No.81 Risk, Infrastructure, and Rural Market Integration: Implications of Infrastructure Provision for Food Markets and Household Consumption in Rural Indonesia

Utilizing original panel data collected in 2007 and 2010 in rural Indonesia for 2261 households located in 98 villages in 7 provinces, this paper investigates the food markets' functions with different extents of integration, and aims to interlink three important factors in the process of economic development — risk, infrastructure and welfare — of the rural poor. Focusing especially on irrigation systems and local paved roads, we explore the potential effect of infrastructure in relation to the global food price crisis that occurred in 2007–08 and thereafter affected poor households in rural Indonesia. The most important finding from our empirical analysis can be seen in the villages with relatively low integration to the surrounding markets, but which had access to irrigation systems. In those villages food prices, and in particular the price of rice, were kept lower, even when rural Indonesia experienced a spike in food prices. This implies that, although the implication is contrastive to rice producers (net sellers), irrigation facilities offset the negative effects for rural households by maintaining a relatively abundant food supply in local markets. Along with this investigation, the threshold estimation examines whether there exists a certain threshold for the proportion of local paved roads that divides villages according to either lower or higher spatial connectivity. Our results clearly indicate the existence of such a threshold. These findings suggest that when evaluating the potential role of irrigation and the effectiveness of irrigation development and management, it is important to pay more attention to the functions of the surrounding markets as related to rural road conditions, in addition to the direct impact of irrigation on agricultural productivity as it affects households.

Keywords: risk, infrastructure, market integration, food price crisis, Indonesia