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.