Palm oil cultivation, a cornerstone of the agricultural sectors in Malaysia and Indonesia – two of the world’s largest producers – has been beset with controversies over the past two decades due to the indirect land use change that its cultivation can cause.  

The governments of these two countries have faced a challenging task in addressing environmental and social concerns while not harming the economic actors who depend on palm oil for their livelihoods. 

In Malaysia and Indonesia, smallholder farmers play a crucial role in the palm oil industry, often relying solely on this crop for their income. It provides a relatively affordable means of farming that can yield substantial income, especially for rural communities where alternative employment opportunities are limited.  

Of the total land area used for palm oil cultivation, 42% is owned by smallholders, who account for 34% of Indonesian palm oil production. The palm oil sector also generates significant revenue, contributing billions of dollars to national economies annually.  

It creates numerous jobs, directly in plantations and processing facilities, and indirectly through related industries such as transportation and retail. For many small-scale farmers, cultivating palm oil has become a pathway out of poverty, offering a stable income and improved standard of living. In Malaysia, palm oil accounts for around 5-7% of GDP. 

Employment dynamics 

The Indonesian Ministry of Agriculture estimates that as of 2024, oil palm plantations in that country have around 16.5 million workers. Of these workers, 9.7 million are employed directly in the palm oil value chain: 5,2 million as smallholders, 4.5 million working at state and private companies. The remaining 6.8 million are indirect workers working in the transportation of palm oil, or suppliers of plantations’ tools and equipment.  

Diana Chalil, a professor at Universitas Sumatera Utara, says palm oil production contributes a substantial amount to Indonesia’s economy, and this amount has been growing over the past decade. Smallholders’ contribution, she notes, has been increasing over this time.  

“This is the main income source for around 16.5 million Indonesian households, with each having an average of four to six members,” she says. “Most of them are in the rural areas, thus this industry supports changes the development of rural areas.” 

“The total production values of the palm oil industry in 2023, both from the national and global market, are estimated at around $62.9 million,” she said. “In 2024, the palm oil export values reached around $10.8 billion, contributing more than 70% of the Indonesian agricultural export values.”  

The reasons for the increase over the past decade are myriad, she notes. “The government increased the replanting funding for smallholders to improve their productivity by using the illegitimate seedlings. This also increased partnerships between smallholders and companies that provide Good Agricultural Practices training and supervision.” 

Addressing the Controversies 

While palm oil production brings economic benefits, it has also been the subject of widespread debate concerning deforestation, habitat loss, and social displacement. Critics argue that unsustainable farming practices have led to environmental degradation, threatening biodiversity and indigenous rights. 

Nonetheless, many producers and governments are increasingly committed to sustainable practices.  

Malaysia and Indonesia have both signed up to the United Nations Sustainable Development Goals, which set ambitious targets for 2030, both for increasing sustainability and eradicating poverty. Efforts to improve palm oil cultivation can address eradicating poverty (goal one), ensuring decent work and economic growth (goal eight), and promoting responsible consumption and production (goal 12).  

For rural farmers in Malaysia and Indonesia, palm oil cultivation remains a critical livelihood. Its short cycle and relatively high productivity make it an effective tool for poverty reduction when managed sustainably. 

But to meet the aspirations of the SDGs, the sector must adopt responsible practices. Certification schemes, environmental safeguards, and respect for indigenous rights are essential to ensure that economic gains do not come at the expense of ecological and social well-being. 

What it would mean to lose it 

Chalil says that losing the palm oil sector would have big economic consequences, and not just for Indonesia and Malaysia.  

According to a report by Chain Reaction Research, the fast-moving consumer goods (FMCG) industry and retail generate 66% of the gross profit and 52% of the operating profit in the palm oil value chain.  

“With more than 80% of the world market, losing this sector [in Indonesia and Malaysia] could also impact other countries that use palm oil as the raw materials,” says Chalil.  

“The top five FMCGs use 3.4 million metric tons, or 6% of palm oil embedded in food, and contribute 11% of gross profit in the group.” Since Malaysia and Indonesia are major suppliers, their withdrawal from the global palm oil market could cause supply shortages, influencing global food prices and the availability of products containing palm oil.  

This could also accelerate the search for alternative oils, with uncertain environmental and economic repercussions. 

The immediate impact of losing palm oil would be a drastic reduction in income for farmers and workers involved in planting, harvesting, processing and distribution.  

Smallholders, who often depend entirely on palm oil, would face unemployment and increased poverty. Urban and rural economies reliant on related industries, such as the manufacturing of oleochemicals (those derived industrially from animal or vegetable fats) and biodiesel, would also suffer.  

Export revenue risk 

The long-term effect would be the loss of export revenue. Both countries heavily depend on palm oil exports. A sudden loss would lead to a decline in foreign exchange earnings, affecting their trade balances and currency stability. This could increase their reliance on imports, impacting inflation and the cost of living. Many rural communities would experience increased poverty and displacement. 

Though efforts are underway to diversify these economies away from commodities, palm oil remains a core pillar. Its absence could slow national economic growth, weaken farmer communities, and destabilise associated sectors like downstream processing, logistics, and research.  

While the loss of palm oil would pose serious challenges in the short term, these countries could look towards diversification strategies, investing in other agricultural commodities, manufacturing, tourism or digital economies. However, such transitions take time and require substantial policy support, infrastructure and investment. 

While sustainability concerns are prompting reforms within the industry, completely losing palm oil would significantly impact economic development, social stability, and the global supply chain. Balancing sustainable practices with economic reliance on palm oil remains will thus be important going forward. 

[Edited By Brian Maguire | Euractiv’s Advocacy Lab ]