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Possibilities of Micro Finance Role as the Catalyst for Rural Agricultural Development in Indonesia

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At least three elements need to be discussed to explore the possibilities of micro finance to catalyze rural agricultural development in Indonesia. First, the economic institutions of micro financing activities which spans over formal, semi-formal, until informal institutions. Second, the economics of rural agriculture activities and factors surrounding it. Third, the interaction between the two previous factors which determine the possibility of microfinance role to catalyze rural agricultural development.

Main problems prohibiting rural agricultural development

Indonesian agricultural development gained momentum when the President Soeharto's New Order governance pushes the green revolution, which culminates in periods of Indonesian rice self-sufficiency. However the agricultural development has ceased to develop further as government's support shrunk and further room for agricultural expansion is limited, both in scale and productivity. We can explore at least four problems prohibiting further rural agricultural development as follows:

Ownership of Land

In many case, landlords and major corporations has acquire vast amount of lands from family farms, which render majority of farmers (especially temporary farm workers - buruhtani) own no farming land. In most cases, productivity of farm workers is lower than those of family farmers who work on their own farm, which landlords has little control of. This often results in low (or halted increase of) productivity of land.

Land used for agricultural activities has not significantly increased, compared to deforested land, as more areas are used for industrial and real estate activities. Even though Indonesia own 100 million hectare area of land suitable for agricultural activities, without proper management, Indonesian agricultural activities would not develop as how it could be. The inequality of farmers' standard of living translate in their productivity, which spans across very high Jakarta to much lower value in some other province in Sulawesi and Papua. The results of all these factors would lower agricultural output. Although these factors wouldn't directly translate into rice production data, careful examination in deserted farmlands would show how improper land management takes its toll on Indonesian rice production, because farm workers are paid lower than workers in big cities. This takes us unto the next problem in farming, the urbanization.


The vastly rapid economic development in urban areas which 'promises' higher income attracts thousands of new workers from rural areas. While this is not a particular economic phenomenon, in Indonesia this has happened so intensely that many rural farm lands are deserted. The urbanization rate has recently rocketed following parity of economic development and growth of informal sector in big cities.

Urbanization phenomena is most notably evident during Moslem New Year holiday season, where millions of Jakarta workers originating from villages in various Java provinces go 'home', as what Indonesian call pulang kampong, leaving Jakarta's everyday-congested-streets empty. They would then bring money to give their parents and nearby neighbors, which is proudly done as it reflect their economic achievement. These factors attract young (new) workers to join them; hence, upon their return, they brought more young prospective workers to work in Jakarta. Moreover, landlords paying subsistent wage levels provide stronger urge for farm workers to move to bigger cities. Most of new workers leaving to Jakarta are youngsters, which leave much of the village economic activities to be performed by aging population (fathers and mothers) and housewives.


Indonesian farm productivity has improved from year to year, with average increase reaching as much as 0.896ku/ha every year , which reached 50.15 in 2010 . However these increases has not caught up with other rice producing countries such as Thailand and Vietnam, whose some of rice production surplus has been imported to Indonesia.

Table 1: Land area, productivity, and total produce of Indonesian Rice Fields

Tahun Luas Produktivitas Produksi

(Ha) (Ku/Ha) (Ton)

1993 10993920 43,78 48129321

1994 10717734 43,48 46598380

1995 11420680 43,52 49697444

1996 11550045 44,20 51048899

1997 11126396 44,34 49339086

1998 11730325 41,97 49236692

1999 11963204 42,52 50866387

2000 11793475 44,01 51898852

2001 11499997 43,88 50460782

2002 11521166 44,69 51489694

2003 11488034 45,38 52137604

2004 11922974 45,36 54088468

2005 11839060 45,74 54151097

2006 11786430 46,20 54454937

2007 12147637 47,05 57157435

2008 12327425 48,94 60325925

2009 12883576 49,99 64398890

2010 13253450 50,15 66469394

2011 13224379 49,44 65385183

While both land area used for farming and productivity has increased , total production has not caught up with increase in domestic demand for rice. As the result, rice need to be imported from rice exporting countries.

Productivity in farming is related to technology used in farming, which include type of rice planted, irrigation and plowing technology, and usage of fertilizer. Proper usage of these technologies has not been uniformly adopted in Indonesia, notably farm areas in Sumatra, Sulawesi and Papua, which is reflected in the parity of rice productivity in provinces in Indonesia.

Implementation of technology enhanced farming is slowed down by inequality of economic development in rural areas where farming takes place. It takes adequate information, capital and proper infrastructure to support usage of technological equipment. Farmers in Indonesia has no proper access to information and capital to implement these technologies, and infrastructure development has been underdeveloped unequally in recent years; while in Thailand and Vietnam it is being rapidly developed to provide



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