A Blessing in Disguise? Effects of Oil Palm Adoption on Smallholder Farmers’ Wellbeing and Agricultural Transformation in Indonesia

Dramatic land-use change in tropical regions due to oil palm expansion has recently raised controversies in the broader public. Indonesia is one of the countries where such rapid land-use change is happening. In many parts of Indonesia, oil palm is increasingly replacing forests and also more traditional agricultural crops such as rice and rubber. The drivers of this expansion are mainly higher profitability of the oil palm crop. Internationally, the demand for vegetable oil is increasing substantially, and oil palm is the most productive oil crop that can satisfy this rising demand. As the biggest producer and exporter of palm oil globally, Indonesia's oil palm cultivation is associated with negative impacts such as greenhouse gas emissions, forest fires, biodiversity loss, and conflict over land. However, oil palm cultivation was also shown to improve the economic condition of smallholder farmers. These economic gains are undoubtedly important, considering that 40% of Indonesia's oil palm plantations belong to smallholder farmers. Therefore, both the positive and negative effects of oil palm expansion need to be considered by policymakers when designing relevant policies. This dissertation aims to extend the current research about the effects of oil palm cultivation on smallholder farmers' socioeconomic status beyond a mere focus on income. Three essays compose this dissertation. The first essay explores the pathways on how oil palm cultivation may affect household nutrition and gender roles. The second essay examines to what extent oil palm cultivation may affect farm sizes and structural transformation more broadly in the medium and long run. The last essay investigates how oil palm contributes to the wellbeing of smallholder farm households in terms of human capital formation. All three essays are based on primary data collected from smallholder farm households in Jambi Province of Sumatra, one of the oil palm boom hotspots in Indonesia. Jambi is also one of the provinces with the highest share of smallholder farmers in oil palm cultivation. Therefore, conducting research in this area is highly relevant to see the consequences of oil palm cultivation on smallholder farmers' lives. Our research involves panel data with a time structure that enable us to observe impacts and impact heterogeneity over time. Oil palm expansion has raised concern about food security as oil palm might compete with food crops in utilizing the land. In the first essay, we explore how oil palm affects household nutrition, mainly through rising income and gender roles. We hypothesize that oil palm improves farmers' income that is positively associated with their nutrition through food ii purchases. Another advantage of oil palm is its labor-saving characteristic that can free family labor, including women, from on-farm work to pursue off-farm work for the generation of additional income. The switch of women's role can increase female financial autonomy, thus improving the households' nutrition, as women often act as the primary caregiver for the family. Our findings show that oil palm cultivation is positively associated with household nutrition, measured by dietary diversity scores and the consumption of calories, vitamin A, zinc, and iron. Oil palm enables farmers to afford more nutritious foods from the market. Female off-farm employment is also positively associated with nutrition. But female off-farm employment seems to be unrelated to oil palm cultivation, possibly due to unequal opportunities and traditional culture that restrain women from pursuing off-farm work. All countries with significant economic growth have seen a structural transformation of agriculture. This process involves productivity growth in farming, an increase in average farm sizes, and a shift of labor from agriculture to manufacturing and services. This phenomenon is also seen in Indonesia, where agriculture's contribution to gross domestic product (GDP) and the share of agricultural employment in total employment have been decreasing over time. As oil palm plantations expand and given that oil palm requires less labor than alternative crops, we investigate if oil palm cultivation contributes to paving the road to Indonesia's structural transformation. In the second essay, we show that oil palm adoption increases the average farm size. However, it does not increase the likelihood of households participating in the manufacturing or services sectors, probably due to the limited non-farm labor demand in the local settings. This finding needs to be carefully discerned as households with extra labor, but without enough off-farm job options, have strong incentives to expand their farm, which might lead to further deforestation. Although we know that oil palm increases farmers' income, little is known about how farm families actually spend the extra income. In the third essay, we are particularly interested to understand if the rising income from oil palm is invested in human capital formation, social needs, and material resources. These indicators capture different dimensions of human wellbeing and living standard. We employ relevant variables, including health, education, housing, electricity, and communication. Some of these variables have never been analyzed before. In general, our results show that oil palm has positive effects on most of the variables that we use. The results suggest that oil palm is positively contributing to various dimensions of smallholder farmers' wellbeing and living standards. Despite the fact that we found several positive effects in our study, further oil palm expansion at the environment's cost is not desirable. Socioeconomic and environmental factors are important in every sustainability discussion and should both receive high priority. Even though the expansion of oil palm that already happened can hardly be reversed, existing plantations can be regulated sustainably by considering various aspects. This dissertation reveals a perspective on oil palm cultivation that is often neglected in the public debate: oil palm can be a blessing if managed in a sustainable way. These findings are essential when designing policies related to oil palm cultivation, sustainable livelihoods, and broader rural development.

2021-06-24