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OECD Review of Agricultural Policies: Indonesia 2012

image of OECD Review of Agricultural Policies: Indonesia 2012

This Review,undertaken in close co-operation with the Indonesian Ministry of Agriculture, assesses the performance of Indonesian agriculture over the last two decades, evaluates Indonesian agricultural policy reforms and provides recommendations to address key challenges in the future. The evaluation is based on the OECD Committee for Agriculture’s approach that agriculture policy should be evidence-based and carefully designed and implemented to support productivity, competitiveness and sustainability, while avoiding unnecessary distortions to production decisions and to trade. Conducted in partnership with the OECD Investment Committee, the Review comprises a special chapter highlighting key challenges to be addressed to attract sustainable investment in agriculture, drawing from the OECD Policy Framework for Investment in Agriculture.

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The policy context

This chapter examines the key issues that have shaped the development of the Indonesian agricultural sector and that have conditioned policy responses over the last two decades. Indonesia was deeply affected by the 1997-98 Asian crisis which activated a large programme of reforms including opening up to international competition and capital inflows. These reforms helped to achieve macroeconomic and political stability and to create more favourable conditions for the development of agriculture, an important sector providing employment for 38% of active population and contributing 15% of GDP in 2010. The farm structure is based on small family farms ranging on average from 0.3 ha in Java to 1.4 ha for irrigated land off-Java. Large commercial farms, located mainly in Sumatra and Kalimantan, specialise in perennial crops, in particular palm oil and rubber. These two commodities account for around 60% of total agro-food exports and contribute to a significant surplus in Indonesia’s agro-food trade. While Indonesia has made significant progress in poverty eradication, 13% of its population continues to live below the nationally-defined poverty line. Poverty incidence in rural areas is twice as high as in urban areas. Increase in agricultural productivity and higher farm incomes are among the key factors towards further progress in poverty reduction. Food consumption has improved, but hunger and undernourishment persist in some areas. Smallholders are constrained by slow progress in registration of land rights which limits access to credit and by poorly developed infrastructure restricting their access to markets. Natural resources and the environment are under strong pressure, partly due to the expansion of agricultural land leading to large-scale deforestation and soil erosion, but also due to the over-exploitation of marine resources, and water pollution from agricultural chemicals. While higher yields of perennial crops will contribute to output growth, most of the production growth is still projected to come from the expansion of the planted area.

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