Palm and the G20

Recover Together, Recover Stronger

Throughout 2022, Indonesia is leading major developed countries and emerging economies around the world in collaboration and collective action, focusing on policy coordination in economics and development during its first ever term as Chair of the G20.

Indonesia’s leadership of the G20 has coincided with a series of global upheavals, as the world attempts to recover from the global pandemic, adapt to a new digital landscape and make a transition to renewable energy.

Indonesia has adopted the theme of ‘Recover Together, Recover Stronger.’ The Indonesian palm oil industry has played a pivotal role in Indonesia’s recovery, and it will continue to make Indonesia stronger in five key ways: strengthening the economy, reducing poverty, boosting trade, halting deforestation, and supporting workers.

Strengthening the Economy

Palm oil contributes between 9 and 17 percent of GDP.

It employs 8 million people — 3.5 percent of the country’s workforce.

It contributes significantly to household incomes, particularly in rural areas.

Reducing Poverty

Palm oil has lifted 2.6 million Indonesians out of poverty.

It benefits 4 million smallholder households in Indonesia.

It leads to better health, education and nutrition in farm communities.

Boosting Trade

Palm oil is Indonesia’s second-largest export worth USD35 billion annually.

It is critical to Indonesia’s trade balance and current account deficit.

Indonesian palm’s competitiveness has prompted European discrimination against palm oil.

Stopping Deforestation

Indonesia has the world’s second-largest protected forest area.

Deforestation has fallen by 75% over the past two decades.

Oil palm deforestation has declined from 310,000ha in 2012 to 21,800 in 2020.

Supporting Workers

Indonesian palm oil supports more than 21 million workers.

Oil palm workers have higher incomes than those for other crops.

Indonesia works with the ILO to ensure child and forced labour are eradicated.

Palm oil is a major contributor to the Indonesian economy. It contributes between 9 and 17 per cent of GDP.

The sub-sector employs 8 million people, or 3.5 per cent of the country’s workforce.

Oil palm cultivation contributes significantly to household incomes, particularly in rural areas.

The palm oil subsector has cushioned the economic blow of the COVID pandemic for Indonesia and its workers.

Palm oil is Southeast Asia’s second-largest agricultural product, second only to rice. Annual production is around USD35 billion annually, representing 12 per cent of the region’s total agricultural production.[i]

Oil palm is Indonesia’s largest agricultural commodity. Production of oil palm fruit is worth around USD25 billion annually.[ii] Current estimates of the contribution of oil palm cultivation and harvesting to Indonesia’s GDP are between 3 and 9 per cent.[iii]

The value added contribution to GDP from additional downstream processing (e.g. oleochemicals and food production), transport and logistics is approximately 17 per cent.[iv]

According to the FAO, palm oil increases employment, improves the trade balance, and improves other sectors that have links to palm such as edible oils, soaps and cosmetics. It contributes to poverty alleviation in rural areas, even to farm laborers and all household categories, including in urban areas.[v]

The palm oil sector lifted up to 2.6 million rural Indonesians out of poverty this century.[vi] Expansion of palm plantation areas led to a 2.7 per cent faster poverty reduction and 4 per cent faster consumption growth.[vii]

The employment contribution of palm oil to Indonesia is approximately 16.2 million people, comprising 12 million direct employees and around 4.2 million indirect employees.[viii] Other estimates are around 17.5 million.[ix]

In rural areas, share of employment is very high. In provinces such as Riau, the share of direct employment in the industry is around 17 per cent, in regencies such as Siak the share is around 38 per cent.[x]

The industry contributes significantly to Indonesia’s state revenues as both non-tax and tax revenue. In the 2020 National Budget the largest revenue contribution was through the Palm Oil Plantation Fund Management Agency (BPDPKS) with total revenues of Rp. 14.74 trillion.[xi]

At the household level in Indonesia, adoption of oil palm by smallholders (as opposed to other crops) boosts household incomes by around 25 per cent. For a sense of scale, there are 4 million palm oil smallholders in Indonesia alone.[xii]

Palm oil boosted Indonesia’s economy during the COVID pandemic. The pandemic resulted in a contraction of around 5 per cent to Indonesia’s economy in 2020.[xiii] However, the plantation subsector – comprising mostly palm oil – recorded growth of more than 8 per cent in the second half of 2021. [xiv]

Palm oil was essential to support lives and livelihoods through the pandemic; and it is now central to rebuilding the rural economy, post-COVID.

Palm oil has lifted as many as 2.6 million Indonesians out of poverty this century

There are around 4 million smallholder households in Indonesia that benefit from poverty reduction from palm oil

Palm oil farmers have better health, education and nutrition outcomes due to higher farm incomes

Palm oil farming makes significant financial and social returns to communities.

Palm oil contributes significantly to poverty reduction across Indonesia largely because of its presence in rural areas and the large number of smallholders. It is estimated that there are as many as 4 million smallholder farmers in Indonesia.[xv]

The palm oil sector lifted up to 2.6 million rural Indonesians out of poverty this century.[xvi] Expansion of palm plantation areas led to a 2.7 per cent faster poverty reduction and 4 per cent faster consumption growth.[xvii]

Financial returns to land for farmers from oil palm are ten times higher than other crops such as rice, and returns to labour were around 20 times higher.[xviii] 

In oil palm cultivating areas, the contribution of palm oil to farmer households is between 63 and 78 per cent according to multiple studies.[xix][xx][xxi]

Palm oil cultivation means higher income and higher expenditures on non-food items.

Palm oil households have 25% higher total expenditures, 37% higher non-food expenditures, and 14% higher food expenditure.[xxii] [xxiii] This can lead to better social outcomes, particularly in nutrition, education and health.[xxiv]

Palm oil households are able to spend more on education. Expenditures for regular school education are 31 % higher, for higher education they are 39 % higher. There are also lower drop-out rates for palm oil households.

This has a broader impact at the community level: “Farmers were able to send their children to high school and university, and an increasing number of natives came back to their villages as public servants, most often primary school teachers.”[xxv]

Higher incomes are also distributed to non-farm households in palm oil communities. In Jambi, the contribution of palm oil to total non-farm household income is estimated at 70 per cent.[xxvi]

Palm oil will continue reducing poverty into the future. A modelling study has found that a 10% increase in the amount of land from oil palm plantations  produces a 0.05% reduction in poverty levels, a 0.02% unemployment rate reduction, a 0.03% increase in the number of school graduates middle to upper, a 0.12% increase in non-food consumption, and a 0.21% increase in access to clean water.[xxvii]

The support that palm oil provides for current and future generations in Indonesia is immense. Social and economic advancement, for millions, has happened because of palm oil cultivation.

Palm oil is Indonesia’s second-largest export and is worth around USD35 billion annually.

Palm oil is critical to maintaining the country’s trade balance and current account deficit.

The competitiveness of Indonesian palm oil has prompted the EU to enact bans and other trade measures against palm oil.

Indonesian Govt introduced strong sustainability standards, while respecting trade rules

Palm oil is Indonesia’s largest agricultural product, and Indonesia is the largest palm exporting country in the world, with more than half of global trade.

Palm oil is Indonesia’s second-largest export. Palm oil and stearic acid combined represent around 16.5 per cent of Indonesia’s total export revenue. This was worth around USD35 billion in 2021.[xxviii]

Indonesia’s export markets are diverse. In 2021 roughly 11 per cent of Indonesia’s palm oil exports went to European nations; around 10 per cent to Pakistan, 12 per cent to India and 16 per cent to China.[xxix]

Palm oil assists in maintaining the country’s trade balance and current account deficit. The use of palm oil for biofuels for mandatory blending reduces a reliance on imports of fossil fuels. Reducing fossil fuel imports reduces the country’s current account deficit.

This has been absolutely critical during COVID, as the price of fossil fuel commodities has soared, and the US dollar continues to strengthen.

The introduction of renewable fuel mandates in the EU (for biodiesel) were designed to act as a subsidy for European farmers. However, the competitiveness of palm-based biodiesel resulted in palm-based biodiesel capturing growing segments of the market.

European countries have subsequently imposed protectionist trade barriers on Indonesian palm oil in European markets. This has taken the form of:

  • A ban on palm oil in the EU biodiesel market, which has prompted a WTO case against the EU;[xxx]
  • Antidumping duties, which were imposed by the EU in 2015 on Indonesian biodiesel, and then ruled illegal under World Trade Organization rules;[xxxi]
  • Countervailing duties, which were imposed on Indonesian biodiesel in November 2019.[xxxii]

Palm oil by-products as waste products, including POME and PFAD, are considered by experts as advanced sustainable energy sources suitable for aviation fuels, for example. However, The EU is seeking to introduce a new ban on palm oil from its aviation market, and will introduce new non-tariff measure on palm oil and deforestation, which will also impact Indonesian rubber, timber and paper.

Measures against palm oil such as those by the EU have been criticised by President Jokowi and other senior officials.[xxxiii]

The EU’s discrimination on palm oil is holding up the potential trade agreement between Indonesia and the EU, which could benefit both economies.

Indonesia has the world’s second-largest protected forest area

Indonesian deforestation has fallen by 75% over the past two decades

Oil palm deforestation has declined from 310,000ha in 2012 to 21,800 in 2020

Indonesia’s forests are the 8th-largest in the world, covering more than 92 million ha. They cover just under half of Indonesia’s land mass.[xxxiv]

Indonesia has the second-largest area of forest in protected areas globally, covering almost 52 million ha. This is an area 1.25 times the size of the Netherlands[xxxv] and represents 56 per cent of Indonesia’s forest area.

Deforestation has fallen by more than three quarters over the past two decades. Indonesia’s deforestation has declined from around 1.73 million ha annually between 1990 and 2000[xxxvi] to 394,000 ha between 2018 and 2020.[xxxvii]

The most recent data indicate that deforestation from palm oil was 21,800 ha in 2020.[xxxviii]

In 2021 the Norwegian Government stated: “Indonesia has become a world leader in combatting tropical deforestation. A series of progressive regulations and policies to protect the nation’s rainforests have been put in place. The results are impressive. Over the last four years Indonesia has delivered massive reductions of deforestation and peatland conversion. This is a significant contribution to global climate change mitigation and protection of biodiversity.”[xxxix]

Oil palm plantations cannot be considered responsible for the majority of deforestation in Indonesia, Southeast Asia, or the world over the past two decades.  Between 2000 and 2018, around 90 per cent of the world’s deforestation was caused by agriculture: 38 percent from livestock and grazing; 50 per cent from crop expansion and 7 per cent from oil palm.

By way of comparison, livestock grazing in South America was responsible for five times more deforestation than oil palm in Asia.

Indonesia – and Southeast Asia are often criticised for fires related to palm oil. The land area burned in Southeast Asia between 2001 and 2018 was smaller than the area burned in Europe.[xl]

Falls in Indonesian deforestation can be attributed to domestic steps taken by successive Indonesian governments, as noted by the Norwegian Government. They have introduced and extended moratoria on forest clearance and on the issuance of new oil palm plantation permits. The forest moratorium, introduced under President Yudhoyono,[xli] has been in operation since 2011. A moratorium on palm oil permits was introduced in 2018.[xlii] The government also introduced a 5-year sustainability action plan for palm oil in 2019,[xliii] incorporating grower capacity, environmental management, conflict mediation and certification under the national standard for palm oil, ISPO (Indonesia Sustainable Palm Oil).

The introduction of the mandatory ISPO standard will continue positive environmental, social and economic outcomes for Indonesia and its people.

Indonesia’s palm oil sector supports more than 21 million workers

Oil palm plantation workers are generally paid more than plantation workers for other crops

Indonesia has taken steps with the ILO to ensure child and forced labour are eradicated from the sector.

Approximately 30% of the total labor force (38.23 million workers) in Indonesia works in the agricultural sector. [xliv] Plantations employ more than 20 million workers and are the largest GDP contributor (35%)[xlv] to the agricultural sector.

The palm oil downstream sector directly employs 7.3 million workers and supports more than 14 million indirect employees.[xlvi]

Around 88% of workers in the agricultural sector are informally employed.[xlvii] Informal palm oil workers are generally in small to medium plantations, in line with the rural labor market.

On large estates, workers are generally employed on a permanent or fixed-term employment contract [xlviii] with a maximum of 21 days of work per month and 40 hours per week, [xlix] with minimum wages set by province or city/regency,[l] as well as a religious holiday allowance and annual paid leave.[li]

Average wage rates for households in palm oil employment are higher than that of households employed in other plantations such as rubber. The average income of palm oil non-farm households was 32% higher.[lii]

Households with palm oil employees tend to have better housing condition and access to electricity and tapped water. [liii]

Indonesia has taken a number of steps to address forced labor and child labor, including on plantations. This includes the launch of the Roadmap towards a Child Labor-free Indonesia in 2022 to support the National Action Plan for the Elimination of the Worst Forms of Child Labor (NAP-EWFCL).[liv]

A coalition of palm oil companies and NGOs have produced the Policy Implementation Manual on Child Protection, which will be used as an industry guideline to promote child rights and address child labor related issues in different geographical contexts.[lv]

The palm oil sector in Indonesia is working with ILO to adopt the strategic compliance model to strengthen the role of labor inspection, with the cooperation of the Ministry of Manpower, Ministry of Agriculture, certification bodies (ISPO/RSPO), GAPKI and APKASINDO, worker unions (JAPBUSI-National network of trade unions in palm oil) and palm oil farmer associations.[lvi]

In 2021 the ILO produced a guide for labor inspection for the palm oil sector in conjunction with the Indonesian government, trade unions and the private sector.[lvii]

Under the National Action Plan for Sustainable Palm Oil, the palm oil sector also ensures labor rights protections by conducting reviews of labor regulations and outreach programs for oil palm plantation workers. [lviii]

The G20 Summit

The 17th G20 Heads of State and Government Summit will take place in 2022 on 15-16 November in Bali. The Summit will be the pinnacle of the G20 process and intense work carried out within the Ministerial Meetings, Working Groups, and Engagement Groups throughout the year.