Economic incentives and comparative advantage in Indonesian food crop production

To suggest directions for diversification, this study assesses policy and production trends for five major food crops (rice, corn, soybeans, sugar, and cassava) during the 1970-1988 period; analyzes the effects of input-output pricing policies on production incentives for these crops; and assesses the crops" relative comparative advantages under three trade regimes (import substitutes, interregional trade, and export promotion). The study finds that rice has comparative advantage as an import substitute but not as an export crop due to poor quality and a thin world market. Corn is the most efficient import substitute, and could become competitive as an export crop if superior varieties are developed. Soybean and sugar production are inefficient, while cassava production meets neither domestic nor export demand. On the policy side, Indonesia"s highly successful policies to promote agricultural development became increasingly costly by the mid-1980"s, particularly output price supports and input subsidies. Although price supports and subsidies are being phased out for rice and corn, some economically inefficient crops continue to receive support in order to encourage crop diversity. A better diversification strategy, it is argued, would be to make producer incentives crop-neutral and linked to border prices, while continuing research investments, expanding extension, and improving rural infrastructure.