Social Costs and Externalities of Indonesian Palm Oil

Indonesia is the leading producer and exporter of palm oil across the globe. Oil palm is of high economic status throughout Indonesia, Africa, and most of the East because of its abundance in the region, richness of nutritional and mineral components, and high yields of edible and technical oils. The extensive development of oil palm industries in many tropical countries is due to its extremely high potential productivity. The steady demand of the oil has existed for integration into processed oods, personal care products, and home-cooked meals.

Correspondingly, with increased interest in substitution of fossil fuels, palm oil is being demanded for biofuel energy production. The issues with palm oil extraction are many; One including that the high demand from developed nations has lead to the push of cultivation into the rainforests, destroying habitat. Additionally, the production and extracting gives opportunities for small land-holders to participate in the cash economy, but often time big banks and companies acquire their land without notification or compensation. Migrant workers and imported laborers are said to legally conflict with extraction processes.

Regardless, a large majority of the rural- poor, working class of Indonesia relies on income from palm oil production. With that, the entire population could be lifted out of poverty. The central obligation Indonesia holds is to lift their unemployed and impoverished majority from those circumstances and boost sustainable economic growth. Since the economy of the country is heavily dependent primarily of the agriculture, forestry and mining sectors, the opening up of forests and further extraction of their natural esources are the most reliable sources toward reaching their financial goals.

In relation, externalities and social costs must be taken into account because local production, global markets, and climate change are ever connected in the race to seize reproductive function of renewable resources. With that in mind, Indonesia is the third largest emitter of greenhouse gases in the world as a result of their deforestation, peat land degradation, and forest fires for their expanding industry of palm oil extraction (Business Watch Indonesia, 2007).

Meanwhile, Indonesia is a low-lying coastal area and is vulnerable to the climate ffects that they, in fact, are contributing their greenhouse gases to. Additionally, with Indonesia’s longitudinal positioning on the equator, it is most susceptible to the sink dynamics resulting from climate change. However, because there is an influx of demand for palm oil for food and industrial consumption, Indonesia has Jumped onto the opportunity to expand their already leading production to meet demand and bring rise to each worker’s GDP.

Indonesia holds close to 50 percent of share-hold global production on palm oil and to keep up with their plans on extending the ountries production from 22 million tons to 40 million tons by 2020, they are using this opportunity to establish programs for promotion of biofuels (Buschmann, The Case of Indonesian Palm Oil, 2011). While rich countries put forth effort to specialize in environmentally friendly production and are implementing boundaries of sustainability in their own economies, they are attracted to productions that are environmentally harmful in developing regions.

This shifts the environmental costs from importer to exporter and ultimately leads to unequal ecological exchange from ttempting to make the shift to renewable energy and meet the standards of the Kyoto and Montreal Protocols within their own boundaries. Wealthy nations are continuously working to cut emissions with increased awareness of global climate change. However, the Kyoto Protocol fails to commit those high producing developing nations to those same standards, (BWI, 2010). This is an issue in that rich nations emission reduction is based on their economic development and status.

What such nations are not willing to assist in is the sustainable development and growth of the eveloping nations they are importing from through fair trade, technology transfer, and overall financial and technical assistance. Without respect to the natural capital or the environment, Indonesia is doing quite well in terms of progressing as an economically sustainable country. Palm oil and its global importance in the newer- found relation to biodiesel is a valuable asset in providing a brighter quality of life in regards to revenue for more than three million Indonesian workers and their families (Waltermann & Streubel, BWI, 2010).

Commonsensically, more people working in a rowing biofuel-centered sector would lead to increasing incomes and overall economic achievement. In the case of Indonesian palm oil, there is a central assumption that represents complex, crisscrossing issues that encompass the different levels of action from a varying range of contributors with multiple interests. This means that although the local production is paying the native workers, local production, international trade, and global climate change are all interconnected.

The directives put in place by developed economies look to reach a final level of renewable energy consumption. Palm oil is seen for its energetic, technically renewable “biofuel” use and can have a positive effect on economic growth for both palm oil producers as well as energy producers, at the expense of exploited natural resources and forest habitats. There are undoubtedly counterproductive consequences accompanying the demand for sustainable crude palm oil and the general switch from fossil fuels to “renewable” fuels.

By converting national accounts to “green economies” (budgets with money for renewable energy allotted into them), there is an alleviation on the debate of translating environmental concerns into conomic variables, but only when applied to sustainable concepts. This is faulty because it rides on the idea that all forms of capital can substitute each other regardless of how the stock of the capital is composed. This means that well-off the while overextending a resources productive capacity (OECD, 2005) The concept of environmental Justice or “strong sustainability’ has limitations on the previously noted substitution of capital.

Because there are boundaries on forests’ reproductive capacity, the continuity of economic systems are at risk. Most “westernized” overnments have reached the manufactured and natural capital equilibrium, where they have the ability to access both forms of the goods, and any rise in one will have an expense on the other. Forest products, and in this case palm oil from the Indonesian forests, are shown to have short-term economic gains by conversion of forest to agricultural use in the over-exploitation of the products. This typically leads to long-term loss in income and biological productivity.

Also in the case of Indonesian palm oil and forest loss, the production is exceeding the value of ready-for- production, mature sources. The graph below demonstrates the progression of palm oil production and how Indonesia was able to reliably supply roughly 57 percent of the annual increase with its vast land resources and a suitable climate. However, it is clear that production has extended beyond the mature supplies and gone into areas beyond suitability to reach demand from international markets and an increased interest by native small farm-holders to erect their own private plantations (USDA, Foreign Agricultural Service, 2009).

Social and external costs are largely associated with export and import rates, overnment investment and tax systems in the international market. One abrogating externality is the non-tariff trade barriers applied by developed importers. To assure some security when and if free trade is effective and ecological standards go down, these barriers work to restrict the exporters in the market when supply cannot meet demand. On the other hand, for small farm-holders to establish their plantations, they must qualify for subsidizing credit provided by the Government of Indonesia and prioritize with other startup costs.

Because of this possibility the palm oil roduction sector has experienced strong development and expansion across the country, with an average of 8-13% annual growth rates in palm areas over the last decade (USDA, 2009). The Indonesian government, over the past decade, has provided these loans to encourage smallholders’ expansion, at rates below market interest. Alongside the enabling of non-commercial plantation ownership, the Government has advocated ownership with programs that provide smallholders with improved seed, fertilizers, and techniques for growth.

Additionally, land-use permits ave been reevaluated to allot more time for companies to control profits earned by a plantation. These interventions have brought positive change in the market significantly; non-commercial palm oil farms now account for 44 percent of the total area in the country, second to private commercials (Foreign Agricultural Service, 2009). A major effect of these implementations is the establishment of processing plants. Because fresh fruit bunches require processing within 48 hours of harvest, oil refining plants have been constructed near major concentrations of harvest land.

Construction and operation of each plant represents a significant fixed cost for the developer, and typically ends up servicing both commercial and smallholder palm producers that surround it” (Foreign Agricultural Service, 2009). The investment in in contributor in the success of Indonesia’s palm oil business. At the expense of the environment’s health, and with the push from changes in government economic and political policies, historical highs have been reached leading Indonesia to the number one spot in exporting and producing of palm oil.

Nonetheless, without regard to its ommunal use and benefits to the servicer, service emissions are still added to the atmosphere, more resources and forests are eliminated, reducing the amount of the fruit available for use by the farmers and ruining the habitat of accompanying wildlife. Further success rates in the palm oil sector I believe, at this point, rely on the clarification of one all-encompassing issue. That is, whether or not ecological economies can lead to different assessments of how economic growth, open trade, and the environment can be positively or negatively associated.

Investors and roducers have optimistic expectations of improving their economies despite being built on the depletion of a natural capital and possibly misleading those civilians toward a downward trend.