Saturday, December 09, 2006

Poor farmers: credit access and social capital

by Berly

The Physiocrat school from France in 18th century put supremacy on land. Even though recent economic research suggest innovation as the engine of growth, Quesnay and his heirs have many strong points. Indonesia certainly can learn from land reform conducted in China (communist) and South Korea (non-communist) which provide strong foundation and more equality for future growth.

The land reform process needs an honest, comprehensive and scientific assessment (both on whose land, which land and for who), restriction on selling the distributed land for medium period and government credibility that this will be a one time measure (otherwise resources will be spend to get more land and to defend land). I had a long discussion with a Fisipol- UGM lecturer doing post-doc in U of Amsterdam and sadly those conditions are far from fulfilled in Indonesia. Furthermore, results of recent land reform in Indonesia have been rather unsatisfactory (most recipients sell their newly acquired land shortly).

If one of the main benefit on enlarging the land possession is the access to credit market lets focus on the credit market it self. The assumption of no credit constraint is one of neo-classical economics most un-applicable preconditions. That’s why Muhammad Yunus and his Grameen Bank justly deserve his Nobel Peace Prize (I would add the Nobel Economic Prize as well) for opening up credit access to poor people.

The late M. Hatta returned to Indonesia after watching admirably the cooperative system in Europe that increase collective bargaining power of farmer, get rid of wasteful middle man and sell the product directly to consumer. The cooperative employ capital (instead of the other way around) to build vast network of suppliers, processing plant and end-point shops. (for farmer cooperative on Tuscany click here).

Why this is not happening in Indonesia despite heavy constitutional mandate? One line of argument (beside low education level) put the blame on low trust/social capital (read Putnam and Fukuyama) among Indonesian farmer that inhibit them to pool resources for common good, low recognition for property right (many farmers still don’t have the ownership certificate of their land) and low credit access.

Let’s prioritize on the farmers. BPS Report for February 2006 show that 44, 47 % of Indonesian workforce are in agricultural sectors. But the trend in developed countries is a decreasing tendency then to stable around 5 % of population while increasing the efficiently of agricultural production. Some researches (sorry I forget the authors’ name) found that very few Indonesian farmers want their children to be farmers. So why not honour their wishes and improve out education so their children have multitude of choices of occupation in the future.


pelantjong maja said...

as if the return from agriculture at least the same as of the other commercial sectors, the parents may wish his/her children become a farmer, no?

embun said...

In fact, if we assume that agricultural job could be at least the same as the other commercial sectors, why in developed countries this sector still under high subsidy? I guess, that fact highlight two thing: 1) agricultural sector is not that attractive for job seeker, 2) the contribution of the sector in term of wage offered is not that high. Note: I still recall the structural transformation, where the share of agricultural sector (in term of output and labor) start to decline compare to non-agricultural sector.

Meanwhile, I agree with Berly that vertical improvement of farm household member is undeniable and in fact that is one way - indirect effect - of farm household improvement in term of knowledge and financial support for income/consumption smoothing strategy. Thus, improving farm household members' (especially their children) education is important and could lead to another way to escape from poverty trap. Although there is a big possibility that those member would be out of farm (don not wish to work on farm again), but I guess that will be good in the sense that land productivity (in term of number of labor per hectares of land) may be increase (if we assume that the cultivation technique also improve through mechanication, better access to fertilizer and seeds, etc).

I am not against land "give-away" policy, for sure. However, I only concern with the continuation of this policy and whether the impact of such policy could be permanently improve people's welfare or only temporarily.

Berly said...

The empirical evidences from long term patterns of development showed that even in developed countries like US, Japan and Western Europe saw the proportion of population work in agricultural sector decline as the sector's productivity (thus, the wages) increase.

The job at agricultural sector is not for everyone, some may want to work in the cities for its dynamic while some other may prefer less outdoor/physical works if they have the choice. Todaro stated that one of the goals of development is to increase choices available for the people.

Three of us have been through Perekonomian Indonesia class; the main literature (Syrquin and Chenery) discussed the structural transformation not only for developing countries but which also apply for developed countries.

We come to a paradox here since the best way to increase farmer’s welfare maybe to help them (and their children) to stop being farmer.