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Agriculture in Indonesia: Lagging Performance and Difficult Choices

Richard Barichello and Arianto Patunru

The Indonesian agricultural sector remains large, comprising 14% of the country’s
aggregate Gross Domestic Product (GDP) in 2007. It is internationally significant
in its production and export of rice, palm oil, coffee, rubber, cocoa, and spices
(nutmeg, cinnamon, and cloves). Half the population is still defined as rural,
although this has been declining steadily over the past 50 years as nonfarm incomes
have come to dominate agricultural income, even in rural areas. These are common
features of an agricultural sector in a growing economy and are generally viewed
overall as healthy developments. Indonesia has succeeded in reducing rural poverty
significantly over the last 40 years. National poverty, both urban and rural,
measured at the national poverty line, fell in 2008 to 15% despite the rapid rise
in food prices at that time (World Bank, 2008a). However, this success has as much
to do with factors outside the agricultural sector as within it.

Value-added in the agricultural sector has grown much slower than in the nonfarm
economy. From 1990 to 2005, agricultural GDP grew at only 2.3% per year (WDR,
2008), less than half the 4.8% growth in aggregate GDP over this period.
Additionally, it has been one of the slower growth agricultural sectors throughout
developing country Asia. Of 13 countries, Indonesia ranks 10th over this period.
Only the agricultural sectors in Thailand, Sri Lanka and Malaysia have grown more
slowly. This situation is not new. In the decade of the 1980s the agricultural
sector grew at only 60% of the domestic economy, and within developing country Asia
only three countries grew more slowly in agricultural GDP. Slow productivity growth
is a sector-wide issue, although it is cited most often in the import-competing
sectors of Indonesian agriculture, notably in rice and sugar.

Indonesia has maintained export competitiveness in tree crops and spices. Its trade
balance in agricultural products is strongly positive, at US$3 billion averaged
over the three years 2002–2004, relative to comparable export values of $8 billion.
Most domestic markets, including those for rice, sugar, maize and soybeans, are
judged to be integrated with world markets (domestic and world prices highly
correlated), despite the policy-induced differences in price levels that exist
(World Bank, 2008c).

We identify six major issues, chosen from the perspective of their political
importance as well as what we judge to be their importance to the country’s
agricultural development prospects. It is striking how similar they are to those in
other agricultural sectors around the world, especially in the OECD countries.
Producer-consumer food price conflicts, slow productivity growth, public support of
biofuels programs, environmental conflicts, and poverty reduction have generated
the key policy debates within the sector.

Rice Policy

The number one agricultural issue in Indonesia without question is rice policy.
Only fuel would be considered as politicized a commodity as rice. Public policy
involves raising the domestic price as well as increasing the degree of rice self-
sufficiency. The current price is roughly 10% above the world price for medium
quality rice, but a 50% margin has been a good guide overall from 2000 to 2007.
There is a longstanding political demand for protection of rice in Indonesia. That
protection takes the form of preventing decreases in its price through the use of
trade policy instruments, namely a tariff plus exclusive import rights granted to a
well-known state enterprise, the food logistics agency, BULOG.

Rice continues to be the most important staple food, provides the main source of
income for small farmers and is the main food expenditure for agricultural
households in Indonesia. Rice represents 7.2% of average consumer expenditure and
the sector employs 7.1% of the total workforce at the farm level alone (Warr 2005).
Because more than three-quarters of Indonesia’s poor are net rice consumers, the
rice price increase caused by current policy, on average, hurts the poor. Among
rice farmers, the supposed beneficiaries of higher rice prices, land owners are
likely to capture most of the gains, while wage earners in rice farming (the
landless) capture little if any (Barichello, 2005; Patunru and Basri, 2009).

Therefore, one might expect strong public resistance toward trade protection on
rice, but the reverse is true. Rice protection has increased since the 1998
economic crisis, with little consumer resistance. This has been the government’s
response to strong pressures from farm and rice producer interest groups to raise
rice prices and a notable absence of political pressure against high rice prices
from consumers and anti-poverty groups.

Part of the policy attention to rice is manifested in the existence and mandate of
BULOG. This agency has been charged since the late 1960s with achieving a policy-
determined floor price for rice, using the instruments of monopoly control of
trade, government financing, domestic procurement and seasonal storage facilities
(World Bank, 2008b). These activities were considered important in the achievement
of food security for Indonesia and the front line in this effort was rice self-
sufficiency. This goal was part of the reason for high rice prices.

But increasingly there has been a need for reform in this approach to achieving
food security. Reform here concerns not only the structure and operations of BULOG
but also the level of rice prices and the bias in crop prices toward rice. The
search for alternatives to the current high cost rice policy began as early as the
mid-1990s, in the direction of greater rice imports to ensure food security, and
increased domestic productivity in the growing of rice. The latter requires greater
investment in rural infrastructure, more agricultural research, and continued
improvements in rural capital markets.

The rapid increase in rice prices in late 2005 and 2006 following the 2004 ban on
rice imports brought the domestic debate on food security into greater focus. But
political pressures by the interest groups noted above stalled any real reform.
Their influence is a notable change from the Suharto era. Since the post-1998
democratic reforms, agricultural lobby groups have become well organized, present
politically forceful arguments, and are a significant factor in agricultural,
especially rice, policy decisions. This policy regime has been strengthened by the
Ministry of Agriculture’s interests in expanding domestic rice production with its
own programs. Recently favorable weather and rice crops have allowed various
interests to take credit for this higher production by pushing their own programs,
whether they be new seed varieties or irrigation investments. The increased
production has also temporarily removed the need for imports, removing any sense of
crisis.

BULOG itself has worked to limit policy change, given the substantial budget
support (roughly half a billion US dollars) it receives for the rice procurement
program to help farmers and for a targeted price subsidy for poor rice consumers,
both of which it operates. This bureaucratic lobby work has prevailed. “No
parliamentarians have been willing to take on both dimensions of the rice program
simultaneously, and so the huge budget subsidies that accrue to BULOG to run these
programs, and the corruption that accompanies them, go unchallenged.” (World Bank,
2008b) Despite the considerable need for rice policy reform, the window of
opportunity to do it appears for now to have closed.

Trade Protection and Self-Sufficiency in Nonrice Commodities

The desire for protection and domestic self-sufficiency is not limited to rice. It
extends to other food crops, namely sugar, corn and soybeans. The priority of these
secondary food crops is lower than for rice but important nevertheless. A variety
of protectionist measures going back at least to the early Suharto era have been
used on these crops, whether they be imports administratively controlled through
BULOG (sugar and soybeans), or tariffs. The regulatory details and politics
motivating protection have varied, but there is uniformly a stated desire to
achieve self-sufficiency.

It is not possible for all these crops to be produced at sufficient levels to

achieve self-sufficiency. They all compete for a similar set of basic resources,
such as agricultural land. Expanded production of one crop to a large extent will
result in less (or more expensive) land available for the others. This policy
direction is not being matched with increased efforts to increase supply
capabilities such as through agricultural research to increase yields per hectare.
With the rice price raised sufficiently high to outcompete most other crops,
moderate price increases from protection on corn, soybeans and sugar have
relatively little effect on their production, even though it would be desirable for
income diversification reasons to produce more nonrice food crops.

The other important effect of this self-sufficiency policy is on consumers. As for

rice, consumers finance this policy through higher domestic prices because they are
caused by border restrictions. Poor consumers who wish to substitute nonrice
cereals as a cheaper source of calories and other nutrients find this option less
attractive due to these higher prices.

On a related issue, trade policy is also being used with worrying results in the
export sector, especially tree crops. Previously it primarily took the form of
export taxes, mostly on crude palm oil to protect domestic consumers and encourage
value-added in exports. The latter objective, however, has motivated a wider desire
to ban the export of raw materials (e.g., logs, rattan) and more recently to ban
the export of low quality cocoa, coffee and cashews, or to increase quality
standards for these exports. This often hurts farmers and even reduces the export
of high quality products in some cases, but the political economy at work is
protection of the processing jobs at the expense of those harvesting or growing the
raw material. This issue has arisen regularly since the 1980s. A more desirable
policy direction for sustainable food security is to substitute productivity
investments (discussed in Lack of Agricultural Productivity section) for border
restrictions and to avoid export bans, taxes, and quality restrictions.

Biofuels Policy
A new agricultural policy issue is the encouragement of biofuel production. The
objective is to convert 6 million hectares of land to biofuel production, based on
increased oil palm production (Basri and Patunru, 2006). The expectation is that
this would generate increased production of 22.5 million kilolitres of biofuel and
create 3–5 million jobs. Additional biofuel initiatives have been proposed: banning
crude palm oil exports and diverting this production to biodiesel production, and
banning sugarcane molasses exports to use them instead for bioethanol production.
Estimates of the 2007 budget cost ranged from Rp 1 to 13 trillion for these
initiatives (Rp 1 trillion is equivalent to almost US$100 million at current
exchange rates). In late 2008 mixing regulations for gasoline were introduced to
require the addition of biofuels. The objective is to absorb more crude palm oil
(CPO) produced in Indonesia and increase its value-added instead of exporting the
currently large and growing volume. In addition the program is aimed at increasing
the supply of green fuels produced in Indonesia to combat global warming, and, it
is argued, reducing unemployment.

This program has attracted more than its share of criticism. In addition to the
questionable economic viability of these investments, and even their energy
viability, they have been criticized for not offering a significant reduction in
unemployment. To avoid the now well-known side effect of biofuels programs bidding
up the cost of various food crops to some degree, this program could have been
designed to support only oil palm production on dry land. These programs have
included no such targeting to minimize food production conflicts. So far, only
about 10-15% of domestic production of CPO is being used to produce biofuels, and
there is no evidence of any effect the program has had on world prices, a concern
because Indonesia is a major CPO producer. Because little is known about how large
the budget commitment will be, what the true social and economic costs of the
program are, and how much deforestation will be caused, the program remains
suspect.

Lack of Agricultural productivity

The relatively slow growth of agricultural value-added is another important issue

in the country’s agriculture, even though it does not merit newspaper headlines.
Agriculture’s GDP share has leveled off at a high 15% (Figure 1). This slow
agricultural productivity growth has persisted for almost three decades, despite
bright spots like increased poultry production.

This problem has damaged the country’s pursuit of increased self-sufficiency by

limiting the crop yield growth and cost reductions that would enhance its
comparative advantage in food crops. It has also reduced Indonesia’s international
competitiveness in agricultural products. Without productivity growth, the only
hope of reducing reliance upon imports is to restrict trade and raise domestic
prices, exactly what has been done in food crops, with negative effects on
consumers and poverty reduction.

The seriousness of this productivity shortfall is finally causing it to receive

serious attention among multilateral aid agencies as well as among government
officials. High farm prices have not been sufficient. The Government of Indonesia
with World Bank support has formulated a rural development strategy with an
emphasis on reinvigorating productivity growth among rural producers and ensuring
these measures are sustainable in the long run (World Bank 2007).

The components of this strategy draw on established methods to enhance productivity

and sustainable resource management. They include improving property rights to land
by increasing the proportion of formal title certificates from the current 25%,
improving water resource management through better irrigation operations and
maintenance, and reducing water waste, groundwater depletion, water pollution, and
soil degradation.

Agricultural research expenditures must be increased significantly after 20 years

of decline. The details include replacing retiring senior researchers, integrating
private sector agricultural research capacity (such as commercializing new
varieties and hybrid seeds) with public sector efforts, reinvigorating sub-national
adaptation institutes, strengthening biotechnology research capacity and giving
greater emphasis to nonrice commodities. Extension services are equally in serious
need of greater public sector contributions to upgrade educational qualifications,
raise salaries, retain the most capable personnel, and coordinate with private
sector and civil society extension providers. Rural infrastructure also suffers
from a long term decline in investment. Reinvestment, including roads, rail and sea
transport, irrigation, and electricity provision, is necessary both to support
intensification of commercial agriculture and to improve living standards of the
rural poor.

Closely related to these productivity growth issues is attention to environmentally

sustainable practices. This includes reduction of deforestation and pollution
externalities from agriculture and food processing. Deforestation, partly from
biofuel subsidies, has become a particularly pressing issue due to the contribution
it makes to Indonesia’s greenhouse gas emissions. Reducing it, however, is complex
and will be expensive. These matters have become an issue not simply due to
increased environmental awareness in Indonesia but recognition that climate changes
and less predictable weather are placing a premium on better environmental
management. These concerns have been applied to the question of future rice
productivity (World Bank 2008b), but the key question for success in better
environmental management in agriculture is implementation and enforcement. This
leads directly to the issue of local governance.

Local Governance and Decentralization

Since 2001 Indonesia has embarked upon a major decentralization of economic power
to the district level, with financial services, personnel, and responsibilities for
basic services being allocated to district governments. This has since been
modified by some increase in provincial government review and monitoring, but the
basic thrust has been a devolution of power and resources to the regions from the
central government. This is of particular importance to the agricultural sector
because (a) local government policies and regulations are often very important, and
(b) most agricultural commodities are regional (e.g., dominance of food crops in
Java and tree crops in Sumatra and Kalimantan). But there is also the danger of
inconsistent regional policies; trade policy and domestic pricing require national
policies.

This step has been welcomed by many observers as an antidote to widely-acknowledged

corruption by the central government on many issues related to ongoing policies and
regulations as well as one-time development projects. It was also seen as a
valuable step to ensure more responsive management of local resources as well as to
inject local data and concerns into various policy decisions, especially given the
diverse ethnic and geographic composition of the country. However, the results have
been mixed and the challenge of quality local governance remains.

This comment summarizes the situation: “Overall, the environment for ‘good
governance’ at the local level is weak and corruption similar to the national
situation is endemic.” (World Bank, 2007a) The comment also highlights the need to
reduce corruption within public sector activity in Indonesia, at both national and
local levels. It remains important to the agricultural sector and contributes not
only to problems of local governance but also to agricultural sector productivity
levels, and the choice, enforcement and ultimate efficiency of various policies
such as trade protection and domestic pricing. Decentralization has its advantages
but is no panacea.

Alleviation of Poverty

Poverty remains a major social issue in Indonesia, by any measure. Because most
poverty is still located in rural areas, many agricultural policies embrace the
rhetoric of poverty alleviation as one of their objectives. In the first two
decades of the Suharto period, to the mid-1980s, agricultural policies that
supported rice production contributed to pro-poor economic growth and reduced rural
poverty. Figure 2 below shows Indonesia’s progress in poverty reduction: poverty
declined from 1990 to the Asian Financial crisis of 1997/98, rose sharply with the
crisis but declined again steadily from 1999 to 2008.

But over the past two decades, the contribution of these policies to economic
growth has been reduced; government priorities shifted away from productivity-
enhancing policies and flowed to rice price protection policies whose costs were
growing. In addition, the leverage of agricultural price policies on rural poverty
has been reduced. Raising the price of rice no longer reduces poverty because the
poorest Indonesians are net rice consumers, wage rates now appear to be influenced
most heavily by the non-farm labor market, and the benefits of price policies have
been strongly tilted toward farmland owners. There have been efforts to soften the
impact of higher rice and cooking oil prices for the poorest consumers through
targeted consumer subsidies (“rice for the poor” targeted 19 million poor
households in 2008), and expenditures on these programs increased in response to
the 2008 price increases. Overall, rural poverty has been reduced since 1999, seen
in Figure 2, but this has been due to strong nonfarm economic growth and a dynamic
rural labor market that features substantial off-farm employment and rural-urban
migration. So although the alleviation of poverty is still promoted as an important
issue for agricultural policy, this is now largely political rhetoric. Much more
could be done.

For More Information

Barichello, R. (2005). “Economic Development and Poverty Reduction in East Asia:

The Impact of OECD-Country Agricultural Policies,” Chapter 5 in Fukasaku, K.,
Kawai, M., Plummer, M.G., and Trzeciak-Duval, A., Eds., Policy Coherence Towards
East Asia: Development Challenges for OECD Countries. Paris: OECD (Development
Centre Studies).

Basri, M.C. and Patunru, A. (2006). Survey of Recent Developments, Bulletin of

Indonesian Economics Studies 42(3): 295-319.

Patunru, A., and Basri, M.C. (2009). The Political Economy of Rice and Fuel Pricing
in Indonesia, conference paper presented at Poverty, Food and Global Recession in
Southeast Asia, Institute for Southeast Asian Studies, Singapore.

Warr, P. (2005). Food policy and poverty in Indonesia: a general equilibrium

analysis. The Australian Journal of Agricultural and Resource Economics 49: 429-51.

World Bank. (2007). http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES

/EASTASIAPACIFICEXT/INDONESIAEXTN/0,,contentMDK:
20534330~menuPK:287102~pagePK:1497618~piPK:
217854~theSitePK:226309,00.html

World Bank. (2008a).

http://siteresources.worldbank.org/INTINDONESIA/Resources/Country-
Update/ecsos.update.dec.2008.eng.pdf

World Bank. (2008b). Adapting to Climate Change: The Case of Rice in Indonesia. A
Study under the Rice Policy Dialogue AAA (P108646). Report #44434-ID

World Bank. (2008c). How International Price Shocks Impact Indonesian Food Prices,
Trade Development Technical Note, Issue 3.

World Development Report. (2008).

http://siteresources.worldbank.org/INTWDR2008/Resources/WDR_00_book.pdf

Figure 1
Figure 1
Time Path of Agriculture�s Contribution to GDP
Figure 2
Figure 2
Poverty Trends in Indonesia
Richard R. Barichello (Richard.barichello@ubc.ca) , is Associate Professor, Food
and Resource Economics, University of British Columbia, Vancouver, BC, Canada.
Arianto Patunru (patunru@lpem-feui.org) is Assistant Professor, Department of
Economics, University of Indonesia, Jakarta, Indonesia.
A publication of
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How Agriculture Contributes to Economic Development
by EVA LEE 9 months ago in FOOD
Agriculture and Its Economic Development

Agriculture has always played a pivotal role in shaping the economy of countries.
Since it fulfills the basic necessities of the people, all nations across the globe
make special provision to improve the productivity. Even the ancient civilization
has given it due importance. The agriculture sector not only provides food but also
a means of employment to millions. It contributes to resolving sociopolitical
issues and building a civilized society. Countries where the real capital income is
less, more emphasis is given on developing the agricultural sector and its related
industries since it can become the driving force to boost the economy. Whether
under developing or developed, agriculture is still the basic occupation of the
world.
Role of Agriculture

Prior to the advent of currency in the world, the neanderthal population was
dependent on the barter system for the exchange of commodities between two
communities. With the discovery of agriculture, the hunter-gatherer community found
a source for food, settling down at one place, and reduce hunting. The agricultural
revolution changed the way the farming sector would impact the overall economy of a
country.

The agricultural development assisted greatly for industrialization in countries

like U.S. and Japan as evident from the significant progress made by them. As a
result, it became clear to the underdeveloped and developing countries that instead
of putting limitations on a particular sector, the industrial and agricultural
industries must co-exist for contributing to the development of the nation. The
agricultural industry plays a big role in driving an economy being a major source
of raw materials. It not increases the employment ratio, but also strengthens the
purchasing power of the people. This sector can also help individuals for playing
an instrumental role in country's foreign exports, and providing job opportunities
for all types of skills.

Ways in Which Agriculture Boosts a Country's Economy

Whether it is a developed country or a developing one, agriculture forms an

important sector in improving GDP, which is important to determine the economic
performance of a nation For the industries which are agro-based, it is the backbone
of their products as major raw materials are obtained from the farm. The
agricultural industry plays a significant role in boosting the national income in
various ways such as:

Improving employment ratio

The agriculture sector and livestock industry are interlinked. Together, they
create ample job opportunities for the population. While the agriculture sector
employs people for agricultural production, the livestock industry does it for
producing and selling animal products. Since both these industries need to function
through a chain of ancillary support such as warehouse and logistics, it helps in
generating employment for the people. For those who love to have their own
business, they can also work as a mediator between the local farmers and industry
wholesale dealers.

Promotes infrastructure creation

When the focus is shifted towards development of agriculture, naturally, it boosts
the small-scale industries situated in the vicinity of that area. As it involves a
lot of operations, it would eventually mean the development of roads, storehouses,
packaging units, and transportation services thus adding to the development of new
infrastructure.

Helps to supply raw materials

Agriculture helps to produce raw materials that are required by other industries.
Processing of these raw materials helps in manufacturing products for several uses.
If the supply of materials is not as per the demand, then it can affect the entire
supply chain thereby impacting the economy, and can cause hindrances in the growth
of a country. As a result, the nation's economic turnover might take a hit thus
adding to more expenses for the people.

Generates a source of foreign exchange for the country

Most of the primary products that are required in industries are obtained from the
agricultural sector. For instance, the refined quality cotton dresses which you
purchase from the mall get their basic material from the farm. When the raw
material is available in abundance, the country can become a primary exporter of
the products and generate a good income. As the international market is very
dynamic and since the price of raw material is constantly fluctuating, the
developing countries have now started focusing on the export of manufactured foods
to increase the percentage of foreign income.

The agricultural sector can assist to contribute significantly in generating

capital income for a country in many ways. For example, when there is a surplus
demand for the raw materials, it will, in turn, lead to the production of more
goods supporting industrialization and increasing employment.

Hence, when a country focuses on making advancements in the agricultural sector, it

is, in turn, contributing to its own economic development by starting to address
the problems at the root level. Giving significance to the issues at the base level
can help to cut down the obstacles in the later stages, and also boost income for
an economy.

FOOD
Read next: Aquaculture and Its Damage to Mother Earth
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Eva Lee
Eva Lee is an Enterprise Software Technology project Manager who also enjoy's
writing,Eva started writing the blogs and articles on Resumes, Career oriented
topics.

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JOBS AND DEVELOPMENT
Five new insights on how agriculture can help reduce poverty
SUBMITTED BY LUC CHRISTIAENSEN ON THU, 07/26/2018
CO-AUTHORS: WILL MARTIN
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A Cambodian farmer
A Cambodian farmer - Photo: Chor Sokunthea / World Bank
The view that a productive agriculture is critical for employment creation and
poverty reduction is now widely shared within the development community. Yet, this
has not always been the case. In the run up to the 2008 world food price crisis,
many development practitioners, government officials and economists doubted whether
agriculture could still play this role, especially in Africa. Agro-pessimism had
set in during the 1990s and 2000s, with a decline in policy attention and
agricultural investment. The food price spikes of 2008 brought a realization that
more needed to be done to strengthen agriculture in developing countries.

Today, world food prices are still 70 percent higher than before the food price
crisis (or 40-50 percent in real terms) and the trade and policy environment is
much more favorable to agriculture. But African incomes have also grown, poverty
has come down and countries are more urbanized. So, what then is the role of
agriculture for poverty reduction today and is the favorable inclination towards
agriculture of the past years also backed up by the more recent evidence?

Eight papers in a forthcoming Special Issue of World Development present the latest
evidence. Using a multitude of analytical techniques (theoretical derivations, CGE
modeling, econometrics), they confirm the continuing importance of agricultural
development for poverty reduction. They also add important nuance. Here are five
take-aways.
Growth in agriculture remains more poverty reducing than growth elsewhere

Growth in agriculture remains in general two to three times more effective at

reducing poverty than an equivalent amount of growth generated in other sectors.
This holds irrespective of the empirical method or the poverty metric used to
estimate this. It is consistent with the findings reported in the literature so
far.

The poorest benefit most from agricultural growth

The effects on poverty reduction of agriculture are largest for the poorest in
society and the advantage of agricultural over nonagricultural growth in reducing
poverty ultimately disappears as countries become richer (see graph). Furthermore,
the lower the literacy rates, the stronger the progressivity in the poverty-
reducing effect of agricultural over nonagricultural growth. This supports the
current policy attention to agriculture in Africa and South Asia, which together
house more than 80 percent of the world’s extreme poor today.

Simulated poverty change from a sectoral productivity increase equal to 1% of GDP

(single country simulations) at different levels of GDP per capita
Simulated poverty change from a sectoral productivity increase equal to 1% of GDP
(single country simulations) at different levels of GDP per capita - Source: Ivanic
and Martin (2018).

The comparative advantage of agriculture is not limited to landlocked countries

The degree of tradability of the food (and nonfood) that experiences the increase
in productivity is an important consideration in determining the reduction of
poverty from growth in that sector. It affects the extent to which prices decline
and thus the extent to which producers and consumers gain. Computable general
equilibrium model simulations for around 300,000 households from 31 countries
suggest that agriculture’s advantage holds, irrespective of whether food is
considered tradable or not. Agricultural growth appears a priority for poverty
reduction in landlocked and coastal economies alike.

However, agriculture’s edge over non-agriculture varies by the latter’s subsectors

There is substantial heterogeneity in the poverty reducing effects of non-

agriculture across its different subsectors. Trade and transport services have
poverty to growth elasticities closer to those of agriculture, and those for
manufacturing, especially agro-processing, can at times even exceed them.
Contrarily, the poverty-reducing effects of mining, finance, and business and
government services are much more limited. Productivity growth in trade and
transport services can have both direct linkages to the poor, but also indirect
ones, for example, by reducing the transaction costs for the marketed products.
This is particularly beneficial in sectors with higher margins, such as agriculture
and food.

The advantages of agriculture vs non-agriculture also depends on the financing

source, a much-neglected fact

The way public investments are financed has first-order distributional implications
which may even overturn the underlying gains from rising productivity. An increase
in public capital formation targeted to agriculture can, for example, negatively
affect real consumption wages of the rural unskilled if financed from a tariff, but
have a positive effect if financed through a consumption tax, which affects mainly
the urban skilled. Great reliance on aid financed investment on the other hand, may
cause real exchange appreciation, favoring the more traditional, domestic oriented
nonagricultural sector over the more productive, open modern sector. Given that
more, and more unskilled, labor is hired by the informal sectors of this closed
(nonagricultural) economy, it may also lead to larger poverty reduction than when
public investment financing is less dependent on foreign grants, which would favor
growth in the open modern economy and lead to greater labor productivity.

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Economics Discussion
Role of Agriculture in the Economic Development of a Country
Article Shared by
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Some of the major role of agriculture in economic development of a country are as

follows:

Agricultural sector plays a strategic role in the process of economic development

of a country.

It has already made a significant contribution to the economic prosperity of

advanced countries and its role in the economic development of less developed
countries is of vital importance.

ADVERTISEMENTS:

In other words, where per capita real income is low, emphasis is being laid on
agriculture and other primary industries.

“Increase in agricultural production and the rise in the per-capita income of the
rural community, together with the industrialisation and urbanisation, lead to an
increased demand in industrial production”-Dr. Bright Singh.

The history of England is clear evidence that Agricultural Revolution preceded the
Industrial Revolution there. In U.S.A. and Japan, also agricultural development has
helped to a greater extent in the process of their industrialisation. Similarly,
various under-developed countries of the world engaged in the process of economic
development have by now learnt the limitations of putting over-emphasis on
industrialisation as a means to attain higher per capita real income. “Thus
industrial and agricultural developments are not alternatives but are complementary
and are mutually supporting with respect to both inputs and outputs.”

It is seen that increased agricultural output and productivity tend to contribute

substantially to an overall economic development of the country, it will be
rational and appropriate to place greater emphasis on further development of the
agricultural sector.

According to Prof. Kinderberger, Todaro, Lewis and Nurkse etc., agriculture makes
its contribution to economic development in several ways, viz.,:

ADVERTISEMENTS:

(1) By providing food and raw material to non-agricultural sectors of the economy,

(2) By creating demand for goods produced in non-agricultural sectors, by the rural
people on the strength of the purchasing power, earned by them on selling the
marketable surplus,

(3) By providing investable surplus in the form of savings and taxes to be invested
in non-agricultural sector,

(4) By earning valuable foreign exchange through the export of agricultural

products,

(5) Providing employment to a vast army of uneducated, backward and unskilled

labour. As a matter of fact, if the process of economic development is to be
initiated and made self-sustaining, it must begin for agricultural sector.

Role of Agriculture in Economic Development:

The agriculture sector is the backbone of an economy which provides the basic
ingredients to mankind and now raw material for industrialisation.

Therefore, the role of agriculture for the development of an economy may be stated
as below:
1. Contribution to National Income:

ADVERTISEMENTS:

The lessons drawn from the economic history of many advanced countries tell us that
agricultural prosperity contributed considerably in fostering economic advancement.
It is correctly observed that, “The leading industrialized countries of today were
once predominantly agricultural while the developing economies still have the
dominance of agriculture and it largely contributes to the national income. In
India, still 28% of national income comes from this sector.

2. Source of Food Supply:

Agriculture is the basic source of food supply of all the countries of the world—
whether underdeveloped, developing or even developed. Due to heavy pressure of
population in underdeveloped and developing countries and its rapid increase, the
demand for food is increasing at a fast rate. If agriculture fails to meet the
rising demand of food products, it is found to affect adversely the growth rate of
the economy. Raising supply of food by agricultural sector has, therefore, great
importance for economic growth of a country.

Increase in demand for food in an economy is determined by the following equation:

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D = P + 2g

Here,

D stands for Annual Rate of Growth in demand for food.

P stands for Population Growth Rate.

g stands for Rate of Increase in per Capita Income.

2 stand for Income Elasticity of Demand for Agricultural Products.

3. Pre-Requisite for Raw Material:

Agricultural advancement is necessary for improving the supply of raw materials for
the agro-based industries especially in developing countries. The shortage of
agricultural goods has its impact upon on industrial production and a consequent
increase in the general price level. It will impede the growth of the country’s
economy. The flour mills, rice shellers, oil & dal mills, bread, meat, milk
products sugar factories, wineries, jute mills, textile mills and numerous other
industries are based on agricultural products.

4. Provision of Surplus:

The progress in agricultural sector provides surplus for increasing the exports of
agricultural products. In the earlier stages of development, an increase in the
exports earning is more desirable because of the greater strains on the foreign
exchange situation needed for the financing of imports of basic and essential
capital goods.
Johnson and Mellor are of the opinion, “In view of the urgent need for enlarged
foreign exchange earnings and the lack of alternative opportunities, substantial
expansion of agricultural export production is frequently a rational policy even
though the world supply—demand situation for a commodity is unfavorable.”

5. Shift of Manpower:

Initially, agriculture absorbs a large quantity of labour force. In India still

about 62% labour is absorbed in this sector. Agricultural progress permits the
shift of manpower from agricultural to non-agricultural sector. In the initial
stages, the diversion of labour from agricultural to non-agricultural sector is
more important from the point of view of economic development as it eases the
burden of surplus labour force over the limited land. Thus, the release of surplus
manpower from the agricultural sector is necessary for the progress of agricultural
sector and for expanding the non-agricultural sector.

6. Creation of Infrastructure:

The development of agriculture requires roads, market yards, storage,

transportation railways, postal services and many others for an infrastructure
creating demand for industrial products and the development of commercial sector.

7. Relief from Shortage of Capital:

The development of agricultural sector has minimized the burden of several

developed countries who were facing the shortage of foreign capital. If foreign
capital is available with the ‘strings’ attached to it, it will create another
significant problem. Agriculture sector requires less capital for its development
thus it minimizes growth problem of foreign capital.

8. Helpful to Reduce Inequality:

In a country which is predominantly agricultural and overpopulated, there is

greater inequality of income between the rural and urban areas of the country. To
reduce this inequality of income, it is necessary to accord higher priority to
agriculture. The prosperity of agriculture would raise the income of the majority
of the rural population and thus the disparity in income may be reduced to a
certain extent.

9. Based on Democratic Notions:

If the agricultural sector does not grow at a faster rate, it may result in the
growing discontentment amongst the masses which is never healthy for the smooth
running of democratic governments. For economic development, it is necessary to
minimize political as well as social tensions. In case the majority of the people
have to be kindled with the hopes of prosperity, this can be attained with the help
of agricultural progress. Thus development of agriculture sector is also relevant
on political and social grounds.

10. Create Effective Demand:

The development of agricultural sector would tend to increase the purchasing power
of agriculturists which will help the growth of the non-agricultural sector of the
country. It will provide a market for increased production. In underdeveloped
countries, it is well known that the majority of people depend upon agriculture and
it is they who must be able to afford to consume the goods produced.

Therefore, it will be helpful in stimulating the growth of the non- agricultural

sector. Similarly improvement in the productivity of cash crops may pave the way
for the promotion of exchange economy which may help the growth of non-agricultural
sector. Purchase of industrial products such as pesticides, farm machinery etc.
also provide boost to industrial dead out.

11. Helpful in Phasing out Economic Depression:

During depression, industrial production can be stopped or reduced but agricultural

production continues as it produces basic necessities of life. Thus it continues to
create effective demand even during adverse conditions of the economy.

12. Source of Foreign Exchange for the Country:

Most of the developing countries of the world are exporters of primary products.
These products contribute 60 to 70 per cent of their total export earning. Thus,
the capacity to import capital goods and machinery for industrial development
depends crucially on the export earning of the agriculture sector. If exports of
agricultural goods fail to increase at a sufficiently high rate, these countries
are forced to incur heavy deficit in the balance of payments resulting in a serious
foreign exchange problem.

However, primary goods face declining prices in international market and the
prospects of increasing export earnings through them are limited. Due to this,
large developing countries like India (having potentialities of industrial
development) are trying to diversify their production structure and promote the
exports of manufactured goods even though this requires the adoption of protective
measures in the initial period of planning.

13. Contribution to Capital Formation:

Underdeveloped and developing countries need huge amount of capital for its
economic development. In the initial stages of economic development, it is
agriculture that constitutes a significant source of capital formation.

Agriculture sector provides funds for capital formation in many ways as:

(i) agricultural taxation,

(ii) export of agricultural products,

(iii) collection of agricultural products at low prices by the government and

selling it at higher prices. This method is adopted by Russia and China,

(iv) labour in disguised unemployment, largely confined to agriculture, is viewed

as a source of investible surplus,

(v) transfer of labour and capital from farm to non-farm activities etc.

14. Employment Opportunities for Rural People:

Agriculture provides employment opportunities for rural people on a large scale in

underdeveloped and developing countries. It is an important source of livelihood.
Generally, landless workers and marginal farmers are engaged in non-agricultural
jobs like handicrafts, furniture, textiles, leather, metal work, processing
industries, and in other service sectors. These rural units fulfill merely local
demands. In India about 70.6% of total labour force depends upon agriculture.

15. Improving Rural Welfare:

It is time that rural economy depends on agriculture and allied occupations in an
underdeveloped country. The rising agricultural surplus caused by increasing
agricultural production and productivity tends to improve social welfare,
particularly in rural areas. The living standard of rural masses rises and they
start consuming nutritious diet including eggs, milk, ghee and fruits. They lead a
comfortable life having all modern amenities—a better house, motor-cycle, radio,
television and use of better clothes.

16. Extension of Market for Industrial Output:

As a result of agricultural progress, there will be extension of market for

industrial products. Increase in agricultural productivity leads to increase in the
income of rural population which is turn leads to more demand for industrial
products, thus development of industrial sector.

According to Dr. Bright Singh, “Increase in agricultural production and the rise in
the per-capita income of the rural community, together with the industrialisation
and urbanisation, lead to an increased demand in industrial production.” In this
way, agricultural sector helps promote economic growth by securing as a supplement
to industrial sector.

Conclusion:

From the above cited explanation we conclude that agricultural development is a

must for the economic development of a country. Even developed countries lay
emphasis on agricultural development. According to Muir, “Agricultural progress is
essential to provide food for growing non-agricultural labour force, raw materials
for industrial production and saving and tax revenue to support development of the
rest of the economy, to earn foreign exchange and to provide a growing market for
domestic manufactures.”

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A diversity of seeds on sale in Nanyuki market, Kenya. K Dekeyser

Why developing countries should boost the ways of small-scale farming

Rachel Wynberg, University of Cape Town, Laura Pereira, Stellenbosch University

August 30, 2018 4.01pm SAST

Industrial agriculture – farming that involves the intensive production of
livestock, poultry, fish and crops – is one of the most environmentally destructive
forms of land use. It depends on mechanisation and on inputs like synthetic
fertiliser and harmful pesticides and herbicides and has led to widespread
contamination of soil and water. It also relies on just a few major crops like
wheat, maize, soybean and rice, the seeds of which are owned by a mere handful of
companies.

A different approach to agriculture is sorely needed. This should, ideally, deliver

household food security, ensure sustainable livelihoods and produce quality
nutrition in a rapidly changing climate.
Developing countries that are industrialising at a pace are uniquely placed to
avoid developing a dependency on one type of technological innovation at the
expense of others. This is what is known as technological lock-in, with industrial
agriculture being one form of lock-in. Such countries are also well placed to
establish alternative ways to grow food that maximise livelihoods and sustainable
food production.

For instance, Brazil, India, China and South Africa have agricultural sectors that
have both industrialised farmers and resource-poor farmers who practice low-input
agriculture. These countries offer important spaces for strengthening practices
that are well suited to the challenges facing smallholder farmers. And ones that
are more environmentally sound.

A change in these countries could pioneer alternative approaches for other

developing countries.

The basis for alternative agricultural systems already exists. They’re practised by
at least 75% of the world’s 1.5 billion smallholders, family farmers and indigenous
peoples.

These alternatives fall broadly under the umbrella of agroecology. Their key
characteristics include the use of technologies based on ecological knowledge, as
well as a focus on family farming and local production. They also have low levels
of external inputs, and are diversified.

Developing countries could leapfrog industrial agriculture systems and move toward
an agricultural sector that’s run on agroecological principles. But this needs
increased public investment and a policy environment that’s conducive to
encouraging the approach.

Millions are doing it already

Agroecology is already practised by millions of small-scale farmers across the

world. China and India, for example, account for 35% and 24% of the world’s 570
million family farms. In Brazil, 78% of farms are less than 50 hectares. In South
Africa there are about four million small-scale and mostly subsistence farmers.

These farms play a critical role in food security. This is especially true at a
local level. But these farmers also face numerous challenges: access to land and
capital, secure land rights, appropriate extension and advice, increased climate
variability and market access.

The question is whether public money in emerging economies is being used to address
these challenges and the needs of small farmers. Or is it being used to prop up
large-scale industrial agriculture?

Many emerging economies have dual forms of agriculture – both industrialised and
small-scale. Yet investment in agricultural innovations typically centre only on
priorities for industrialised farming.

Genetic engineering is an example. It has become one of the main areas of focus in
agricultural research over the past three decades. Highly specialised – it involves
the modification of an organism by manipulating its genes – it needs high levels of
investment. Those developing it also expect high returns and it’s very much a “top-
down” approach, removed from the context and knowledge of most of the world’s
farmers, and often bringing questionable benefits.

Solutions
Smallholder agriculture is increasingly important in emerging economies. There is a
need for alternative agricultural solutions. Emerging economies can be leaders in
this field.

Agroecology presents a tested and forward-looking approach. But it needs to be

institutionalised in the allocation of research funding and in science and
technology policy.

Agricultural research and development is already playing an important role. Over

the past decade there have been increased investments by emerging economies in
agricultural research. For example Chinese government investment in agricultural
research doubled from 2001 to 2008, exceeding any country except the US. Brazil
similarly increased agricultural research and development spending by 46% between
2006 and 2013. South Africa’s investment level is more erratic. But it’s still high
compared to most other sub-Saharan countries.

More needs to be done. Additional steps should include:

Increased cooperation in agricultural research between countries with large public

sector institutes like Brazil and China, and countries with less research capacity,
such as Mozambique and Malawi;

Demonstrating the validity and economic potential of agro-ecology. This can be

achieved by drawing on farmers’ knowledge, developed over centuries of
experimentation; and

Redesigning formal training and extension programmes to incorporate local knowledge

and have a stronger uptake of agroecology in places where resources are scarce.

Emerging economies provide an important opportunity to upscale agroecological

innovations to help improve the livelihoods of small and resource-poor farmers and
address environmental problems. But they need public investment and an enabling
environment to flourish.

Comment on this article

Rachel Wynberg
Associate Professor and DST/NRF Bio-economy Research Chair, University of Cape Town

Laura Pereira
Researcher/Lecturer at the Centre for Complex Systems in Transition, Stellenbosch
University
Rachel Wynberg works for the University of Cape Town, South Africa where she holds
a research chair funded by the Department of Science and Technology and National
Research Foundation. The work in this article was funded by a FP7 project on
Responsible Innovation (PROGRESS). Through the University of Cape Town, she forms
part of the Seed and Knowledge Initiative (SKI) which represents an innovative
collaboration between universities, practitioners and a range of NGOs across
southern Africa to revive and enhance traditional seed and knowledge systems and to
deepen understanding about their functioning. Rachel serves on the Boards of
Biowatch South Africa, Environmental Monitoring Group and the Union for Ethical
Biotrade. This article is written in her personal capacity and does not represent
the views of any of these organisations. No benefit will accrue to any
organisation.

Laura Pereira does not work for, consult, own shares in or receive funding from any
company or organisation that would benefit from this article, and has disclosed no
relevant affiliations beyond their academic appointment.
University of Cape Town and Stellenbosch University provide funding as partners of
The Conversation AFRICA.

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The Blog
You are here:Home»The Blog»The Blog»Agriculture»How is Farming in Developing
Countries Different?

July 29, 2013

How is Farming in Developing Countries Different?

Farming in Developing Countries

The story of farming in the developing world is a completely different one. In the
US, agricultural workers make up a very small portion of the population, but
agriculture employs anywhere between 50 percent and 90 percent of the population
for farming in developing countries. Of this percentage, small farmers are the most
prevalent form of producers, making up 70-90 percent of those working in
agriculture. According to the Bill and Melinda Gates Foundation’s website “Three-
quarters of the world’s poorest people get their food and income by farming small
plots of land about the size of a football field.”

Improving Farming in Developing Countries

As such, helping these small farmers in developing countries increase production

and sell more crops is the best way to combat global hunger and poverty. The
difficulties in increasing production for these farmers include unproductive soil,
plant diseases, pests, and drought. In many cases these small farmers trek miles to
the nearest water source and are only able to bring enough water back to produce
small amounts of crops. Lack of access to improved seeds or fertilizers and
pesticides further add to their hardships, in addition to a lack of reliable
markets and little available pricing information.

One important aspect of furthering agricultural production in developing countries

is pushing for empowerment and equality of women in these nations. In Asia, women
produce 60 percent of agricultural products, and in Africa that figure is 80
percent. However, these same women also are not given equal access to credit which
could enable them to afford quality seeds, fertilzers, and water pumps, increasing
their production and providing more food to their communities. If women farmers
were given equal access to resources, developing countries would see significant
increases in agricultural productivity.

Other ways to aid these small farmers include investment in technological

innovations, such as cheap solar-powered water pumps, and giving farmers better
access to information about the markets they are selling to. Thanks to new
information technologies, farming knowledge can now be transferred across regions
through radio, internet, and mobile phones.

The important thing to note about farming in developing countries is that such a
large portion—up to 90 percent—of the economy is made up of agriculture workers. If
innovations and policies can improve their standard of living then the majority of
the poor in many developing countries would be lifted out of poverty. Out of their
rise from poverty comes new consumers and contributors to the global economy,
benefitting not just developing countries, but developed ones as well.

– Martin Drake

Sources: Gates Foundation, Canadian Federation of Agriculture

Photo: World Crunch

Tags: Africa, Agriculture, Asia, Developing Countries, Farming, Female Empowerment

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