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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