The Indonesian vegetable oils sector : modeling the impact of policy changes

In two decades, Indonesia has become the world's second largest producer of palm oil and coconut oil. But Indonesia remains a price-taking producer of perennial (tree) crops in a market dominated by annual crops, particularly soybeans. Indonesia has expanded production despite a Byzantine collection of price and quantity restrictions that affect both consumers and producers. But the Government appears ready to liberalize trade and increase private participation in the sector. The author simulated the effects of trade liberalization on the sector and the effects of an export tax on tax and export revenues. His policy simulations show that: (a) removing cumbersome government regulations would stimulate production but would not guarantee consumer benefits; (b) whatever scenario is pursued, past investments in tree crops guarantee rapid expansion of production, but increased production does not give producers marketing power; (c) the rapid expansion of vegetable oil production may precipitate a domestic crisis in the palm oil milling industry; and (d) should the export tax on vegetable oils increase, export revenues will drop and some of the gains from tax revenues will be offset by reduced revenues from state-owned estates.