Impacts of CPO-Export Tax on Several Aspects of Indonesian CPO Industry

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Transcript of Impacts of CPO-Export Tax on Several Aspects of Indonesian CPO Industry

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    IMPACTS OF CPO-EXPORT TAX ON SEVERAL ASPECTS OF INDONESIAN CPO INDUSTRY

    Wayan R Susila*****

    * Indonesian Institute for Estate Crops,Bogor, Indonesia.

    Impacts of CPO-Export Taxon Several Aspects of

    Indonesian CPO Industry

    INTRODUCTION

    Like rice, crude palm oil (CPO) isconsidered a strategic commodityin the Indonesian economy. Firstly,as a raw material for the maincooking oil consumed inIndonesia, its price plays animportant role in determining theinflation rate of the Indonesianeconomy (Badan Pusat Statistik,2001; Arifin and Susila, 1998;Amang, 1995). Secondly, palm oilindustries provide employment formore than two million people(Direktorat Jenderal Bina Produksi

    Perkebunan, 2003). Thirdly, it is asource of foreign exchange earningas its export has exceeded morethan USD 1 billion since 1997.While the area of land cultivatedwith oil palm in 1988 was 862 900ha, it sharply increased to around4 million hectares in 2002,implying an 11% per annumgrowth rate. As a result, theproduction of CPO increased byaround 10% per annum, from342 700 t in 1988 to 7.97 milliontonnes in 2002 (Direktorat JenderalBina Produksi Perkebunan, 2003).Similarly, the use of CPO as a raw

    ABSTRACTABSTRACTABSTRACTABSTRACTABSTRACT

    To control domestic supply and price of crude palm oil (CPO) andcooking oil, the government of Indonesia has imposed CPO-export taxsince August 1994. As the CPO industry plays an important role inIndonesian economy, the imposition of the tax is expected to havesubstantial impacts on various aspects of the industry, such as oninvestment, production, trade, farm income and welfare distribution.The main objective of this study is to assess these impacts using aneconometric model of the industry. The results of the study reveal thatthe export tax policy has inhibited the growth rate of investment,production, export and farm income. On the other hand, this policyhas been an effective instrument to control domestic CPO and cookingoil price. Moreover, this policy has caused a substantial welfare transferfrom producers to consumers and the government. To compromise theseconflicting impacts, an alternative CPO tax formula is also proposedin this paper.

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    OIL PALM INDUSTRY ECONOMIC JOURNAL (VOL. 4(2)/2004)

    material for cooking oil sharplyincreased by around 10% perannum.

    The CPO industry is expectedto play a greater role in theinternational market for oils andfats. Basiron (2002), Sultoni andSusila (1998) and Pasquali (1993)projected that the growth rate ofCPO production would be thefastest among edible oils. CPO hasbeen predicted to over takesoyabean oil as the biggest oiltraded in the world oil and fatmarket. The market developmentof CPO will even be faster becauseof the success of the UruguayRound (Susila et al., 2002; Barton,1993).

    Considering its importance,Indonesia has launched policies tooptimize the development of theindustry, such as supplystabilization. The most importantpolicies have been on export tax,first implemented in August 1994to stabilize and secure the domesticsupply and price. The export taxrate when first introduced waslinearly related to the CPO price,ranging from 40%-60% of thedifference between the CPO priceand minimum export price to betaxed. From 4 July 1997 toFebruary 1998, the rate waschanged to 5% of the CPO price.Due to a sharp increase in the CPOprice and substantial depreciationof the rupiah, the governmentbanned export in the beginning of1998. Then, this policy wasreplaced by an export tax of 60%which has since been graduallyreduced to 30% in July 1999 andapproximately 4% in 2002.

    This policy is expected to havea substantial impact on variousaspects of the industry, such asinvestment (area), production,consumption, trade, domesticprice, added value, farm incomeand welfare distribution. On theother hand, the magnitude anddistribution of the impacts willcolour the future of the industry.

    Therefore, an estimation of themagnitude and distribution ofthese impacts is important in aneffort to formulate an appropriateexport tax rate relatively fair toproducers, consumers and thegovernment.

    This paper has two mainobjectives, namely: (1) to assess theimpacts of CPO-export tax onIndonesian CPO industry, coveringimpact on domestic price,investment (area), production,consumption, export, employment,added value, cooking oil price,government revenue, producersurplus and consumer surplus; and(2) to propose an alternative CPO-export tax formula which isrelatively fair, either from produceror consumer point of view.

    RESEARCH METHOD

    Theoretical Model and ModelSpecification

    Simulation approaches on theeconometric model of the industrywere used to assess the impacts ofCPO-export tax on various aspectsof the industry. The econometricmodel developed in this paper isbasically a modification of a modelpreviously developed by Susila etal. (1995). The main modelmodifications are a re-specificationof the model, level of aggregationand the use of a simultaneousequation system approach for allequations (the previous modelused single equation for eachcountry and simultaneous equationsystem for the world market).

    The use of a simultaneousequation system approach isexpected to yield better estimatesbecause this approach is consideredmore appropriate in dealing with asystem of commodity market inwhich some variables aresimultaneously related or inter-dependent (Koutsoyiannis, 1977;Pindyck and Rubinfield, 1987).Due to this advantage, various

    studies used this approach forcommodity market modelling andpolicy analysis. Dradjat (2003)used this approach to assess theimpacts of trade liberalization onIndonesian rubber, cocoa, coffee,and tea industry. Abidin (2000)and Ernawati (1997) used thisapproach to estimate the impact oftrade liberalization on Indonesiansugar industry. Finally, Zulkifli(2000) used this simultaneousequation system to assess theimpact of CPO trade liberalizationon Indonesian CPO industry.

    Theoretical model of CPOmarket was specified to consist of10 blocks/subsystems, that are,four blocks of main producing/exporting countries (Malaysia,Indonesia, Nigeria, and LatinAmerica), four blocks of mainconsuming/importing countries(West Europe, China, Pakistan,and Egypt), one block of the restof the world, and one block of theworld CPO market. Theproduction share of the fourproducing countries has beenaround 86% of world production,while the consumption share of thefour consuming countries has beenaround 72%. This implies that thelevel of aggregation is consideredto be relatively justified.

    A simplified theoretical modelby assuming the model consistingof one block exporting country(Indonesia), one block importingcountry (West Europe), and theworld market block, is illustratedin Figure 1. Figure 1 shows thehypothetical relationships betweenvariables in the model.

    As seen in Figure 1, Indonesiablock consists of seven equationsas follows:

    INPOAt = a0+a1RPORBP+a2INE45+a3INI45+a4D0+a5INPOAt-1+U1...........(1)

    INPOQt = b0+b1INPOPt+b2INPOAt+b3T+U2......................................................(2)

    INPOCt = c0+c1INPOPt+c2 INYt+c3D2+c4 D3+U3....................................(3)

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    IMPACTS OF CPO-EXPORT TAX ON SEVERAL ASPECTS OF INDONESIAN CPO INDUSTRY

    INPOXt = d0+d1(1-INTAXt)WDPOPt*INEt+d2INPOQt+d3INPOXt-1+U4....(4)

    INPOSt =e0+e1(WDPOPt-WDPOPt-1)+e2INPOQt+e3INPOCt+e4INPOSt-1+U5....................................................(5)

    INPOMt = INPOCt+INPOXt+INPOSt-INPOQt-INPOSt-1............................(6)

    INPOPt = f0+f1(1-INTAXt) WDPOPt*INEt+f2INPOQt+f3INPORPt-1+U7........(7)

    INPOA = oil palm mature area ofIndonesia (1000 ha)

    INPOQ = palm oil palm productionof Indonesia (1000 t)

    INPOC = palm oil consumption ofIndonesia (1000 t)

    INPOX = palm oil export of Indonesia(1000 t)

    INPOM = palm oil import of Indonesia(1000 t)

    INPOS = palm oil stock of Indonesia(1000 t)

    INPOP = domestic price of palmoil (Rp/kg)

    RPORBP = [(1-INTAXt-4)WDPOPt-4+(1-INTAXt-5) WDPOPt-5]/(INRBPt-4+ INRBPt-5)

    = price ratio of palm oil and rubberwith time lag four and five years

    WDPOP = world palm oil price(USD/t)

    INTAX = CPO export tax (%)

    ING = Indonesia gross domesticproduct (USD million)

    INI = Indonesian interest rate (%per annum)

    INN = Indonesian population(million)

    INE = Indonesian exchange rate(rupiah/USD)

    INY = Indonesian income percapita (USD/capita)

    WDRBP = world rubber price(USD/t)

    INRBP = domestic rubber price(Rp/kg)

    T = vintage of crops which have

    optimal production or trend ofgovernment support

    D0 = dummy variableD = 0 before1979D = 1 after 1979 to 2010

    D0 represents the governmentpolicy to promote oil palmdevelopment (Perusahaan IntiRakyat project and credit subsidy)

    D2 = dummy variableD2= 0 before 1980D2 = 1 after 1980 to 2010

    D2 represents the governmentpolicy to control domestic supplythrough production allocationpolicy (domestic allocation policy)

    D3 = dummy variableD3 = 0 before 1991D3 = 1 after 1991 to 2010

    D3 repersents domestic tradeliberalization policy

    Note: subscript 45 means sum ofvariable at time lag 4 and 5example: INPOP45 = INPOPt-4 +INPOPt-5

    Figure 1. General theoretical model of crude palm oil (CPO).

    GNP Popula- tion

    Consumption

    Import

    Stock

    Export

    Tax

    Domestic

    Price

    Production

    Mature Area

    Government

    Policy

    Interest

    Rate

    Other Crop

    Prices

    Exchange

    Rate

    T

    Export

    World Import

    World

    Price

    World

    Stock

    World

    Export

    World

    Production

    World

    Consumption

    GNPPopula-

    tion

    Consumption

    Substitute