Government interventions and competitiveness: The case of the Indonesian palm oil industry

The Indonesian palm oil industry occupies an important position in Indonesian agriculture and development, providing a valuable source of foreign exchange earnings and generating employment opportunities and incomes for millions of smallholder families. Yet, the government heavily intervenes in this industry through a variety of policy measures. These include export taxes and quantitative and price restrictions.;This study analyzes the effects of government interventions on the competitiveness of the industry as measured by net export shares and value added of the industry. The specific objectives are (1) to analyze factors that determine the competitive of the Indonesian palm oil industry in international markets and (2) to analyze the dynamic behavior of the effect of an export tax on competitiveness of the Indonesian palm oil industry.;A conceptual framework based on economic and strategy business approaches has been developed to identify factors that determine competitiveness of the Indonesian palm oil industry. Further, the economic model has also been developed to examine the effect of the export tax on competitiveness of the industry. An econometric model based on ordinary least squares estimation is specified to estimate these relationships using annual data from 1978 to 1997. Time series analysis is carried out to analyze the dynamic behavior of export tax on competitiveness of the industry by a specifying vector autoregressive (VAR) model and analyzing the impulse response function as well as the variance decomposition. The impulse response function reveals how much export performance, as measured by, net export shares responds to the “shocks” in export tax and world prices relative to domestic prices variables. The variance decomposition gives some indication of the extent to which the variation of the forecast error in net export shares determined by the shocks in export tax and world prices relative to domestic prices variables, in addition to its own shock.;Results of ordinary least squares estimation shows competitiveness of the Indonesian palm oil industry can be explained by labor productivity, real exchange rates, and four-firm concentration ratio. It is also shown that government interventions—in the form of an export tax and domestic allocation price—has a significant and negative effect on competitiveness of the industry as shown in the net export shares and value added equations. Time series analysis gives more convincing evidence that the export tax has a significant and negative effect on the competitiveness of the industry. In addition, it is also shown that the effect is permanent rather than stationary.