Agricultural Demand Linkages and Growth Multiplier in Rural Indonesia

In a fast urbanizing Indonesia, the rural sector still plays an important role in the countrys economy. Although declining, the majority of the population still live and find employment in rural areas. However, rural areas lag behind urban areas in many aspects. As a result, around 80% of all the poor in the country are found in rural areas. Resolving this problem requires a clear and effective strategy to jump-start and sustain economic growth in rural areas. This study finds that the growth of the agricultural sector strongly induces the growth of the non-agricultural sector in rural areas. Although it has been fluctuating over time, it is estimated that, on average, one percent growth in the agricultural sector will induce 1.2% growth in the non-agricultural sector in rural areas. This finding vindicates the view that rising incomes in the agricultural sector stimulate demand for locally produced goods and services in rural areas, in particular those produced by the non-tradable sector. Formulated appropriately, a rural development strategy that develops the agricultural sector could provide a major impetus for achieving a fast growing and vibrant rural sector in Indonesia.