Export agriculture and rural poverty: Evidence from Indonesian palm oil

Abstract

This paper measures the impacts of Indonesia’s palm oil export expansion on district poverty and household expenditure from 2002 to 2015. Identification exploits geographic variation in agro-climatic suitability in a long difference instrumental variable framework. The main result is that a 10 percentage point increase in district area under cultivation for oil palm corresponds to around six percentage points faster poverty reduction and nine percent faster expenditure growth. The expenditure gains are principally explained by rising returns to agricultural labor. I find no evidence of labor reallocation across sectors: new farmland absorbed labor saved from palm adoption. The expansion increased local government revenues, spending and public goods, while increasing deforestation, forest fires, certain health problems and conflict. Indonesian palm oil thus provides a striking modern illustration of some of the trade-offs inherent in large changes in trade and land use. • Indonesian palm oil expansion accelerated local poverty reduction and household expenditure growth from the early 2000s. • A 10-percentage point increase in district area under cultivation for oil palm from 2002–15, on average, corresponds to around 6 percentage points faster poverty reduction and 9 percent faster expenditure growth. • Income gains appear to be primarily driven by higher returns to agricultural labor, and there is no evidence of cross-sectoral labor reallocation within districts. • Palm oil expansion also boosted local public finances and public good provision but increased deforestation, fires, health risks and conflict, highlighting key trade-offs inherent in modern industrial agricultural development.