The Hesitant Boom: Indonesia’s Oil Palm
Sub-Sector in an Era of Economic Crisis and Political Change
 Anne Casson *

This paper was prepared for the Programme on the Underlying Causes of Deforestation, Center for International Forestry Research (CIFOR), Bogor, Indonesia, under the guidance of Dr William Sunderlin.

Executive summary

From 1967 through to 1997, oil palm was one of the fastest growing sub-sectors of the Indonesian economy, increasing 20-fold in planted area and showing 12 percent average annual increases in crude palm oil (CPO) production. While the growth of the oil palm sub-sector has conferred important economic benefits, it has posed an increasing threat to Indonesia's natural forest cover. Local communities have also been displaced by the large scale oil palm plantations and social conflict has resulted.

At the beginning of the economic crisis, there was every expectation that the oil palm boom would not only continue, but would also be propelled by the currency depreciation and lifting of foreign investment constraints. But a slowdown in area expansion and CPO production took hold instead. For 1999, the government estimated that only 177,197 hectares of oil palm would be planted. While this is a large area increase, it is a 33 percent decline in plantation expansion compared to the 266,565 hectares planted in 1997. CPO production also declined for the first time since 1969 and reached only 5 million tonnes in 1998. This was a 7 percent decline in production from 1997 when it reached almost 5.4 million tonnes.

Among the key reasons for the slowdown are: (1) the government’s export tax policy; (2) reform policies that targeted the oil palm sub-sector; (3) social unrest and the consequent withdrawal and withholding of foreign investment; (4) changes to the CPO distribution system; (5) credit access difficulties; (6) changes to the state-owned plantation sector; (7) the 1997/98 El Niño Southern Oscillation phenomenon and consequent drought and fires; (8) a precipitous decline in the world price of crude palm oil; and (9) increased production costs.

It now seems that the Indonesian oil palm sub-sector is poised for a return to the pace of growth that prevailed prior to the economic crisis. Many companies increased their planting targets for 1999 and CPO production was expected to increase by 12 percent to 5.6 million tonnes in 1999. The growth in CPO production is mainly attributed to an increase in rainfall after the 1997/98 El Niño Southern Oscillation phenomenon. However, several other factors have stimulated plantation development, and will continue to do so. Among these are: (1) lower interest rates; (2) regulatory changes that facilitate further oil palm development; (3) debt restructuring opportunities; (4) the availability of land cleared through the El Niño drought and related forest fires; (5) predicted growing global demand for CPO; (6) the government’s drastic reduction of the export tax; and (7) cooperation between Indonesian and Malaysian oil palm producers to push up the price of palm oil and regain their share of the vegetable oil market.

While the government is committed to emphasising oil palm development in Eastern Indonesia, particularly in Kalimantan and Irian Jaya, most expansion can be expected to occur in Sumatra in the near future. Oil palm companies will, however, continue to apply for concession areas in Kalimantan, Irian Jaya and Sulawesi in the near term to gain access to forest land. Unless there are fundamental changes in the way forest land is allocated in Indonesia, further expansion in the oil palm sub-sector will continue to pose a significant threat to Indonesia’s forest cover.

Abbreviations and glossary
Executive summary
I. INTRODUCTION
II. RAPID DEVELOPMENT OF THE OIL PALM SUB-SECTOR until 1997
Prospects for the oil palm sub-sector before the crisis
III. THE HESITANT BOOM
Reasons behind the slowdown in palm oil area expansion
1. The Government’s export tax policy
2. Reform policies that target the oil palm sub-sector
3. Social unrest and withdrawal and withholding of foreign investment
4. Changes to the CPO distribution system
5. Credit access difficulties
6. Changes to the state-owned plantation sector
7. ENSO, drought and fires limit CPO production
8. A precipitous decline in the world price of CPO
9. Increased production costs
IV. PROSPECTS FOR RESUMED GROWTH AND THE FATE OF FORESTS
Prospects for renewed growth
1. Lower interest rates
2. Regulatory changes that facilitate further oil palm development
3. Debt restructuring opportunities
4. Land made available through the El Niño drought and related forest fires
5. Growing world demand for crude palm oil
6. The government’s drastic reduction of the export tax
7. Plans to boost the world price for CPO The impact of resumed growth on Indonesia’s natural forest cover
Conclusion
Recommendations
References
Appendix A—List of people consulted
Appendix B—Area and production of oil palm plantations by owner type, 1967-1997.
Appendix C—Malaysian investment in the Indonesian oil palm sector
Appendix E—The impact of the economic crisis and various government policies on plantation share prices, 1997-1999
Appendix D—Policy changes affecting domestic and international CPO and cooking oil prices
Appendix G—Some Incidents of violence on Oil Palm estates
Appendix F—The government’s new schemes for oil palm development Appendix H—Forest land converted to plantations and conversion forest deficits

* Anne Casson is a Doctoral candidate in the Department of Forestry, the Australian National University, Australia. She undertook this work while based at CIFOR. This paper constitutes partial fulfilment of her PhD.

Center for International Forestry Research
Office address:
Jalan CIFOR, Situ Gede, Sindangbarang, Bogor 16680, Indonesia.
Mailing address:
P.O. Box 6596, JKPWB, Jakarta 10065, Indonesia.
Tel: +62 (251) 622 622; Fax: +62 (251) 622 100
Email: a.casson@cgiar.org / Website: http://www.cifor.org/cifor