THE ROLE OF THE STATE IN THE PALM OIL INDUSTRY
This essay is a series of extracts from my undergraduate dissertation written in 2017, some of the actors’ stances and practices could have changed. This essay describes the situation at the time of the research.
List of acronyms and abbreviations used in the document:
GSCM – Green Supply Chain Management
RSPO – Roundtable for Sustainable Palm Oil
The recent quest for vegetable oil as biofuel or food has transformed the Indonesian economy to accommodate intensive palm production. Palm is the largest grown crop in the world by area and offers a higher yield than most oil-rich crops (Tan et al., 2009). In Indonesia alone, palm plantations grew by 79% between 1990 and 2008 by area (Dixon, 2016). These expansion rates are a significant contributor to environmental damages. The Indonesian government has used palm oil expansion as its flagship to lower poverty rates, turning a blind eye to human rights breaches and widespread deforestation, giving the author a case study for implementing green supply chain within a context of economic development (Edwards, 2015). Palm oil even became the centre of a diplomatic dispute, which has resulted in Indonesia being charged with permitting unsustainable agricultural practices as neighbouring countries anticipate the annual haze – a lethal smoke emanating from smouldering peatlands (McCafferty, 2015 and Watts, 2018). The supply chain links many actors with various levels of interests towards sustainable practices making practices difficult to trace and change. This study aims to comprehend the role of the State in establishing green supply chain standards, within the palm oil industry. It will be argued that the imbalance of power encouraged Indonesia to pursue unsustainable agricultural practices.
Supply chains are expected to provide the customer with the right products and services, on time, at the right place and with the required specifications (Azevedo et al., 2011).
The definition considered for sustainable development is the one of Daly (1997) and Gibson (2001), who advocate for a growth model that would comprise the environment and people instead of solely economic growth, deemed unsustainable.
The complementary concept of GSCM supports the corporate pillar of sustainable development through environmentally friendly practices along the supply chain (Azevedo et al., 2011). Globalisation and complex sourcing have increased the impact supply chain has on the environment. This demonstrates the importance of GSCM (Handfield et al., 1997). GSCM practices can range from safe working conditions to reverse logistics operations, and supplier selection (Carter and Jennings, 2002). Firms are an important player in sustainable development and need to be aligned with green values, however, GSCM theories relate to developed countries and knowledge economies. This study offers a case study of a developing economy adding to the literature on sustainable development and GSCM (Elkington, 1998 and Janicke, 2008).
The literature in State theories frames the intricate role of the Indonesian government as a decision-maker. State theories have noted the gap between holding office and holding power, with non-political actors limiting the State’s key decisions (Carnoy, 2014). Structuralists argued that amongst all interests, businesses possessed a veto over policy- making as governments need to create a successful economy for the sake of re-election. Neo-pluralism adds that businesses’ privileged interest leaves the State with limited ‘decision-making autonomy’ (Linblom, 1977). The Skocpol’s ‘Janus-faced’ model agrees on a relative autonomy of the State, balancing the powers of national and international actors who alter the political agenda, for instance making decisions that favour businesses. The model will act as a theory to explain this international dimension in relation to the lack of autonomy of the State (1979).
The palm oil supply chain is complex and fragmented, therefore, we will introduce a simplified version. Starting with plantations managed in various transactional models, the fruit grows before being sold to mills and refineries managed by large corporations. The extracted product is sold to traders to be refined into a solid product (Daemeter Consulting, 2015 and Purnomo, 2018). The palm oil is sold to manufacturing companies for processing before it reaches the end customer (Rabobank, nd).
Small holders representing 35% of the total production in Indonesia
The extracted product is sold to traders to be refined to a solid product – its main advantage compared to other oils used for beauty, or food and drinks industries
This supply chain encompasses several members embracing different views on sustainability in the palm industry. The next section will offer an overview of the strongest actors’ stance on the matter.
Description of Actors and Their Interests
The sustainable movement is led by Non-Governmental Organisations (NGOs) such as, RSPO, WWF or Greenpeace aiming to move towards GSCM (SOS, 2017). Despite the lack of transparency in the SC, one of the main non-profit organisations, RSPO encourages sustainable palm oil consumption aided by multi-stakeholder governance (RSPO, 2017a). The certification standards fail to trace the oil before the mills but have led to improvements in many plantations (RSPO, nd). NGOs work together with buyers to establish regulatory frameworks and reasonable standards to constrain Indonesia to ethical practices including management of deforestation (gov.com, 2015).
India and China, the two largest importers, are not concerned for GSCM, although they could induce a shift in the industry. This contrasts with the nine European countries who have committed to increasing their sourcing of certified sustainable palm oil but whose input weighs too little in the global trade (Hucal, 2015). China may be showing a growing interest in sustainability as it spread awareness of green choices for palm oil, although without target setting, assuming an overall low interest for sustainably sourced palm oil (china.org.cn, 2017).
Joko Widodo, the Indonesian President, emphasises economic growth – de facto at the expense of the environment (The Economist, 2015). The country operates on a complex political structure, with a powerful federal government recently weakened by trials of decentralisation resulting in an unclear entrustment of power. Decentralisation intended to preserve the regional culture and encourage economic development, assigning village chiefs to resource allocation. Nevertheless, the funds were used for clearing rainforests to expand plantations and overlook sustainability (Antlöv et al., 2016 and forestlegality.org, 2016 and Henda, 2016). The central government is also impeding on sustainable practices when reclassifying fallow land as abandoned to further the plantations (Cramb and McCarthy, 2016). These two examples are not the only actions hindering the progress of sustainability, thus it is hard to reach a decisive conclusion regarding the federal government’s stance. In contrast, local administrations disregard GSCM, not enforcing forest land regulations and intercepting NGOs’ efforts to improve the ethics of the industry (forestlegality.org, 2016).
Multi-Nationals Enterprises (MNEs) source inexpensive palm oil in Indonesia but are confronted with high levels of bureaucracy (Daemeter Consulting, 2015). In response, licences are granted from local authorities, rather than the president himself. This system bypasses current regulations providing short-term rewards to both MNEs and local populations (Ardiansyah et al., 2015). While MNEs claim to be committed to ethical processes to their customers, the complex supply chain makes it difficult for an external body to assess and certify (Neslen, 2017 and Nestle, 2016). Their strong buying power enables them to demand better traceability of the palm oil up to the plantation. Given that they have not done so, it can be concluded that MNEs are not interested in being at the forefront of sustainable progress.
This concludes that most actors profit from loose legislation short-term. While PO’s high yield could sustainably supply a rising demand for oil, the Indonesian government does not convey a strong preference for GSCM (Edwards, 2015). The government preference for economic development through palm oil expansion does not seem economically viable.
This study aimed to comprehend State preference over palm oil supply chain. The Janus-Faced State theory implies the State will protect its preferences against internal conflicts and external pressures (Skocpol, 1979). The pressure put on the State to sustain current practices are conveyed by MNEs, large importers and local governments. On the other hand, NGOs and European countries promote GSCM with little progress. The Indonesian government shows mixed preferences in improving the supply chain and strong external pressures for putting the growth of the industry first. As a result, the lack of improvement to GSCM is the product of strong players backing the current practices pushing the state further away from GSCM. While some demand better practices, they represent only a small portion of the global market and Jakarta already satiates the needs of the biggest buyers. This imbalance of power leaves Jakarta, albeit indifferent, unable to promote change in the supply chain and too weak to face importers and MNEs. The State is solely focused on economic growth rather than sustainable development and concedes to the strong external pressure to sell low-cost palm oil to India and China.
The Relevance of the Framework
The framework partially explains the current preference of the state and standards in the palm supply chain but does not provide a full picture of the situation as it is lacking in some aspects. Firstly, the model reduces state action to being the mere result of pressures and preferences neglecting obstacles to enforcing legislations – as decentralisation or corruption. The case of Indonesia shows that its geography and ethnic diversity has encouraged decentralisation policies, with high levels of corruption and a weaker federal administration (Kurlantzick, 2012). These were not considered in the Skocpol model, hindering the author from even contemplating that corruption might be the culprit and the ultimate reason for inaction. Skocpol (1979) presents internal and external interests as a zero-sum game: the government works to protect national preference against external ones. In this case, some national actors overlook environmental protection with MNEs’ backing them, so that some external and internal actors’ preferences are aligned. This leaves the framework even less suited to explain the balance of the various pressures. Finally, the model fails to offer guidance on how to face the pressures and recover a stronger authority for the palm oil or any future crisis that could utilise legal caveats and the weak enforcement of federal law.
This study aimed to understand the lack of promotion of GSCM for Indonesian PO. The Skocpol framework was used to summarise each actors’ scope of action in the industry, identifying strong pressures who relish Indonesia’s fast economic growth. The various external and internal pressures found to influence the State’s decisions were split between NGOs and some European countries while the strongest pressures, composed of MNEs, India and China favoured short-term profit. This resulted in corporations recklessly destroying the Indonesian rainforests and ecosystem. Undoubtedly, regulating the expansion of the plantations would have supported sustainable development in rural areas, controlled MNEs’ influence and allowed politicians to map the crop’s expansion. Yet, this paper shows that Jakarta is not solely to blame in the matter, external pressures encouraged a shallow interest for GSCM and the inability to enforce forestry regulations weakened Widodo’s administration.
This paper identified the State as an obstruction to GSCM, a crucial finding for the business literature. Often, corporations focus on internal barriers to progress rather than the external environment made up of politics, pressure groups and many other actors. Had MNEs decided to implement a GSCM, they would be slowed by the lack of enforcement of laws and monitoring of practices locally.
One solution put forward by the author is the micro-funding of plantations to offer the means to subscribe to sustainable principles. With this first step, GSCM practices can be instilled within a greener economy. Increasing the yield of palm plantations would multiply the oil supply without enlarging the plantation areas, rather through agricultural research or selection of species. The low productivity is a known threat to market competitiveness for Indonesian plantations as Malaysia, the second largest producer has reached a much higher yield. Restuccia et al., (2008) advise that countries undergo productivity improvements to boost their GDP, especially within agriculture, where government support is required for research or loans. In that regard, Munthe (2016) argues that any financial pressure on the most impoverished link of the value chain cannot be part of sustainable progress. To improve the palm industry, funding will need to be made available to growers. The government needs to ensure equal redistribution of profit to supply chain actors through certifications and lower corruption levels (Block, 2009).
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