Downstreaming Agro Industry through Export Tax and Productivity Increment Policy for Primary Export Commodities

Abstract

The agro-industrial sector is the largest contributor in the industry sector, but its contribution to GDP (Gross Domestic Product) has consistently declined each year. The average growth of this sector is only around four per cent for the period 1999-2012. Decline in the share of agro industry to GDP is predicted due to lack of availability of raw materials and low productivity of the agricultural sector. The Ministry of Industry through a policy of acceleration and expansion strategy seeks to encourage the development of agro-industry support infrastructure in line with the master plan for economic development expansion and acceleration program in Indonesia (MP3EI). The Government will provide incentives to employers who supply the raw materials to country, and disincentives (duty) for the export of raw materials. The government is gradually trying to attract local and foreign investors to develop the agro-industry. In addition, the government through its strategic plan has allocated a budget to increase the productivity of the agricultural sector, due to the stagnation in the agricultural sector. Increased productivity is expected to encourage downstream agro industry. This study will focus on the export tax and productivity increment policies on export commodities as the main policies chosen for the development of downstream agro industry. The main export commodities in this study are tax imposed export commodities. The model used to measure the impact of the policy is a comparative static CGE (Computable General Equilibrium) model. In addition this model is also able to measure the impact of macroeconomic, sectoral economy, and measure the impact on household income distribution groups. The results show that the export tax policies have a negative impact on economic growth (real GDP). The decline is due to the decline in value of exports, real household consumption, real investment and real government expenditures. If the success of the national economy is only assessed by macroeconomic indicators, the policy is judged to be a pro to national economic growth, and worsen the competitiveness of exports. Conversely, if the export policy is accompanied by an increase in the productivity of the upstream sector, it will have a positive impact on real GDP. The increase in real GDP would be higher if the export tax policy and increased productivity upstream sector is accompanied by an increased productivity in downstream sectors. Export tax policy could restrain export growth in the sectors imposed tax with or without an increase in productivity of the upstream and downstream sectors of agro-based industries. The decline in exports become smaller if accompanied an increase in productivity of the tax imposed export commodities. This is consistent with the expectations of the export tax enforcement policy, which restrains the growth rate of exports. The same thing happened in the sectoral imports. The decline in exports has prompted an increase in domestic output in certain agro-industrial subsectors. However, if it is followed by an increase in the productivity of the upstream and downstream sectors of agro-based industries, domestic output will increase at each agro industry and agriculture subsector. The increase in output is accompanied by a decrease of sectoral output prices, especially agro-industrial sector and the agricultural sector. The policy also affects the employment sector, where in general an increase in employment, except in the palm oil sector. If the export tax policy is implied with or without an increase in the productivity of the upstream and downstream sectors, it will increase the income of the non-farm household, and a decrease in the income group of farm households. The policy worsens the distribution of income and welfare among household groups. Based on the results of research, the policy implications that can be suggested, are: (1) The realization of the strategic plan of the Ministry of Agriculture and Ministry of Industry related with productivity improvements in upstream and downstream sectors of agro industries becomes a necessary condition of encouraging downstream agro industry. It takes strategic measures to encourage increased productivity, both through increasing labor productivity (by increasing the expertise and skills) as well as increase the efficiency of the use of various material inputs and capital equipment, an increase in research activities, and technology development. Development of agro industries that only depends on the export policy is a misleading decision either macroeconomic, sectoral, and income distribution point of views. (2) The government needs to create a strategy to compensate the decline in household incomes through the redistribution of agricultural export tax revenues, as practiced by the government of Ghana. Export tax revenue redistribution scheme can be done by providing cheap credit for farmers, where credit payments are based on the pattern of farmers' income. (3) The government should help in increasing farm household productivity through rejuvenation of old plants, the use of seeds waiting, as well as proper maintenance, fertilization, and cultivation. (4) Suggestions for further research would be to develop recursive or fully dynamic CGE models for the simulations in this research. The aim is so the model will be able to respond to as well as simplify the dynamics of change in time and to empirically predict for a specific period of time.