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Abstract
Indonesia began subsidizing fertilizer in 1971 to encourage its use as a complement to the new,
high-yielding rice varieties that were becoming available. While providing considerable assistance
to encouraging farmers to utilize these new HYV s and the associated package of inputs, the subsidy
for fertilizer has attracted considerable attention in the light of the increasing budget limitations
in Indonesia. The high levels of fertilizer and HYV use, the rapidly changing elasticities
and cross elasticities among the major food crops, and the growing intersectoral linkages in the
Indonesian economy suggest reasons for re-assessment of the subsidy for fertilizer. The operation
of the subsidy is explained, followed by a discussion of changes in the relevant elasticities for
demand and supply of commodities and fertilizer. A static welfare analysis of the fertilizer subsidy
is presented, showing that the economic subsidy is worth only 42% of the financial subsidy and
that farmers are receiving only 7% of the financial subsidy. A simulation of the effects on the food
crop sector of removing the subsidy follows the welfare analysis. The paper concludes with an
exploration of the policy issues stemming from the results.