The Economics Behind an Ecological Crisis: Livelihood Effects of Oil Palm Expansion in Sumatra, Indonesia

Abstract

While the negative ecological effects of the rapid expansion of oil palm in Southeast Asia are far-reaching and relatively widely studied, the socioeconomic consequences have received much less attention in the literature. We examine whether local farmers in Indonesia benefit from cultivating oil palm. We also look at the impact dynamics and possible spillover effects on other farmers. Our analysis builds on panel data collected from 680 farm households in Jambi Province, Sumatra. We show that oil palm cultivation has significant positive effects on farmers’ livelihoods. The economic gains allow farm households to increase their consumption. Oil palm has lower labor requirements than alternative crops. Hence, oil palm farmers can cultivate larger areas and also reallocate saved labor time to non-farm economic activities, which contributes to additional secondary gains. Policies aimed at regulating further oil palm area expansion will have to account for the economic benefits of this crop for the local population.