Oil Palm Boom, Contract Farming, and Village Development : Evidence from Indonesia

Through contract farming schemes between cohorts of farmers and private companies the Indonesian government intended to spur rural economic development. In particular within the oil palm sector, such community-company 'partnerships' are commonplace. Yet, empirical evidence of the success of these formations remains mixed. In this paper, we investigate the effects of contract farming on economic development at the village level. At the same time, little is understood regarding the fac-tors that determine that cohorts of farmers sign a contract. Analyzing data from a structured village survey, we find a positive effect of contract farming schemes on economic development, in particular on village wealth. The share of farmers under contract and contract length play a significant role in this. Regarding contract adoption, we observe that contract participation is conditional on the visit of a private investor. Controlling for this conditionality, we find that villages that have no access to electricity are more likely to participate in community-company partnerships. Finally, considering the government's intention to spur rural economic development through contract farming and the positive wealth effects associated with it, we find that contract farming has not been entirely equally accessible; however, we do not find evidence that the rural poor were excluded.