Course:CONS200/2019/Complexities and Tradeoffs of Smallholder versus Large Commercial Oil Palm Plantations in Indonesian Borneo

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Borneo grows oil palm as a cash crop monoculture with the purpose of exporting and creating revenue.

There are social, environmental, and economic impacts of smallholder vs. large commercial oil palm plantations on the conservation of biodiversity and forests in Indonesian Borneo. Oil palm is a controversial matter with many invested parties. Oil palm is used in the creation of palm oil which is one of the most used vegetable oils in the world.[1] It produces the highest yield per hectare.[1] It is one of the main sources of economic growth for Indonesia,[2] however oil palm plantations have caused massive deforestation in one of the world’s largest biodiversity hotspots. Approximately 47% of intact forests in this region have been converted into plantations resulting in a significant loss in carbon storage and habitats for endangered species.[3] Aboriginal peoples were strong-armed into leaving their land. Because of this, millions of people face social, cultural, and economic hardships.[4] Both large commercial and smallholder plantations provide many jobs for the Indonesian people. Smallholder is defined as "family-based enterprises producing palm oil form less than 50 ha of land" by the Roundtable of Sustainable Palm Oil (RSPO) (Vermeulen). Values of different stakeholders and trade-offs between groups make this a complex problem.

History and Uses

Importance of Oil Palm

Borneo is the largest island in Asia and the third largest in the world. It is politically split among three countries: Malaysia, Brunei, and Indonesia, with the latter owning about 73% of the island. Borneo has become one of Southeast Asia’s largest edible oil producers, specializing in palm oil.[5] Palm oil is a vegetable oil derived from the mesocarp of the plant oil palm (Elaeis guineensis) and it produces six to ten times higher yields than most vegetable oil crops.[6] Palm oil not only a key ingredient in edible products such as chocolate, margarine, and instant noodles, it is the ubiquitous component found in many different categories across the global market (i.e. biofuel, detergent, plastic, industrial chemicals).[5] Palm oil is predicted to grow as a global commodity in relation to population and demand increase, acting as a one of the drivers of Borneo’s economy.

Palm oil is derived from the fleshy mesocarp of the oil palm plant.

History of Oil Palm in Borneo

The palm oil frontier of Indonesia was developed from the plantation belt implemented by the Dutch. In 1800, the land that is now Indonesia was colonized by the Dutch East India Company and named The Dutch East Indies.[7] It was renamed Indonesia during 1880 and during the 1920s it was found that oil palm would grow in Borneo and was encouraged to be included into the economy.[7] As a territory controlled by imperialism, the Dutch government stimulated the expansion of growing oil palm by “granting land without premium and rent free for five years",[8] to residents who would grow oil palm. A sudden increase in palm oil demands Palm oil made up 5% of the vegetable oil market in the 1970s and has since risen to comprise 35% of the global market demand. Plantations and established agricultural lands were gradually transformed into oil palm plantations between 1990-2010.[6] From 2000 to 2007, oil palm area in Indonesia increased from 4.2 million ha to almost 7 million ha.[9] In that same time frame, the price of palm oil almost tripled. Today 96% of oil palm grown in Borneo are located in Sumatra and Kalimantan. These islands also cultivate rubber and cacao in plantations as part of cash crop agriculture. Indonesia’s palm oil production accounts for 11% of its exports ($5.7 bn).[6] Increasing demands of the palm oil in the global market has resulted in the expansion of plantations across Borneo, providing both costs and benefits to Indonesia.  

Social Impacts

Benefits of Oil Palm to Communities

Oil palm plantations have several beneficial impacts on communities that are worth highlighting. For example, there is an increase in employment and economic development that occurs in the rural areas surrounding plantations.[1] This development leads to improvements in local infrastructure and eventually creates urban employment opportunities for people that they may not have otherwise had.[1] Unfortunately, discrimination and class divisions make it difficult for people to gain entry into these positions.[4] While an elite few may excel, the people who are from poor families tend to remain poor and work on plantations. Overall, there are more negative than positive social impacts of oil palm plantations in Indonesian Borneo.

The infrastructure in Indonesia has developed as shown in the image of Ketapang Public Hospital and the surrounding area.

Costs of Oil Palm and Negative Outcomes for Indigenous Peoples

The establishment of large commercial oil palm plantations involves clear-cutting the forests that Indigenous peoples in Indonesia depended on for millennia; however, their property rights are nonexistent and they are given no right to consent to the land use changes that occur.[4] When Indigenous people lose their land, they are losing both their resources and a significant part of their culture including connections to their ancestors that lived on the land.[4] This loss is irreparable and will cause emotional harm in addition to the loss of resources and detriment to the wellbeing of Indigenous peoples.[4] Most Indigenous people rely on the forest as part of their food source and without an intact forest, their diets are likely to suffer.[1] According to a report made by the UN, within the Kalimantan provinces, the Kalimantan Border Oil Palm Mega-Project will affect 1 – 1.4 million indigenous if the proposed 1.8 million hectare oil palm plantations are established.[4] To make matters worse, when Indigenous Peoples are displaced some are forced to become de facto bonded labourers and work for the companies managing the oil palm plantations.[4] The UN also recognized that there was “a pattern of racial discrimination or encroachment on the lands of minority communities and a substantial threat of immediate and irreparable harm to indigenous peoples in the affected area.” [4]

The Indigenous Peoples who once thrived in Indonesian Borneo have now been displaced.

Smallholder plantations are different in structure than large commercial plantations, however the social impacts they create are often similar. Smallholder plantations may be independent or supported, but both types of plantations use local labour forces.[10] The independent smallholder plantations tend to have more freedom in their production methods and tend to have less forced labor and problems with owing debts to supporters.[4] In Indonesia, smallholder plantations take up approximately 1.81 million hectares which is 37% of the total oil palm plantations.[10] However, this number does not differentiate between independent and supported smallholders.[10] The supported smallholders are usually supported by either government or private companies that simultaneously run large commercial plantations.[10] This means the supported smallholders and large commercial plantations have similar methods, outcomes, and impacts on the community.[4] Once oil palm plantations have been established on their land, Indigenous peoples may sometimes be faced with no other choices to make a living for themselves.[4] After the land has been significantly altered, the only option the Indigenous peoples have left is to become smallholders on their own lands.[4] The oil palm plantation companies pay for all of the initial investments into the planting process.[4] Later on, the smallholders are expected to pay back the oil palm plantation companies with an additional amount of interest attached to the initial loan.[4] When Indigenous peoples are unable to pay back the larger companies, they enter into a permanent debt and have to provide their labour in exchange for the rest of their lives.[4] While the smallholder plantations may be seen as better by some because they offer work to Indigenous peoples, they often contribute to this unfortunate cycle of forced labour.[10] Indigenous people are generally not given a voice, nor are they given consent in the destruction of land and establishment of oil palm plantations.[4]

Environmental Impacts

Loss of forest in Borneo from 1973 to 2010[11]

The island of Borneo is one of the major terrestrial biodiversity hotspots on earth. Although it is a small landmass (about 0.2% of terrestrial earth) It hosts over 200 mammalian species, over 400 bird species, and about 18,000 different plant species.[12] However, the island is being rapidly deforested; This is due to several factors, with industrial oil palm plantations being the major source of land-change in the area[13]. Both large commercial and smallholder plantations have similar impacts, however the large commercial plantations have impacts that are much more severe.

Forest loss and land-change

The old growth forests and peatlands of Borneo are major carbon reserves, however through deforestation, land-change, and land degradation these reserves are quickly destroyed. Land conversion is responsible for 15-25% of global carbon emissions, and there has been over 1.7 million hectares of peat lands converted into oil palm plantations.[14] About 26% of old-growth forests were cleared between 1973 and 2015 in Indonesian Borneo, with over 6.4 million hectares of industrial plantations developed by 2015 and half of that being planted between 2005-2015.[13] There have also been occasions in which land gets cleared for oil palm plantations, but the companies or investors back out before construction and the land gets abandoned.[13] There is not enough data to determine how much forest loss is due to this. While many oil palm plantations in Indonesian Borneo were planted on land that had been logged, plantations have become the leading source of deforestation in the area in the last decade.[13]

Other Consequences

Borneo’s forests are home to an incredible number of species, and the deforestation happening is leading to severe habitat loss. The island is home to 13 different non-human primate species, of which 8 are endemic to the area.[12] The loss of habitat will lead to the extinction of these primates, which would dramatically alter the ecosystem.[12] The Borneo Orangutan (Pongo pygmaeus) is perhaps the most widely known species that is threatened in Borneo, with 7% of its population left from its population at the beginning of the 20th century.[12] Many of the other species are also in danger due to deforestation and land change and there are many ways to determine if the local environments are experiencing worsening conditions.  Butterflies can be used as an indicator of the quality of their ecosystems; It has been found that the is reduced species richness and abundance in areas of oil palm plantations, especially oil palm plantations that have been there for decades.[15] This is primarily due to the clearing of a diverse landscape and changing it to monocultures; butterflies tend to prefer areas with more diverse plant life.[15]

Deforestation and oil palm plantations have led to many other environmental problems. Deforestation has been linked to the siltation of waterways, as well as sedimentation of the rivers.[14] It is also a major cause of soil erosion, and the erosion that occurs in or around riparian areas allows for flash floods, which cause significant damage.[14] There has also been an increase in air pollution because of the plantations, this is due to the burning of oil palm waste that is done.[14] As well, there has also been an increase in water pollution due to runoff and leaching of pesticides and herbicides, affecting both plant and animal life.[14]

Economic Impacts

Indonesian Government and Palm Oil

Throughout the history of palm oil in Borneo, the government of Indonesia have used the palm oil industry to improve the income in rural communities.[16] By improving incomes, the palm oil industry has in turn, improved living standards of Indonesians.[1] Indonesian plantations have gone through three stages of development which are, new order (late 1970s-94), transition period to private (1994-98) and free from government intervention (1998-present).[1] In the new order period, 80% of plantation area was held by smallholders as during this time, the Indonesian government subsidized smallholders living expenses and establishment of plantations.[1] In 1994, the World Bank criticized the Indonesian government for financially supporting smallholders, promoting a laissez faire approach.[1] Eventually, the Indonesian government did begin to remove financial aid due to budget restrictions, which resulted in more independent smallholders appearing in the market as migrants could now settle.[1] It has been shown that smallholders with outside support (i.e. government or large companies) produce more crops than independent smallholders.[10] The government assistant programs that had increased income for over 500,000 Indonesian farmers were halted in 2001.[17] This now laissez-faire approach has led to a rapid growth of the palm oil industry in Indonesia, and further depletion of natural resources as a result.[1] In 2011, Indonesia created the Indonesian Sustainable Palm Oil (ISPO), which increased environmental regulations surrounding Indonesian palm oil plantations.[9] With these new regulations and market pressures, zero-deforestation plantations are struggling to be profitable without both political and monetary support.[18]

Smallholder Economic Impacts

Both smallholder and large commercial oil palm plantations play a key role in the economy of Indonesian Borneo.

As of 2016, smallholders account for 40% of the oil palm market and yield for these plantations is less than 2 tons per hectare.[2] Smallholders have been consistently improving annual yield while maintaining low cost of production.[10] Despite this, smallholders face many setbacks as they begin their plantations.[10] This includes disputes of land tenure resulting in violence, finding capital to hurdle the initial expenses of a plantation, and barely making ends meet in early development of smallholder plantations can lead to food insecurity.[10] Smallholders are vulnerable in that, should there be any fluctuations in palm oil pricing, they do not have the capital reserves to support themselves during low rates.[10] RSPO has a Smallholder Task Force to promote inclusion of smallholders in the RSPO policies.[10] Unequal benefit sharing, muddy land rights, and a lack of consent, has resulted in many conflicts between locals and palm oil companies.[16]

Large-scale Commercial Economic Impacts

Large plantations are often established in areas with low populations and because of this, workers are moved out into these remote areas.[1] The construction of these plantations result in stimulation of the local economy as roads are built, and overall spending by plantation staff and company within the area.[1] Plantations are built to last through at least one production cycle of 25 years.[1] One cycle requires 59-144 person-days per hectare per year.[1] For large-scale plantations to be profitable, the have to build processing mills near plantations as oil palm must be processed within 48 hours of harvest.[1] The yield of these large-scale plantations is 3.5-4 tons per hectare.[2] Large companies in Indonesia have begun investing extensively in palm oil refining, though historically Indonesia has only been exporting raw palm oil, because refined products are of higher value on the market.[9] The palm oil industry in Indonesia has resulted in a large jump in the capital value of it's residents.[19] Fourteen of the thirty-two total billionaires in Indonesia are from the large-scale commercial palm oil industry.[19]


In a relatively short period of time, oil palm plantations have increased dramatically and there have been both positive and negative consequences. Both large-scale commercial and smallholder plantations have similar social, environmental and economic impacts however the scale of these impacts differ. The use of oil palm in Indonesian Borneo has helped to grow the economy substantially, but in the process has caused environmental degradation and has had negative social impacts on Indigenous Peoples. Based on current trends, the future of oil palm plantations is going to continue to harm the environment and local populations. In order to improve the palm oil situation in Indonesian Borneo, there needs be stricter policy, a global initiative for sustainable palm oil, and public education. If there is clarity and homogeneity in policy on palm oil at both a national and international level, achieving positive change is possible. In order to be effective, policy should include mandating further research on impacts of oil palm and more transparency with products that do contain palm oil. If people are educated and government policies change and are enforced, sustainable palm oil practices can be attained.


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Seekiefer (Pinus halepensis) 9months-fromtop.jpg
This conservation resource was created by Will. It is shared under a CC-BY 4.0 International License.