Cinderella industry: Palm oil’s misfortunes
A “stepchild”, according to the dictionary, is “one who fails to receive proper care or attention”. Cinderella is a famous folktale of a stepchild who was unrecognized, oppressed and had to work hard above her means to satisfy her family. So how do we compare “Cinderella” with the palm oil industry?
Let’s look at how the palm oil industry typically operates. It works mostly in remote, disadvantaged areas that lack infrastructure and thus they must build everything on their own. After the commodity boom several years ago, the palm oil industry has been highly taxed with no government subsidies, and yet it provides a source of livelihood to about 3.3 million households. In short, it is a backbone of rural development, a promoter of regional development and a means to reduce poverty.
Consider other facts: oil palm estates play an important role in renewable energy or biofuels. It feeds people in a significantly more efficient way than other vegetable oils, while using less land.
All are closely related to sustainable development, which is production and consumption that not only has benefits for today’s generation, but also tomorrow’s. This is not only development for urban people, but also people living in remote areas.
Smallholders in fact play active roles in palm oil production. Growth of smallholders’ production increases by around 16 percent per year, exceeding government plantations (7 percent) and only slightly below growth in the private sector (18 percent) between 2000 and 2009.
In terms of production, smallholders’ plantations accounted for about 36 percent (7.6 million tons) of the total national production in 2009, while government estates and the private sector contributed 12 percent and 52 percent, respectively.
What does this mean? It means smallholders are using the latest agricultural technology and implementing it more efficiently than government-owned plantations. The transfer of technology and the improvement of productive work culture has enabled these smallholders to advance their remote areas, in conjunction with palm oil companies.
However, this is what I called as the Cinderella syndrome, where the one who works hard goes unrecognized and is punished for their productivity and roles in advancing the national and regional economy. The punishment is the export tax and duty for crude palm oil and its derivative intermediate products — two different forms of taxation imposed in the name of economic strategy.
The export tax and duty or other forms of levies were introduced in 1994, when the palm oil industry was starting to thrive and showing economic credentials. It was levied up until 40-60 percent, and even now is levied at about 25 percent. Many explanations have been given by the government in attempts to justify these levies, i.e. stabilizing prices of domestic cooking oil, improving national stocks of CPO and, further, to drive the national downstream palm oil industry by imposing disincentives to the upstream CPO exports.
However, many believe levies were principally for tax reasons: to get more and more taxes and duties and sacrificing other negative and distorted impacts, such as the price pressure to the smallholders and growers, resource transfer from growers and CPO producers to the downstream industry and also vertical integration of upstream and downstream industry in one hand which pose threat to the antimonopoly and trust measures.
The government is sidelining the strategic function of the levies, to optimize the proceeds and earmark for advancing competitiveness of the upstream palm oil growing industry and develop more upstream and value added industry.
One area that needs attention and intervention is surely is the productivity in the upstream industry, which is significantly lower than Malaysia by 13.6 percent. Indonesian comparative advantage is due to lower labor cost and endowment factor in terms of availability of lands. Other than these, Malaysia is significantly ahead us, especially in the palm oil-related research and development, which push the innovation to the limit.
We are stalled in the in the early phase of upstream industry, which is commodity-driven, and under-investing in expanding to the downstream industrial phase, which is capital-and-innovation driven.
Let us look to the international data. According to the 2011 Global Innovation Index, we ranked 99th out of 125 economies. Compared with neighbors Singapore which ranked third, Malaysia 31st, Thailand 48th and even Vietnam 51st, surely we lack innovation resources to improve our economy.
Malaysia has similar palm oil export tax imposed on the industry. However, all of the proceeds go to the development of the industry, in forms of research which integrates interests of growers, industry in the up-downstream value chain, research institutions and universities subsidized credit scheme for smallholders; safety net funds; and also for promotion and marketing. Therefore, Malaysian palm oil industry is more prepared in keeping its agricultural practices align with the best practices, better funded and functioned in other areas, which prevent any negative campaign to the industry.
What the Indonesia and palm oil industry is a well-crafted national strategy, aimed at longer horizon of developing valued added industry, and left the short-term thinking of extracting more tax and duties from the industry. This industry will not able to compete in its optimal speed due to ineffective funding mechanism, research and innovation, market development, adoption of good practices, and institutional and governance reform.
Further, with continuous negative campaigns on the palm oil in the European market, all socioeconomic contributions, particularly in poverty alleviation has been undermined. The industry has been left alone to struggle without adequate supports from concerned stakeholders.
The mistreatment story of palm oil industry is neither appropriate nor appealing for Indonesia. We need to transform this stepchild industry by inviting a white knight in form a comprehensive and visionary policy laying out the blueprint of the sustainable industry. We are expecting that in the due course with favorable policy framework — as divine interventions and unexpected miracles in case of Cinderella — the palm oil industry will be realized as the jewel princess of Indonesian economic development.
The Bali’s Palm Oil Conference on Dec. 1-2 needs to urgently raise this issue. Let us imagine the faces of smallholders when the government and industry work hand in hand in advancing their interest, development not only for urban, but also people living in remote areas.
The writer is head of sustainability at an agribusiness company. The views expressed are his own.
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