Heading toward Indonesia 7.0
Dwi Andreas Santosa
During the administration of President Joko “Jokowi” Widodo, in 2017, Indonesia entered the "One Trillion Club" -- countries with gross domestic product exceeding US$1 trillion -- and had the 16th highest GDP in the world. If GDP is calculated based on purchasing power parity, Indonesia is ranked seventh in the world.
All of this was achieved with an average economic growth rate of 5.6 percent per year for the past 10 years. Nevertheless, over the last several years there have been signs that we are stuck in a growth rate of 5.0 to 5.2 percent. It will be a big challenge for the government in its second term to push the economic growth rate to reach 7 percent, as targeted by Jokowi in 2014. If it is achieved, Indonesia will only need 10 years to double its GDP and become a middle-income country with a GDP per capita of $6,000 to $12,000 per year.
Economic textbooks identify five main components of GDP, namely consumption, investment, government expenditure, exports and imports. Consumption is the biggest contributor to Indonesia\'s GDP, namely 55.74 percent in 2018. Several things are key factors in economic growth, such as public and government compliance with the rule of law, protection of ownership rights and contractual rights and the building of an effective legal system. Countries with the lowest per capita income in the world are always characterized by ineffective legal systems, weak governance and community disobedience to rules and law (SA Greenlaw et al., 2017).
Opini: Menuju Indonesia 7.0—Dwi Andreas SantosaSUPRIYANTO28-07-2019
Sustainable economic growth is also related to labor productivity. One of the things that determines labor productivity the most is human resources (HR). HR is an accumulation of knowledge from education, experience, skills and expertise. Changes in technology also have a major influence on labor productivity. Technological changes are a combination of inventions (increased knowledge) and innovation (application of inventions in the form of new products or services). Labor productivity is also influenced by economies of scale. When the quantity of products being produced increases, labor productivity also increases.
However, in less than two decades, Europe rose again, even reaching a higher level, as a result of a combination of skilled and knowledgeable workers and the use of technology in a helpful market climate.
The important role of HR and technology is clearly recorded in world history. Europe lost tens of millions of human resources to go with the destruction of physical resources in the form of infrastructure, factories, roads etc. during the World Wars. In World War I, 16 million people died while at least 50 million died from the Spanish Flu. During World War II, a total of 43 million people died. However, in less than two decades, Europe rose again, even reaching a higher level, as a result of a combination of skilled and knowledgeable workers and the use of technology in a helpful market climate.
Going into more detail to look at what sectors trigger a country\'s economic revival, what is the position of the agricultural sector? All economic literature related to growth refers to the theory that when a country grows from a poor country (GDP per capita below $2,000) to a developed country (GDP per capita of above $20,000), a structural economic transformation will occur with agriculture-based primary economic activities and rural areas becoming industrial and service-based economic activities.
The role of agriculture as a provider of employment and contributor to GDP has continued to decline. One of the things that underlies this thinking is the high elasticity of demand for non-agricultural goods and services when incomes increase.
Given this, government policy is directed at relocating production factors from the agricultural sector to the industrial and services sectors. Many economists believe industry is a dynamic sector, while agriculture is static and not responsive to incentives. Taxation of the agricultural sector is justified because it only sacrifices a little agricultural output (Schiff and Valdes, 1992).
According to studies from the 1960s to the 1980s, the agricultural sector was taxed by around 30 percent with the largest share (22 percent) being indirect taxes by reducing the prices of agricultural commodities. A further consequence of all of this is the impoverishment of farmers and the marginalization of the agricultural sector.
Agricultural reform toward Indonesia 7.0
For Indonesia, the sharp increase in the agricultural and food sector budget in the last four years (2015-2018) to Rp 409 trillion did not produce growth. Instead of reaching self-sufficiency, food imports increased. The total imports of eight commodities with imports above 200,000 tons per year, namely rice, corn, wheat, soybeans, cassava, garlic, peanuts and sugar cane, increased by 5.6 million tons from 21.95 million tons in 2014 to 27.62 million tons in 2018. Imports of rice, which received the largest portion of the budget, even increased from an annual average of 0.902 million tons (2005-2014) to 1.177 million tons (2015-2018), according to Statistics Indonesia (BPS) and Agriculture Ministry data. A sharp increase in the budget and food imports also occurred under the previous government.
Exports of food crops, horticulture products and livestock even fell compared to the previous government. Volumetrically, exports declined from an annual average of 1.54 million tons (2005-2014) to 1.01 million tons (2015-2018), dropping in value from $1.47 billion to $1.13 billion. The food crop, horticulture and livestock trade deficits also continued to swell from an average of $4.09 billion per year (2005-2014) to $6.75 billion, according to Agriculture Ministry data.
The poverty severity index is always much higher in agricultural areas than in urban areas.
The welfare of farmers has also not improved. The farmer\'s term of trade (NTP), which is one of the indicators of farmers\' welfare, tumbled from 123-124 in the early 2000s to 100-103 in the 2008-2019 period. The daily wage of farm workers in April 2019 was only 60.8 percent compared to construction workers, according to BPS data. Farmers also make up the majority of poor people in Indonesia, comprising 60.54 percent of the country’s 25.67 million poor in September 2018. The poverty severity index is always much higher in agricultural areas than in urban areas.
Fundamental policy error
The GDP growth rate in the agricultural sector (agriculture, forestry and fisheries) between the first quarter of 2019 and the first quarter of 2018 was the lowest of all sectors at only 1.81
percent. The GDP growth rate in the agricultural sector has consistently been below the economic growth rate, namely 3.37 percent compared to 5.03 percent in 2016, 3.87 percent compared to 5.07 percent in 2017 and 3.91 percent compared to 5.17 percent in 2018.
The contribution of the agricultural sector to GDP has continued to decline from 15.60 percent in 2000 to 13.58 percent in 2009 and 12.81 percent in 2018, but on the other hand the agricultural sector remains the largest provider of employment in Indonesia, accounting for 38.11 percent of the country’s 129.36 million workers as of February 2019.
Why has all of this happened? Fundamental errors have been made in agricultural policy, namely regarding taxation of the agricultural sector through efforts to intervene to lower the prices of agricultural products as well as errors in subsidy and assistance policies. Market intervention has resulted in a significant transfer of revenue out of the agriculture sector, at an average of 46 percent of agricultural GDP from 1960 to 1984 in 18 developing countries studied (Schiff and Valdes, 1992). This study is increasingly relevant to agricultural policy in developing countries, especially Indonesia.
The first policy recommendation is that if a country wants faster agricultural growth, faster economic growth and to decrease poverty, taxation of agriculture relative to other sectors must be stopped. Interventions both directly and indirectly with the aim of lowering the prices of agricultural products must also be eliminated. GDP growth in country’s that intervened the least was twice as large (6.5 percent) compared to those that intervened the most (3.3 percent). Eliminating interventions and taxation on agricultural commodities has the potential to increase annual GDP growth by 1.1 percent (Schiff and Valdes, 1992).
Subsidies and various other forms of assistances waste a considerable amount of funds. Therefore, the second policy recommendation is to shifting the budget to direct transfers, after-sale cash payments and price protection. This was proven when the transfer of prosperous rice (rastra) assistance was changed to non-cash food aid through the provision of assistance in the form of e-money every month. The value of benefits received by the community increased by 46.3 percent, meaning the rice for the poor program (raskin) and rastra resulted in 46.3 percent of the budget being wasted.
By working hard to double farmers\' income in the next five years, 7 percent economic growth will not be a utopian idea. Hopefully.
Agricultural problems cannot be overcome with bombastic slogans about increasing production, food self-sufficiency and becoming the world\'s food basket, which in reality cannot be achieved. Future agricultural development needs to be focused on improving farmers’ welfare and increasing farmers\' independence to achieve equal incomes to other sectors. By working hard to double farmers\' income in the next five years, 7 percent economic growth will not be a utopian idea. Hopefully.
Dwi Andreas Santosa, Professor at the Bogor Agriculture Institute; chairman of the Indonesian Farmers\' Seed Bank Association (AB2TI) and associate at the Center of Reform on Economics (CORE) Indonesia
