Economic Diplomacy on Palm Oil

Kompas/Raditya Helabumi

Farmers collect palm oil picked from a plantation in Namang village, Namang district, Bangka Tengah regency, Bangka Belitung, on Tuesday (14/3). The palm oil is sold by farmers to hoarders at a current price of Rp 1,300 per kilogram.

In March 2017, Indonesian palm oil was again attacked by the parliament of the European Union (EU). Palm oil is considered environmentally destructive as it is produced through the conversion of natural forests and peatland. This often causes fires, especially during extreme dry climates.

In April 2017, the Indonesian government lodged a protest on the discriminative act of the EU, although this is not straight forward. Indonesian diplomacy is carried out only through political and normative statements because of a lack of support from domestic scientific studies that can be used as a reference.

For example, the government has always said "there are 16 million people who are directly/indirectly dependent on the oil palm sector. As much as 41 percent of palm oil production is produced by small-scale farmers in rural areas ".

During previous meetings of the Asia-Pacific Economic Cooperation Forum (APEC), Indonesia  failed in its fight to include  palm oil on the list of environmental goods (EG). The struggle of Indonesian diplomats ended at the APEC meeting in Vladivostok, Russia, due to many factors. In addition to strong opposition from the US and the EU, Indonesia’s preparation was also not optimal.

The government was too confident that no initial negotiations were needed. It was aware that tough negotiations were needed when there was strong pressure ahead of the deadline.

There are no an instant results in the dictionary of economic diplomacy. Negotiations should be established from the beginning, from informal talks and meetings between diplomats and business players to forums featuring academics before delivering our official position at the negotiation table.

This article discusses Indonesia’s struggle in defending palm oil in the forums of economic diplomacy, such as at the APEC Forum. This time, Indonesia is again fighting for palm oil in the context of rural development and poverty alleviation (RDPA).

The struggle began following the APEC meetings in the Philippines in 2015, Peru in 2016 and Vietnam in 2017. On paper, the current struggle should not be as complex as before. The empirical evidence is strong enough that palm oil is able to positively contribute to rural development and poverty reduction.

In addition to palm oil, Indonesia is also fighting for four other agricultural commodities, namely rubber, rattan, paper and fishery products. Together with the derivative products of the five commodities, there are 15 products proposed as RDPA.

The essence is that these 15 products do not face significant barriers in international trade. Currently, crude palm oil (CPO) products face 187 non-tariff barriers and CPO derivatives confront 171 non-tariff barriers from Indonesia’s trading partners.

Indonesia should fight such barriers in the global economic diplomacy forum. Economic diplomacy at the APEC Forum differs from the double-standard diplomacy made by the EU. Politically, the EU rejects Indonesian palm oil, but in reality, the rate of consumption continues to rise.

Contribution of palm to the economy

Indonesia\'s CPO production reached 34 million tons in 2016 while exports of CPO and its derivatives totaled 25 million tons. Malaysia\'s CPO production totaled 19.5 million tons and exports reached 17 million tons.

The production from other CPO producing countries is still quite small, as they are still in the developing stage. Thailand\'s CPO production is only 2 million tons, Colombia 1.1 million tons and Nigeria 950,000 tons (USDA, 2017).

In Indonesia, the palm oil sector employs some 5.7 million people, including 2.2 million small-scale farmers, who enjoy the economic benefits of palm oil. Palm oil has contributed to rural development.

If the figures include those involved in the palm oil derivative industry and other related sectors, the total labor force absorbed by the palm oil sector could reach about 20 million people.

However, the rapid development of the palm oil industry over the past two decades has not been comparable to the reduction of the poverty rate. In some areas such as in Sumatra and Kalimantan, where palm oil expansion has caused socio-economic conflict, mainly due to land disputes, the presence of palm oil plantations are opposed by the surrounding community. In fact, the increase in oil palm areas has had a negative impact on the lives of local people.

Oil palm plantations cause deforestation and other external impacts, such as water pollution and soil erosion.

By taking samples in West Kalimantan, West Papua and Papua, Obidzinki et al (2010) found erosion and air pollution. Oil palm plantations in the frontier areas have little impact and only benefit migrants with education and skills from local communities.

However, oil palm farmers face uncertainty in market access and in prices. (Vermeulen and Goad, 2006).

Oil palm farmers generally rely on companies or middlemen who buy directly into their plantations. Small-scale farmers lack the capital to apply good agricultural practices. Oil palm farmers who partner with large companies are relatively more resistant to price changes, but are still vulnerable to changes in production disruptions.

In short, although the farmers who partner with large firms can enjoy a positive impact from rising incomes, small-scale farmers are still vulnerable to poverty if there are serious external disruptions.

Academics in palm diplomacy

A comprehensive econometric study of the socio-economic impact of palm oil on farmer welfare was recently conducted by Edwards (2015, 2016). Edwards used an observation unit at regency level Sumatra, mainly in North Sumatra, West Sumatra and Riau. By comparing the regression results with ordinary least squares and variable instruments, Edwards found that the increased use of oil palm plantations by 10 percent would encourage a reduction of 40 percent in poverty.

In his research in 10 regencies across Sumatra, he found that 1.3 million people were freed from poverty due to the development of the palm oil industry. Poor peasants grow oil palm or work on plantations and in palm oil industries. Other poor people benefit from the economic growth fueled by oil palm plantations.

Another comprehensive study of the socio-economic impact of palm oil and its derivative products on rural development and poverty alleviation with a computable general equilibrium model was conducted by Oktaviani et al (2017).

Oil palm plantations increase labor absorption, improve the trade balance and support  other sectors that are linked to palm oil, such as edible oils, soaps and cosmetics. The oil palm sector contributes to rural poverty reduction.

The study also found that not all sectors can benefit from trade liberalization, such as coffee and cocoa processing industries and even tea and tea products.

The positive thing is that the Oktaviani et al (2017) study can serve as an important reference for the APEC Secretariat to continue the next stage of negotiations and economic diplomacy.

In conclusion, objective academic study as well as some positive facts in the business world and the implementation of policy intervention can be used to propel our diplomacy

Economic diplomacy must still depend on the expertise of the negotiator, the consistency of domestic policy and the support of all parties to behave in accordance with what they fight for.

Our diplomacy in the international arena will not be meaningful if central and local governments continue to allow just a handful of companies to control the country’s oil palm plantations.

KOMPAS/TOTOK WIJAYANTO

Bustanul Arifin

BUSTANUL ARIFIN

Professor at the University of Lampung and Senior Economist at Indef, Jakarta