Palm oil industry 1970-2010: Do we see a flying geese pattern emerging?

"Palm oil has been one of the fastest growing agricultural sectors the past half a century. Today palm oil is the most traded and produced vegetable oil in the world, and is used in a large number of products.1 Its legacy would at first glance seem mixed. On the one hand, it has been criticized for leading to the destruction of rainforests in Indonesia and Malaysia. On the other hand, palm oil has lifted many out of poverty in these two countries.2 Despite this mixed legacy, the palm oil sector is likely to expand in the future. The nature of its future expansion is crucially dependent on the direction of technological progress and innovation. For instance, a new technology, which allows for more palm oil extraction per tree, could lead to less land being required to meet demand thereby limiting the impact on the environment. In addition, such improvements could lead to a more profitable industry, which could lead to increased welfare for countries producing palm oil. The level of technology largely determines a country’s comparative advantage, as seemingly is also the case in the palm oil industry. Malaysia has since the 1960s moved from mainly exporting crude palm oil to exporting the higher value added processed palm oil in the 1970s and eventually created more forward linkages to food processing, chemicals and biodiesel since the 1980s. This gradual increase in value-added has made Malaysia the technological leader within the industry. Indonesia, however, has recently overtaken Malaysia in both production and exports of palm oil. The high growth of the Indonesian palm oil sector has been driven primarily by increased exports of crude palm oil. The paper uses a flying-geese framework to analyse the nature of dynamic comparative advantage in the palm oil sector. The literature on the palm oil sector has thus far focused mainly on revealed comparative advantage and the linkages of palm oil in the two countries by themselves. This paper instead focuses on the interdependency of Indonesia and Malaysia and analyses the comparative advantage in both countries over time. This paper first introduces the international palm oil market and its ascendency. The second and third parts give a brief overview of the history of the palm oil sector in the two largest producers, Indonesia and Malaysia. In the fourth part the flying-geese framework is explained and attempted to fit the palm oil sector. In the fifth part the comparative advantage of Indonesia and Malaysia are compared to analyse whether these fit with the prediction of the flying geese theory."