World Bank’s Strategy for Palm Oil Shouldn’t Curtail Economic Freedom

COMMENTARY International Economies

World Bank’s Strategy for Palm Oil Shouldn’t Curtail Economic Freedom

Jun 30, 2010 4 min read

Former Research Fellow For Economic Freedom and Growth

James M. Roberts' primary responsibility was to edit the Rule of Law and Monetary Freedom sections of Index of Economic Freedom.

The World Bank Group’s International Finance Corporation is examining its “global strategy” for future development assistance investments in the palm oil sector — a sector vital to growth and job creation in Indonesia, Malaysia and other developing countries — after suspending it in late 2009 in response to pressure from environmental activists.

But groups seeking to restrict further development of the global palm oil sector and limit access to developed-country markets in Europe and elsewhere would block new opportunities for raising living standards and reducing poverty in the developing world, and potentially harm trade and investment partners too.

To counter this, the World Bank should adopt a pro-growth strategy that continues to support palm oil investment programs in developing countries.

Palm oil is an essential food item and cooking oil, and a good source of private-sector investment, economic development and employment for thousands in the developing world.

Yet nongovernmental organizations have long campaigned against the production of palm oil in developing countries, alleging that it damages the environment (specifically tropical rainforests) and endangers threatened species such as the orangutan.

In fact, one of the factors motivating the opposition to palm oil production is protectionism: These groups are opposing imports of lower-cost, higher-quality palm oil because it threatens the market share of oil produced from rapeseed grown in European Union countries.

Many of the NGO opponents of palm oil production are recipients of some of the millions of euros in annual grants from EU environment ministries and the European Commission, advanced by European companies and labor unions in an effort to protect their domestic rapeseed oil production (which is itself subsidized through the EU’s Common Agricultural Policy).

Foreign direct investment to develop the palm oil industry has played an important part in fueling the market-based economic growth and freedom in the past decade that has increased stability and prosperity in Indonesia and Malaysia (together accounting for as much as 85 percent of world production), as well as Colombia, Liberia, Ghana and other important economies in the tropical regions.

Indonesia and Malaysia have maintained high palm oil production while protecting more than 25 percent and 50 percent of their forest cover respectively.

The palm oil industry also employs more than 570,000 Malaysians and more than three million Indonesians. The industry in these countries accounted for more than $27 billion in sales in 2007.

Oil palm trees originated in West Africa and the oil is produced from its fruit. The trees are now cultivated in tropical regions around the world.

The crop is vital to meeting global demand for healthy cooking oil as the world’s population increases and standards of living rise.

Palm oil is also an efficient and sustainable crop.

It consumes less energy in production, uses less land, requires less input of fertilizers or pesticides and generates more oil per hectare than other leading vegetable oils, such as European rapeseed or soybean oil.

Over the past five decades, the World Bank and the IFC together have invested nearly $1.3 billion in palm oil projects and are helping palm-oil-producing countries take steps to expand production while protecting the environment and wildlife.

In response to NGO pressure groups, however, in September 2009 the IFC announced a suspension of approval of any new palm-oil-development investments pending completion of a review of its practices in the sector.

It is distressing to see the World Bank trying to take another step in reorientating its development resources away from private-sector economic and agricultural development projects and toward more social engineering and environmental causes.

The decision to suspend the IFC’s palm oil program is symptomatic of this larger pattern.

This policy bias directly contradicts the IFC’s stated mission of “promoting open and competitive markets in developing countries” and “catalyzing and mobilizing other sources of finance for private enterprise development.”

The campaign by European NGOs such as Greenpeace, Rainforest Action Network, the World Wildlife Fund and Friends of the Earth, among others, to restrict palm oil production worldwide and limit access to European markets would block future job creation, development of higher living standards and poverty reduction in the very countries the NGOs claim to be protecting.

In part, their opposition reflects a philosophical objection to plantation industries in any form anywhere in the world.

As is often the case with left-leaning environmental groups, they have also formed an alliance with the European Commission as well as protectionist European biofuel producers and their labor unions that seek to restrict palm oil imports.

In fact, dozens of European NGOs (or their subsidiaries) that oppose palm oil production are recipients of some of the millions of euros in annual grants from EU environment ministries.

Friends of the Earth Europe, one the most vocal palm oil opponents, receives more than 50 percent (more than 800,000 euros) of its funding from the European Commission.

Thus, in addition to their campaign against palm oil, these NGOs are pushing for adoption of the EU’s “Renewable Energy Directive,” which would restrict imports of biofuels by imposing higher and more onerous environmental standards on them than on biofuels produced in the EU (for instance, from rapeseed).

This favoritism is prohibited under the nondiscrimination and national treatment rules of the World Trade Organization.

In addition, the RED mandates taxpayer subsidies to European producers of rapeseed, which further erodes the low cost advantage of palm oil and is also deemed illegal by the WTO.

Almost 90 percent of the world’s vegetable oils are produced in developing countries.

In Malaysia, the palm oil sector has become one of the larger contributors to GDP growth, while in Liberia and Uganda it is an important source of small business creation.

In Uganda, the Vegetable Oil Development Project expects to employ 3,000 smallholder farmers and 136,000 households directly stand to benefit.

In nearly every case, palm-oil-sector growth has correlated positively with these countries’ scores on the Index of Economic Freedom.

The EU’s RED is a protectionist measure that harms economic growth and poverty alleviation in the developing world and stands in direct contradiction to the free-market principles that alleviate poverty and create prosperity.

The World Bank needs to uphold its principles of alleviating poverty while encouraging economic growth, and adopt a pro-growth strategy that continues to support palm oil investment in developing countries.

James M. Roberts is a research fellow for economic freedom and growth at the Center for International Trade and Economics at the Heritage Foundation .

First appeared in the Jakarta Globe