The World Bank Group, Palm Oil, and Poverty

Workers loading harvested oil palm fruit from a plantation, Malaysia. Photo credit: Beth Gingold, WRI

The World Bank Group should aim to achieve and measure poverty reduction, not palm oil investments.

In March 2011, the World Bank Group (WBG)’s President Robert Zoellick is expected to decide whether to lift a global moratorium on WBG palm oil investment. The moratorium was instituted as a result of the findings of a 2009 internal audit (PDF, 4.5 Mb). The audit was triggered by civil society concerns regarding an International Finance Corporation (IFC) investment in a major palm oil company in Indonesia.

His decision will be based on a review of a revised version of this draft of “The World Bank Group Framework and IFC Strategy for Engagement in the Palm Oil Sector.” The strategy document is IFC’s response to this letter and is the result of an extensive public consultation process.

The WBG’s engagement in the palm oil sector has potential to contribute to poverty reduction and social and environmental sustainability if country- and project-specific IFC and World Bank strategies are designed and effectively implemented to achieve this mission.

If the WBG removes the moratorium on palm oil investment, it is critical that issues such as the treatment of free prior and informed consent are addressed on an institutional level, and that country- and project-specific strategies be guided by clear measurable objectives, informed by relevant research, implemented with appropriate staff incentives, and measured according to its long term success in achieving poverty reduction.

Agreement on Palm Oil Potential

Despite the focus of the media on the palm oil “controversy” and “debate”, which often pits proponents of “development” against those concerned with deforestation and human rights, many voices in the private, public, and civil sectors have recognized the potential of the palm oil sector to contribute to poverty reduction. Many groups have expressed agreement with key points detailed in the WBG strategy document such as:

• Palm oil is the world’s most traded and most affordable cooking oil as well as a versatile product with many uses.
• Oil palm, the crop that is used to produce palm oil, has a higher yield of vegetable oil per hectare than any other major oil crop.
• Palm oil production has contributed to economic benefits such as government revenues, profits for companies, employment, and raised incomes for smallholders. In Indonesia—the world’s largest producer—the industry generated US$12.4 billion in foreign exchange from palm oil exports in 2009, and supports millions of jobs and opportunities for rural farmers.
• Many of the negative consequences that have been associated with the sector can be avoided when rights of local people are recognized, land use planning considers long term social and environmental impacts, and companies follow improved practices such as those required for certification by the Roundtable on Sustainable Palm Oil.

In the recent public consultations, many stakeholders agreed that some form of IFC and World Bank engagement could contribute to poverty reduction. Many participants expressed continuing willingness to engage with the IFC and World Bank, noted ongoing improvements in the process, and welcomed revisions to the second draft such as increased focus on poverty and smallholders and emphasis on coordination between the World Bank and IFC.

Potential Challenges for Poverty Reduction

Whether this poverty reduction potential can be achieved will depend on how decisions are made regarding when and how to engage or invest in particular countries, programs, or projects. Investing in the palm oil sector should be viewed as one possible means to achieve poverty reduction, not a goal in itself.

As noted by many stakeholders, and acknowledged in the WBG document, different countries and policy contexts will require different responses by both the IFC and World Bank. For example, countries in Africa and Latin America—such as Ghana or Colombia—have relatively small industries with growth potential with their own opportunities and challenges, some similar and some quite different from those in Indonesia.

As acknowledged by the strategy, the “impacts of oil palm depend on where and how it is developed.” Information from the public consultation and research conducted by the World Bank demonstrate that under some conditions IFC investment in the palm oil sector is unlikely to reduce, and may increase, poverty. For example:

• Investment in some business models may not result in poverty reduction. According to a World Bank analysis of district level data in Indonesia, only smallholder production—not production by private estates—is positively correlated with poverty reduction.
• Investment in some business models may increase poverty. Large-scale land acquisition for agriculture has resulted in loss of livelihoods and increased poverty (PDF, 3.5 Mb) where the regulatory and policy environment did not recognize existing rights to land and natural resources or support sustainable practices.
• In some countries the prospect of IFC financing may provide little leverage for improving company practices. For example, in Indonesia the palm oil sector is already “largely self-financing” according to the government (PDF, 1.6 Mb).

Many of these challenges are not unique to the palm oil sector but rather depend on the IFC and World Bank’s institutional approaches to strategy and project implementation. Many problems can be avoided by following IFC’s existing performance standards with appropriate safeguards, and by effective coordination with the World Bank and host country governments. However, some of these issues have not yet been addressed on an institutional level (for example through the Performance Standards Review process)—such as the treatment of free prior and informed consent.

Both the institutional organization of the IFC and its standard monitoring and evaluation (M&E) tools encourage the separate treatment of “economic benefits” on one hand and “social and environmental costs” on the other. This institutional approach does not explicitly acknowledge that economic, environmental and social sustainability are key parts of poverty reduction, or sufficiently address equity concerns related to the distribution of costs and benefits among different groups. In addition, past experience (PDF, 4.5 Mb) has shown problems in implementation resulting from inappropriate staff incentives and insufficient training.

Recommendations for the World Bank Group

If the WBG removes the moratorium on palm oil investment, it is critical that country- and project-specific strategies include the following:

• Application of relevant research and decision-making tools. Relevant research would need to address the following questions on an appropriate country and project level: Which models result in poverty reduction? What investment needs are not met by the private sector and could be addressed by IFC investment? What necessary policies are or are not in place and how are they implemented? A new “risk analysis tool” proposed in Annex XII of the WBG document may help address these questions.
• Clear measurable objectives aligned with the WBG’s mission. Objectives should aim to achieve poverty reduction, not investment in a particular sector.
• Clear roles and responsibilities for the World Bank and IFC. To ensure cooperation, mechanisms for coordination and communication should be established at the outset.
• Suitable measures of success. M&E tools should measure indicators related to poverty and social and environmental sustainability. Current standard tools focus on measuring financial returns and positive development impacts, while negative development impacts—such as loss of livelihoods of local people and local environmental degradation—are treated separately as “social and environmental risks” to be mitigated. Local communities are not included as stakeholders under the IFC’s standard economic performance indicators.
• Appropriate staff incentives and support. Staff incentives should be aligned with poverty reduction and social and environmental sustainability goals, and not based on financial returns. Staff members also need appropriate training and support, including incentives to cooperate and coordinate across teams and institutions.
• Room for improvement. Any effective strategy should explicitly include processes that allow flexibility to continually improve and receive and incorporate feedback. The recent public consultation process, which demonstrated increasing transparency and continued openness to civil society inputs, can provide a positive basis for further improvements.