Overview Indonesian agriculture supports the livelihood of millions of Indonesians. Three out of five Indonesians still live in rural areas and farming is their main occupation. While Indonesian agriculture has performed well historically and contributed to significant growth with increased employment and reduction of poverty, productivity gains of most crops have now slowed down significantly and the majority of farmers operate in less than one-half hectare today.  Revitalizing the agricultural sector is necessary to underpin renewed and robust growth of the economy and is a key component of the Government’s rural development strategy.
With agriculture now averaging only half of rural households’ incomes, a strategy for rural development will also need to focus on the non-farm rural economy which will demand close cross-sectoral collaboration. An additional challenge is that big-bang decentralization is altering fiscal and administrative relations between central and sub-national governments, regulatory systems are struggling to maintain nationally coherent frameworks in the face of decentralized implementation capacity, and public/private roles are being re-examined for extension, research animal health services, and others.  The rural development agenda will need to focus on two areas: reinvigorating productivity gains among rural producers, and providing the foundation for the long-run sustainability of these productivity gains.
To alleviate rural poverty, broad-based growth in rural productivity is essential with robust systems for generating, adapting and disseminating technology relevant to small-scale producers. While Indonesia has concentrated on these in the past through public sector research and extension institutions, these public systems are facing severe challenges due to decentralization. Back to top Progress Over the past decade, Indonesia has achieved and was, until the East Asia economic crisis struck, considered to be among the best performing East Asian economies. Indonesia grew at a rate of 7.1 percent between 1985 and 1995, and attained real GDP growth of 7.8 percent in 1996. Between 1970 and 1996, the proportion of the population living below the official poverty line declined from 60 percent to an estimated 11 percent -- about twenty-eight million people -- reflecting the government's strong commitment to poverty reduction. However, this rose to 23.4 percent at the peak of the crisis in 1999 but has since dropped back to 16.7 percent, lower than the pre-crisis level of 17.6 percent. With rural households accounting for about 57 percent of the poor, poverty in Indonesia is still largely a rural phenomenon. Back to top Key Issues  Land. Land conflicts and disputes, concentrated ownership and tenure of land, and lack of legal protection of poor people’s rights over land adversely affect income and opportunities for the poor.
Less than 25 percent of rural land parcel holders have a formal certificate which is also a constraint to access to credit. Since 1997, the Government has titled over a million parcels of land, increased capacity at the National Land Agency, and carried out a comprehensive review of the policy and legal reforms needed to modernize the land system under democratic, pro-poor principles. However, only 25 percent of the nation’s estimated non-forest land parcels have been registered in the 40 years since land registration began. If this trend continues, it will be difficult for land registration to catch up with the growing number of parcels. Moreover, a large share of land off-Java is communal and private titling of this land may work against the poor and increase conflict. Water: Securing Sustainable Water Resources Management The key issues facing the water resources and irrigation since 1997 relate to (i) poor governance in the sector, and weak management and professional capacity; (ii) fiscally and managerially unsustainable asset management; (iii) increasing environmental problems; and (iv) deterioration of the existing asset stocks and investment constraints to develop new or improve the existing assets. Growing water scarcity is increased by the increasing costs of developing new water resources, soil degradation in irrigated areas, groundwater depletion, water pollution and degradation of water-related ecosystems, and wasteful use of already developed water supplies. Systematic under-funding of operations and maintenance has led to at least one third of the three million ha of government designed irrigation schemes being rehabilitated twice in the last 25 years.  The upper watersheds in Indonesia are also increasingly degraded as they lose their protective vegetative cover through deforestation and poor land management practices.
Coastal Resources There are four key development issues for Indonesia’s coastal resource management: (i) fishery, the next forestry – It is globally recognized that like forestry, the once abundant natural resource of fishery is in serious decline due to a lack of governance, consensus, and competing interests over common property (coastal ecosystems and the fisheries they support) and resource users (poor fishers), and institutional weaknesses to deal effectively with its sustainable use and management. At risk are coastal products accounting for approximately 25 percent of Indonesian GDP annually (according to FAO) coming from 81,000 kilometers of coastline; (ii) poverty-coastal environment nexus – Approximately 5,500 rural coastal communities dependent on the coastal ecosystem for their livelihoods are neglected from the development process and lack economic opportunities. The high number of unemployed youth has contributed to increasing pressures on the depleting coastal resource base. Technical Services: Low Expenditures on Agricultural Research Indonesia’s agricultural research expenditures have declined dramatically since the early 1990s compared to its neighbors. The immediate challenges for the agricultural research system are to (i) increase the overall level of national research expenditure; (ii) clarify the public funding responsibility for the sub-national adaptation institutes; (iii) counter decentralization’s effect of increasing the administrative overhead costs of this sub-national system; (iv) replace the significant proportion of senior researchers nearing retirement; (v) integrate private sector agricultural research capacity as part of a national strategy; and (vi) strengthen capacity in biotechnology resources and effort to give growing emphasis to non-rice commodities.  Agricultural Extension
Indonesia faces a major challenge to develop an effective institutional mechanism for disseminating technology relevant for small scale producers. While there is less experience in new models of agricultural advisory services, there is growing evidence of significant benefits to decentralized extension systems that involve the private sector and civil society. Privatized extension services will assume greater importance in the dryland cash cropping sub sector in Eastern Indonesia since exportable commodity production is being increasingly supported by the private sector. Educational qualification levels of public extension agents are being improved, but compensation appears to be deteriorating with decentralization, with attrition of the more capable personnel seeking other employment. Poor linkages between agricultural research and extension has militated against both ensuring focus on farmers’ problems while setting the research agenda, and effective dissemination of research results. The new Extension Law (Law No. 16/2006) that was passed recently explicitly recognizes the need for a multi-provider system for the delivery of agricultural services to increase the competitiveness of the Indonesian agricultural sector and improve farmer incomes.  Local Governance
The ongoing decentralization process since 2001 has resulted in financial resources, personnel and responsibilities for delivery of basic services being devolved to district governments. In September 2004, the decentralization laws were revised with the passage of Laws 32 and 33/2004. The key significant changes introduced by the last include direct election of regional heads, review of district budgets by the province on behalf of the central government, a greater role for the province in monitoring of district performance, and new requirements on local borrowing. However, most district-level funds are being allocated for routine rather than developmental expenditures and the potential for misuse of public funds is also high. Overall, the environment for “good governance” at the local level is weak and corruption similar to the national situation is endemic. Rural Infrastructure Investment in rural infrastructure has seen a significant slowdown resulting in a deterioration of existing facilities. Village to market access roads are critical for the rural poor, and for supporting the intensification of agriculture.  Kabupaten roads make up 72 percent of the classified road network; almost half of this network is in poor or bad condition, and only 19 percent is in good condition. Initiatives for developing rural information and communication technologies provide an exciting opportunity for disseminating information to the rural communities, improving research and extension linkages, and promoting rural growth.
Microfinance Microfinance in Indonesia is operating in a policy vacuum preventing stakeholders from aligning their efforts and creating a sustainable microfinance system. A national policy on microfinance is needed overcome the current restrictions by creating an enabling environment, which will allow existing microfinance institutions to fill the gaps of demand and supply, predominantly in rural areas. Back to top World Bank Program  Land. The Bank’s engagement in the land sector has continued for more than a decade and has been focused on improving tenure security and development of the land market, institutional arrangements to improve delivery of land services to the community, and decentralization of land services.
The ongoing Land Management and Policy Development Project aims to (i) improve land tenure security and enhance efficiency, transparency, and improve service delivery of land titling and registration; and (ii) enhance local government capacity to undertake land management functions with great efficiency and transparency. Water Resources. After decentralization, the agenda for the Water Resources Sector Adjustment Loan included a new water resources law; related Government Regulations and implementing directives and guidelines at the national and regional levels; and creation of basin and management organizations in eight provinces that had been initiated under the Java Irrigation Improvement and Water Management Project and the follow-on Indonesia Irrigation and Water Resources Reform Implementation Project through a grant from the Government of Netherlands.  The Bank’s ongoing Water Resources and Irrigation Sector Management Program is a 11-year adjustment program loan, that is an extension and consolidation of the broad and coherent support the Bank has provided since 1997 focussing on institutional development.
The program’s objectives are sustainable and equitable management of surface water resources and infrastructure; increased irrigation farm household incomes and more cost-effective and fiscally sustainable management of sector agencies. This sectoral reform agenda is supported by other donors (ADB, JBIC, GON). The Water Resources and Irrigation Sector Management Program is also supplemented by a €10 million grant from the EU to support basin water reources management, water conservation, and participatory irrigation management in the province of Nusa Tenggara Barat. Coastal Resources. The Bank’s main engagement in this area has been COREMAP, one of the largest coral reef management programs in the world which is currently in its second phase. The objectives of the program are: Institutionalization of a management framework that supports the restoration of a healthy coral reef ecosystem that would in the process, improve the income of empowered coastal communities through this rejuvenation of the coral reef fishery. Assist local government and rural coastal communities to co-manage the associated ecosystems and fisheries resources sustainably. Regulatory and policy reforms to legally empower communities to sustain reef conservation activities.
 Technical Services. The World Bank has had a long-standing relationship with the Government of Indonesia with regard to its financing of agricultural technical services since 1975 and its extension services since the late 1960s.
The Bank has additionally supported agricultural education and training in a series of training and capacity building projects to support the Government of Indonesia's strategy of improving and expanding pre-service and in-service agriculture sector training. The Bank has also financed smallholder cattle development, tree crop development, and more recently, integrated pest management projects, research management and decentralized extension projects. The Farmer Empowerment through Agricultural Technology and Informationn (FEATI) (2007-2011) will work in 71 districts across 18 provinces and would strengthen and deepen the innovations initiated under these earlier projects. The project offers a historic opportunity to reshape the delivery of agricultural services (research and extension) towards a dynamic multi-provider system that is needed to increase the competitiveness of the Indonesian agricultural sector in international markets.  View the FEATI project in pictures
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