Neoliberal Policy of Indonesia’s Agricultural Revitalization

Discussing food policy or, more specifically, food security in Indonesia, one will face two important issues. First, s/he will meet the irony of agrarian country. While in the middle of 1980s rice production was self-sufficient, however, since 1998 till today as result of Indonesia has entered the global trap of neoliberalism, she has become the biggest food importer country in the world. This is, of course, ironical since, as the biggest agrarian country in Southeast Asia, Indonesia, indeed, has vast and fertile land. In fact, for recent years, Indonesia has been facing food shortage especially in rice, sugar, soybean, and corn that they have been to be imported in great amount. In 1998 till 2000, for example, Indonesia became a net importer with an average value of US$863 million per year (Witoro, 2006:229). Second, food is a sensitive issue since it deals with the achieve-ment of a regime or government. In Indonesia, the decrement of poverty is an important indicator in evaluating the success of a regime. Therefore, in almost every general election, this issue always becomes a political commodity which invites polemic. The claim from the incumbent government is likely to be chal-lenged by its political rivals. While, on the other side, the poverty rate is susceptible against price fluctuation of basic needs (Basri, 2008). A slight increase of the price of basic needs will significantly affect the amount of poor people in Indonesia. Whereas, by applying careful and critical analysis in scrutinizing the poverty rate in Indonesia, using US$ 1.5 per day as its stan-dard as applied by BPS (Badan Pusat Statistik/ Central Statistics Bureau), 32.53 millions (14.5%) of poor people in 2009 was basically susceptible. It was due to great amount of poor people and the great role of food commodity in determining poverty. Hence, little fluctuation of basic needs will strongly affect the amount of poor people.

Basically, the vulnerability of food security in Indonesia today, as a whole, cannot be separated from the failure of agricultural development inherited by the Suharto’s New Order. Green Revolution, in fact, had widened social and economic inequality in rural areas (Winarno, 2008). Subsidies and facilities offered during Green Revolution was distributed to landlord only, while small farmers did not get equal benefit because of lack of access to the input of agricultural production. This condition was worsened by the policy of cheap food applied during the New Order. The price of basic needs, in Soeharto’s era, was always made cheap to silence the potential violence of urban citizens (Jhamtani, 2008). Political stability which was one of the main purposes during development era required the regime to prevent every potential vio-lence. The policy of cheap food, along with military repression, was utilized to cope with the protesters. Its consequence is clear as shown by more rural inequality condition. As revealed by Sritua Arif (2005), during the New Order, 20% of Indonesian population enjoyed 80% of the national wealth, while the rest, the biggest part, only gained 20%.

When the New Order regime fell in the end of 1990s, precisely in May 1998, the next government inherited a bankrupt economic system suffering huge debt. Even, Indonesia had to obey IMF as a conse-quence of its debt. Ironically, compared to the other countries facing the same crisis, Indonesia needed longer time of economic recovery because of its faithful obedience to IMF suggestions.

The intervention of IMF into Indonesia during the reform era has given broad implication to Indonesian economy, particularly in agricultural sector. One of the results of Letter of Intent (LoI) is agricultural liberalization and the reformation of BULOG. This agreement was included in the Memorandum of Economic and Financial Policies, signed by Indonesian government and IMF in the beginning of 1998. There are four basic matters approved in the memorandum (Jhamtani, 2008:21), namely: first, the abolition of BULOG import monopoly on wheat and wheat flour and onion. Private importer was allowed to distribute all these products, except wheat, in domestic market. The rate was imposed for all of these products, but limited by 20% or less, and would be relegated into 5% in 2003. Second, the rate of all food products was re-relegated into a maximum of 5%, while the regula-tion on local content for milk production was abol-ished. Third, all importers were allowed to import sugar and distributed it in local market. This policy aimed to rationalize sugar production and improve efficiency and competitive ability of industry which utilized sugar, such as food processing. In addition, the government had to reform BULOG—the institu-tion of food security in Indonesia during the New Order. Through Letter of Intent, in 1998, BULOG’s status as State Trading Enterprise (STE) had to be revoked. Some of the most important agreements are: the monopoly of strategic commodities (rice, sugar, soybean, corn, wheat, and cooking oil) was abolished; inexpensive donation of KLBI (Kredit Likuiditas Bank Indonesia/Bank Indonesian Liquidity Credit) was reduced, and captive market (PNS/Civil Servant and TNI/Armed Forces of Indonesia) was abolished.

Discerning the entire LoI in agriculture as stated above, it is easy to predict the direction of the next food and agricultural development policy in Indone-sia: the domination of neoliberal policy. Through the above four agreements, Indonesia was driven to be part of agricultural neoliberal globalization, which was obstructed on the plane of international level (WTO). Therefore, through IMF, the place of the most fertile neoliberal ideology (Harvey, 2009), the policy moved smoothly. Besides, the fast speed of neoliberal policy was sustained by “organic intellectuals”, in Gramsci’s term, who dominate the reform government. It can be seen from two indications, namely the consistency of agricultural liberalization and the stronger domination of private enterprise in agricultural sector. The next appropriate questions to ask are: will this neoliberal policy in agricultural sector strengthen food security or just the reverse? Besides, in the context of Indonesia, is there any other reason that can be utilized to explain the domination of neoliberal policy in agricultural sector, particularly in the context of agricultural revitalization?

This writing will attempt to answer those two questions by focusing on the analysis that liberaliza-tion policy in agricultural sector constitutes pragmatic policy. It is a policy framework which is basically an integral part of economic pragmatism of the New Order. In this context, agricultural revitalization has to be understood in the frame of agricultural liberaliza-tion which not only serves neoliberal ideology, but also constitutes the pragmatic response to the back-wardness of agriculture or, more specifically, the decrease of agricultural productivity and production in Indonesia which implies to food security.


We will not gain careful understanding in describ-ing agricultural liberalization without discerning the activator ideology, neoliberalism. Briefly, a neoliberal is the endorser of economic liberalization who defends the importance of free market and laissez-faire principle. This ideology was strengthened in 1980s when Marga-ret Thatcher and Ronald Reagan executed economic reform. Those two figures believed that market was the most efficient mechanism in distributing scarce economic sources. According to neoliberal, peace international trade and market economy will result inbetter life standard above big countries governed poorly (Wolf, 2007:39).

The base of free trade is comparative advantage theory developed by Adam Smith and David Ricardo. According to this theory, a country ought to self-specialize to produce goods which cost smallest compared to other countries, based on its comparative advantage. For example, if Indonesia has a comparative advantage in producing rice powder, it is better for Indonesia to specialize in trading the commodity. For other necessary products, it is better for Indonesia to get them from international market through interna-tional trading because purchasing costs cheaper than producing. According to comparative advantage theory (Chang, 2008:54), although it is more efficient for a country, compared to other countries, to pro-duce goods, the other countries still earn profit by specializing to produce goods which give them more profit than its partner. Likewise, a country will still earn profit though its production cost is higher than her partner’s, as long as it specializes to produce goods which cost smallest.

Eli Heckscher and Bertil Ohlin, Sweden econo-mists, and also Samuelson consummated this com-parative advantage theory. By referring to David Ricardo, yet having differences in some important issues (Chang, 2008:84), HOS theory believes that comparative advantage particularly emerges because of international differences in relative contribution of “production factors” (capital and labor), and not in international difference in technology. According to free trade theory, every country earns comparative advantage in some productions because, based on this definition, every country is relatively better in produc-ing certain goods rather than other goods. In HOS perspective, a country earns comparative advantage in products which intensively utilize relatively helping production factors. Free trade, related to this, will encourage countries to carry out specialization based on their comparative advantage. “Trade theory con-tends that under free market trade each country can and will specialize in that industry where it has a comparative advantage, and will trade with its partner to secure that good for which it does not.” (Chang dan Graebel, 2008: 54).

According to Heckscher and Ohlin (Oatley, 2004: 23-24), comparative advantage of a country will increase as a consequence of the differences of factors of endowments owned by a country. These factors are basic tool for production process. Factors of endow-ments meant by Heckscher-Ohlin model are labor and capital. When an enterprise produces goods, it uses labor and capital to alter raw materials into finished goods. Every country, in this understanding, has different factors of endowments. Hence, it has to specialize in producing goods which have the lowest cost in order to gain profit from international trade.

The basic assumption formed in this free trade theory constitutes the base for agricultural liberaliza-tion. In this theoretical perspective, free trade gives all countries, especially the poor ones, advantage. First, agricultural liberalization will encourage efficiency. Competition is considered positive based on the assumption that it will encourage market agent to find the most efficient fashion. Second, for Third World countries, it is better for them to open their market because people in Third World countries will have bigger chance to get cheaper agricultural products. It will encourage consumption and eventually more poor people have the chance to get cheaper food material. Third, Third World countries will get more benefit from the open market of developed countries. Third World countries can exploit developed countries’ market through the export of agricultural products by which they get the comparative advantage. The result of this export is significant income which will be used to defray the domestic development. Therefore, agricultural liberalization will bestow prosperity for all.

The issue faced in the frame of agricultural liberal-ization is that what was assumed by neoliberals misses the target. There are several reasons proposed. First, comparative advantage theory, the base of neoliberal economy, in globalization era carries deformity and is in question (Burcill, et. al. 1996:57-61). Comparative advantage theory was proposed in the time when national control on capital movement existed. Ricardo and Smith considered capital unmovable and only provided for national investment. They also had a notion that capitalists are, first and foremost, national political community members, which, in this context, form commercial identity. In Smith’s opinion, ‘the invisible-hand’ requires internal relationship and society bonds that the capitalist could feel ‘natural disinclination’ to invest abroad. Thus, Smith and Ricardo could not predict what so called a world of cosmopolitan managers and transnational corporations, which suffer limited liability and immorality bestowed by national government. They have ignored govern-ments and no longer discerned national community as their context. Hence, the emergence of capitalists who release themselves from community loyalty and obligation and no longer posses ‘natural disinclina-tion’ to invest abroad seems absurd (Day and Cobb, 1989: 251). Movable capital markets, which are also chopped around, are the challenge for comparative advantage theory.

Second, intellectual, economic, and political devel-opment, including the shift of ‘comparative’ advantage into ‘competitive’ advantage as the trade base, and the formulation of ‘new (strategic) trade theory (Gilpin and Gilpin, 2002: 85). According to competitive advantage theory, trade is not merely determined by capital, labor, and resources. It is often affected by specialization change, historical event, and technologi-cal development (Gilpin and Gilpin, 2002: 91). This theory acknowledges that technological change be-come more significant in determining trade patterns. In relation to this, technology grounds for competitive advantage and trade patterns are often deliberately created by government and corporations. By the same token, some national economic aspects posses signifi-cant meaning: national culture and its influence toward the purpose of economic activities, the status of capital and labor, the demand sufficiency, the health of supporting industries and industrial struc-tures in economy (Gilpin and Gilpin, 2002: 92). Hence, the supporters of competitive advantage theory support the notion that the advantage in international trade, at least in industry, can and in fact be created by deliberate corporation’s and government’s policies and rules, and not merely from nature’s static gift. The last, the new development of protectionism forms in trade. Ironically, the obstacle of this trade often exists in developed countries which constantly obtrude trade liberalization. Hence, liberalization is only a tool for developed countries to win their economic interests against Third World, while in the same time they hamper the entry of goods from other countries through several harming non-rate obstructions. Green and Luehrmann (2003: 118) stated, “Ironically, for all their talk about “free trade”, it is subsidies and various protectionist measures by developed countries that are making it hard for much of the third world to earn an honest living through trade”.

Joseph Stiglitz (2007:151) has pointed out this agricultural liberalization trend and its implication to Developing Countries, the notion that indirectly defend the above objection. According to Stiglitz, a decade after Uruguay Round, more than two third of agricultural income in Norwegian and Switzerland, more than half in Japan, and one third in European Union come from subsidies. For some plants, accord-ing to Stiglitz, such as sugar (sugar cane) and rice (rice plant), the subsidies reached 80% from the income of agriculture. Therefore, the aggregate of agricultural subsidies in US, Europe Union, and Japan is at least 75% of total income in Sub-Saharan Africa. It is a huge amount income that debilitates the ability of African peasants to compete in the world market (see Stiglitz, 2007:152).

As pointed out by Stiglitz, Third World countries do not only face the deadening subsidies of developed countries, but also the narrow land they work on.

Hence, no matter how high the food price resulted from globalization in this sector, it will not be suffi-cient to fulfill their basic needs. It does not mention the low access of technology for Third World peas-ants, bad irrigation, and other non-rate obstacles that hamper Third World peasants to access the market created by liberalization in developed countries.

The lesson learned from what happened with the world cotton trade is the failure of theoretical assump-tion of free trade. The US’s subsidies which reached 3-4 billion dollars given to 25,000 rich cotton peasants had pushed down the world cotton price and inflicted a financial loss to 10 millions of cotton peasants in Burkina Faso and other places in Africa (Stiglitz, 2007: 152). The more concerned matter, the amount of Third World people who depend on agriculture is much higher than those of developed countries. As shown by Stiglitz (2007: 153), by studying all agricul-tural products (1% from total products), it is proven that those products received 25% of total subsidies, with the average amount reached 1 million dollars per agricultural land. Eighty percents of the money entered the rich farmers’ pockets with average receipt of US$200,000, those who only occupied 20% of all farmers. Ironically, according to Stiglitz, 2,440,184 small farmers in bottom level, who are the real farm-ers, only received 13% of total subsidies, which only reached US$7,000. As a consequence, small farmers were marginalized.

By understanding those facts, free trade is basically a condition desired to reach, while the requirements to reach is likely unfulfilled. The problem faced by Third World countries, such as Indonesia, is that they cannot avoid the international pressure to open their domestic agricultural markets as the consequence of financial dependence, the lack of vision from their leaders, and inefficient bureaucracy. As a result, liberalization makes farmer more marginalized and poorer.

Author : Budi Winarno