The economic crisis of the late 1990s led to an overhaul of Indonesia's agricultural policies. Influenced by the conditional loan requirements set by the International Monetary Fund (IMF) and other donor institutions, the government has liberalised trade policies. As pre-crisis policies imposed less interventions on secondary food than other crops, however, the impact of policy reform (especially trade policies) on these commodities is expected to be less.

This chapter has several objectives. It provides background data on secondary crops. It also contains details of institutional arrangements concerning these crops. Finally, it contains analysis of the assumed effects of altering R&D investments, so that they favour secondary food crops (i.e. maize, soybean and cassava) more than in the past, using the economy-wide WAYANG model (described in Appendix 1 of this volume).

Production and trade

Indonesia's agricultural land decreased around 1.1 million hectares during the period 1983-1993 (Kasryno, 1997). However, the harvested area of agricultural commodities has increased: an increase of cropping intensity has compensated for a decrease in land usage. During the period from 1969 to 1999, the harvested area of rice increased by 1.6 percent, maize 1.4 percent and soybean 3.5 percent annually, while cassava slightly decreased by 0.5 percent.

Up to mid-1997, the agricultural sector was very instrumental in supporting Indonesia's economic development. Growth in agricultural output, which was around 3 percent over 25 years, made it possible to provide relatively cheap food for the domestic population of more than 200 million people.

For the quarter-century prior to the financial crisis of late 1997, Indonesia's economic performance had been, along with that of other East Asian countries, one of the best in the world. During those years Indonesia's real GDP grew at an average rate of more than 6 percent per year, inflation averaged less than 10 percent, and the incidence of poverty fell from three-fifths to one-seventh of the population. Significant structural changes accompanied that rapid economic growth, the nature of which raised important questions about its impact, together with that of Indonesia's agricultural, industrial, trade and environmental policies, on the sustainability of the country's development.

Up to 1997 all the forward-looking analyses aimed at understanding how to best address these structural changes had assumed the economy would continue growing at a strong pace into the future. The dramatic withdrawal of financial capital from Indonesia and the crash in the value of its currency from late 1997 meant that all these previous analyses needed to be revised. Also, the domestic policy emphasis shifted temporarily to emphasise basic concerns over unemployment, hunger and poverty, leaving concerns over the environment to richer countries' citizens.

Lots of important new questions emerged. How much difference would a few years of GDP decline in Indonesia make to projections of the structure of production, employment and trade? Might there be a re-agriculturalisation of the economy? How would the crisis alter the expected effects on Indonesia of implementation of the WTO's Uruguay Round agreements, and hence on attitudes towards the efficacy of trade and other economic policy reforms?

For convenience, as with the first half-century of Economics at Adelaide, the second half also is split into three periods: until Peter Karmel became Vice-Chancellor of Flinders University in mid-1966; from then until Frank Jarrett's retirement in 1988, during which time Jarrett held the George Gollin Chair and was frequently Dean of the Faculty of Economics; and the period since then when Jonathan Pincus held the Gollin Chair and was Head of Economics for six of those years (1991-96, a term exceeded only by Karmel 1950-61 and Eric Russell 1967-76 – see Table 24).

The Karmel et al. years

Professor Peter Karmel's arrival in May 1950 began a major takeoff for Economics at Adelaide, aided by additional funds being made available by the Federal government for universities in the post-war era: ‘From 1950 onwards the Department was amongst the foremost in the University in expansion of teaching and research activities and growth of tenured staff of distinction’ (Edgeloe 1992, p.2). It was arguably the liveliest and best Economics Department in Australia by the early 1960s, with a growing number of staff establishing reputations nationally and ultimately internationally.

Within two years of his arrival, Professor Karmel had orchestrated the formation of a new Faculty of Economics with two separate departments, Economics (which also retained its membership in the Arts Faculty) and Commerce (to be headed by Russell Mathews on his appointment as a Reader in 1953).

Granville Motel

9th June 2000

Session 1 Chairman

9.00-9.30 Introduction to WTO and APEC-Dr Samson Polume

9.30-9.45 Discussion and comments

9.45-10-15 The Government View-Michael Maue, Secretary, DTI

Session 2 Chairman: Samson Polume

10.15-10.30 Morning tea

10.30-11.00 Investment Promotion-Simon Peter, IPA

11.00-11-15 Discussion and comment

11.15-11.45 NGO Point of View- Lessons form Seattle-Lester Seri, Conservation Melanesia

11.45-12.0 Discussion

Session 3 Chairman

1.15-1.45 Union Point of View-John Paska

1.45-2.00 Discussion and comment

2.00-2.30 Manufacturers' Point of View-Manufacturers' Council

2.30-2.45 Discussion and comment

Session 4 Chairman: Mike Manning

2.45-3.00 Afternoon tea

3.00-3.30 Agricultural Point of View-RIC

3.30-3.45 Discussion and comment

3.45-4.15 Summary-Malcolm Bosworth, Consultant

4.15-5.00 General discussion and comment

There is a mixture of views within East Asia about agricultural trade reform and hence about its inclusion in the Uruguay Round agreements and subsequent negotiations under the World Trade Organization (WTO). On the one hand, governments in the wealthier densely populated countries are under pressure to continue to protect their farmers from import competition and to be seen to be providing an adequate degree of food security. In the countries with a stronger comparative advantage in agricultural products, on the other hand, governments are keen to secure more access to markets for their farmers' exports. This difference of views within East Asia surfaces periodically in APEC as well as WTO fora. Since it is mirrored in other parts of the world too, agriculture is guaranteed to be a controversial part of the Doha round of multilateral trade negotiations, just as it was in the Uruguay Round.

Given the high degree of distortion in world food markets that existed in the 1980s (Tyers and Anderson 1992), every impartial observer agrees that one of the great achievements of the Uruguay Round (UR) was to start to bring agricultural policies under GATT discipline, and to agree to return to the negotiating table by the turn of the century. Following the signing of the UR accord in 1994, non-tariff barriers to agricultural imports have been tariffied and bound and the tariff bindings are scheduled for phased reductions.

Participation in WTO will constitute the cornerstone for PNG trade policy development in the 21st century, as it will for those larger Pacific Island economies that have recently joined WTO (Fiji and Solomon Islands) or are in the process of joining (Samoa, Tonga and Vanuatu). In return for the rights and opportunities that membership of these clubs brings, there are also some obligations and challenges that must be faced. Governments sign on to those obligations presumably because they believe the benefits will outweigh the costs, even though some of the obligations offer political challenges in the short term. In particular, the process of negotiating accession to WTO consolidates and makes it more difficult to reverse a country's economic reforms.

Benefits and obligations of WTO membership

To become a WTO member is to join a club. Like all clubs, the WTO bestows benefits on members but there are some costs; it offers rights but with them come obligations; it provides new opportunities but also some challenges. Evidently the net benefits are overwhelmingly positive, given that more than 120 developing countries will be members within five years. But like all worthy clubs, there are rules to be followed, entry conditions to be met and formal accession procedures to follow. Occasionally the rules and obligations upset political sensitivities because some groups within a country may lose a privilege (e.g., protection from import competition), but almost invariably those rules boost the overall economy of each WTO member.

The Mitchell years

Modern undergraduate economics teaching at the University of Adelaide began in 1901. The University was founded in late 1874 and first offered subjects in March 1876. Twenty-five years later a core Economics undergraduate subject was introduced, and that year saw the first two B.A. students and first LL.B. student graduate after completing the subject. Adelaide was thus a very early provider of tertiary economics education. It was preceded only by the University of Pennsylvania, which introduced a Bachelor of Science in Economics a decade earlier, and by the London School of Economics which was established in 1895. Simultaneously, a Faculty of Commerce was established at Birmingham University in 1901 (Turner 1904), followed in 1903 by Alfred Marshall's success in getting tripos status for economics at the University of Cambridge.

That is not to say there were no precursor subjects on offer at Adelaide prior to 1901. From 1878 lectures in Political Economy were offered to B.A. and M.A. students by the Reverend William Roby Fletcher (Hughes Professor of English Literature). While it is not clear how frequently these subjects were taught or how many students enrolled, numbers must have been small initially because in 1880 the library had just two books in the field (both by John Stuart Mill). The older universities of Sydney and Melbourne also introduced political economy subjects in the late 19th century. And they, like Adelaide, complemented those offerings with university extension courses in economics for non-degree students, whose evening classes continued until well into the 20th century (Goodwin 1966).

Introduction

The Global Trade Analysis Project (GTAP) model is a global computable general equilibrium (CGE) model which has its origins in the SALTER model (Jomini et al. 1991). Since its inception in 1993, GTAP has become widely used and respected by researchers and policy-makers around the world.

In this Appendix we introduce some of the key features of the GTAP database and model, applications of which are used in a number of chapters in this book. We then explain how results from the GTAP model can be analysed and we conclude with a summary of some of the main advantages and limitations of global CGE analysis.

The GTAP database

The GTAP model and database are publicly available and fully documented; these features enhance the credibility of modelling work and facilitate comparability of analysis. The global database is updated approximately every eighteen months, with contributions coming from throughout the GTAP network of international organisations and country experts. Version 3 of the database comprises 37 commodities and 30 countries (McDougall 1997), while Version 4 of the database comprises 50 commodities and 45 regions (McDougall et al. 1998). In both versions, Indonesia is one of the countries specified and there is a relatively heavy disaggregation for agricultural sectors. Table A1 details the countries and regions in recent versions of the GTAP database, while Table A2 shows the commodity breakdown. To aid computation and to highlight the implications for the regions and sectors of particular interest, the GTAP database is generally aggregated to a smaller number of regions and sectors when running simulations and interpreting results.

Introduction

The economic crisis of the late 1990s had economic and political consequences which are still unfolding. Within the crisis affected countries, large numbers of rich and poor people were adversely affected. The effects on the poor operated through a contraction in the demand for labour, on the one hand, and increases in commodity prices, especially for internationally traded goods, on the other. These problems have apparently been more severe in Indonesia that anywhere else. Not all poor people in Indonesia were adversely affected. Some smallholder agricultural producers whose products are exported benefited substantially from the depreciation of the national currency, the rupiah. Nevertheless, most poor people, including most agricultural producers, seem to have been harmed, especially those who are net purchasers of food. Food prices have thus been a special concern in the policy response to the crisis.

The staple food of Indonesia, rice, has been a special focus of government intervention for decades. The National Logistics Planning Agency, Bulog, has been charged with regulating food markets, especially rice, and has enjoyed a monopoly in rice imports. One objective of Bulog's interventions in the rice market has been to stabilise domestic rice prices relative to international prices and it has done this effectively (Timmer 1996). Another objective has been to ensure adequate supplies to consumers and this has been reflected in suppression of the average level of domestic prices below the average levels of international prices.

Indonesia is facing commitments to international trade liberalisation through the Uruguay Round, its participation in Asia Pacific Economic Cooperation (APEC), and its collaborative effort with other ASEAN economies to form an ASEAN Free Trade Area (AFTA). As part of the Uruguay Round commitment, Indonesia has been reducing its border tariffs, opening its markets, as well as reducing other domestic distortions especially in the agricultural sector.

As a member of APEC, Indonesia is determined to liberalise trade and investment in the Asia Pacific region. In the meeting in Bogor, Indonesia, in 1994, APEC economies set the long-term goal of free and open trade and investment in the Asia Pacific. The Bogor Declaration hopes to realize the goal in 2010 for developed economies and 2020 for developing economies. Furthermore, the Bogor meeting clarified the three pillars on which APEC would be based, namely, Trade and Investment Liberalisation and Facilitation (TILF); Economic and Technical Cooperation (ECOTECH); and Development Cooperation. Import tariffs have been cut unilaterally in APEC member economies, and further tariff cuts are expected so as to implement the Bogor goal.

While considerable industrial tariff reduction has been implemented in APEC, there has not been much discussion of agricultural liberalisation. This is different from the Uruguay Round which explicitly specifies reductions of import tariffs, domestic subsidies, and export subsidies on agricultural commodities. In APEC, the tariff reduction measure is generally based on the average level of tariff.

All of the forward-looking analyses of East Asia's economies of the decade or so to mid-1997 had been premised on the assumption that rapid national output and trade growth would continue. The dramatic withdrawal of financial capital from the region and the crash in the value of local currencies from late 1997 meant that such analyses needed to be revised. How much difference would a few years of GDP decline in Indonesia and other East Asian economies make to projections of structural change in Indonesia, for example? Might we even see a re-agriculturalisation of the economy? In particular, how will the crisis alter the expected effects on Indonesia of implementation of the Uruguay Round, and hence attitudes towards the efficacy of that and other economic policy reforms?

To help answer these questions, this chapter uses a global, economywide model known as GTAP (Hertel 1997). That model was used recently to project the implications of economic growth and Uruguay Round trade policy reform at home and abroad for the structure of Indonesia's economy over the period to 2005 (Anderson and Pangestu 1998). We extend that work to consider the impact of an interruption to growth due to the current economic and financial crisis. We begin by modelling the effect of the growth interruption on the economy in 2005 without and then with Uruguay Round implementation. We then simulate two alternative possible trade policy responses to the crisis: either that Indonesia chooses to slow its trade reform program, or that it chooses to liberalise its markets even further than it is currently committed to under the Uruguay Round.