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Jakarta Post

Villages waiting to join Indonesia'€™s march of growth

  • Anderson Tanoto

    The Jakarta Post

Pangkalan Kerinci, Riau   /   Mon, June 29, 2015   /  06:26 am

President Joko '€œJokowi'€ Widodo'€™s recent call for a shift from a consumption-driven economy to a production-based one should turn the national spotlight once again on agriculture.

At the World Economic Forum on East Asia in Jakarta last April, he outlined Indonesia'€™s recent economic history. In the 1970s, the country grew rich from the export of crude oil.

In the following decade, crude oil prices crashed, along with the rupiah, at a time when oil and gas made up an overwhelming 80 percent of Indonesia'€™s exports. The country then started to industrialize and expanded into textiles, pulp and paper, furniture and palm oil. Now history is paying a repeat visit to Indonesia in the form of a commodities price collapse coupled with steep rupiah depreciation.

Against these ups and downs of contemporary history, agriculture affords the continuity of hope. Agriculture could provide the way out from consumption to production in the economy.

Villages have been one of the sources of Indonesia'€™s economic success. Agricultural gross domestic product (GDP) grew by more than 3 percent a year, compared with population growth of 2.3 percent in the 1970s and 2 percent in the 1980s. This made agriculture a key driver of national development in two critical decades associated with Indonesia'€™s economic take-off.

Today, the need for inclusive growth requires more attention to be paid to the rural sector. Nearly half of all Indonesians '€” 48 percent of the population or about 120 million people '€” live in rural areas. If nothing else, pure demographic heft would suggest that this segment is economically significant.

Warning signs have appeared in World Bank and International Monetary Fund (IMF) forecasts that the Indonesian economy this year will grow less than 5 percent, meaning insufficient jobs and virtually stagnant incomes amid a rising population with about 2.5 million young entrants to the labor market every year.

The problem is compounded by a weakening currency. It causes imports to become more expensive, exports more competitive and the country more attractive to foreign investors. Much of that could have been good news '€” except that about 60 percent of Indonesian exports consist of commodities, the prices of which have taken a beating.

This is where rural Indonesia comes in. It could help to push the country to the next phase of growth, driven by production, that President Jokowi envisages. That shift would require two inputs.

First, there must be investment in skilled human capital to increase labor productivity. Although Indonesia has a high gross school enrollment rate, learning outcomes are unfortunately poor. The country ranked almost at the bottom in reading performance according to the organization for economic co-operation and development (OECD) Program for International Student Assessment.

Second, there must be expansion in the manufacturing sector, which is labor-intensive and therefore creates employment and accelerates growth.

The depreciation of the rupiah makes the manufacturing sector competitive and attractive to foreign entities, with some analysts suggesting that Indonesia can fill the space vacated by China abandoning low-end manufacturing. Also, Indonesia benefits from being in a region that has strong production networks.

Within this overall context, rural areas need better infrastructure and connectivity to play their part in national development. This is true of all countries; it is true with a vengeance of Indonesia, an archipelagic nation with sprawling dimensions that make connectivity a national imperative.

Thus, trans-island highways, seaports and railways are at the heart of the President'€™s infrastructural agenda. His plan to spend more than US$23 billion on agriculture this year '€” double the amount allocated in 2013 '€” signify the seriousness with which he treats the need to develop and connect villages. As a man of the people, he realizes the visceral importance of rejuvenating the economy of Indonesia'€™s rural heartland.

In the process, Jakarta could help to narrow the rural-urban divide and the income divide. Inclusive growth must hold center stage in a country where about 30 million people live below the poverty line. However, the government will have to overcome bureaucratic bottlenecks, including tortuous tendering processes, which thwart the implementation of good plans.

The government cannot and should not try to lead rural development '€” particularly through resource-based manufacturing '€” all by itself. Partnership between farmers and the private sector will benefit both people and companies.

The palm oil industry illustrates the potential for this partnership. The traditional model was for companies to own and operate plantations. Now, most major companies collaborate with smallholders. This has resulted in the transfer of agricultural knowledge and best practices that enable farmers to improve land yields.

But why should companies, which are devoted to the bottom line, devote their energies to the uplift of people who are not their direct customers? The reason is that they enjoy clear economic benefits from the partnership.

Companies are guaranteed palm oil supplies, which they buy from the farmers at a price determined by the government, without having to meet labor costs or other overhead.

For this model to work, firms must be willing to understand and recognize the often complex regime of land rights that lie at the heart of local culture.

There is another way for companies to contribute to rural development, which I can cite personally. I have been living for the past two years in the town of Pangkalan Kerinci in Riau province. Only 200 households inhabited Kerinci until the APRIL Business Group, a unit of RGE, set up its pulp and paper mill there more than two decades ago. Since then, transformation has been dramatic. The population has grown to 100,000, more than 90,000 direct or indirect jobs have been created and 85 percent of the town'€™s electricity needs are met by renewable energy generated by the mill.

A once remote area has become a part of Indonesia'€™s economic ecosystem, benefiting from and contributing back to development on a national scale. If villages and towns are not to come to the cities, swamping them in the process, development must go rural.

It would be unfortunate if some among Indonesia'€™s urban elites, like their counterparts in other agrarian nations, see economic growth largely in terms of industrialization and urbanization.

There would be a consequent danger of the rural hinterland being viewed as a historical legacy at best and as a contemporary impediment at worst on the road to industrial progress.

Such views would be myopic. Rural Indonesia is not an economic relic of the colonial past. It is a gateway to the future for an independent nation that is a member of the Group of 20 sunrise economies. Indonesia owes it to the working class, and to the population in general, to make the transition to that economy by focusing on its villages.

The writer is the director of Singapore-registered RGE Pte Ltd., which owns pulp and oil palm plantations and paper industries in Sumatra, China and Brazil. This is a personal view.

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