Revealed Comparative Advantage of Indonesian Crude Palm Oil Indonesian Crude Palm Oil Supply Model

1.53, 1.52 and 1.45 in that order. Thailand on the other reported an increase in its RCAI value to 1.03 in 2005 from the previous 0.97 in 2004 especially in India. However, in 2006, Thailand RCAI increased drastically to 1.16 It has been observed that Indonesia has registered a higher value of competitiveness index than Malaysia for the period that the study was carried out. This can be an indicator that Indonesia has an advantage on national endowments than Malaysia. This is because Indonesia has enjoyed a cheaper labor input in CPO industry than Malaysia. At the same time, there has been an intensive use of cheaper materials and inputs in the CPO industry that makes production cheaper. Malaysia on the other hand has recorded a higher revealed advantage index over the years than Indonesia. This has been brought about by the fact that Malaysian CPO production industry is more efficient than that of Indonesia. Therefore, Indonesia must invest heavily so as to maximize its production in a most efficient way so as to compete in the international market efficiently with Malaysia.

6.3 Revealed Comparative Advantage of Indonesian Crude Palm Oil

In comparing Indonesia with other CPO exporting countries to the two strong markets for its CPO, namely China and India, the study revealed that Indonesia is competitive in these two markets. However, from its revealed comparative advantage analysis, it was found that Indonesia faces a strong competition from Malaysia in the export of CPO to these export markets. In both countries, Malaysia recorded RCA of 0.9 in 2004 and 2006 and the values reported in Table 22. That proves that Malaysia is highly competitive in these markets alongside Indonesia. It was also realized that Thailand did not pose any serious competition to Indonesia in the two CPO markets. In both countries that import CPO from Indonesia, Thailand had a RCA value of 0.1 in the two markets during the same period. The competition offered by Hong Kong in the China export market for CPO was 0.6 showing that it does not offer stiff completion to Indonesia in that market. Table 22. Revealed Comparative Advantage of Indonesia in Crude Palm Oil World Market in the Year 2004 to 2005 India CPO Market China CPO Market Country 2004 2005 2004 2005 Malaysia 0.90 0.90 0.90 0.90 Singapore 0.60 0.60 n.d n.d Thailand 0.10 0.10 0.10 0.10 Hong Kong n.d n.d 0.60 0.60 Note: n.d - indicate no data available

6.4 Factors contributing to competitiveness of Indonesian Crude Palm Oil

In this section, the factors that contribute to the competitiveness were analyzed quantitatively through the use of a regression model. In this case, the regression analysis was used with export competitiveness as the endogenous variable. The exogenous variables included all the factors that were suspected to contribute in the export value and volume of CPO based on existing economic theories. The population was used as a proxy for the demand of CPO by the importing countries. The demand condition of Indonesian CPO has been on the rise internationally and at the same time depending on the new farming technologies that are used by Indonesian palm oil producers. The Indonesian government has facilitated the increase in the production of palm oil hence its export in the world market. The India and China markets therefore benefit from the improvement in the production of palm oil through the utilization of improved technologies by the palm oil producers. The diversification of crude palm oil production has led to an increase in the value of CPO production and other products that are processed from the crude palm oil. From the regression analysis, results showed that Indonesian CPO competitiveness depends on the CPO’s industrial and governmental influence. As shown in Table 23, the competitiveness of Indonesian CPO is negatively related to export tax and domestic consumption. The variables that were found to contribute to the competitiveness of Indonesian CPO included demand by the importing countries, productivity of oil palm operations in Indonesia, world price of CPO, domestic consumption of CPO and the exchange rate. All the variables were found to be significant at the 20 percent significant level. Table 23. Regression Results for Export Competitiveness Factors Variable Parameter Estimate t-value p-value level of significance INTERCEP -32.679783 -2.728 0.0155 Export Tax -0.023701 -0.893 0.0861 Population of importing countries Demand 0.160491 2.840 0.0124 Productivity 0.722756 1.795 0.0928 World CPO price 0.000818 1.420 0.1760 Domestic CPO consumption -0.000655 -1.455 0.1662 Exchange rate 0.000135 -2.486 0.0261 R 2 = 0.4943; DW = 1.216; ProbF = 0.0564; F-value = 2.789 The demand by the importing countries and export tax were found to be significant variables at five percent confidence level. An increase in export tax by 1 percent would result in reduction in the competitiveness of Indonesia CPO by 0.024 while an increase in domestic consumption in Indonesia will reduce the competitiveness by 0.0007. The study further revealed that competitiveness of the in CPO in the market was positively influenced by the population of the importing country. With an increase in population by one million in the importing country results in an increase in Indonesian CPO competitiveness by 0.16 showing that it is a major determinant of the competitiveness of Indonesian CPO. The other factor that was found to affect the competitiveness of Indonesian CPO in the world market was the palm oil productivity. With an increase in one unit of palm oil productivity level will result in competitiveness index by 0.723 in any period, showing that it is a major determinant of the performance and competitiveness of the product in the world market The fluctuating price of CPO in the world market does not only depend on the production and consumption of CPO in the world market but also on the production and consumption of its substitutes. The price of the CPO also fluctuates in case there is an oil palm failure or failure of the other substitutes of CPO that include soybean, sunflower, corn and coconut. The CPO substitutes normally originate from oil seeds that grown while the other substitutes are from animal fats that includes lard, grease and tallow. From the results reported in Table 23 above, an increase in world price by US 1ton will automatically influence the export of CPO from Indonesia and thereafter increase its competitiveness by 0.0008. The other factor that leads to increase in export of Indonesian CPO into India and China market is their steady rise in population. In the year 2006, China had a population of 1305 million people that increased from 1298 million in the year 2005. At the same time, India also has registered a steady rise in population growth. In 2004, India’s population was 1134 million people while in 2006, its population increased to 1169 million people. In these countries, there is high population, economic development and reduced import tariff on CPO from Indonesia. In 2006, China eliminated import tariff on CPO hence is one of the main market targets of Indonesian CPO. The increase in population in these two countries has continued to lead to an increase in demand for Indonesian CPO hence making Indonesia to increase its production and exports of CPO into the international markets. From the analysis, an increase in population by one million people automatically increases the export of CPO to that country and then leads to an increase of 0.16 value in competitiveness index. The Indonesian government was found to be in a position to affect the export competitiveness of Indonesian CPO in the world market. The government policy on trade such as export tax policy and interest rate were found to be very important as far as the performance of CPO in the world market is concerned. The exchange rate was found to be significant at five percent confidence level. With a depreciation in exchange rate by Rp. 100USD would lead to an increase in competitiveness index by 0.0135. This is due to the fact that with an increase in exchange rate, the Indonesian CPO will be cheaper for the importers to purchase hence will increase their imports than when the rupiah is appreciated. However, the government has to control the exchange rate so as not to depreciates too much as it would weaken the Indonesian economy rather than increasing the export of CPO to the world market.

VII. EFFECT OF EXPORT TAX ON INDONESIAN CRUDE

PALM OIL INDUSTRY The results of estimates were found to be generally in accordance with theorieshypotheses. This can be seen from the signs and magnitudes of estimates, which are generally in line with expectation. Moreover, the model estimates are also fairly robust, as indicated by the equations all of which have coefficient of determination R 2 larger than 89 percent. Moreover, with a criterion of root mean square percentage error to validate the model, it can be concluded that the model is adequate for simulation modeling. The values were estimated at 20 percent significance level.

7.1. Indonesian Crude Palm Oil Supply Model

7.1.1. Indonesian Palm Oil Mature Area Model

From the results in Table 24 shows that there are two explanatory variables that influenced investment on mature area INPOA. They are price ratio of CPO and rubber RPORBP and the time trend TREND. These variables can explain around 98.33 percent of mature area variation. The CPO-rubber ratio variable had positive effects on the mature area under oil palm plantation while the trend showed a negative effect. This shows that with an increase in price of palm oil, more land will be allocated for its production as compared to rubber and vice versa. From the estimated values, it is observed that with an increase of one unit in the ratio of palm oil price to that of rubber price, the oil palm area will be increased by about 38 693 ha in the given period. It is therefore expected to greatly influence the investment on palm oil with respect to other substitute products such as rubber. The production of CPO was found to be the most significant variable at 5 percent significance level affecting the mature area under palm oil and was found to be positively related. Table 24. Regression Results of Oil Palm Mature Area Variable Parameter Estimate t-value p-value Elasticity INTERCEP 18.110588 0.364 0.7205 RPORBP 38.692872 1.742 0.1007 0.0502 TREND -4.235343 -2.027 0.0597 R 2 = 0.9833; F-value = 375.036; ProbF = 0.0001; DW =1.481 Note: indicates significance at 5 percent level, indicates significance at the 10 percent level, and indicates significance at the 20 percent level. The estimates also revealed that the relationship between the ratio of CPO price to rubber price and the mature area under palm oil is inelastic with a value of 0.0502. The values estimated from the mature area variables resulted in F-value as 375.036 while R 2 was found to be 0.9833 which suggests that the variables in the system are contributing to about 98.33 percent of all variables that affect the area under oil palm in Indonesia. The price ratio of CPO to rubber indicates that there has been a competition for land use between oil palm and rubber in Indonesia. The competition has occurred mainly in palm oil producing areas, which are traditionally known to be suitable for both rubber and oil palm plantation. The positive sign of the price ratio coefficient indicates that the increase of CPO price or a decrease in rubber price will increase the area under palm oil plantation.

7.1.2. Indonesian Palm Oil Yield Model

The productivity of palm oil INPOY in Indonesia was found to be determined by the oil palm mature area INPOA and the previous productivity level LINPOY. In Indonesia, the area was found to be negatively related to the productivity level of palm oil. The area was found to be most significant variable at 5 percent as observed in Table 25. Table 25. Regression Results for Palm Oil Productivity Variable Parameter Estimate t-value p-value Elasticity INTERCEP 0.066909 0.191 0.8509 INPOA -0.000347 -1.813 0.0875 0.051 LINPOY 1.069291 8.278 0.0001 R 2 = 0.8814; F-value = 71.596; ProbF = 0.0001; DW = 1.955 Note: indicates significance at 5 percent level and indicates significance at 10 percent level. From the study, as the area under palm oil increases in Indonesia by 1000 ha, the productivity level will be expected to reduce by 0.000347. At the same time, the productivity in the previous year was found to be positively related to the productivity level of palm oil. It was observed that with an increase in productivity level in the previous year by one unit would lead to an increase in the productivity in the present year by 1.069 units hence showing it is a major determinant of that parameter.

7.1.3. Indonesian Crude Palm Oil Consumption Model

From the study, it was found that consumption of CPO INPOC has been positively related to income per capita INY as most domestic use of palm oil is for cooking as reported in Table 26. The domestic price of palm oil INPOP was found to be negatively related to the consumption of palm oil in Indonesia. It was discovered that the consumption of CPO is directly affected by the population INN. This was found to be the most significant variable since an increase in population results to increased consumption. However, the price of palm oil as cooking oil does not affect the consumption of CPO significantly since it is considered as a basic need. Therefore it is upon the government to control the price of the palm oil so as to protect the consumers from being exploited by the processors. Table 26. Regression Results for Crude Palm Oil Consumption Variable Parameter Estimate t-value p-value Elasticity INTERCEP -2194.484969 -5.576 0.0001 INPOP -0.010550 -1.014 0.3256 0.051 INY 12.386117 0.835 0.4159 0.046 INN 13.564682 6.966 0.0001 3.68 R 2 = 0.9431; F-value = 105.956; ProbF = 0.0001; DW = 2.062 Note: indicates significance at 5 percent level. The relationship between the CPO consumption in Indonesia and domestic price of CPO was found to be highly inelastic with price elasticity of 0.05. This shows that the change in price is not proportional to the change in CPO consumption in Indonesia, with price changing greater than the consumption rate. The F-value was found to be 105.909, while R 2 was 0.9431. This shows that the variables in the system accounted for 94.31 percent of the total variables that directly affect consumption of CPO in Indonesia leaving the residual errors to account for only about 5 percent. It has been observed that an increase in domestic price of palm oil in Indonesia by one rupiah will lead to a reduction in the consumption of CPO in Indonesia by 10.55 tons in that period. The price was found to be negatively related to the consumption of CPO in Indonesia hence an increase leads to reduction in consumption and vice versa. On the other hand, an increase in per capita income by US 1 will lead to an increase in consumption of CPO by 12 330 tons in quarter of a year and this therefore will lead to an increase of about 50 000 tons of CPO consumption per year. The same trend was reported for changes in population. An increase in population by one million people will result into an increase in CPO consumption by 13 560 tons on quarterly basis hence resulting to about 55 000 tons increase per year. From the analysis, it was found that the population was the most significant variable at 5 percent that affects domestic consumption of CPO in Indonesia. The other exogenous variables were found not to be significant at 20 percent confidence level with respect to CPO consumption in Indonesia. With respect to elasticity, domestic price of palm oil and per capita income reported inelastic relationships with the consumption of CPO in Indonesia. It was only population variable that had elastic relationship with CPO consumption with elasticity of 3.68.

7.1.4. Indonesian Crude Palm Oil Export Model

The most significant variable that affects export of Indonesian CPO was found to be production as in Table 27. The CPO export INPOX is positively influenced by production INPOQ, world CPO price WDPOP, and exchange rate INE. The export is further negatively affected by export tax INTAX and domestic consumption of crude palm oil INPOC. Since export tax is negatively related to export price, increases in export tax decreases volume of export. Table 27. Regression Results for Crude Palm Oil Export Variable Parameter Estimate t-value p-value Elasticity INTERCEP -1213.5063 -1.014 0.3297 INPOQ 0.8221 4.960 0.0002 1.118 INTAX -70.7645 -1.564 0.1402 0.073 WDPOP 2.3474 2.223 0.0432 0.492 INE 0.0401 0.301 0.7677 0.203 INPOC -0.4258 -0.238 0.8153 0.192 R 2 = 0.9046; F-value = 37.038; ProbF = 0.0001; DW = 2.590 Note: indicates significance at 5 percent level and indicates significance at 20 percent level. At 5 percent confidence level, the significance exogenous variables were CPO production and world price of CPO. At the same time, only export tax on CPO was found to be significant at 20 percent confidence level while the rest were not significant at 20 percent confidence level. All the variables did not have elastic relationships with the export of CPO from Indonesia except CPO production in the short run. Considering the effects of CPO production on export of CPO, it was found that when CPO production increases by 1000 tons, then the CPO export from Indonesia to international market will increase by 822.1 tons. This therefore indicates that in a year, CPO export shall have increased by about 3300 tons hence increasing export volume. This variable has been identified as the most significant to CPO export in Indonesia. The other significant variable that influences the export of Indonesian CPO was world CPO price. With respect to world price of crude palm oil, an increase in price by one dollar would result in increase in export volume by 2 500 tons of CPO in a period of a quarter of a year. The exchange rate was found to be positively related to the export of CPO to the world market. An increase in exchange rate by one rupiah per dollar would result in an increase in CPO export from Indonesia by 40.1tons in the period of three months, translating to about 160 tons increase by one year period. This would take place because as the exchange rate increases the Indonesian currency depreciates hence making it cheaper for the foreign traders to purchase Indonesian CPO. The export volume was found to be negatively affected by export tax and domestic consumption of crude palm oil. An increase in export tax by one percent would suppress export of CPO and lead to a reduction by 73 000 tons. The other variable of CPO domestic consumption has negative effect on export variable. An increase in domestic CPO consumption by 1000 tons will lead to a reduction in CPO export by 425.80 tons for the quarter year period as indicated in Table 28. The variables including production, exchange rate, world price of CPO, domestic CPO consumption and export tax were found to be contributing to 90.46 percent R 2 of the variables that affect export volume of CPO in Indonesia. The analysis revealed an F-value of 37.038. With respect to elasticity relationships between the variables, production variable and export of CPO variable had elastic relationship. The world CPO price and consumption had inelastic relationship with export variable. The export tax does not affect CPO export significantly as would be expected because the traders or exporters normally shift the tax bundle to the producers while they receive their required targeted price. The producers therefore bear the effects of export tax more than the traders thereby making them worse off in case the export tax is increased. At the same time, all the variables that affect the CPO export parameter had inelastic relationship with export variable except the production function that had elasticity of 1.118, showing that it is elastic.

7.1.5. Indonesian Crude Palm Oil Production Model

Production of palm oil INPOQ depends on the mature area INPOA and the productivity of palm oil INPOY. The two variables can explain around 99.89 percent R 2 of production variation as reported in Table 28. The mature area under oil palm and the palm oil yield are both significant determinants of CPO production in Indonesia. Table 28. Regression Results of Crude Palm Oil Production Variable Parameter Estimate t-value p-value Elasticity INTERCEP -3049.836512 -29.047 0.0001 INPOY 814.404006 23.235 0.0001 0.9497 INPOA 3.760443 76.801 0.0001 1.0183 R 2 = 0.9989; F-value = 8257.454; ProbF = 0.0001; DW = 1.329 Note: indicates significance at 5 percent level. It was realized that in the short run, the mature area had elastic relationship with the production variable in Indonesia. This was not the case with palm oil yield that reported inelastic relationship with the CPO production in Indonesia. With respect to oil palm mature area, an increase of 1000 ha results into an increase in production by 3 760 tons. In other words, an increase of 1000 ha in a given year would lead to an increase of 13 784 tons of CPO produced by the producers. At the same time, an increase in productivity level of palm oil would adversely affect the CPO production in Indonesia. It was reported from the estimated values that an increase by 1 tonha in productivity would lead to an increase in CPO production by 814 000 tons in Indonesia. It therefore shows that production level of CPO is purely controlled by the productivity of palm oil than other factors.

7.1.6. Indonesian Crude Palm Oil Domestic Price Model

The Indonesian domestic price of CPO INPOP was found to be controlled by previous price of CPO LINPOP, world price of CPO WDPOP and CPO stock. The above variables explain 92.16 percent price variation of Indonesian CPO and the results are in Table 29. All the above exogenous variables were found to be significant at 5 percent confidence level with respect to domestic price of CPO. The previous price of CPO, world price and CPO stock had positive impacts on the domestic price. Table 29. Regression Results of Domestic Price of Crude Palm Oil Variable Parameter Estimate t-value p-value Elasticity INTERCEP -589.397334 -1.785 0.0932 WDPOP 6.247423 9.257 0.0001 0.7014 INPOS 0.695783 3.632 0.0022 0.1569 LINPOP 0.290868 3.253 0.0050 R 2 = 0.9216; F-value = 75.429; ProbF = 0.0001; DW = 1.927 Note: indicates significance at 5 percent level. A further interpretation of domestic price of CPO revealed that world price and the previous CPO domestic price were the most significant variables that affect domestic CPO price in Indonesia. An increase in world CPO price by US 1ton will result in an increase in CPO domestic price by Rp 6.25kg. In the same context, if the stock of CPO was increased by 1000 tons, then the price of CPO increased by Rp. 0.696kg. In this scenario, it shows the price of CPO does not depend so much on the stock of CPO in Indonesia. It is against the hypothesis that an increase in stock should lead to reduction in CPO domestic price. It therefore shows that the stock may be kept by traders hence not enabling free access by the CPO consumers locally hence making the price to rise continuously.

7.1.7. Stock of Crude Palm Oil Model

As far as Indonesian CPO stock is concerned, the most important variables that were outstanding in determining its level were CPO production, consumption, import, previous stock and export. All the above variables were found to have significant effect on CPO stock in Indonesia. They were all significant at 5 percent confidence level except the import variable that was not significant even at 20 percent confidence level. This is because there is no much import of CPO currently witnessed in Indonesia from the recent past. Table 30. Regression Results for Crude Palm Oil Stock Variable Parameter Estimate t-value p-value Elasticity INTERCEP 79.383574 0.639 0.5329 INPOQ 0.890147 21.395 0.0001 3.072841 INPOC -0.807115 -3.966 0.0014 0.731651 LINPOS 0.703265 9.695 0.0001 1.23549 INPOM 5.448971 1.243 0.2342 0.024206 INPOX -0.846218 -17.067 0.0001 2.143405 R 2 = 0.9810; F-value = 197.361; ProbF = 0.0001; DW = 1.685 Note: indicates significance at 5 percent level. From all the variables that determine CPO stock, export and consumption variables were found to be negatively related to the CPO stock while the others were positively related to it as can be observed in Table 30. It was found that CPO stock had elastic relationships with CPO production, previous CPO stock and export while the rest had inelastic relationships with it. These relationships were reported in the short run basis. The above exogenous variables explained about 98.1 percent variables that determine CPO stock in Indonesia, meaning it had only about 2 percent of residual error included in its estimates.

7.2. Model Validation