Oil palm and agricultural policy: Boom or ruin for Indonesian farmers?

Author: John McCarthy, ANU

Palm oil is now the world’s most widely traded vegetable oil. As Indonesia is the centre of global production, palm oil is a priority for Indonesia’s economic planners. With millions of hectares either under oil palm or planned for development, a highly polarized debate surrounds the question of oil palm development in Indonesia. The underlying question here is: can a boom in agricultural commodities such as oil palm provide a pathway out of poverty? Or does it amount to an instrument of mass immiseration?

In the last year, Greenpeace has pursed a very successful campaign against a range of large multinationals.

Unilever, the world’s largest buyer of palm oil, responded by blacklisting two major Indonesian members of the Roundtable on Sustainable Palm Oil (RSPO) for engaging in ‘unsustainable’ practices. Nestle, the world’s biggest food and beverage company, announced it would also withdraw from another key Indonesian supplier. Earlier, in response to complaints, the World Bank Group ordered a complete moratorium on investment in palm oil for one year.

While usually discussed with respect to climate change and deforestation, this controversy also resonates with another key policy debate. In 2008 the authors of the World Bank’s World Development Report suggested that a dynamic and efficient agribusiness can spur agricultural growth, reducing rural poverty by including the poor in globalized agricultural markets. In a similar fashion, the advocates of biofuels have argued that biofuels offer a vast opportunity that can link remote, degraded areas where the poorest live, to global markets, enabling the poor to farm their way out of poverty. However, NGOs and social movement critics have argued to the contrary. They assert that corporate agribusiness works in exclusionary ways, suggesting that biofuels raise new social vulnerabilities, increasing pressure and competition for land, and heightening the food security issue faced by the most vulnerable. Can both these perspectives be correct?

Changing policy settings have affected farmers across wide swathes of Indonesia. Here agriculture is in transition as forested areas and areas used for swidden farming are transformed for more intensive cash crop production (see study for details). As the state has withdrawn from direct involvement in smallholder development, from the 1990s, the central government moved away from supporting smallholder oil palm development schemes. Instead, policy allows for the free development of independent smallholders and private-social partnerships with minimal central government involvement. Following this demand for the liberalisation of agricultural arrangements, during this decade a ‘Partnership’ model has relaced the earlier nucleus estate model.

Research in Jambi reveals that the earlier (PIR/NES) schemes led to the enclosure of large areas of land for oil palm and plantation projects. While only small numbers of local people were included in these early schemes, many Javanese transmigrants found pathways out of poverty. We can usefully contrast this scheme with  a later subsidized cooperative (KKPA) scheme that set out to target local villagers. To understand the processes driving outcomes, here we can compare three villages subject to the same scheme.  In the first village, eighty per cent of farmers retained their oil palm entitlements under the scheme and largely emerged as prosperous oil palm farmers. In the third village, by contrast, the oil palm scheme left some thirty per cent of farmers landless following manipulative land dealings and crisis sales during the East Asian economic crisis.

To understand outcomes we need to unpack the workings of the circuits through which farmers obtain legal certification for their land, access inputs, market their products, and gain access to planting material and agricultural technology. Villages affected by economic, geographical and social isolation face significant structural disadvantages and their farmers are less likely to find pathways out of poverty. The ability of farmers to enjoy the fruits of the oil palm boom also depended upon village control over the institutions and processes through which they participate in the oil palm economy.

To contrast the fate of smallholders under these schemes, the case of a village that had been left to fend for itself is telling. In this village some fifty per cent of villagers had become landless since the advent of oil palm. Following the collapse of rubber prices, villagers had sold off unproductive rubber land. As local elites bought up these lands, large village estates were emerging. Meanwhile, without support from the state for access to seedlings and fertilizer, the poor were unable to find a secure foothold in the oil palm economy. Here the oil palm boom has created significant numbers of prosperous farmers alongside large numbers of poor farmers and landless labourers. There is a large gap in average incomes between prosperous oil palm scheme villages and left behind rubber villages where a much more narrow cohort of villagers had succeeded in enjoying the fruits of this boom crop.

Under the earlier ‘nucleus estate’ model of the 1990s utilized in the Jambi villages, the plantation estate developed 30 per cent of the scheme land for its core plantation while 70 per cent was returned to participating smallholders. But now these schemes no longer operate. Under the new ‘partnership’ model of the last decade, depending upon negotiations in the field, the core estate is only obliged to return 20 per cent of the scheme land to villagers, retaining up to 80 per cent of the land as its core estate. In the Jambi schemes, 70 per cent of the land was returned to smallholders. Here farmers obtained 50 per cent of yields after credit and production costs were subtracted by the scheme developers.

In Sanggau, West Kalimantan, farmers only received 20 per cent of the land developed under the new ‘partnership’ scheme. Further, they would only obtain 30 per cent of the benefits under a 30:70 production sharing arrangement, with further deductions for plantation costs and credit repayments. Clearly the terms under which smallholders engage with oil palm have remarkably deteriorated under the most recent arrangements. (see the AIGRIP policy brief [pdf]).

The oil palm controversy needs to move beyond a simple polarized argument between those who advocate oil palm as an instrument for poverty alleviation and those who see it as an instrument of impoverishment. Clearly agricultural intensification and integration into global markets can be  both. The answer to the question of whether farmers can be included into the globalized oil palm economy on advantageous terms very much depends upon the ways in which smallholders engage with oil palm and the dynamics that shape that engagement. The pathways of agrarian change are highly variable, and are affected by policy and social processes that vary over time and space. State intervention generated the conditions for prosperity for some, while state withdrawal has allowed processes of immerseration to affect others.  Now, in the absence of an effective policy response, vulnerable landowners are even more exposed to risk under recent policy settings. Consequently, there is a need for reappraising agricultural policy to consider how various projects, interventions or schemes might set terms that provide for smallholder inclusion on more favourable terms.

The current ‘partnership’ model needs to be reworked. The state, civil society and private or multi-lateral investors need to engage more effectively in providing credit, extension, technology and the forms of accountability required to protect the poor.

John  McCarthy is a researcher at the Crawford School of Economics and Government, Australian National Univeristy.

This is an abridged version of a new paper that analyses agrarian change in Sumatra. It forms a part of an Australian Research Council discovery grant project that examines the widespread changes now occurring across Southeast Asia, particularly Indonesia, as markets for palm oil develop and extend.