Agriculture Public Spending and Growth in Indonesia

This paper analyzes the trends and
evolution of public spending in the agriculture sector in
Indonesia, as well as the impact of public spending on
agricultural growth. It finds that, in line with empirical
work undertaken in other countries, public spending on
agriculture and irrigation during the period 1976-2006 had a
positive impact on agricultural growth, while public
spending on fertilizer subsidies had the opposite effect.
The composition of spending patterns in Indonesia over the
past decade can partly explain why significant increases in
public spending for agriculture have not resulted in a
commensurate increase of agricultural production. The paper
is structured as follows. Section I presents analytical and
empirical findings about the impact of overall public
spending on growth, with a particular focus on Indonesia,
followed by an analysis of the government's role in
agriculture. More precisely, it discusses how public
spending can contribute to higher productivity and faster
growth in the sector. The section draws lessons from the
empirical literature and country examples worldwide,
exploring the implications of some of these findings in the
Indonesia context. Section II presents the results of an
empirical analysis of the impact of agriculture public
spending on agriculture gross domestic product per capita
growth in Indonesia, using time series analysis with both
ordinary least squares and generalized method of moments
econometric techniques. Section III analyzes in detail
agriculture public spending trends in Indonesia over the
period 2000-08, highlighting that a large and increasing
share of the spending is being allocated to subsidies
(fertilizer, credit, seeds) and to fund transfers to farmers
and farmers' groups.