Agroindustry could lead Indonesian economic recovery

Agroindustry could lead Indonesian economic recovery

We have been closely following the domestic food situation and
asked Dr. H.S. Dillon, Executive Director of the Center for
Agricultural Policy Studies, who has held various senior
positions in the Ministry of Agriculture. We asked his opinion on
how the budget will affect Indonesian food and agriculture.

Question: How do you see the 1998/99 draft budget?

Answer: I would rather not discuss the draft at present as many of
its underlying assumptions are being seriously questioned;
furthermore, so much has been said already. However, should the
sectoral allocation of funds remain the same in the final
budget, then I fear that we have missed an important opportunity
to base our recovery on agroindustry, at least during the initial
stages.

Q: What do you exactly mean by this statement, could you
elaborate?

A: What I am saying is straightforward: after all has been said
and done, we'll be left with a number of very serious problems.
Firstly, our debt burden will certainly be higher, as a result of
both utilizing the funds in the IMF package and the depreciation
of the rupiah: how much higher is anybody's guess. Secondly, the
tight money policy and attendant high interest rates will further
exacerbate the downturn, forcing massive layoffs.

Thus, our policy priority would be to reembark on the path of
high growth by bringing our debt burden to a more manageable
level and without inflicting undue hardship on the poor and
underprivileged. As we have to generate a large amount of
foreign exchange, we will have to export ourselves out of this
crisis.

Of all our economic sectors, only agroindustry and mining have
the smallest import content, thus output in these two sectors
would generate largest amount of foreign exchange per unit of
imported input.

Growth in agroindustry, however, possesses other virtues: it
would involve millions of households spread all over the country.
The demand of these households is normally for locally-produced
commodities and products, and would thus serve to stimulate
regional economies as well.

Studies have shown that agroindustry has multipliers higher
than 1.5, which means that a one per cent increase in
agroindustrial output would generate 1.5 growth in other sectors
of the economy. Agroindustrial growth could go a long way in
alleviating the economic distress upon the more than 40 million
poor and recently-impoverished.

Q: Why do you fear that this might be an opportunity missed?

A: The current draft budget was prepared by officials of the
planning agency, BAPPENAS, the Ministry of Trade and Industry,
and the Ministry of Agriculture. It is apparent that they failed
to recognize the potential benefits to be reaped from according
priority to agroindustry.

Over the years, agroindustrial development policy has been
somewhat of a no man's land, despite the fact that a Directorate
General of Agroindustry was established in the Ministry of
Industry more than four years ago.

This is one of the reasons why we remain producers of crude
palm oil (CPO) and olein, for example, in sharp contrast to
neighboring Malaysia, which has developed an impressive oleo-
chemical industry. If the current trend continues, then we will
be permanently relegated to being suppliers to Malaysia, which
will naturally garner all of the value-added and its attendant
benefits. In actual fact, Indonesia's agro-industrial exports are
far below their potential compared to Malaysia.

Q: Why would you push for priority on agroindustrial development at
this moment?

A: You see, the rupiah's depreciation actually presents an
opportunity to increase our share in international markets, but a
number of non-market factors -- which have not been satisfactorily
addressed to date -- will constrain our ability to benefit from
this opportunity. Now, a tight budget will render it even more
difficult to create better farm to market infrastructure, provide
better trade and processing services, and enhance the quality of
rural credit -- such non-price endowments might even
deteriorate.

Over the last five years, we have witnessed the largest
influx of food imports ever -- turning us to a deficit country in
terms of food crops and live animals. The annual growth rate of
imports since 1994 of unmilled wheat and mueslin, live animals
other than fish, sugar -- molasses- and honey, and rice was
respectively, 33.5 percent, 95 percent, 147 percent, and 787
percent. These do not include the two million tons of rice we are
importing now. In fact, consumer imports exacerbated our current
account deficit. You could place all other purchases on hold,
but the stomach truly can not wait.

Q: What are the constraints impinging upon achieving the full
potential of agro-industry?

A: A number of constraints continue to impinge upon Indonesian
agroindustrial growth, ranging from the very basic availability
of planting material all the way to excessive protection to the
industrial sector and export regulations. The constraints are
poor infrastructure, inefficient land markets, underdeveloped
supporting institutions, protection, scarcity of middle-level
managers, a general lack of policy focus and poor coordination
amongst many different agencies and arms of government.

It would serve us well to emulate some of the of the policies
adopted by the successful countries like Chile such as the
provision of incentives to induce foreign direct investment, the
establishment of agro-industrial zones with all the attendant
supporting infrastructure, the dismantling of all barriers to
imports of planting materials and other inputs, and the granting
of very wide latitude to private sector initiatives. In short,
their superior performance can be summed up as a market-led
response by an unfettered private sector. In our case, cocoa
serves as a very good example.

Therefore, it is imperative that we dismantle all trade
barriers on commodities and other inputs into agroindustry, the
privatization of government plantations on Java and conversion to
high value crops, provision of greater access to land, and the
creation of private institutions to provide market information
and to facilitate technology transfer. To implement all these,
along with all the necessary institutional changes we would need
to put a new team of highly capable ministers and senior
officials committed to change in place.

Furthermore, there must be more than a million small agro-
industries, providing a means of livelihood for not less than
two million people at the present. It is estimated that 88
percent of total agro-industrial output and 92 percent of value-
added is generated by the medium-large industries, which only
comprise five percent of the total number of agroindustries.

Cross-country studies have revealed that rapid export growth
requires a large number of new exporters; thus we need new
players. Most of the large agro-industries happen to be
conglomerates with large holdings in the financial and property
sectors, and will be preoccupied with setting their houses in
order for quite some time. We can't count on them now; many of
them are rent-seekers, anyway. What better pool to draw upon
than these small, highly-dedicated agro-industrialists?

Q: What would it require to realize agroindustrial potential in
leading the recovery?

A: Well, many things would have to happen, but I am optimistic
that they could be made to happen. Both the Ministry of
Agriculture and the Ministry of Industry and Trade have many
bright and talented officials, who have been intimidated into
silence by their superiors. They could play an important role in
turning the situation around.

There are two things we could do in the short-run. First, we
should increase production of the major estate crops along the
lines which have given high growth rates in the recent past (the
CPO export ban is counter-productive). Secondly, the extension
services to small agroindustries and horticulture needs to be
strengthened immediately.

The most important ingredient, however, is enlightened
leadership, which could motivate the whole system. They say bad
times produce good policies. Let us hope that this crisis will
also generate the policies we have been long waiting for.