Agriculture in Indonesiaan important sector of the economy in terms of employment and household incomeis supported by substantial government subsidies. These amount to more than $A800 m a year in budgetary costs alone, and there may be additional non-budgetary costs associated with efficiency, welfare and the environment. The Indonesian Government is now questioning the high costs of some policies involving commodity price-support and fertiliser subsidies. There has been some reductions in fertiliser subsidies. The Government is interested in exploring alternative policies that could achieve the underlying objectives more efficiently and equitably.
The Centre for Agro-and Socio-Economic Research (CASER), an independent research unit of the Indonesian Ministry of Agriculture, supplies information and advice to the Government on economic issues. CASER is currently undergoing development as an institution to become even more involved in policy analysis, and has requested ACIAR assistance, particularly in areas of modelling at both farm, agricultural sector and macroeconomic levels.
ACIAR has called on a team from the Research School of Pacific Studies within the Department of Economics at the Australian National University (ANU). The team has had extensive economic policy-analysis and research experience in agriculture in Indonesia and other developing countries. The project leader has also worked at the Australian Bureau of Agricultural and Resource Economics (ABARE)the Australian counterpart of CASERand both the Research School of Pacific Studies and ABARE are at the forefront of farm-level, agricultural-sector and macroeconomic modelling, policy development, and the use of models in policy analysis.
The Australian team will collaborate closely with staff of the Indonesian Ministry of Agriculture and other Indonesian agencies to investigate:
At the farm level
The physical and economic impact of overuse of fertilisers; the influence of technology on farm production; and the impact of Government policies on farm employment and incomes. (This will be done by estimating production functions for major crops and different regions using regression analysis on farm data.)
At the agricultural sector level
Aggregate responsiveness of rice production to fertiliser prices, and rice consumption to incomes; aggregate impact of policies by regions, crops, fertilisers etc.; and agricultural sector benefits from subsidies. (This will be done by analysing agricultural policies with an econometric model of the sector developed on the basis of current models of the Indonesian agricultural sector.)
At the economy-wide level
The impact of agricultural subsidies on inflation; impact of agricultural policies on the environment; impact of assistance on the allocation of resources. (This will be done by analysing the full impacts of agricultural policies on the economy and broader Indonesian policies on the agricultural sector through the development of a multisector model.)
There will be a high degree of interaction between the Australian team and the Indonesians through discussions, workshops and joint research papers. This will take place in both countries so as to take advantage of local expertise, for example on the data or modelling task.
The potential benefits to Indonesia from the project are:
. an enhanced capacity to make decisions concerning agriculture at all levels; and, as a consequence,
. more efficient policies concerning fertiliser subsidies (A 1% cost reduction in fertiliser subsidies would give a budget saving of $A6m annually to Indonesia.);
. greater economic efficiency and lower social and environmental costs economy-wide.
Australia will benefit through:
. lower assistance to Indonesian agriculture and a more efficient Indonesian economy increasing opportunities for Australian exports to Indonesia and for efficient world trade;
. more efficient Indonesian agriculture reducing dependence on aid;
. its strategic, economic and foreign policy interests being complemented by the aid the project provides.