Transnational Operations and Controversies Around the Rapid Growth of Oil Palm Plantations in Indonesia: The Case of Sumatra

Amidst its negative impacts on the environment and local communities, oil palm represents a vast economic opportunity for the Indonesian government and considered as the main component of its development strategy as well as the main driver of people’s economy. The strategic role of oil palm in Indonesian economy is due to it’s comparative advantage in terms of labor and land costs, and the prospect of increasing demand from new biofuel markets in Europe and the United States. The palm oil plantations in Southeast Asia have been in operation since the colonial period. In Indonesia it was imported from West Africa by the Dutch colonialists in 1848. The first large-scale commercial oil palm plantations were established in the eastern coastal region of Sumatra in 1911 and have been characterized as transnational operations. During the Old and New Order periods, oil palm was associated with direct state investments via state-owned companies where direct foreign involvement in the plantation industry was relatively minor. However, the structure of the industry changed drastically, when in 1998 the International Monetary Fund’s (IMF) required the country to liberalize its plantation sectors. The agreement with the IMF has led to substantial investments by Malaysian companies and allowing maximum foreign ownership in both domestic and foreign investments. The center of Indonesia’s oil palm production is in Sumatra where in 2013 fifty percent of the country’s 10.5 million hectares oil palm plantations is located in that region. Due to the fact that since the mid-1990 Indonesia’s oil palm industry has been characterized by the growing importance of TNC’s, this paper will discuss the impacts of the industry on the environment and local communities in the eastern coastal region of Sumatra.