Export agriculture and rural poverty: Evidence from Indonesian palm oil

Summary

This instrumental variable study quantifies the economic and environmental trade-offs of Indonesia's oil palm export expansion from 2002 to 2015. Exploiting geographic variation in agro-climatic suitability, the analysis finds that palm cultivation expansion significantly reduced district poverty and increased household expenditure principally through higher agricultural wage returns, with labour absorbed from productivity gains rather than intersectoral reallocation. However, these gains were accompanied by increased deforestation, forest fires, health problems and conflict, illustrating the multifaceted trade-offs inherent in commodity-driven land use change.

Regional applicability

This study is specific to Indonesia's context and palm oil systems. The findings are not directly transferable to United Kingdom conditions, which lack significant palm oil cultivation; however, the methodological approach to quantifying trade-offs between export agriculture expansion, poverty reduction and environmental/social costs may be relevant to UK policy evaluation of global agricultural commodity chains and their development vs. sustainability tensions.

Key measures

District-level poverty rates, household expenditure, agricultural labour returns, local government revenues and spending, deforestation extent, forest fires, health problems, conflict incidence

Outcomes reported

The study measured the impact of district-level oil palm cultivation expansion on rural poverty reduction, household expenditure growth, labour outcomes, government revenues and environmental/health consequences between 2002 and 2015. A 10 percentage point increase in district palm oil area corresponded to 6 percentage points faster poverty reduction and 9% faster expenditure growth.

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