Palm oil remains key export for Malaysia

loading Ben Wisemen

Malaysia has substantial agricultural exports, the chief among which is palm oil. This product brings greater economic benefits to the country than either rubber or timber, and will do so for some time to come.

PALM OIL is widely used in the food and cosmetics markets and has more recently been in great demand in the making of bio-fuel. There are many advantages associated with the oil. Cost-wise, of all the edible oils and fats available worldwide, palm oil is said to be the most cost-effective one, producing more oil per hectare planted than other crops. Its cultivation also requires less input of pesticides, fertilisers and fuel per unit of oil produced.

The food industry is amongst palm oil’s largest market while China and India constitute the largest palm oil export market.

The palm oil industry has been in existence in Malaysia for more than a hundred years. The palm originated in West Africa, and it was the British who first brought it to Malaya in the 1870s. The first commercial oil palm estate was set up at Tennamaran Estate, Selangor, in 1917. The crop grew quickly in importance and Malaysian exports of the oil currently exceed 40% of the global total.

Palm oil has been gaining in significance and is grown commercially in 15 countries. The palm occupied 4.2 million hectares in 2006, compared to 1959 when palm oil covered only about 51,053 hectares of land (Department of Statistics 2010). South-East Asia is the centre of production with Malaysia and Indonesia together producing more than 80% of the world’s palm oil.

Malaysia’s palm oil is exported to more than 120 countries with China, the European Union, the US, Pakistan, India and Japan being the main importers in 2008. Palm oil products form the most important part of Malaysia’s agricultural exports, reaching almost RM60bil, ahead of rubber and timber.

What comparative advantages does Malaysia have in this industry that makes it such an important supplier?

The Law of Comparative Advantage was formulated by David Ricardo already in 1817 in his book, Principles of Political Economy and Taxation. This law refers to the ability of a party to produce goods or services at a lower opportunity cost (meaning higher efficiency) than other parties. Revealed comparative advantage (RCA) was used by Bela Balassa (1965) to measure relative export performance by country and industry, and was defined as a country’s share of the global total export of a product. RCA measures a country’s trade specialisation in a commodity group and is defined as the country’s sectoral share on the world market. The index value ranges between zero and infinity with values greater than unity indicating specialisation in that commodity group, while a value between zero and unity indicates no specialisation in that commodity group.

South-East Asia is the centre of production with Malaysia and Indonesia together producing more than 80% of the world’s palm oil.

A comparative advantage is “revealed” if RCA is greater than 1. If RCA is less than unity, the country is said to have a comparative disadvantage in the commodity/ industry. Besides cost and effi cient reasons, the RCA index is computed to evaluate Malaysia’s comparative advantage in producing and exporting palm oil (Table 1).

Based on the computed RCA index in Table 1, Malaysia is seen as having a comparative advantage in the palm oil industry since the 1960s. The RCA index had always exceeded 1, indicating specialisation and Malaysia’s comparative advantage in producing palm oil during the period under observation (1964–2009).

The country’s palm oil export as a percentage of the world’s export of the product was about 34% in 1964. It held an approximately 73% share of world exports in 1990 and was responsible for about 41% of global palm oil exports in 2009 (see Table 1 and fi gure 1). The drop in Malaysia’s export as a percentage of world’s export share after 1990 can be attributed to rapid growth in palm oil exports in Indonesia and other countries, especially during the second half of the 1990s. Malaysia’s export patt ern has always been the same with the world export trend shown at Figure 1. The gap between Malaysia’s and the world’s palm oil export started to widen in the present decade due to expansion in the export of palm oil in competing countries.

The contribution of palm oil to Malaysia’s external sector recorded a rise recently over the previous decade. It is, however, lower than in the 1970s and 1980s. This may be attributed to the rise in the relative importance of the manufacturing sector to the economy. Recent data show that palm oil exports contributed about six per cent of the nation’s total exports in 2009.

While economic advantages may be maximised for the benefit of the country, best practices for sustainability need to be applied within the industry. However, it goes without saying that these gains need to be considered alongside adverse environmental effects such as carbon emissions.

Balassa, B. (1965), “Trade Liberalisation and ‘Revealed’ Comparative Advantage”, The Manchester School, 33, 99–123.

Rafiq Idris is a fellow at the Department of Economics, University of Malaya.

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