Improving Agricultural Market Performance:
Creation and Development of Market Institutions
149
 Diversifying Indonesia’s agricultural production to generate more and different forms
of rural employment;464 and
 Protecting agricultural producers as opposed to only ensuring reasonable and stable
food prices for consumers. 465
These four bottlenecks basically relate to the inability of Indonesia’s farmers to get integrated
in the agricultural marketing system has resulted in low prices for their products, which is
further exacerbated by Indonesia’s drive for import substitution and volatile and overvalued
currency exchange rates.466 Therefore, the key challenge – similarly to Tunisia and Uganda –
concerns linking Indonesia’s small-scale farmers with the agricultural marketing system.
Despite the fact market intervention through a number of market institutions (e.g. BULOG,
PTPN III, and PT Pupuk Indonesia) has been strong in the past, it is now virtually absent for
food crops other than rice and sugar for which the Government of Indonesia also attempts to
realize food self-sufficiency e.g. beef, soybeans and corn).467 Moreover, the intervention power
of these market institutions such as BULOG has gradually reduced, particularly as a result of
the liberalization policies of the late 1990s in response to the Asian Financial Crisis and IMF
agreements.
PTPN III’s plantations remain an instrument through which the Government of Indonesia
continues to directly intervene in the production, albeit limited to a number of export-
orientated commodities. However, Indonesia’s agricultural intervention primarily revolves
around the other forms of market intervention,468 including subsidies, which benefit a wide
range of commodities (e.g. subsidized inputs through PT Pupuk Indonesia), and commodity-
specific trade or border interventions complemented with price support to stabilize food
prices. Price support remains the most important policy instrument for rice, which is by far
Indonesia’s most important staple food (e.g. through BULOG).
The use of pricing policies as the key policy instrument for several objectives (e.g. food
security, farmers’ income protection, increasing Indonesia’s competitiveness, and agricultural
product diversification), however, may eventually lead to contradictions and conflicts of
interest.469 Positive effects of pricing policies for one objective may have negative
consequences for other objectives.
The case of Indonesia reflects the difference between agricultural polices between developed
and emerging economies. While the former is more engaged in providing direct farmers’
income support, the latter is more concerned with domestic price support and stabilization of
staple food prices. Policies relating to direct farmer’s income support put a considerable
pressure on public budgets while price support and stabilization, in combination with trade
policies, are less financially demanding.470
464 FAO (2003), “WTO Agreement on Agriculture: The Implementation Experience - Developing Country Case Studies,”
available a Accessed June 2017].
465 Ibid
466 Anindita, R., Baladina, N., & Setiawan, B. (2013), “Effect of Marketing Efficiency Improvement in Indonesia,” Russian
Journal of Agricultural and Socio-Economic Sciences, 7(19), pp. 5-6.
467 OECD (2010), “Policies for Agricultural Development, Poverty Reduction and Food Security,” Paper presented to the
Working Party on Agricultural Policy and Markets, 15-17 November 2010, Paris: OECD.
468 OECD (2015), Indonesia Policy Brief – Agriculture, available at
[Accessed June 2017].
469 FAO (2003), “WTO Agreement on Agriculture: The Implementation Experience - Developing Country Case Studies,”
available a Accessed June 2017].
470 Ibid