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Oil Palm Boom, Contract Farming, and Village Development: Evidence from Indonesia

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  • Gatto, Marcel
  • Wollni, Meike
  • Rosyani, Ir.
  • Qaim, Matin

Abstract

Through contract farming schemes between cohorts of farmers and private companies the Indonesian government intended to spur rural economic development. In particular within the oil palm sector, such community-company 'partnerships' are commonplace. Yet, empirical evidence of the success of these formations remains mixed. In this paper, we investigate the effects of contract farming on economic development at the village level. At the same time, little is understood regarding the fac-tors that determine that cohorts of farmers sign a contract. Analyzing data from a structured village survey, we find a positive effect of contract farming schemes on economic development, in particular on village wealth. The share of farmers under contract and contract length play a significant role in this. Regarding contract adoption, we observe that contract participation is conditional on the visit of a private investor. Controlling for this conditionality, we find that villages that have no access to electricity are more likely to participate in community-company partnerships. Finally, considering the government's intention to spur rural economic development through contract farming and the positive wealth effects associated with it, we find that contract farming has not been entirely equally accessible; however, we do not find evidence that the rural poor were excluded.

Suggested Citation

  • Gatto, Marcel & Wollni, Meike & Rosyani, Ir. & Qaim, Matin, 2015. "Oil Palm Boom, Contract Farming, and Village Development: Evidence from Indonesia," EFForTS Discussion Paper Series 10, University of Goettingen, Collaborative Research Centre 990 "EFForTS, Ecological and Socioeconomic Functions of Tropical Lowland Rainforest Transformation Systems (Sumatra, Indonesia)".
    • Handle: RePEc:zbw:crc990:10
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    References listed on IDEAS

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    1. Miyata, Sachiko & Minot, Nicholas & Hu, Dinghuan, 2009. "Impact of Contract Farming on Income: Linking Small Farmers, Packers, and Supermarkets in China," World Development, Elsevier, vol. 37(11), pages 1781-1790, November.
    2. Gatto, Marcel & Wollni, Meike & Qaim, Matin, 2014. "Oil Palm Boom and Land-Use Dynamics in Indonesia: The Role of Policies and Socioeconomic Factors," EFForTS Discussion Paper Series 6, University of Goettingen, Collaborative Research Centre 990 "EFForTS, Ecological and Socioeconomic Functions of Tropical Lowland Rainforest Transformation Systems (Sumatra, Indonesia)".
    3. Larson, Donald F., 1996. "Indonesia's palm oil subsector," Policy Research Working Paper Series 1654, The World Bank.
    4. Zahari Zen & Colin Barlow & Ria Gondowarsito, 2005. "Oil Palm in Indonesian Socio-Economic Improvement A Review of Options," Departmental Working Papers 2005-11, The Australian National University, Arndt-Corden Department of Economics.
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    6. McCarthy, John F. & Gillespie, Piers & Zen, Zahari, 2012. "Swimming Upstream: Local Indonesian Production Networks in “Globalized” Palm Oil Production," World Development, Elsevier, vol. 40(3), pages 555-569.
    7. Herath, Deepananda & Weersink, Alfons, 2009. "From Plantations to Smallholder Production: The Role of Policy in the Reorganization of the Sri Lankan Tea Sector," World Development, Elsevier, vol. 37(11), pages 1759-1772, November.
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    Cited by:

    1. Chrisendo, Daniel & Siregar, Hermanto & Qaim, Matin, 2020. "Oil palm and structural transformation of agriculture in Indonesia," EFForTS Discussion Paper Series 33, University of Goettingen, Collaborative Research Centre 990 "EFForTS, Ecological and Socioeconomic Functions of Tropical Lowland Rainforest Transformation Systems (Sumatra, Indonesia)".

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    Keywords

    oil palm; contract farming; rural development; Indonesia;
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