Economic Incentives and Comparative Advantage in Indonesian Food Crop Production

Recognizing that the green revolution has resulted in considerable success in production of rice and wheat in many Asian countries, which are now self-sufficient or surpluses in these cereals, IFPRI believes that further growth in agriculture will rely on the productivity of these countries to diversify their agricultural production, while improving productivity in cereals through management and human capital-intensive increase in yield levels. Indonesia is an important example of a country where policy successes in rice production combined with other domestic and world developments in the economic environment of agriculture encouraged policymakers to consider agricultural diversification policies. Key developments leading to an increased interest in diversification in the mid-1980s included the success of the rice production program. which eliminated imports of rice in several years; the likely increase in difficulty in maintaining rice production growth in the future, because of high levels of attainment in use of modern varieties, fertilizer, and irrigation, and the high costs associated with replicating these achievements in more marginal areas; the tightening of resources availably for agriculture due to declining oil prices, government revenues, and budgetary expenditures; declining world commodity prices, which have put an additional squeeze on the increase in competition for land among agricultural commodities and between agricultural and nonagricultural uses. In this changing environment, the success of diversification efforts will depend on price and investment policies in relation to the comparative and advantage of alternative crops in domestic and foreign markets. This study assesses trends in government policy and in growth area, yield, and production, analysis nominal and effective rates of protection, and examines comparative advantage as import substitutes or exports for major Indonesian food crops, including rice, corn, cassava, soybean, and sugar. The results are used to suggest policy directions for agricultural diversification in Indonesia. This work, together with ongoing IFPRI research in Sub-Saharan Africa and Bangladesh, adds to the growing IFPRI knowledge on development of strategies to diversify agricultural livestock products, based on comparative advantages on different crops in Sri Lanka, Senegal, Burkina Faso, Mali, and Niger. This research was carried out in collaboration with the center for Agro economic Research (now the center for Ago Socioeconomic Research), Bogor, Indonesia. IFPRI is grateful for support received from the Asian Development Bank and the Australian Center for International Agricultural research during the course of this research.