Socio-Economic Impacts of Palm Oil and Biodiesel: The Case of Indonesia

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Top Highlights

• Expansion of palm oil production in the country is driving significant socio-economic change in many of the Indonesia’s rural areas, bringing employment and income, while transforming rural communities and triggering social tensions

• While palm oil is predominantly in demand for traditional food and some non-food uses, it is also used as a feedstock for biofuel, both domestically and for export

• This chapter presents some of the key findings from research conducted in Sumatra in 2011 by Greenlight Biofuels, Indonesia, in the framework of the Global-Bio-Pact project. The study focused on four local and one regional scale case studies, identifying and analyzing the socio-economic impacts of palm oil production and conversion

• Indonesia’s rural areas are undergoing rapid change. Population growth and migration alongside changes in agriculture are fuelling both socio-economic and environmental changes.

• One of the most significant drivers of change in many rural areas of Indonesia is the expansion of oil palm plantations

• Indonesia is now the world’s leading producer of palm oil, with an annual production of 23.5 million t in 2011 (GAPKI 2012),

• There are notable differences between production systems used in each ownership model, which in turn affect yields. Reported yields are highest in state-owned plantations, which in 2006 produced average annual yields of 3.4 t of crude palm oil (CPO) per ha, followed by private estates with 2.8 t per ha (although there are considerable variations in yields between private plantations). Average smallholderFootnote1 yields were the lowest, at only 2.2 t per haFootnote2 (World Bank 2010) .

• Estates operating the NES model of production are divided into two areas: a core plantation area (‘nucleus’) run by the plantation company, which also owns the associated palm oil mill, and a surrounding plantation area (‘plasma’) cultivated by smallholder producers. Plasma (outgrower) smallholders may be members of the local community or migrants. The company clears the plantation area at the outset, and provides agricultural inputs and management services in the early stages of plantation development. When the oil palms reach maturity, the company turns the plasma area over to smallholders or to a smallholder cooperative, with a typical land allocation of 2 ha per familyFootnote3.

• Despite the increasing significance of this group, little is known about their landholdings. Data about the economic status of independent smallholders is also limited, although they appear to be a diverse group, from farmers cultivating their own small plots of land to those operating small plantations in conjunction with absent landlords known as Petani berdasi (lit. ‘white collar farmers’)

• On average, independent smallholders have the lowest yields , and hence the lowest financial returns of any group of producers

• Although private estates still occupy the largest share of planted area (50 %), the fastest growth over the last decade has come from smallholder areas, which grew at an average of 12 % per year and now occupy around 42 % of oil palm areas

• The research upon which this chapter is based comprised of both desk based research and three small-scale field studies. The objectives of the study were to identify, analyze and evaluate social and economic impacts of palm oil production and conversion at the local, regional and national scales.

• The focus of much discussion and concern about palm oil expansion surrounds its environmental impacts; it is widely agreed that palm oil is a key driver of deforestation and habitat loss in Indonesia and elsewhere. These issues have been particularly prominent in biofuel debates, where the requirement for carbon savings has amplified concerns about forest and peat land conversion. Alongside environmental concerns, however, are the socio-economic impacts of palm oil expansion, which in many ways are more nuanced. Central justifications for promoting palm oil expansion and by extension biofuel development in Indonesia have focused on job creation , rural development and poverty alleviation. Meanwhile, the acquisition of ever more land by palm oil companies to develop and expand plantations is a key trigger of social conflict in Indonesia’s rural areas.

• Finally an overview of a selection of socio-economic impacts is presented which feature particularly prominently in the literature: job creation and smallholder incomes; food security; social conflict and gender impacts. For each category of impact, an overview of the issue is provided, together with a brief discussion of the evidence gathered from the case studies.

• Even without demand for palm oil as a feedstock for biodiesel, the impacts of the crop on an increasing number of Indonesia’s provinces is significant. Expansion of plantations is creating new employment opportunities and transforming rural economies, but also triggering social conflict in some areas. Meanwhile the increasing role of smallholders in the sector represents an opportunity to boost rural incomes

• This chapter has illustrated that questions about sustainability should extend beyond environmental dimensions to encompass considerations of social and economic impacts.