INDONESIA Essays on Agricultural Institutions and Policy
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37413 Public Disclosure Authorized INDONESIA Public Disclosure Authorized Essays on Agricultural Institutions and Policy Public Disclosure Authorized June 24, 1999 Public Disclosure Authorized Rural Development and Natural Resources East Asia and Pacific Region ii CURRENCY EQUIVALENTS (As of June 1, 1999) Currency Unit = Rupiah 1 Rupia h = 0.00012 US$ US$1 = 7300 Rupiah FISCAL YEAR: 1 January to December 31 ABBREVIATIONS AND ACRONYMS ABN-AMRO - Dutch Bank ACDI/VOCA - BAPPENAS - National Planning and Development Body BGR - BKD - Village Credits Bank BKKBN - National Family Planning Board BRI - People’s Bank of Indonesia BULOG - Food Logistic Authority CIDA - Canadian International Development Agency CFTC - Commodities Future Trading Commissions EBRD - European Bank for Resonstruction and Development EKUIN - Economic, Finance and Industry GDP - Gross Domestic Product GOI - Government of Indonesia ICEB - IDF - International Development Fund IMF - International Monetary Fund KKPA - Credit for Members of Primary Cooperating KKOP - Credit for Food Crop Harvest and Distribution KLBI - Bank Indonesia Liquidity Credits KUD - Village Cooperative KUK - Small-scale Enterprise Credit Program KUPEDES - Village Enterprise Credit Program KUT - Farmer Production Credit LDKP - Lembaga Dana Kredit Pedesaan MOA - Ministry of Agriculture MMT - NGO - Nongovernmental Organization OPK - Rice Subsidy Program PHBK - PKM - Proyek Kredit Mikro RDKK - TPSP - Tempat Pelayanan Simpan Pinjam Undang-Undang Dasar - Law UPGM - USAID - United States Aid Development Program WRS - Warehouse Receipts System WTO - World Trade Organization iii PREFACE The essays contained in this volume were produced by the Rural Development Unit of the East Asia and Pacific Region to provide background information for the continuing policy dialogue between the Government of Indonesia (GOI) and the World Bank. The topics selected are priority sectoral concerns for Indonesia as the government examines reforms needed to revitalize agriculture and the rural sector following the economic and political crisis of 1997-98. Information for the essays was collected by a mission that visited Indonesia in March, 1999. Preliminary findings were discussed with government officials at that time, papers were then completed, reviewed within the Bank, and commented on again by Indonesian officials and academics. The papers were then finalized and put together in this collection. Authors of the papers are: Steven Tabor, consultant, Rice Price Policy and the Restructuring of BULOG; Donald Larson, the World Bank, Alternative Food Security Instruments; Stephen Mink, the World Bank, Rural Credit; Jock Anderson, the World Bank, Agricultural Cooperatives in Indonesia; Ian Gregory, the International Fertilizer Development Center, Fertilizer Policy; and Isabelle Tsakok and Ade Tunis, the World Bank and Ministry of Agriculture, Indonesia, respectively, Commercialization of the Seed Industry. The papers were edited by Phil Sawicki and the work was under the general direction of Malcolm Bale. The authors wish to thank the many officials of the GOI who provided information, detailed explanations, and valuable comments on the papers. In particular, Mmes. Delima Azahari and Ade Tunis, (EKUIN and MOA, respectively) and Mr. Gellwynn Jusuf (BAPPENAS), played a key role in identifying counterparts and in the review of the papers. iv TABLE OF CONTENTS Page No. I. RICE PRICE POLICY AND THE RESTRUCTURING OF BULOG................ 1 Policy Challenges and Constraints..................................................... 2 Farm Income Support......................................................................... 3 Targeted Rice Distribution................................................................. 4 Price Stabilization.............................................................................. 5 Public Stocks...................................................................................... 6 Rice Market Development Policy...................................................... 6 BULOG Restructuring....................................................................... 7 Table 1: Rice Policy: Short and Medium-Term Reform Options 9 Table 2: Rice – Area Harvested, Production, and Yield, 1982-1998.......................................................... 12 Table 3: Food Price, Consumer Price, Exchange Rate and Rice Price in 1998 ...................................................... 13 II. ALTERNATIVE FOOD SECURITY INSTRUMENTS: THE WAREHOUSE RECEIPTS SYSTEM................................................................................... 13 Exchange Delivery............................................................................. 13 Facilitating Trade ..................................................................................... 13 Policy Instrument ..................................................................................... 15 Prospects for Developing a Warehouse Receipts System in Indonesia ..................................................................................... 14 Banks are Interested........................................................................... 14 Intermediaries..................................................................................... 15 Warehouse Management Companies................................................. 15 Farmers’ Practices.............................................................................. 15 Coffee and Cocoa............................................................................... 16 Other Major Crops ............................................................................. 16 The Rice Market in Indonesia ............................................................ 16 Technical Issues ................................................................................. 17 Experience of Other Countries........................................................... 17 Recommendations .............................................................................. 18 III. RURAL CREDIT ....................................................................................... 19 Rural Credit Aggregates During the Crisis........................................ 19 Table 1: Commercial Bank Credits to Agriculture ...................... 21 Subsidized Credit Schemes................................................................ 22 Table 2: Bank Indonesia Rural Credit Programs ......................... 22 Table 3: Subsidy Costs................................................................. 23 Changes in the KUT Program............................................................ 23 Commercial Programs of Rural Credit .............................................. 25 Table 4: Commercial Rural Credit Programs .............................. 25 Table 5: Micro-Credit Programs.................................................. 27 v Page No. Policy Conclusions and Recommendations ....................................... 27 Table: Directions in Rural Credit Policy..................................... 31 Annex 1 – Commercial Banks’ Outstanding Rupiah Credits (Total, Investment, Working Capital) by Group of Bank, Total and Agricultural Sector, in Rp. Billions ............................................. 34 Annex 2 – Commercial Bank’s Outstanding Rupiah Credits (Total, Investment, Working Capital, by Group of Bank, Total and To Agriculture, in Constant Rp. Billions (1996=100) ................. 35 Annex 3 – Agriculture Sector Share of Total Outstanding Rupiah Credits Of Commercial Banks, by Group of Bank................................... 36 IV. AGRICULTURAL COOPERATIVES IN INDONESIA ..................................... 37 Introduction........................................................................................ 37 Principles of the Cooperative Movement .......................................... 37 Strengths and Weaknesses of Cooperatives....................................... 37 Roles for Government ........................................................................ 38 Recent Institutional Developments .................................................... 38 Cooperatives in Indonesia .................................................................. 38 Operation and Efficiency of KUDs.................................................... 39 Current Directions.............................................................................. 40 Rural Credit Issues............................................................................. 41 Conclusion......................................................................................... 42 V. FERTILIZER .............................................................................................. 43 Fertilizer Consumption...................................................................... 44 Table 1: Indonesia - Domestic Fertilizer Consumption, 1975-1998...................................................................... 45 Fertilizer Production.......................................................................... 44 Table 2: Indonesia - Fertilizer Use on Food Crop Sector Only, 1991-1997...................................................................... 46 Fertilizer Distribution......................................................................... 46 Fertilizer Prices and Subsidies ........................................................... 47 Recent Policy Program....................................................................... 47 Table 3: Indonesia - Ratio of Floor