Premium
Oil palm cultivation, household welfare, and exposure to economic risk in the Indonesian small farm sector
Author(s) -
Mehraban Nadjia,
Kubitza Christoph,
Alamsyah Zulkifli,
Qaim Matin
Publication year - 2021
Publication title -
journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.157
H-Index - 61
eISSN - 1477-9552
pISSN - 0021-857X
DOI - 10.1111/1477-9552.12433
Subject(s) - consumption (sociology) , endogeneity , palm oil , agricultural economics , panel data , revenue , economics , business , agriculture , indonesian , household income , standard of living , welfare , agricultural science , geography , market economy , linguistics , philosophy , environmental science , social science , accounting , archaeology , sociology , econometrics
The massive expansion of oil palm in tropical regions has substantial implications for socioeconomic development. Several studies show that smallholder farmers benefit economically from cultivating oil palm. However, most existing studies examine short‐term impacts with cross‐sectional data, which has two disadvantages. First, issues of endogeneity are difficult to address with cross‐sectional data. Second, dynamic and risk effects cannot be analysed. We address both issues by using three waves of panel data from smallholder farmers in Indonesia and pseudo fixed effects panel estimators. We show that oil palm cultivation increases household living standards, measured in terms of annual consumption expenditures, by 13% on average. Moreover, we demonstrate that oil palm cultivation tends to reduce households' economic risk, measured in terms of potential decreases in living standard due to income variability. The risk‐reduction effect is evident despite fluctuating international palm oil prices and consequences for oil palm revenues and profits. Oil palm requires less labour than alternative crops, thus freeing family labour for other economic activities. We find that oil palm farmers are more involved in off‐farm activities, which helps to smooth income and consumption. Policy support may be required to address oil palm adoption constraints that some smallholders face. In addition, fostering the non‐farm economy and improving household access to lucrative off‐farm jobs are important for equitable rural development.