III. Smallholder farming in Indonesia

The Indonesian Farmer

Smallholder Indonesian farmers dominate the agriculture sector, and cash crop production in particular. Although the number of people employed in the agricultural sector has declined in the past 30 years, this form of employment still dominates the economy. The following graph shows the relative decline in the agricultural labor force and incline in industrial labor. However, the agricultural sector is still dominates the labor force with a near 50% share.

Despite the relative decline in the agricultural labor force, according to Indonesia's Central Bureau of Statistics 1993 Agricultural Census, the number of agricultural households has increased from 12.2 million in 1963 to 21.5 million in 1993, a 76% increase. The increase was significantly higher in the outer islands (128%) compared to Java (47%), due to a higher initial base in Java, limits of arable land in Java, and transmigration programs that relocated Javanese from Java to the outer islands. The land controlled by agricultural households also increased 42.4% from 1963 to 1983, but decreased 0.68 million hectares, or 3.7% from 1983 to 1993. In accordance with this trend, the average land controlled by agricultural households has declined both in Java and the outer islands, reaching an average of 0.9 hectares and 1.2 hectares, respectively. Thus, it appears that while urban migration was a significant factor in the past three decades, there is a trend of more agricultural households being created through a division of land into smaller plots.

Structure of Distribution

The structure of distribution and the problems presented to the smallholder farmer vary for different crops. The generalizations described below are meant to give an overall picture, while the sections on coffee and spices present specific cases from which more realizable recommendations can be given.

Typically, the smallholder farmer in Indonesia must sell his crop to an agent or processor, who then either adds value to the produce before selling it to an exporter, or acts as a middleman to gather a large enough quantity of a given crop to sell it to an agent in a town or city. Although the steps vary from crop to crop and location to location, in most cases the farmers are in a geographically isolated situation and it is most feasible for them to sell their raw produce to a middleman. There may be several middlemen in the process of getting the crop to the exporter, and eventually to the manufacturer in the importing country. Since there are many links in the chain, each one adding a margin, and the price is determined by world supply and demand, the farmer may end up receiving a low price for his crops. This price may or may not cover his costs. Also, even if there is a high demand for a certain crop, the farmer may be isolated from this information and not know whether he is getting a fair price for his produce.

This problem is exacerbated if the farmer is in a relationship with a money lender, of which there are many in rural Indonesia, to whom he has given his immature crop as collateral. If the farmer is not able to repay the loan, as is often the case with the high interest rates charged by the lenders, he must sacrifice his crop to the lender and begin the borrowing cycle again.

Another issue of concern for the farmer is that the majority of the time he is selling his crop as a non-value-added commodity. Since he does not have the technology, finances, or know-how to add value to his produce, he is not able to charge a premium above the market price. He may try to compete for a higher price with a higher quality crop, but the price differential is sometimes not high enough to compensate for the extra effort required. (McStocker, 1987)

Due to the fragmented nature and inadequate infrastructure of smallholder agriculture, it is easy to identify potential problems. The long supply chain also seems susceptible to monopolistic practices, through middlemen and a higher concentration of players at the top. To understand the reality of the situation, however, a review of the theory and case studies regarding this sector will be helpful.

A Review of Theory

The capacity of the peasant farmer to take advantage of market opportunities and integrate with an urbanizing society has generated several studies and corresponding theories. Reviewing these studies will help provide a rationale for the structure of distribution, the marketing of agricultural products, and the effects of policy intervention in this sector.

One highly acclaimed account of Indonesian rural agriculture is given by Clifford Geertz, who has written several books on the effects of colonization on Indonesian society. One of his better known works, Agricultural Involution (1963), makes the argument that agriculture in Indonesia, particularly Java, has experienced what he terms involution. This is a process in which increasing population is absorbed into the agriculture sector, as yields increase but production per worker does not increase. It describes a pattern that involves intricate dissection of the farming system (particularly rice) into a complex, complicated web that requires more and more labor. Under the Dutch plantation system (including the Culture System and the Corporate Plantation System), the whole rural economy was pervaded with "tenure systems that grew more intricate, tenancy relationships more complicated, cooperative labor arrangements more complex -- all in an effort to provide everyone with some niche, however small, in the over-all system." Because of this phenomenon, Geertz argues, Indonesian rural villagers were not able to connect with growing urban communities, which were dominated by foreigners, Chinese middlemen, and the wealthier classes who ran international trading operations.

Geertz's theory is connected to that of another Indonesianist, Julius Boeke, whose theory of social dualism was also formed based on the colonial era of Dutch rule. This theory states that during the colonial era, there were two societies, two economies, working side by side in Indonesia -- the bumiputra Indonesian farming villages and the worldly urbanizing export community. The Dutch kept these two societies separate from one another, reasoning that this would preserve the Indonesian way of life and thus fulfill a certain "moral" obligation.

The combination of these two phenomena, involution and social dualism, made a smooth transition to modernism more difficult than if the rural and urban sectors were allowed to integrate, such as was the case in Japan. Japan, often used as a comparative case study for the late 19th century to early 20th century phase of Indonesia's development, had many similarities to Java: both were heavily populated, both had labor-intensive, small-farm, multicrop cultivation regimes centering on wet rice, and both managed to maintain a significant degree of social and cultural traditionalism in the face of profound interaction with the West. However, excess labor in Indonesia was used by the Dutch to build plantations for export or was absorbed into rice production; in Japan it was used to build a capital-intensive manufacturing sector. The Dutch may have built an infrastructure -- they created better irrigation, improved communications, increased availability of foreign manufacturers -- but they did not build human capital or a modern business class. The Javanese peasant did not need to leave his rice terrace, whereas the Japanese peasant had to become an active member of a manufacturing system, no matter how small scale it may have been.

Geertz conceived this theory in the early 1960s, while Sukarno was still president. This was a dismal time for Indonesia's economy, and the picture he paints for Indonesia's future is of a society imbedded in the trap of involution, unable to effectively industrialize. This inability is mostly rooted in an isolated rural majority that has not developed an economic mentality to think or act entrepreneurially.

A contrasting viewpoint is presented much later in a study done by Yujiro Hayami and Toshihiko Kawagoe. Although their study admits that Geertz theory of involution may have been an adequate description at the time in which he wrote, they found in their field research a situation quite the opposite.

Hayami and Kawagoe (1993), in The Agrarian Origins of Commerce, postulate that smallholder farmers in Indonesia are entrepreneurial, and the government can play a positive role in developing this trait through the following: fostering easy entry into trading by improving rural infrastructure, providing marketing information as widely as possible, developing reliable and appropriate property rights and contract mechanisms with grades and standards, and by staying out of the business themselves.

Between May 1986 and August 1990, Hayami and Kawagoe conducted studies in two Indonesian villages, one in Java and one in South Sumatra. They found that the peasant marketing of agricultural products was efficient and profitable with little government intervention and regulations. The trade hierarchy included a large number of self-employed marketing agents. The bottom of the hierarchy consisted of small traders specializing in the collection of small marketable surpluses from village farmers. At the top, there were large traders specializing in the shipment of the assembled commodities. The larger traders were usually more educated and of a wealthier class than the village collectors, and were able to receive credit from large lending institutions. They in turn extended this credit to the villager collectors and farmers, neither of which had the collateral to make these loans directly. This created a bond between the small and large traders, and guaranteed a delivery of produce upstream. Since charging interest is not permissible in Muslim law (approximately 80% of Indonesians are Muslim), the large traders indirectly lowered their credit costs through charging a premium for fertilizer and supplies, and "cheating" on weights and measures (i.e. underpaying).

According to Hayami and Kawagoe, this decentralized hierarchy stemmed from the following characteristics of Indonesian smallholder farming: 1) a small marketable surplus per farm in the peasant farming system, 2) scale economies in transportation and processing, 3) differences in labor's opportunity costs, and 4) differences in financial positions. The nature of agricultural production in Indonesia is largely fragmented, and the village collectors need to gather farm products in sufficiently large lots to exploit scale economies in long-distance transportation and processing. The large traders and factory owners have higher education and higher entrepreneurial/ management ability, so it is economical to let small traders (village collectors), who have lower employment opportunity costs, assemble small farm surpluses from farmers. Also, the large-scale traders and processors are able to mobilize less expensive credits on behalf of small collectors and farmers based on good collateral values of their real assets.

This decentralized system is akin to a sub-contracting system in which large firms contract out the supply of parts and materials to smaller firms. The large and small traders create long-term relationships based on ethnicity (discussed below) and extension of credit. This may appear to present ample opportunity for the larger traders to exploit small traders and farmers. However, it was found in these case studies that there was sufficient competition among large traders to temper this possibility. Although there is a time lag to communicate price information to villagers, they do eventually receive this information (usually via word-of-mouth, radio broadcasts), and this prevents large traders from exercising this monopolistic practice for very long. If they continued to use it, the villagers would be likely to shift their supply to other produce collectors in the future.

Another characteristic of the Indonesian village community that plays an important role in binding village collectors to farmers is social pressure. Due to the tight gossip network in a village community, any misconduct is quickly spread. Anyone who violates a contract with a fellow villager is subject to losing the benefits of the present contract as well as a bad reputation, which may prevent him from gaining future contracts. This social pressure mechanism should not be understated, and should be considered a crucial element to maintain as marketing becomes more institutionalized and formal.

The village traders and farmers are almost all bumiputra (indigenous Indonesians), which also creates a social bond and responsibility. The larger town-based traders are predominately ethnic Chinese, and do not have the same community mechanism to enforce contracts. Most transactions between large and small traders are done on the spot in cash, and farmers "tend to admit that these ethnic Chinese are trustworthy in the sense that they are largely accurate in offering the prices prevailing in the market -- no favors are given but no cheating." The ethnic Chinese, however, have ethnic ties to other interregional Chinese traders, which gives them an advantage in collecting information and enforcing contracts at a higher level of trade (i.e. across regions and for export).

In sum, Hayami and Kawagoe have found evidence of a smoothly operating farmer-to-market system in two rural villages of Indonesia. They found that these systems work efficiently in economizing the use of scarce capital and management input, while making intensive use of local inputs, especially labor which has a low opportunity cost.

It is interesting to note that at least one of Geertz's comments remains relevant today: "Smallholder cultivation of export crops remains a source of succor for the hard-pressed Indonesian economy, but it is hardly even approaching the status of a driving force." Perhaps it is time to develop this sector into a driving force to help rebuild the Indonesian economy, quite literally, from the ground up.