Palm Oil and the Politics of Deforestation in Indonesia

Abstract

This paper studies the interactions between political and economic incentives to foster forest conversion in Indonesian districts. Using a district–level panel data set from 2001 to 2016, we analyze variation in remotely sensed forest losses as well as measures of land-use licensing. We link these outcomes to political incentives arising before idiosyncratically–timed local mayoral elections as well as to price exposure measures based on oil palm soil suitability combined with global price variations for palm oil. Empirical results document increases of about 4% in deforestation in the year prior to local mayoral elections on average. Additionally, palm oil plays a crucial role in driving deforestation dynamics. Deforestation rates increase by 7% in places that experience a one standard deviation increase in local price exposure, but no upcoming elections. These effects are amplified to almost 19% larger forest losses in places that experience pre-election years and a standard deviation higher palm oil price exposure at the same time. We thus find clear evidence for economic and political incentives reinforcing each other as drivers of forest loss and land conversion for oil palm cultivation.

Keywords: democratization; decentralization, elections, deforestation, forest conservation, demand shocks, palm oil, concessions, Indonesia

JEL Classification: O13, Q15, Q56, P16