations, local
agricultural services now have more resources, bigger freedom to
develop area-specific policies and local technologies at their
agricultural research stations, which had been set up over the
past three decades but were underutilized.
The regional autonomy law is especially beneficial to
agricultural development as it vests the responsibility of
agricultural development with the regent or mayor, not the
agricultural office.
It is strategic as it ensures integration and coordination of
policies at the local level.
Integration and coordination are fundamental to both the
development of food farming and agribusiness as all their
components -- from the production of inputs such as seeds,
fertilizer and other technologies, provision of extension service
and on-farm techniques, harvest and processing technologies,
financing and market infrastructures -- should be developed in an
integrated manner.
One of the biggest problems in agribusiness development
is an inadequate financing system because the banking law is
biased against lending to agribusiness in particular and rural
credit programs in general.
Note how the banking act has been designed as if
Indonesia is already a fully industrialized country. This law
encourages financial services in urban areas and benefits mostly
big corporate borrowers, whereas the backbone of the economy
remains small and medium-scale enterprises and cooperatives.
It's no wonder that Indonesia, with more than 60 percent
of its 210 million population living as farmers in rural areas,
does not have even a single agricultural or farmers bank.
Observe how most other ASEAN countries have fully developed
agricultural or farmers banks highly capable of serving the
savings and credit needs of the farming community or rural people
in general.
True, numerous rural credit institutions have sprouted up across
the country but most of them are very small, with inadequate
staff and capital and located in Java and Bali. The bulk of them
are based in towns, catering mainly to off-farm loan needs of
rural people.
Agricultural financing was not big a problem before 1997 because
farm loans were arranged under government-directed credit
programs that used subsidized refinancing facility from Bank
Indonesia, the central bank.
Since most of these government-directed credit programs were
stopped after the crisis, there is now a severe shortage of loan
financing for farmers.
Most damaging yet is that due to the basic flaw of the Banking
Law of 1992 that was designed to cater to business conglomerates,
major banks do not have an adequate number of staff capable of
assessing credit risks of small and medium-scale agribusiness.
Banks are incapable of adequately serving the farming community
nor supporting the development of food farming and agribusiness,
lacking sufficient human resources with the technical competence
to simultaneously fulfill farmers' demand for savings
instruments and credit.
An agricultural bank should be able to create flexible savings
instruments to meet the special characteristics of farmers' cash-
flow situation. Only through savings mobilization can this bank
spur their growth, expand its outreach and build up a reliable
information system on farmers.
Such a database is crucial for enabling credit officials to
assess farmers' credit proposals and to expediently design loans
to meet farmers' specific needs.
The Ministry of Agriculture has proposed to the Ministry of
Finance to arrange more than Rp 12 trillion in subsidized credits
for the development of agribusiness, in addition to the Rp 2.2
trillion already appropriated for food security programs.
But this proposal is only a crash program to kick start the
development of agribusiness, thereby promoting this program among
farmers.
In the long term, agribusiness development is sustainable only if
the present supply-led subsidized credits are replaced with
demand-led loans with interest rates that cover the costs of
financial intermediation with a reasonable margin.
Such institutional-capacity building will never take place in the
banking industry unless the current banking law that is
ridiculously designed to serve business conglomerates is amended
to allow for the development of agricultural banks or financial
institutions that cater to the savings and credit needs of the
rural people or peasant community.

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