Regional economic empowerment through oil palm economic institutional development

Abstract

Purpose The purpose of this paper is sixfold: first, to know the ability of area carrying capacity to the development of downstream oil palm industry; second, to know the potential for the development of downstream oil palm industry in efforts to improve the community through employment and business opportunities in the regions; third, to find eco-friendly institutional arrangement strategies of oil palm farming in order to spur economic growth and development; fourth, to formulate strategies for potential environmental impact as a result of institutional arrangement and development of downstream oil palm industry, both in regional and national scope; fifth, to predict the economic multiplier effect as impact of institutional arrangement and development of oil-palm-based downstream industry; and sixth, to include production centers and development areas of oil-palm-based downstream industry in potential areas. Design/methodology/approach Research location was in potential areas of oil palm plantation development, either in the form of plasma through state-owned enterprises (BUMN) and private-owned enterprises (BUMS), or in the form of self-supporting by community. The research locations were divided into two parts, namely the land area and the coastal area. The land area of Riau consisted of Kampar, Rokan Hulu and Kuantan Singingi Regency, while the coastal area of Riau consisted of Pelalawan, Siak, Bengkalis, Indragiri Hilir, Indragiri Hulu and Rokan Hilir Regency. Both research areas had different productivity which was caused by differences in soil fertility. The required data were primary and secondary data. Findings Plantation activities have increased the mobility of goods in the villages, causing plantation activities to also open business and employment opportunities for people who are able to accept these opportunities. Since post-1998 crisis, the growth of oil palm plantation area in Riau increased sharply, namely in 1998, the area of oil palm plantations was 901,276 ha, in 2012, 1,119,798 ha and increased to 2,103,175 ha at the end of 2017. Through economic activities that produce goods and services required during the plantation process and the development, downstream industries will have backward linkages. The development of oil palm plantations in Riau has had an impact on economic activities in rural areas. The result of the research in the field is that the average income of farmers in the plantation subsector (especially oil palm) is Rp4,576,696 per month or $5,781.09 per year. The impact on investment in the estate subsector has been felt by rural communities. This condition also affects the purchasing power of the people, resulting in the increase of mobility of goods and people. During the period 2009–2016, rural communities enjoyed a high level of prosperity. During this period, the price of fresh fruit bunch at the farm level was quite profitable. On the other hand, the production of the plantation area also increased compared to the previous period. The impact of rising prices and increasing production of farmers is that the farmers’ welfare index in the countryside had a positive value of 0.43. This index showed the increase of farmers’ welfare from the previous period by 43 percent. Originality/value There are few previous studies which have comprehensively and specifically reviewed the regional economic empowerment through institutional arrangement and development of oil-palm-based downstream industry. The development of oil palm plantations aims to eliminate poverty and underdevelopment, especially in rural areas. In addition, it also pays attention to equity. In broad sense, agricultural development which is based on plantations aims to improve the welfare of the community so that there is a change in the pattern of life of the surrounding community. On the other hand, the success of plantation development that is based on oil palm agribusiness is expected to reduce income inequality between community groups and between regions.