Palm oil key to poverty reduction but doubts linger on sustainability
Swiss voters narrowly backed a free trade agreement with Indonesia in early March, which would abolish duties on industrial products including palm oil as long as they meet certain environmental and social standards. With the trade agreement to be implemented in the latter half of the year, Indonesia is expected to reevaluate its commitments to producing sustainable palm oil.1
Although palm oil is one of the most common ingredients in a wide range of products from food to cosmetics, the commodity’s bad reputation stems from its role in deforestation, where huge swathes of rainforests are logged to make way for plantations.
In the last few years, trade tensions between Indonesia and the European Union (EU) heated up after the European Commission concluded in March 2019 that palm oil was not environmentally friendly. Thus, the EU no longer recognized palm oil as a renewable biofuel and the commodity would effectively be phased out as fuel for transportation between 2023 and 2030.
Nonetheless, the recent developments from the Swiss referendum have allowed Indonesia to breathe a sigh of relief, with the Indonesian Palm Oil Association (GAPKI) expressing hopes that Switzerland’s approval will pave the way for the EU to reconsider its opposing stance on palm oil.2
The news should not be a cause for Indonesia to sit back and relax, however. Economists point out that the proposal gained approval by only a thin margin, which was 51.7 percent of the vote. According to Sawit Watch deputy executive director Achmad Surambo, the results of the referendum should serve as a wake-up call for Indonesia to take the sustainability of its palm oil seriously, as it will not just be a requirement to export to Switzerland, but in the global market as well.
Research Center for Climate Change University of Indonesia (RCCC-UI) researcher Sonny Mumbunan says that Indonesia still has a long way to go to meet sustainable requirements. Various certifications such as the Roundtable on Sustainable Palm Oil (RSPO) or the Indonesian Sustainable Oil Certification (ISPO) used in the country, he said, cannot sufficiently vouch for the sustainability of the commodity.3
In fact, the government’s commitment to palm oil sustainability has been questioned at large. This can be seen by the government’s moratorium on new palm oil development, wherein the issuance of new permits for oil palm plantations has been temporarily halted since 2018. But with the moratorium concluding in September, environmentalists have said that its effect over the three years it was implemented has been minimal.4
Presidential Instruction (Inpres) No. 8/2018 was also expected to help clear up uncertainty concerning the rights of oil palm smallholders and boost productivity on existing plantations. The Inpres has yet to be properly implemented since its issuance, especially since no guidelines have followed up.
Though these lackluster efforts might suggest doubts about the government’s commitment to sustainability, it is also worth noting that Indonesia considers palm oil to be a gateway to poverty alleviation. As the world’s fourth-most populous nation, an estimated 26.42 million Indonesians, out of a total of 270.2 million, still live below the poverty line.
Thus, the palm oil industry alone has helped lift millions of people out of poverty, as plantations create jobs and smallholder farmers are able to own land. In 2019, it was estimated that the palm oil industry had succeeded in lifting as many as 2.6 million rural Indonesians out of poverty.
Having already made huge strides in poverty reduction – cutting the poverty rate by more than half since 1999, to 9.78 percent in 2020 – Indonesia might just be putting the issue of sustainability on the backburner while its hands are full with tackling poverty in the country.
Indonesia is the world’s largest palm oil producer, accounting for 84 percent of the world’s palm production along with Malaysia. Alone, Indonesia supplies approximately 56 percent of the global crude palm oil (CPO) trade, with an export value of around US$21 billion in 2020, accounting for 12.86 percent of the country’s total exports.5
With such a large industry, palm oil plays a critical role in the country’s economic growth and has had a significant impact on alleviating poverty and income distribution within society. In 2015, it was found that the expansion of oil palm land in 10 regions that saw the largest expansions, had actually decreased the poverty rate and narrowed the income gap.6
In 2017, a separate study showed that contracts between smallholder oil palm farmers and private or state-owned enterprises also significantly contributed to the regional economy especially at the village level, through infrastructural development, which not only benefited contract farmers, but noncontract farmers as well.
Moreover, research also suggests that there is a correlation between poverty alleviation and the rate of deforestation, wherein efforts to lift people out of poverty in Indonesia has also been found to help slow the country’s rate of deforestation.
A study analyzed 7,468 rural villages across 15 provinces participating in the government’s social aid program – the Family Hope Program (PKH) – between 2008 and 2012. The results of the study found that the program, despite not being designed to address environmental issues, had led to the reduction of forest cover loss in those participating villages by an average of 30 percent.7
The government recently claimed success in reducing forest area coverage, reporting that a loss of up to 115,460 hectares of forest due to deforestation from 2019 to 2020, was lower than the two previous figures of 462,500 ha in the 2018-2019 period and 439,400 ha in 2017-2018.
However, lower deforestation rates cannot justify turning a blind eye to the sustainability of palm oil, especially when the commodity needs to meet international standards of environmental friendliness.
Indonesia currently finds producing palm oil sustainably to be a challenging matter because issues are evident in various processes, such as the transfer of ownership from smallholder farmers to palm oil-processing factories. Sustainable practices need to be implemented at each stage of the supply chain, to ensure that workers are not exploited, indigenous people are not harmed and forest coverage is not loss.
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