11/10/2012 (Reuters) - Indonesia must reform export taxes and import curbs on farm commodities to spur investment in the sector and improve national food security, the OECD grouping of the world's top economies said on Wednesday.

Agriculture contributes around 15 percent to the GDP of Indonesia, Southeast Asia's largest economy, employing about 42 million people of a population of roughly 240 million.

Import protection hinders competitiveness of the farm sector, limits productivity and growth and increases food costs for poor consumers, the Organisation for Economic Cooperation and Development said in a review of Indonesia's farm policies.

"If the aim is to improve access to food for Indonesian consumers, you wouldn't think raising the price of that food would be a good place to start," Ken Ash, director of the OECD trade and agriculture directorate, told Reuters in an interview.

"That's exactly what an import measure does, whether a tariff, quantitative restriction or standard constraint at the border."

CRISIS POLICY REFORMS SEEN REVERSED
Indonesia sets import limits and tariffs on several food items such as sugar, wheat, rice and soybeans, although it often scraps them when global prices spike.

Last week, an industry group in the country, Asia's top importer of wheat, urged the government to fix a 20 percent import tariff on wheat flour to protect domestic grain millers.

Although it is the world's biggest sugar buyer, Indonesia restricts imports of the sweetener to protect local farmers and aid domestic sugarcane mills.

The OECD report said many of the agriculture policy reforms introduced by Indonesia in line with IMF loan conditions after the 1998 Asian financial crisis had now largely been reversed.

Among these were the abolition of national purchase agency Bulog's monopoly on many farm imports, reducing tariffs and eliminating fertilizer subsidies.

"You may try to protect some processors, but at the cost of the consumer," said Andrzej Kwiecinski, a senior farm policy analyst at the Paris-based policy laboratory for the world's top economies.

Export taxes on agricultural products are hurting the country's primary producers, while also making the sector unfriendly for investors, OECD's Ash said.

Indonesia, the world's tenth largest agricultural producer, is the top producer of palm oil and the third largest cocoa grower.

But it has introduced export taxes on palm oil and cocoa beans to ensure domestic supplies, boost revenues and support domestic processing industries.

"In doing that, there is a discouragement that's being given to the primary producer," added Ash.

"If you have money and want to invest, are you going to invest in an environment that allows you to take advantage of domestic and international opportunities by moving across borders ... or in a country that is blocked?"

To increase investment in its agriculture sector, Indonesia could reduce export taxes, enforce forest laws, improve its infrastructure, enable easier access to credit, tackle land rights issues and increase funding on agriculture research.

Other suggestions in the report include replacing Indonesia's costly fertilizer subsidies with a voucher scheme, improving water supplies, and offering greater education and help to agriculture workers who want to leave the sector.

TACKLING POVERTY
Economic growth in the world's fourth most populous country is estimated to surpass 6 percent this year, but around half of its people still live on less than $2 per day.

Spikes in global food prices, such as those in soybeans and corn this year, often hit Indonesia's rural poor the hardest.

To help combat this, the country has extended the role of Bulog beyond rice in order to build bigger food stockpiles.

While it was feasible to ensure emergency reserves of food commodities to combat price spikes, Ash said, policies that tried to manage market forces were usually an expensive failure.

Indonesia has also set itself a number of self-sufficiency targets for 2014, such as beef, rice and corn, but the OECD said such a focus was misplaced, with a greater emphasis needed on food diversity away from rice.

The country, self-sufficient in rice in the 1980s before farmland was converted to build housing for a booming population, has tried to rein in rice consumption and expand paddy fields, but still relies on imports to keep up stocks.

Indonesia could replace its rice for the poor scheme with cash payments to give households greater choice and help reduce their dependence on the staple grain, the study said.

"It would be better to provide direct income support and to leave the people the choice of what they would like to buy," said Kwiecinski.

"If you want to diversify, you should change the system of supporting both rice consumers and producers, and look closer at other commodities which would bring higher incomes."