International Journal of Administrative Science & Organization, January 2014 Volume 21, Number 1

Bisnis & Birokrasi, Jurnal Ilmu Administrasi dan Organisasi

The Economic Performance of Indonesian

Rice-based Agribusiness
JOKO MARIYONO
Lecturer and Researcher, Faculty of Economics - University of Pancasakti, Tegal, Indonesia
mrjoko28@gmail.com

Abstract. Inefficiency is one of major causes of low performance in Indonesian rice production. This study measures the
technical efficiency of rice production in five Indonesian regions and examines its determining factors. A stochastic frontier
production function is used to reflect best practice production given certain levels of input use with equal amounts of
technology. Unbalanced panel data on input-output rice production consisting of 358 farm operation in 2003, 2008 and 2013
are employed for estimating frontier production functions. The results indicate that variation in rice production across the five
main regions is due primarily to variation in technical efficiency. Sources of variation within technical inefficiency include
household characteristics, composition of labour and tractor use. Of the five regions investigated, rice production on Java is
the most efficient. Technical efficiency of rice production increases over time in all five regions but remains low overall. This
study concludes that there is considerable room for productivity improvements in Indonesian rice-based agribusiness through
increases in technical efficiency.

Keywords: farm level panel data, rice agribusiness, stochastic production frontier, technical efficiency

Abstrak. Inefisiensi merupakan salah satu penyebab utama rendahnya kinerja agribisnis bebasis padi di Indonesia. Studi ini
mengukur efisiensi teknis produksi padi di lima wilayah Indonesia dan meneliti faktor-faktor yang menentukan efisiensi. Fungsi
produksi frontier stokastik digunakan untuk menduga produksi terbaik pada tingkat penggunaan input dan teknologi tertentu
dengan jumlah yang sama. Data panel input-output produksi padi yang terdiri dari 358 agribisnis padi pada tahun 2003, 2008
dan 2013 digunakan untuk memperkirakan fungsi produksi frontier. Hasil penelitian menunjukkan bahwa variasi produksi padi
di lima wilayah utama terutama disebabkan oleh perbedaan efisiensi teknis. Sumber variasi dalam inefisiensi teknis meliputi
karakteristik rumah tangga petani, komposisi tenaga kerja dan traktor digunakan. Dari lima wilayah penelitian, produksi padi
di Jawa adalah yang paling efisien. Efisiensi teknis produksi padi meningkat dari waktu ke waktu di semua lima wilayah namun
tetap rendah secara keseluruhan. Penelitian ini menyimpulkan bahwa ada cukup peluang untuk memperbaiki produktivitas
agribisnis padi Indonesia melalui peningkatan efisiensi teknis.

Kata kunci: agribisnis padi, efisiensi teknis, produksi frontier stokastik, panel data tingkat petani

INTRODUCTION

Indonesian agriculture is still one of sectors that

occupies a central position in the national economy. The
agricultural sector is the main foundation providing food
for 245 million people in Indonesia, about 87% of raw
materials of small and medium industries, as well as
contributing about 15% of gross domestic product (GDP).
In addition, the agricultural sector absorbs about 33% of
the workforce and become a major source of income for Figure 1. Share of Agricultural Sector to GDP and Employment
about 70% of households in rural areas (Haryono, 2013).
Recently, the agricultural sector is still important, despite Source: Indonesian Statitical Agency (BPS) 2013, analysed.
gradual declines in the contribution to economy and
employment, as depicted in Figure 1.
Politically, rice is a strategic product. Both shortages interventions concerning the quantities and prices of rice
of rice in domestic markets and highly volatile rice prices imports are politically sensitive especially because rice
hold the potential to generate domestic political instability. is a staple food and accounts for a large share of both
The shortage of supply of rice into domestic markets consumers’ budgets and total employment.
has become a more pressing problem in the Indonesian In the future, the agricultural sector also remains
economy, not only because of its status as the main staple one of the mainstays of the national food and energy
food, but also because the price of rice plays a major security. The need for food and energy will continue to
role in forming expectations on inflation and economic increase in line with the rate of population growth and
stability. The recent developments in rice production increased prosperity. As a large country, food security is
have energised the ongoing debate in Indonesia regarding a key pillar of national stability, thus becoming one of the
the government’s interventions in the rice market. Such main targets of agricultural development which cannot be
36 International Journal of Administrative Science & Organization, January 2014
Bisnis & Birokrasi, Jurnal Ilmu Administrasi dan Organisasi
compromised. Until now, rice is still a major component
of national food security, so that the rice self-sufficiency
remains a primary indicator of food security. The
government continue to increase national rice production
to 5% per year and is targeting a surplus of 10 million
tons of rice in 2015 (Haryono, 2013). The target of
production capacity improvement program is to enhance
the national capacity to increase food production that can
respond the dynamics of food demand of the population
and encourage equitable distribution of food supply. It is
expected to optimize the utilization of natural resources
to achieve food security based on domestic resources
(Suryana, 2008).
Crucial problems of Indonesian rice production
include low production efficiency (Haryono, 2013) and
low productivity (Mulyani and Sarwani, 2013). This
leads to a condition in which rice production is relatively
low and uncompetitive compared to other rice producing
countries. As a result, there is no incentive for farmers
to continue operating rice farms, and imported rice will
dominate the Indonesian market. It is more realistic for
Indonesia to be more competitive in rice production
by increasing the performance in terms of efficiency
and productivity. This study aims to explore sources of
variation in the productivity of Indonesian rice-based
agribusiness. Understanding whether technical efficiency
has been achieved will be important for agricultural policy
makers in deciding whether or not upgrading existing
technology or introducing new technology is necessary
– or optimal – in order to increase rice production. If
the level of technical efficiency is still low, it is likely
that an increase in rice production can be achieved by
improving technical efficiency using existing technology.
Because, efficiency means to the extent of efforts required
to accomplish the desired result (Rosdiana, 2011), so
using the technology it’s important to increasing the rice
production. This analysis utilises a stochastic frontier
production technique to estimate technical efficiency and
to determine sources of inefficiency.
Many previous studies investigated technical
efficiency in Indonesian agriculture, using various
methods and data. Factors affecting efficiency include the
type land as Makki et al. (2012) indicate that the farmers
in tidal swamp land have better efficiency than those in
upland; and farming practices as shown by very recent
studies by Laksana and Damayanti (2013) showing that
rice production with system rice intensification is more
efficient than usual practices, and irrigation infrastructure
is the dominant factor encouraging farmers to adopt the
system; and by Hidayah et al. (2013) indicating that
rice farming system with integrated plant and resource
management approach in the research areas are efficient
and profitable. Up to now, information on temporal
patterns of technical efficiency in Indonesian rice-based
agribusiness is still limited.
This study complements and fills the gaps of previous
studies in multiple respects. Firstly, this study uses panel
data sets at farm level, which can reduce the analytical
effects of specific characteristics embodied in each farm
and farm operator. In most cases examining the technical
efficiency of rice production, efforts have been made to
isolate sources of technical efficiency. The intention of
Volume 21, Number 1
these efforts is to provide a basis for the development of
polices which could improve technical efficiency. Many
factors affecting efficiency in rice-based agribusiness
have been determined, often based on locally specific
factors. In most cases, the managerial characteristic of
farm operators including age (representing farmers’
experience) and level of education (representing capacity
to adopt technology) is of interest. This study seeks to
improve the previous studies by examining additional
sources of variation – including labour composition,
mechanisation and geographical characteristics — which
have not previously been examined. Lastly, this study
uses more updated and wider coverage of data. For
these reasons, it is expected that this study will provide
updates on technical efficiency in Indonesian rice-based
agribusiness
RESEARCH METHODS
This study uses a method of stochastic frontier analysis.
The method has been widely used as a measure of
performance of firm in many sectors, including agricultural
sector (e.g. Tijani, 2006), manufacturing sector (e.g.
Prabowo and Cabanda, 2011) and banking sector (e.g.
Abidin and Cabanda, 2007) and multi-sectors (e.g. Ikram
et al. 2012). In agricultural sector, the method has been
recently used to analyse performance of agriculture in
Africa (e.g. Fatoba et al. 2009; Enwerem and Ohajianya
2013; Erhabor and Ahmadu 2013), South Asia (e.g. Ghee-
Thean et al. 2012; Alam et al. 2011), South East Asia (e.g.
Villano and Fleming, 2006), the Middle East (e.g. Moradi
et al. 2013), and Europe (e.g. Kumbhakar et al. 2014). The
recent global use of such method indicates its credibility
in representing performance of firm in various sectors.
Stochastic frontier production is defined as function
model in which the disturbance term (Ԑ) is composed of
two parts, a systematic component (v) and a one-sided
component (u) (Villano et al., 2010). For panel data, a
functional form of a stochastic production function can
be specified as:
Yit = f (X it , β , t ) exp{ε it } .......................................(1)
for ί = 1,2, … and t = 1, 2, …
where Υ is output, Χ is a vector of inputs is time trend
to capture technological change and β is a vector of
parameters to be estimated. The error term (Ԑ) is, then
defined as:
ε it = vit − u it ...................................................(2)
The systematic component vit, which captures random
variation in output due to factors outside the control of
the farmer, is assumed to be independently and identically
distributed (iid) as N (0,σ2), and independent of uit, which
specifies the technical inefficiency relative to the stochastic
frontier. Most of the empirical literature assumes that ui
has a non-negative (one-sided) half-normal distribution
with N (0,σv2). Based on the assumption that ui and vi are
independent, the parameters of the production frontier can
be estimated using a maximum likelihood method and
econometric software. Furthermore, given a multiplicative
production frontier for which the production function
 MARIYONO, THE ECONOMIC PERFORMANCE OF INDONESIAN
is specified, the farm-specific technical efficiency of
the ith farm in the tth period is defined as the ratio of the
conditional expectation of output, given the inefficiency
effect, relative to its expectation if the inefficiency effect
is zero, as:
E (Yit | u it , X it )
ϕ it = = exp{− u it } are expected to be less inefficient. A time trend is not
E (Yit | u it = 0, X it )
..............(3)
Technical inefficiency can be considered as the unobserved
effects embodied in producers. When data are collected
over a sufficiently long time, technical efficiency may
indeed vary over time concurrent with other changes
in the (efficiency-related) characteristics of producers
(Druska and Horrace, 2004; Feng and Horrace, 2007).
This study uses a primal approach – i.e. the direct
estimation of the production function– with functional
form of a transcendental logarithmic (translog)
production technology. Thiam et al. (2001) concludes
that using more flexible functional forms results in a
more accurate technical efficiency estimate. More flexible
functional forms reduce the error terms (Ԑit = vit - uit),
which results in higher estimates of technical efficiency.
Considering that a higher rate of efficiency represents a
better estimate, a primal approach is more accurate than
the dual because ‘studies using the primal approach leads
to significantly higher TE estimates than those obtained
from dual frontiers’ (Thiam et al., 2001, pp. 241). The
translog production function in this study, is specified as:
.....(4)
where (k,j)=1, 2, …,5 for land, capital, labour, material
and agrochemicals respectively, βkj =βjk for k ≠ j , t is the
time index, is logarithmic operation. A time index is
included in the model to account for smooth technological
progress (Kompas and Che, 2006). Factors affecting
inefficiency of farm can be analysed using a multiple
regression, formulated as:
......(5)
where AG is age of farmers, ED is education, FM is
number of family members, NP is the number of plots,
ST is status of land, SZ is size of total area, SH is share of
hired labour, MC is a dummy for mechanisation, and JV
is a dummy for Java.
The underlying principles for including those variables
that determine level of efficiency are as follows. Age
represents experience of farmers, older farmers being
more experienced and thus expected to be less inefficient.
Education represents human capital and skill and thus
more educated farmers are expected to be less inefficient.
Family member represents the size of households. Larger
households are expected to be more capable of dealing
with problems in farming and thus less inefficient. The
number of plots represents land fragmentation. More
fragmented land will be more difficult for farmers to
manage and thus are expected to be more inefficient.
Hired labour represents professionalism and thus more
hired labour employed on farms is expected to be less
37
inefficient. Mechanisation represents the adoption of
technology and thus mechanisation is expected to render
farms less inefficient. Java is included in the model as a
source of variation because of Java’s status as the “rice
laboratory” of Indonesia. New technology and policies
related to rice-based agribusiness have often been
implemented on Java first, and thus farms located on Java
included in the model because of the inclusion of the age
of the farmer variable, which increases over time at the
same rate as time trend. Level of education and number
of family members are also likely to increase overtime
when the period under examination is sufficiently long.
The time trend would likely be strongly correlated with
those variables if it were included in the model.
To capture the time-varying technical inefficiency,
the temporal pattern of technical inefficiency needs to be
modelled a quadratic function of time as:
u it = δ 0i + δ 1i t + δ 2i t 2 .....................................(6)
where δ0i, δ1i, δ2i ( =1, 2, …,n) are the producer-specific
parameters to be estimated. This model has advantages
in that it is flexible and allows inefficiency to vary across
time and between producers. In this model, the average
rate of change in technical inefficiency across time can be
identified. Importantly, there is no inconsistency in this
two-stage approach because in the second stage predicted
efficiency is dependent merely on time trend which
is identically distributed among producers rather than
on a number of producer characteristics. This model is
consistent with a method in which technical efficiency is
independently and identically distributed in the stochastic
frontier (Karagiannis et al., 2002).
This study uses a database which is established from
longitudinal surveys conducted in five rice-producing
regions of Indonesia. The regions include Lampung, West
& East Java, West Nusa Tenggara, South Sulawesi and
North Sulawesi. The regions were selected to provide
diverse representation of Indonesian rice production. The
unbalanced panel data consist of 358 farm operations in
2003, 2008 and 2013. Several villages were selected in
each region based on agro-climate characteristics and
farmers cultivating rice were drawn using purposive
random sampling. Once farmers were selected, they
became respondents of the survey and were interviewed
sequentially. The quantitative data were supported with
qualitative data collected from informal discussion with
key informants. These information related to habits
and social culture that might affect the performance of
agribusiness such as exchange and voluntary labour
during planting and harvesting seasons; share cropping
and share tenancy, quality of land, land fragmentation
and habits of local people working in informal sectors
during out of planting and harvesting seasons. Farmers’
perception on soil fertility of land was also discussed.
The number of variables observed in the data varied
widely across survey years. This is because the survey
sought to accommodate variations in farming which are
spatially and temporally specific. For example, certain
fertilisers were not used in some regions but always used
38 International Journal of Administrative Science & Organization, January 2014 Volume 21, Number 1
Bisnis & Birokrasi, Jurnal Ilmu Administrasi dan Organisasi

in others. In some regions, voluntary labour was common Table 1. Data on Input and Output Used to Estimate
during early planting and harvesting seasons but it was Production Efficiency
uncommon in others. For the purpose of this study, Variable Description Unit meas-
therefore, the data were aggregated to avoid problems of urement
missing data. Note that in Indonesian agricultural practice,
including rice-based agribusiness; it was common for Rice production un-husked production kilogram
farmers not to use fertilizers, pesticides and tractors at all. Area (A) Total rice-sown area hectare
In the absence of such inputs the rice production was still Labour (L) Total labour comprises family, man-working
positive. voluntary and hired labour, used day
However, with a translog production technology, the for six stages of farming
production with no such input will be zero and econometric
Capital (K) Capital consists of tractors and tractor-work-
estimation will be impossible as logarithm of zero is animals mainly used in land tillage ing day
undefined. It is suggested that the problem can be handled
by summing the quantities of individual fertilisers and Materials (M) Total material used in rice produc- monetary
replacing the zero level of input use with a small positive tion comprises seed, water irriga- term*
value. Villano and Fleming (2006) use a quadratic tion, and green manure
functional form rather than a translog model to overcome Chemicals (X) Chemical fertilisers and pesticides. monetary
this problem. The results show that both methods provide Fertilisers consist of Urea, Triple term*
very similar measures of output elasticity with respect to Super Phosphate (TSP), Ammo-
inputs and estimates of technical efficiency. The translog nium Sulphate (ZA) and Potassium
model, however, provides more precise estimates than Chloride (KCl). Pesticides com-
the quadratic model as the log-likelihood for the translog prise solid and liquid formulations
model is much greater than that for the quadratic model Note: *) Monetary value is at 2003 constant price, deflated us-
(and the variance of the technical inefficiency effects ing food-crop price index.
in the stochastic frontiers for the translog model is also
greater than that for the quadratic model). The description Table 2. Data on Factors Determining Technical Efficiency
and unit measurement of aggregated input and output
variables and technical inefficiency variables can be seen Variable Description Unit
in Table 1 and Table 2 respectively. measurement
The hypothesis established here is to find factors Age Age of farmer year
affecting level of efficiency. The test for a technical Education Education of farmer, years spent in year
efficiency is formulated as: formal education

H0 : δ 0 = δ 1 =  = δ 9 = 0 H : H is not true Member Number of household members, includ- persons

1 0
(H.1) ing the farmer
inefficiency effect is constant. The test is formulated as: Plot Number of blocks of land cultivated unit
with rice
H0 : δ 1 =  = δ 9 = 0 H : H is not true Status of Fraction of privately owned land cul- [0,1]
1 0
(H.2)
land tivated with rice. = 1 if totally owned
Testing for these hypotheses is conducted using a land, = 0 if purely rented land
likelihood ratio test (LR-test) as described in Verbeek Area Total area of rice cultivation hectare
(2003). That is,
Share Share of hired labour, = 100 if fully [0,100]
R = −2(L
LR
L H0 −L H1 ) of hired hired, = 0 if fully unpaid labour
............................................(7) labour
Mechanisa- Dummy for using tractor, = 1 if using dummy
where LL(H0) and LL(H1) are the values of the likelihood tion tractor, = 0 otherwise
function under the null and alternative hypotheses, Java Dummy location, = 1 if located on dummy
respectively. The value of LR asymptotically has a chi- Java, = 0 otherwise
square distribution if the null hypothesis is true.

RESULT AND DISCUSSION
For convenience, the outcomes of analyses are
presented in three sub-divisions: results of testing for the
hypotheses, technical efficiency and factors determining
level of efficiency; and profiles of rice-based agribusiness
grouped by level of technical efficiency.
Table 3 shows tests for the technical efficiency model.
The hypothesis that δ0 = δ1 = ... = δ9 = 0 is rejected. This
indicates that inefficiency is dependent on producer
characteristics. The test also rejects δ1 = ... = δ9 = 0, meaning
that the constant of the effect of inefficiency should be
included in the model of the technical inefficiency effect.
Table 4 shows parameter estimates of technical
inefficiency effects. Individually, the factors that
significantly improved level of efficiency include age
of household head, education of household head, share
in hired labour, size of farm, use of mechanisation and
farm location. Older farmers enhance the performance of
rice production. This is likely a result of older farmers
having more experience and knowledge of rice growing
activities than younger farmers. Older farmers may
 MARIYONO, THE ECONOMIC PERFORMANCE OF INDONESIAN 39

also be more willing to embrace agricultural production represents the proportion of privately owned land to total
practices that increase technical efficiency. They may also farm land improve level efficiency. This is a common
be simply more reliable in performing production tasks. phenomenon whereby farmers rent out less fertile land
Perhaps for these reasons, technical efficiency increase as and concentrate their farming on the more fertile land.
age increases. Consequently, farms operated on less fertile land will
Education level enhance the efficiency, meaning that be less efficient. This is consistent with the findings of
a higher level of educational attainment results in better Jamal and Dewi (2009) pointing out that sharecropping
technical efficiency. Consistent with many studies on is inefficient for the tenants; and it is still a common type
productivity and growth, educational attainment can be of land transaction in Java. To improve efficiency, the
perceived as a proxy for human capital. local government can help farmers by enabling them to
Number of family members of the household is able lease land through fixed rental or other more favourable
to boost efficiency, by mean that more members in the arrangements.
household mean more labour is available for carrying out Labour share enhance the level of efficiency. This share
farming activities in a timely fashion and therefore the represents the proportion of hired labour to total labour
production process is more efficient. employed on the farm. The employed labour that is not
Number of plots can improve efficiency. The number paid can include family, exchange and voluntary labour.
of plots represents land fragmentation, which is expected Farms with a high proportion of hired labour are more
to have a negative effect on efficiency. It is possible that efficient. Farmers are able to supervise the hired labour
more plots do not necessarily indicate that each plot is such that it works effectively and efficiently. On the other
small, such that the more plots farmers have the larger hand, it is unlikely and disrespectful for farmers to control
those farms might be. Farm size is also has positive exchange and voluntary labour to do the same extent.
effect on efficiency. This means that a large farm is more Mechanisation is able to increase level of efficiency.
technically efficient than a small one. Larger farms could Farmers who use tractors are more efficient in producing
be the result of either more plots or a larger single plot. rice. Tractor provides more effective work in large farm,
Despite its insignificance, the status of land that which is consistent to the fact that large farms are more
technically efficient.
Table 3. Testing for Production Fontier and Inefficiency Effects Rice-based agribusiness located in Java is more
Hypothesis Formulation z-count dasdfgval
technically efficient than those located in other regions.
Decision One of the factors behind this is that Java is considered
as a rice-bowl area, in which the government policy
H.1 Source of 27.29 reject
δ 0 = δ1 =  = δ 9 = 0 has conducted a lot of intensification programs and
inefficiency
agricultural infrastructure has been well developed.
Socially, tradition, culture in and the density of people in
H.2 Constant 5.71 reject Java that is higher than that out site Java enables farmers
effect δ1 =  = δ 9 = 0 to work closely in a so-called “gotong royong”.
Average technical efficiency is depicted in Figure 2.
Overall, the efficiency rate of Indonesian rice production
Table 4. Parameter of Technical Inefficiency Model was around 0.67. A very recent study by Mariyono (2014)
using aggregate data across provinces of Indonesia shows
Coefficient z-count a similar rate. This is lower than in Bangladesh, which
Constant δ0 2.4751 4.44a show efficiency rate of 0.78 (Shantha et al., 2013). Of
Age δ1 -0.0252 -3.64a all the regions, average technical efficiency of rice-based
agribusiness on Java is highest. This is not surprising
Education δ2 -0.0718 -2.57b
because Java has the best quality land, in terms of soil
Member δ3 -0.0464 -1.33n fertility and climate, and as such is considered the
No. Plots δ4 -0.9066 -2.95b most suitable location for non-tree cultivation of crops,
including rice (Strout, 1983). Java also has better irrigation
Status of Land δ5 -0.0761 -0.32n
infrastructure than other islands. Touré et al. (2013) shows
Size δ6 -0.6181 -1.88c that rice production with better irrigation infrastructure
Share labour δ7 -0.0055 -2.05b perform better. In fact, the technical efficiency of Javanese
Mechanisation δ8 -1.3739 -3.48a rice production is 0.78, around 0.14 higher than the other
regions in this study. Despite its performance relative to
Java δ9 -1.7632 -3.50a these other regions, however, Java’s agricultural facilities
σ 2 1.0970 5.92a and highly fertile paddy fields mean that an efficiency
statistic of 0.78 could still be considered low.
γ 0.8811 38.48a
In 2003, rice-based agribusiness outside Java was
Log-likelihood -645.56 less efficient compared with that on Java. Based on the
LR-test 137.47a estimated technical efficiency, the rank order from most
to least technical efficiency of rice-based agribusiness
Mean technical efficiency 0.6755 in 2003 is: Java, West Nusa Tenggara, South Sulawesi,
Note: a) significant at 1%; b) significant at 5%, c) significant Lampung and North Sulawesi. In 2008, the rank order
at 10 %; n) not significant was still the same as that in 2003. In 2013, however,
40 International Journal of Administrative Science & Organization, January 2014 Volume 21, Number 1
Bisnis & Birokrasi, Jurnal Ilmu Administrasi dan Organisasi

the rank order dramatically changed. The coefficients 0.85

for West Nusa Tenggara and South Sulawesi were not
0.8
significant (and were even positive for South Sulawesi).
This means that rice-based agribusiness in both regions 0.75

was as technically efficient as that on Java. In other words,

Technical efficiency
0.7
the technical efficiency of rice-based agribusiness in both 0.65
regions had caught up with that on Java. The rank order
0.6
in 2013 is South Sulawesi, Java, West Nusa Tenggara, and
Lampung. 0.55

Technical efficiency in rice-based agribusiness does 0.5

2003 2008 2013
not vary much across the other regions. In all regions, Year
technical efficiency tends to increase over time. The Lampung Java West Nusa Tenggara
differences in technical efficiency across regions and North Sulawesi South Sulawesi Overall
years (compared to Java) are given in Table 5. The fact
that most of these coefficients are significantly negative Figure 3. The trend of technical efficiency
indicates again that rice-based agribusiness on Java is the
most technically efficient of all the regions. Table 5. Regression of Technical Efficiencies on Dum-
In Figure 3, it is clear that the technical efficiency of my Regions
rice-based agribusiness in all regions except Java has Regions 2003 2008 2013 Overall
continually increased. In 2013, the technical efficiency
Constant 0.7716 0.8268 0.7325 0.7839
of rice-based agribusiness on Java fell due to a sharp
(=Java) (27.94)a (26.32)a (18.76)a (42.37)a
decrease in capital use (capital had been substituted for
by non-agriculture-experienced labour). As mechanised Lampung -0.1822 -0.2229 -0.0923 -0.1757
capital is an important factor in determining technical (-5.41)a (-5.96)a (-2.03)b (7.95)a
efficiency, and farms with mechanisation are more West Nusa -0.0803 -0.1234 -0.0223 -0.0840
technically efficient, this substitution had some effect on Tenggara (-2.56)b (-3.48)a (-0.50)n (-4.01)a
technical efficiency. The catch-up of technical efficiency
North -0.2031 -0.2255 N/A -0.1990
in West Nusa Tenggara and South Sulawesi therefore
Sulawesi (-4.46)a (-4.48)a (-6.11)a
derives from two sources. The first is a fall in technical
efficiency of rice-based agribusiness on Java in 2013 South -0.1372 -0.1257 0.0224 -0.1043
due to a sharp reduction in mechanised capital. The Sulawesi (-4.16)a (-3.11)a (0.46)n (-4.58)a
second is continual increase in technical efficiency in R2 0.1122 0.1244 0.0632 0.0928
South Sulawesi and West Nusa Tenggara. Table 6 shows F-stat 10.62 a
10.62 a
3.78 b
20.77a
the dynamics of technical efficiency. Estimated with a
linear form, technical efficiency significantly increases No. Obs. 341 304 172 817
at a constant rate of 0.0227 every five years. However, Note: number in parentheses is t-ratio, a) significant at 1%; b) significant
when estimated using a purely quadratic form technical at 5%, c) significant at 10%; n) not significant; N/A: no observation
efficiency increases at an increasing rate. As described
in Figure 2, overall technical efficiency is increasing Table 6. Regression of Technical Efficiency on Time Trend
at a decreasing rate, so it is reasonable to estimate the Variable Linear Quadratic 1 Quadratic 2
dynamics of technical efficiency in the form of a general
quadratic function. The result indicates that the coefficient Coeff. z-count Coeff. z-count Coeff. z-count
of the linear time trend is positive and the coefficient of Constant 0.6348 39.32a 0.6543 63.93a 0.6177 13.72a
the quadratic time trend is negative. This is an indication t 0.0227 2.75b 0.0438 0.83n
t2 0.0056 2.65b -0.0054 -0.41n
R2 0.01 0.01 0.01
0.9

0.8
2003 F-test 7.54b 7.00a 3.85b
2008

0.7
2013 Note: ) significant at 1%; ) significant at 5%, c) signifi-
a b
Overall
cant at 10%; n) not significant
0.6

0.5
that technical efficiency increases at a decreasing rate. It
0.4
is important to note that both coefficients are individually
0.3 insignificant, but jointly significant. This is because the
0.2 time trend is small and the data are an unbalanced panel,
0.1
such that both linear and quadratic time trends are highly
correlated and cause a multicollinearity problem.
0
Lampung West & East Java Nusa Tenggara North Sulawesi South Sulawesi
The average technical efficiency of producers does
not vary by region, but the individual technical efficiency
Region
among producers varies considerably. This indicates
Figure 2. Comparison of Technical Efficiency Among Regions that within regions there is a large variation in technical
 MARIYONO, THE ECONOMIC PERFORMANCE OF INDONESIAN 41

efficiency. This was always a likely outcome because Output

of rice-based agribusiness’s sensitivity to ecological
Total output kg 784 1707 2859 5989 0.450a
situations such as weather and pest infestations. This
ecological situation clearly varies among regions and Land
across time. For instance, when there is a pest outbreak in Area ha 0.50 0.58 0.70 1.04 0.211a
the middle or late stage of rice cultivation, rice production Number of plots # 1.08 1.10 1.28 1.89 0.273a
will be very low. In such a case, large amounts of inputs
Owned land % 0.89 0.93 0.92 0.97 0.051n
have been used and as a consequence the technical
efficiency is low. Capital
Following Kompas and Che (2006), it is a relatively Total capital day 2.00 3.57 6.03 4.19 0.126a
uncomplicated task to analyse technical efficiency Animal day 1.63 2.41 2.52 2.01 0.074b
rankings. Since there is a wide range of individual Tractor day 0.41 1.15 3.51 2.19 0.142a
technical efficiencies, the rankings are grouped into
Labour
‘very low’ (less than 0.60), ‘low’ (0.60 to 0.75), ‘high’
(0.76 to 0.85) and ‘very high’ (greater than 0.85). The Total labour day 50.45 48.26 62.91 98.32 0.181a
number of rice producers in each group is 219, 235, 280 Family labour day 39.75 34.89 40.86 41.43 0.045n
and 83 respectively. The characteristics of rice-based Unpaid labour day 1.00 0.38 0.44 0.51 -0.049n
agribusiness indicated by average values in each technical Hired labour day 9.70 12.99 21.61 56.39 0.254a
efficiency group are given in Table 7.
There are a number of features that emerge from these Share hired labour % 18.73 25.11 32.63 53.13 0.229a
profiles of rice-based agribusiness. First, high and very Material
high technical efficiency groups of producers are more Total material Rp 20679 27453 38514 46638 0.224a
educated and more experienced operators. Second, rice-
Seed kg 28.56 38.19 49.52 59.86 0.178a
based agribusiness in both these groups also operates at a
large scale either on single or multiple plots of land. The Irrigation Rp 952 39594 10967 26119 0.252a
larger scale operations are the more technically efficient, Organic materials Rp 3796 135 134 70.48 -0.033n
where the levels of use of all inputs except irrigation and Agrochemicals
organic materials are higher.
Total agrochemi- Rp 36656 55023 178838 125422 0.053n
Third, the use of a high proportion of hired labour cals
dominates the characteristics of the higher technically
Fertilisers kg 83.15 124.63 205.59 322.30 0.197a
efficient groups. This is an indication that hired labour is
more effective than voluntary labour. Finally, a high level Pesticides Rp 7610 12964 11820 21046 0.357a
of use of capital with a high proportion of tractors tends to Note: ) significant at 1%; ) significant at 5%; ) signifi-
a b c

be associated with high and very high technical efficiency. cant at 10%; n) not significant
It is obvious that use of tractors is more effective than
the use of animals for that same purpose, particularly in CONCLUSION
large-scale rice-based agribusiness.
All of the coefficient correlations, except for unpaid The productivity of Indonesian rice-based agribusiness
labour and organic materials, are positive. The positive is on average still low, particularly in areas outside of
coefficient indicates that more technically efficient farms Java. Because of the fact that most Indonesian people rely
are correlated with a number of farm characteristics. on rice for dietary energy requirements, it is important to
Employing volunteer labour leads to low technical raise productivity. There are two choices for achieving this:
efficiency because, as mentioned above, workers are adopting new technology or raising the level of technical
unlikely to be as effectively controlled by farm managers. efficiency. Adopting new technology will be effective
Consequently, these workers are likely to be less if the process of production with existing technology is
effective. The use of organic materials also leads to low technically efficient. However, if the production with
technical efficiency because the land actually receives the existing technology is still technically inefficient,
organic material regularly from the biomass of plants at improving technical efficiency is often a more appropriate
harvesting (eg. farmers usually leave dried rice stalks in policy objective. Thus, it is important to estimate the
the paddy field after harvest). technical efficiency of rice-based agribusiness. After
levels of technical efficiency are determined, factors
Table 7. Summary Characteristics by Efficiency Groups producing the differences in technical efficiency can be
Average value of Unit Efficiency group Correla- isolated and efforts made to redress these factors.
farm character- <0.60 0.60- 0.76- >0.85 tion with This study uses stochastic frontier production
istics tech. ef-
(219) 0.75 0.85 (83)
ficiency
functions to indicate that technical efficiency still plays a
(235) (280) key role in affecting Indonesian rice production. Average
Farmer technical efficiency in the regions examined is around
0.68. The important factors that significantly increase
Age year 45.66 46.69 51.51 53.27 0.189a
technical efficiency are: farmer’s experience, educational
Education year 4.28 4.35 4.76 4.78 0.090c attainment, size and number of plots, hired labour and
Family member # 4.90 4.92 4.85 4.86 0.021n mechanisation. More experienced and educated farmers
42 International Journal of Administrative Science & Organization, January 2014
Bisnis & Birokrasi, Jurnal Ilmu Administrasi dan Organisasi
can increase technical efficiency because they will be
more capable of implementing and correctly using
existing technology. Mechanisation and hired labour lead
to high technical efficiency because tractors are highly
productive and hired labour works more effectively
than voluntary labour. Regional characteristics that have
positive effects on technical efficiency on Java include
intensification programs and irrigation management. This
higher level of technical efficiency appears where various
extension programs have been implemented, and, as a
result farmers in this region operate with more technical
efficiency than those in other regions.
Technical efficiency is increasing at a decreasing rate.
The implication is that the average production function
is approaching the production frontier. Since rice-based
agribusiness is still technically inefficient, there is enough
room for improvement in the productivity of rice farms
by increasing technical efficiency for rice production with
current agricultural technology. Rice-based agribusiness
on Java, the rice-bowl of Indonesia, is considered the
most desirable region for efficiency-related improvements
because it already has good agricultural infrastructure and
institutions, as well as good soil fertility in paddy fields.
Despite Java having the highest technical efficiency of
the regions studied, potential for improvements there
remains, especially given the region’s worrying trend of
decreasing technical efficiency.
Another alternative, Indonesia has no other option
for achieving national food security than to manage
its available and suitable sub-optimal lands for food
production. Efforts to increase productivity have become
technically more difficult and economically less feasible
for farmers. Nonetheless, it should be realized that
suboptimal lands have many different characteristics
and potentials. Therefore, technology development
should be prioritized to create relevant technologies for
each distinctive character of suboptimal land, financially
affordable by local farmers, and in accordance with
local communities’ preferences and social culture.
There are two approaches could be simultaneously and
interactively implemented. Firstly, optimizing physical,
chemical, and (micro) biological soil conditions, coupled
with effort in improving water resources management
to increase effectiveness of irrigation or drainage
network and efficient use of water and other resources.
Secondly, selecting suitable agricultural commodities
and developing crop cultivars adaptable to each specific
characteristics of suboptimal lands. For maintaining
sustainability of suboptimal land management, all
technical and technological efforts should be evaluated
not only based on their potential economic benefits, but
also needed to consider their ecological impacts and
socio-cultural values of the local community (Lakitan and
Gofar, 2013).
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