An interesting new paper suggests that the Indonesian palm oil industry has made a significant dent in rural poverty.

…my most conservative estimate suggests at least 1.3 million out of the approximately 10 million people lifted from poverty over the 2000s have escaped poverty due to growth in the oil palmsector. Poverty gaps significantly narrow, suggesting not only those near the poverty line are being lifted up.

Of course, as several have pointed out on Twitter, this is not an optimal method of development. Beyond the environmental damage you have negative impacts on health and a lack of incentive to invest in capital and human capital.

However, there are peculiarities of the palm oil industry that break in its favour. Palm oil production has a greater positive impact on poverty than other crops. One of the reasons is that palm oil has to be processed within twenty four hours, leading to decentralised infrastructure.

The observed poverty reduction can be explained by more rapid increases in household expenditures for people in the bottom quintile and agriculture, and through greater provision of public goods most related to agricultural manufacturing, specifically roads and electricity.

Indonesia’s over 1600 palm oil mills each buy fresh fruit bunches fromdozens of villages, often through a complex network of traders providing important aggregation and logistical functions for independent smallholders and farmer groups needing to get their fruit to the mill within 24 hours of harvesting. Urgent processing requirements mean the area feedingeach mill is roughly a 50 kilometer radius.

All that being said (and I recommend reading the paper in full), there is one big takeaway. Roughly 90% of recent increases in production have come from expansion in land use, and the large number of small holders are significantly less efficient than the larger operators.

Part of this is due to economies of scale that the smallholders can’t achieve. But with so many of our products containing palm oil, one way to tackle the environmental problem may be to invest in Indonesian smallholders to raise productivity.

Yield maximizing practices relate to pest management, fertilizer application, pruning, and harvesting at the optimal time… The key on-farm technology is seed quality, determined at the planting stage… Roughly two laborers are needed for every five hectares of Indonesia’s current 7 million hectares of industrial plantations.