Regrowing Agriculture and Economic Transformation

Agus Pakpahan

We have no doubt that our age now is in knowledge based economies. We should
learn also that the global economic convergence is something that is far from the fact.
Madison (1993) showed that in 1820 Indonesia’s income per capita was US$ 614. In
addition, income per capita of India and China was US $ 531 and US$ 523, respectively.
At the same period, UK and USA income per capita was only US$ 1.756 and US$ 1.287,
respectively. After 180 years of global economic evolution, income per capita of UK and
USA has reached US $ 25.120 and US$ 34.400 while income per capita of Indonesia was
only about US$ 700, after eaten up by economic crisis.

Can we jump to the new age of global economy? The answer is clear. We cannot.
Utilization of new knowledge and technologies is complicated. We have to have a
minimum sophistication of knowledge and skills if we want to apply something new that
is now is external to us.

Green Revolution that was induced by new technology in the 1970s showed that
its impact on agricultural growth was quite high, i.e., 4 % a year in 1968-1992. However,
its growth was declined to 1 % per year within the period of 1993-2000 and this slow
growth of agriculture occurs up to now. We are lost of prerequisite for successful
economic transformation, namely high agricultural productivity growth. We need
regrowing our agriculture.

There are many obstacles that should be tackled to regrow our agriculture. In the
Green Revolution era we consolidated farmers for the purpose of application of new
technology such as irrigation, seeds and fertilizer. Even though agricultural productivity
has increased significantly, farmers’ income has been worsening. Economic growth has
also increased demand for land. In addition, agricultural land has been bequeathed from
one generation to the next one. As a result, agricultural land has been fragmented and
converted to the level that has reached an alarming rate.

What we have now is only in a form of a large number of farmers. We have to

reduce this number of people. There is no other way if we want to transform our
economic structure and to sustain our development process in the future.

So, we have to focus our efforts to develop our path of organizing farmers. There
must be a large number of farmers that should be transformed into a new job. Therefore,
we have to find a way to develop new employment opportunities. It means we need a
large amount of fund, sophistication of knowledge and technologies and new institutional
setting. An old way of thinking will not suitable for this purpose.

Let us take rice farmers as our case study. The key of success is in how we are
able to invest in socio-economic organization that is able to leverage our available limited
capital. Farmers have invested their capital in a form, for example, paddy field that makes
the flow of rice in every season.

There are alternatives of forming farmers’ organization. However, the only type of
organization that is feasible to leverage invested capital is corporation. This corporation is
called farmers owned enterprise (FOE).

Let us assume that government grant farmers in a form of shares that is managed
by professionals that work for FOE. The share is determined according to land size which
is its the production is devoted to be managed by FOE. If per hectare is equivalent to Rp
4 million, then for 10,000 hectare, the value of investment is Rp 40 billion. FOE can
leverage this amount of capital up to Rp 200 billion. The yield of 10,000 hectare will be
about 70,000 ton of rice per season (it is about 55 % higher than the national average
yield per hectare) or 140,000 ton a year by assuming we plant rice twice a year. The value
of 140,000 ton of rice will be about Rp 280 billion. The production cost a year will be
about Rp 100 billion. Then, FOE will have income about Rp 180 billion a year (from rice
only). If 20 % of FOE’s income is retained, then there will be available Rp 144 billion of
fund can be disbursed for working capital and new investment. Farmers will entitle to
receive better price, production increase, shares and wages, and other benefits that can be
generated by FOE. If a farmer has a hectare of land then he will receive at least Rp 14
million a year. In addition, what has been granted by government, namely Rp 40 billion
will also be able to be returned by FOE within approximately one year if we include all
byproducts of rice such as brand, husk, straw, and broken rice.

It is almost impossible to ask farmers to build FOE by their own initiatives. Just
like a long bridge or a large dam, farmers’ economic organization should be viewed as
public good. Therefore, it is also a part of public investment where State Owned
Enterprise (SOE) can function as an intermediary i.e. public service obligation (PSO),
especially SOE that its scope of works is related with agriculture. SOE will also gain
benefits as a share holder in FOE. The benefits will accrue through delivering its SOE
outputs such as hybrid rice or fertilizers or through shares. If SOE as a consortium has 30
% of share, and a unit of FOE can generated profit about Rp 200 billion than SOE will
receive Rp 60 billion a year. By assuming we have 400 FOE in managing irrigated rice
field 4 million hectare, we will come to the approximation of earning capacity 4 800
trillion a year.

By continue leveraging this fund, we will have a sufficient amount of energy to

transform our economy. We see regrowing agriculture will create our path to make
manageable economic transformation from a nation of coolie to a nation of owners. This
is our challenge to make it real.