Improvement of Economic Equality through Oil Palm Plantation

Oil palm plantation in Indonesia is an important asset to accelerate the development of regional economy and the reduction of rural poverty (World Growth, 2011)

In the cabinet meetings throughout 2017, Indonesian President Joko Widodo paid more serious attention towards the problems of economic inequality. One of the problems that was under the spotlight was the imbalance between rural and urban economy. The President asked the Ministers to work hard and give priority to overcome economic inequality in various forms.

The key to reduce the imbalance between rural and urban economy is by accelerating the development of rural area. Ever since the beginning, President Jokowi’s nine priorities for Indonesia (Nawacita) have mainly focused on rural development. Namely building the outskirts, remote areas and many other underdeveloped areas are the main focus. Unfortunately, there are not many businessmen who have interest to invest in rural areas.

The contribution of oil palm plantations in increasing farmers’ income, reducing poverty and accelerating regional economic development in Indonesia, has actually been published by the World Bank since 2011. It stated that Oil palm plantation in Indonesia is an important asset to accelerate the development of regional economy and the reduction of rural poverty (World Growth, 2011).

Oil palm plantations which have been developed in many rural areas, underdeveloped areas and even isolated areas are vital in improving rural economy and overcoming economic inequality. Why so? The reason can be explained through the following 5 mechanisms. First of all, in developing oil palm plantation, private and public investment should enter rural areas to build oil palm plantations, road infrastructure, ports, housing, and other social facilities. The entry of these investments is going to turn the wheel of the economy in rural areas.

Second, oil palm plantations in rural area are mostly owned by farmers. 45 percent of oil palm plantations in Indonesia belong to individuals and they are currently widespread in around 190 districts.  Riau province has the largest oil palm plantations. Approximately 60 percent of the plantation is under public ownership. Third, oil palm plantation is an intensive labor economic sector. Therefore it is accommodating to the quality of rural labor. People who did not go to school can still work in oil palm plantation and those who do not own oil palm plantations can still play their role as workers.

Fourth, Palm oil plantation requires large input in the form of capital goods (namely fertilizers, plantation tools, office stationery,) as well as services (such as finance, credit, or transportation services). The development of oil palm plantation will increase the demand and supply. The people who play the role as suppliers will also progress. At last, the existence of owner, workers and suppliers in oil palm plantations creates a market for food production. Not only food, it also creates a market for non-food products produced from cities. Therefore, the development of oil palm plantation will lead to great establishment of business and marketing network of food and non-food products in the rural area.

Through these five mechanisms, the rural economy develops and many people in rural areas enjoy the benefits of developing oil palm plantations directly or indirectly. Economic benefits of oil palm plantation are not only for the owners but also for everyone involved in the mechanism.

Before the statement came from World Bank, National experts also reported that the development of oil palm plantations has been proven to reduce income inequality in the surrounding rural areas. The result of the empirical study by Prof. Dr. Almasdi Syahza, Professor at Riau University, proves that not only is the welfare index of rural farmers increasing, but also income inequality between groups and between regencies or cities has also been significantly reduced.

Using the indicator of income inequality, the empirical study stated that Williamson index of inter-regional inequality in Riau province (the center of national oil palm plantation) declined from 0.5 in 2003 to 0.4 in 2005. It went to another decrease down to 0.3 in 2007. The decrease showed that overall income inequality in Riau province has steadily been reducing.

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