Poor farmers: credit access and social capital

by Berly

The Physiocrat school from France in 18^th 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.