Luhut argued that legalizing the “illegal” plantations and putting them into the tax system and under the supervision of the relevant ministry and government agencies, while punishing them with heavy administrative penalties, would be the least-cost correction in terms of employment and state revenues. This economic and social impact of the legal-washing measure is far less devastating than the risks of moral hazard as the estates also involve a large number of smallholders.

But whatever was the point of the argument, the revelation of the 3.3 million ha of illegal oil palm estates a few months ago only validated the perception as to just how bad has been the public and corporate governance of the country’s natural resources, notably the lucrative palm oil industry.

As the world’s largest producer with an estimated 16.8 million ha of oil palm plantations and one of the biggest consumers, Indonesia is in a strong position to lead the industry and shape the market globally. Further, the country, richly endowed with land suitable for oil palm plantations, is still able to increase its palm oil output, and its large population of over 270 million and rising allows for further expansion of the domestic market for the vegetable oil.

The biophysical aspects, such as rainfall, solar radiation and soil suitability and a massive land mass make Indonesia the best place for palm oil development. Such valuable resources, if well managed with good governance and best agricultural practices could become a main driver to propel the country into to prosperity.

However, like many developing countries, Indonesia is also plagued by the "resource curse" or a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources. The country has failed to capitalize on the abundance of resource wealth to spur sustained economic growth due to poor governance and mismanagement.

Indonesia is now facing self-inflicted governance issues in the palm oil industry, particularly related to misguided policies in the upstream and downstream processing industries and market intervention. We are now reaping what the government has sown with the series of emotionally charged policies it introduced. The country’s resource mismanagement and poor governance, particularly corruption, have failed to optimize the benefits of palm oil development.

Despite its vital role, the palm oil industry has been suffering from a series of stringent antimarket policies such as export quotas, a domestic market obligation and fixed prices introduced since early 2022 to stabilize the price of cooking oil at the government-fixed level after the prices of palm oil skyrocketed due to the massive disruption in the global supply of edible oils.

Palm oil has and will continue to play an increasingly vital role in the economy because this commodity is also relatively inexpensive, versatile and the most widely produced edible oil, meeting more than 40 percent of global demand for vegetable oil on less than 6 percent of all land dedicated to producing vegetable oils. Consequently, food and fuel will continue to compete fiercely for crude palm oil (CPO).

Given the complex structure of the palm oil industry and its vital economic role as it employs more than 17 million workers and involves over 2 million smallholders the government urgently needs to reform the governance of the industry. There is no other way to sustain the palm oil benefits for the whole economy but for the government to improve its regulatory framework and governance by reducing red tape and strengthening policy certainty and predictability.

Without good coordination, it is not possible for the government to design an integrated development policy for such an important industry. There is a three-pronged approach on how we can transform the resource curse into a blessing and improve natural-resource management for the benefit of the country and the people.

First and foremost is the need for the government to improve institutional capacity and the regulatory framework in managing palm oil to provide a coherent support system. The existing Task Force can be upgraded and consolidated into a new strong central government institution with authority in policy-making, regulating, managing licensing, implementation of development programs, conducting research and development and coordinating all activities related to palm oil and its derivatives.

The new body can use the complete data collected under the comprehensive audit of the whole palm oil industry a few months ago as a reliable input to coordinate all policies related to upstream and downstream palm oil industries at the central government and local administration levels. The Palm Oil Fund Management Agency (BPDP-KS under the Finance Ministry) could be strengthened to manage all government programs in palm oil development.

Second, the government has to launch comprehensive sustainability standards for production, trade and use of palm oil by aligning sustainability and ethical principles throughout the palm oil supply chain. The standards should be based on the globally accepted United Nations Sustainability Goals (SDGs), good governance and balancing acts of environmental conservation with responsible economic development.

The government is currently planning to revamp Presidential Regulation No. 44/2020 on the Indonesia Sustainable Palm Oil (ISPO) scheme to be able to face current and future challenges, such as international market acceptance, the European Union Deforestation Regulation (EUDR) and other environmental, social and governance issues related to palm oil.

The EUDR will make other sustainability standards less relevant. So now is a good and right moment to adjust for the shifting equilibrium.

Lastly, the country has to work hard to clean up the tarnished image of corruption and create a conducive business environment for good corporate governance. A vigorous anticorruption drive and improvement in the public and corporate governance of the palm oil industry will further spur the engine of economic growth to propel the country to prosperity.

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The writer is a sustainability analyst.