Economic Reforms and Agricultural Development in Indonesia

Abstract

This article analyses the impact of economic reform on agricultural sector development. The result indicates there are at least two macroeconomic policy biases towards agriculture: underinvestment and double squeeze. Economic reform through deregulation via the marketbased approach indicates that this would largely benefit the agricultural sector. Monetary policy instruments, such as money supply and exchange rate, and the growth of economy have positive effects on the agricultural sector share in GDP This implies that shifting from import substitution to export promotion industrialization strategy would provide a conducive environment for agriculture development. Furthermore, removal of subsidies and deregulating agricultural sector price would strengthen efforts to increase production and income. Thus, the economic reform, shifting from the tightly-protected to market-based approach, would strengthen the agricultural sector. Economic Reform in Indonesia Due to external shocks, the price of crude oil declined to as low as US$9.75 in 1983 from US$31 per barrel in 1981. As a result, the Indonesian economy lost two sources of growth, that is supply of investment and domestic effective demand. In response to this sudden change Government of Indonesia (GOI) initiated a series of policy reforms (economic reforms). The important reforms or adjustments were: devaluation of the rupiah by 45 per cent to push the so-called non-oil export, a series of deregulations and debureaucratizations in the financial sector (monetary and banking system) followed by various policy adjustments and reforms in the real sectors (Nasution 1995; Tambunan 1989). From 1983 to 1993 GOI issued at least 20 policy packages in the financial sector alone (Nasution 1995). The economic reform in this article is related to changes in the government policy, institutional structure and administrative procedures designed to alter the economic activity and improve the economic performance (Roemer and Redelet 1991). Still in this economic reform, GOI also liberalized the economy through a series of deregulation packages such as lessening government interventions in price controls, quantity restrictions, trade and investment liberalization, changes from nontariff to tariff barriers, etc. The objective of these economic (policy) reforms is essentially to use the market mechanism towards building a competitive market. As Roemer and Redelet (1991) put it, the genesis of the case for economic reform, especially the liberalization agenda (as in the case of Indonesia) is probably close to the neoclassical paradigm of a competitive market. A complete reform package, derived from the Neoclassical paradigm, consists of: (1) freeing markets to determine the price (letting the market work), (2) adjusting controlled price (letting the market work), (3) shifting resources from government into private hands (privatization), (4) rationalizing the role of government (budget rationalization), and (5) reforming institutions to carry out the government's new role. This article, however, is not designed to discuss this neoclassical economic reform type but to make an assessment on how this economic policy reform has affected the agricultural sector. The first part analyses the economic structural changes. Second, it examines the performance of macro and micro policy reform on agricultural sectors. Third and finally it also analyses the weakness of macroeconomic policy reform in the agriculture sector. 1. The Role and Achievement of the Agricultural Sector During the implementation of the import substitution (1970-83) and export promotion strategy (1983-93 up to now) the role and achievement of the agricultural sector in the national economy is remarkable. It cannot be denied that since 1983, the economic deregulation policies, both in monetary and real sectors, have resulted in some positive changes. Among the major achievements are the following: 1. …