Fertilizer in Indonesian Agriculture: the Subsidy Issue

Abstract

AbstractIndonesia began subsidizing fertilizer in 1971 to encourage its use as a complement to the new, high‐yielding rice varieties that were becoming available. While providing considerable assistance to encouraging farmers to utilize these new HYVs and the associated package of inputs, the subsidy for fertilizer has attracted considerable attention in the light of the increasing budget limitations in Indonesia. The high levels of fertilizer and HYV use, the rapidly changing elasticities and cross elasticities among the major food crops, and the growing intersectoral linkages in the Indonesian economy suggest reasons for re‐assessment of the subsidy for fertilizer. The operation of the subsidy is explained, followed by a discussion of changes in the relevant elasticities for demand and supply of commodities and fertilizer. A static welfare analysis of the fertilizer subsidy is presented, showing that the economic subsidy is worth only 42% of the financial subsidy and that farmers are receiving only 7% of the financial subsidy. A simulation of the effects on the food crop sector of removing the subsidy follows the welfare analysis. The paper concludes with an exploration of the policy issues stemming from the results.