J. ISSAAS Vol. 15, No. 2:107 -119 (2009)
THE IMPACTS OF EXPORT TAX POLICY ON THE INDONESIAN
CRUDE PALM OIL INDUSTRY
Joseph Obado1, Yusman Syaukat2?and Hermanto Siregar3
1 Postgraduate Student, Bogor Agricultural University (IPB), Email: firstname.lastname@example.org
2 Associate Professor, Department of Resource and Environmental Economics, IPB, Kampus IPB
Darmaga, Bogor, Indonesia 16680. E-mail: email@example.com
3 Professor of Economics, Department of Economics, IPB. E-mail: firstname.lastname@example.org
(Received: August 11, 2009; Accepted: November 16, 2009)
was assessed the 2SLS method which is an econometric model. The export tax was found to be
negatively related to mature area of oil palm plantation, production, export, and domestic price of
CPO and positively related to CPO consumption and stock. The export tax policy benefitted the
domestic consumers of CPO. Clearly, the export tax policy reduces competitiveness of the
Indonesian palm oil industry since it hurts producers of CPO. It is recommended that the export tax
formulation with well considered and sound justifications is needed and from the study, 11.13 percent
export tax on Indonesian CPO was recommended.
Key words: Competitiveness; effects of tax to local CPO producers, domestic consumers, consumers
in importing countries; cooking oil price
The impacts of the crude palm oil (CPO) export tax policy on the Indonesian CPO industry
Indonesian national economy. These commodities, and specifically crude palm oil (CPO), have
contributed immensely to the gross domestic product (GDP) of Indonesia, led to growth in production
and areal development, created various forms of employment for more than 3.5 million people in this
sub-sector, increased international and national trade and improved the living standards as well as the
financial status of the local people (Siregar and Sinaga, 2006). Indonesia is one of the highest CPO
producers in the world. This can be attributed to the country’s favorable climatic conditions, the large
area of production potential, its investment in research and technology, as well as the availability of
trained manpower that have necessary skills to bring about improvements in CPO production. Such
improvements have uplifted the quality of Indonesian CPO to meet the specifications of the
international market for crude palm oil (Siregar and Sinaga, 2006). The development of CPO needs
to focus on the prospects and other means that would make it meet the basic customer requirements
for the commodity for use in the food industry, industrial applications, and as an alternative source of
The crude palm oil industry in Indonesia has evolved from government sponsorship and
market interventions to a private sector initiative in response to international price signals and
continuous market growth. Induced by the profitability in this sector, oil-palm plantations in
Indonesia have expanded from 600 000 hectares in 1985 to more than 6 million hectares by early
2007, and are expected to reach 10 million hectares by 2010. At the same time, Indonesian palm-oil
Agricultural products have a very important role to perform in the development of the
production has increased from 157 000 metric tons to 16.4 million metric tons in the same period,
while exports have increased from 126 000 metric tons to 12 million metric tons (Butler, 2007).
The world CPO production has grown steadily and relatively faster as compared to other oil
yielding crops. During the period 2001-2005 the world CPO production grew on average 8.78 percent
per year (Soeherman et al., 2006). However, CPO production in Indonesia has been constantly lower
than that in Malaysia. Export growth of Indonesian CPO can be attributed to three factors: world
demand factor, product and market effects and competitiveness effects. The world demand factor
reflects growth in exports that can be attributed to rising international demand, i.e. the stronger global
import demand, the stronger the country’s export growth (Susila, 2004). However, an increase in a
country’s share of world trade can only be explained by factors beyond world demand effects. The
foreign currency contribution of CPO increases year by year (Tambunan, 2006).
The CPO industry is expected to play a greater role in the international market for oils and
fats. Basiron (2002) and Pasquali (1993) projected that the growth rate of CPO production would be
the fastest among edible oils. The market development of CPO will even be faster because of the
success of the Uruguay Round (Susila et al., 2004 and Barton, 1993). By engaging in trade, countries
that specialize in producing goods in which they are relatively efficient will maximize their economic
benefits. Trade therefore plays a very significant role in the economies and the developing countries
like Indonesia are relatively small open-economies and therefore, rely on income earned from export
to create jobs, buy imports, and maintain an overall healthy balance in external accounts (Aoki et al.,
1997 and Balassa, B. 1989).
Due to the importance of the crude palm oil to the Indonesian economy, and the world over,
the Indonesian government decided to impose export tax on its CPO. This was intended to improve
the benefits of the local CPO producers and consumers. The effect of this export tax needs to be
critically studied to find out whether it has positively contributed to the Indonesian CPO sector or it
has led to a deterioration of the sector. Therefore, the study wishes to find out the impact of the CPO
export tax on Indonesian CPO industry and specifically on domestic price, investment, production,
consumption, export, employment, added-value, cooking oil price, government revenue, producer
surplus and consumer surplus.
This study sought to assess the impact of the export tax on the Indonesian CPO industry.
The government of Indonesia considers agriculture as a very important sector in the national
economy. Agriculture provides job opportunities for majority of labor forces in Indonesia. At the
same time, the government makes efforts to maintain the prices of basic needs including cooking oil
to be affordable to low-income people. Therefore the price of cooking oil should remain at an
affordable level. When the price of palm oil in international market went up in 1994, the price of
cooking oil in domestic market experienced similar increase. In order to lower the price of cooking
oil, the government applies export tax on crude palm oil and refined products. By export tax, the local
price of the crude palm oil can be brought down to a considerable level which is affordable
The effect of an export tax by a small country under a competitive market structure causes
the price in the exporting country to fall below the world price (Reed, 2000). From the previous
studies, Mohamad et al. (2001) found out that Indonesian palm oil’s net export shares fell by 44.5
percent in October 1994 after the implementation of the export tax in September 1994. The effect of
J. ISSAAS Vol. 15, No. 2:107 -119 (2009)
the export tax on Indonesian palm oil reached a peak in December 1994, when it reduced net export
shares by 64.4 percent.
The most devastating impact of the policy had been on the export and farm income. The tax
policy when enacted results in the reduction in export and income resulting in substantial loss for
farmers. On the other hand, this policy had been proven to be effective in controlling domestic
cooking oil price. With this policy, the government had been successful to keep the cooking oil price
down when the world CPO price increased or when rupiah was substantially depreciated. Moreover,
from the government point of view, significant tax revenue is also considered to be a positive result of
the policy (Susila, 2004).
Under the export tax policy, producers in the exporting country will lose because they
receive lower prices and exports decline. Consumers in the exporting country gain through lower
prices and the government generates revenue (Simeh, 2004). The effect of an export tax is different in
the case of a large exporting country (i.e., when a country faces a downward sloping residual demand
curve). Having market power on the world market, the export tax causes a reduction in domestic
production; thus, exports decline and the world price increases. In this case, consumers, producers and
the government in the exporting country can gain from this policy. The effect of an export tax by a
small country under a competitive market structure causes the price in the exporting country to fall
below the world price (Reed, 2000).
When Bartholomew (1997) analyzed the effect of an export tax for palm oil on the
distribution of income in Indonesia using a static model, he found that an export tax reduced the price
of palm oil products, ceteris paribus, thus, benefiting consumers. In addition, he found that the tax
lowered profits earned by palm oil producers, and that processors lost slightly as well. The
government gained revenue from the export tax, but lost more revenue in the government’s role as
owners of palm estates. Thus, the net result was that the government lost with an export tax on palm
oil. This research extends their work by using a dynamic, time series model that assesses the short
and long term consequences of the Indonesian palm oil export tax on competitiveness.
Clearly, the export tax policy reduces not only competitiveness of the Indonesian palm oil
industry but also hurts producers of CPO, some of them are small-holder farmers, due to the lower
price of CPO relative to the world market price. On the other hand, refiners that process CPO into
various products such as cooking oil, margarine, shortening gain from this policy since they get CPO
at lower prices (Mohamad et al., 2001). The export tax policy also hinders the development of the
cooking oil industry in Indonesia as a whole and does not encourage diversification in cooking oils.
The imposition of an export tax diverts CPO from the export market to the domestic market, lowering
all cooking oil prices. This causes more competition with the domestic coconut oil industry, which
otherwise would provide the supply more of the raw material for domestic cooking oil (Soeherman, et
Empirical Model of Indonesian Crude Palm Oil Industry
Simulation approaches on the econometric model of the industry was used to assess the
impacts of CPO-export tax on various aspects of the Indonesian CPO industry. The use of a
simultaneous equation system approach was expected to yield better estimates because this approach
is considered more appropriate in dealing with a system of commodity market in which some
variables are simultaneously related or interdependent (Koutsoyiannis, 1977). A simplified theoretical
model illustrated in Figure 1 shows the hypothetical relationships between variables in the model.
Fig. 1. General empirical model of Indonesian crude palm oil.
Indonesia equation-block consisted of seven equations as follows:
INPOQt = INPOYt * INPOAt
INPOSt = INPOQt - INPOCt + INPOSt-1 + INPOMt - INPOXt
INPOAt = a0+a1(INPOP/INRBP)t + a2TREND + U1 …………………………. (1)
Hypothesis: a0, a1>0; a2<0
INPOYt = b0 + b1 INPOAt + b2 INPOYt-1 + U2 ………………………............... (2)
Hypothesis: b0, b2>0; b1<0
INPOCt = c0+c1INPOPt+c2INYt+ c3INN+U3 ………………………………… (3)
Hypothesis: c0, c1<0; c2, c3>0
INPOXt = d0+ d1INPOQt + d2INTAXt + d3WDPOPt + d4INEt +
Hypothesis: d0, d2, d5<0; d1, d3, d4>0
INPOPt = f0 + f1WDPOPt + f2INPOSt+ f3INPOPt-1 + U5 …………………….. (5)
Hypothesis: f0, f2<0; f1, f3>0
J. ISSAAS Vol. 15, No. 2:107 -119 (2009)
Where: INPOA = oil palm mature area of Indonesia (1000 ha)
INPOQ = palm oil production of Indonesia (1000 t)
INPOC = palm oil consumption of Indonesia (1000 t)
INPOX = palm oil export of Indonesia (1000 t)
INPOS = palm oil stock of Indonesia (1000 t)
INPOP = domestic price of palm oil (Rp/kg)
INPOM = palm oil import of Indonesia (1000 t)
INPOY = palm oil yield of Indonesia (Ton/ha)
RPORBP = INPOPt /INRBPt
= Price ratio of palm oil and rubber
WDPOP = world palm oil price (USD/t)
INTAX = CPO export tax (%)
ING = Indonesia gross domestic product (USD million)
INI = Indonesian lending interest rate (% per annum)
INN = Indonesian population (million)
INE = Indonesian exchange rate on average market rate (rupiah/USD)
INY = Indonesian income per capita (USD/capita)
INRBP = domestic rubber price (Rp/kg)
Model Identification, Estimation and Simulation
Model identification to be used in this study was found to be of order condition. With
endogenous variables (equations), pre-determined variables, and explanatory variables in each
equation and using order condition, the model qualified as definitely over-identified. The model was
identified based on its order condition as follows:
K = total variables in the model (endogen and exogen variables)
M= total endogen and exogen variables in the a given equation
G= Total equations that exist in the model excluding identity equations
If (K-M) is greater than (G-1), the problem is over-identified; if (K-M) is equal to (G-1), then
it is exactly identified; while if (K-M) is less than (G-1), then the condition is unidentified. Based on
the above definitions, the equations on the Indonesian block can be identified as follows.
Table 1. Model identification
1 Mature area
3 Crude Palm Oil consumption
4 Crude Palm Oil export
5 Crude Palm Oil Production
6 Domestic price of palm oil
7 Crude Palm Oil Stock
Given that the model was over identified, the 2SLS method of estimation was applied.
Koutsoyiannis (1977) stated that under the circumstance of the existence of model misspecification,
missing of relevant variables, multicolinearity and autocorrelation error, 2SLS tends to yield more
robust estimates. Moreover, 2SLS method is arguably the simplest method among methods suited to
(K-M) ? (G-1)
K-M G-1 Condition
over-identified model. Based on previous export tax rates, four scenarios associated with the tax rates
were analyzed in this study, namely:
1. Scenario I was used as the basic scenario that is a scenario in which the values of the parameters
were estimated and predicted means used as the true values for the model.
2. Scenarios II, III, and IV were further used to predict the impacts of export tax on various aspects
of Indonesian CPO industry using time horizon of the year after 2007. Arbitrary values of export
tax were used in scenario II, III and IV based on an assumption that the export tax rate in that time
horizon increased with time. Scenario III was taken as 7.5 percent scenario IV as 15 percent and
scenario V as 20 percent. These values were converted into effective export tax that makes the
export tax to be based on the profit got not on the price of CPO.
Model validation was undertaken by using the standard t-tests, F-tests, and R2 procedures
where applicable in this analysis. Mean Squared Error (MSE) and Theil’s inequality coefficient
techniques were applied to assess the overall reliability of each model. MSE depends upon the units
in which the variable is expressed. The magnitude of the error does not give any indication of how
large the error is, therefore, this error can be assessed only by comparing it with the average size of
the variable in question. However, the main advantage of MSE is that it can be decomposed into
various components, which show the deviation between the simulated and actual values. Theil’s
method of decomposition was applied
Data Sources and Descriptions
In general, two groups of data were used in this study, namely, palm oil and macro-economic
related data. The data sources for CPO included Oil world, 2007, Indonesia central bureau of
statistics (BPS) 2007 and palm oil statistics 2007. Macro-economic related data were got from Bank
of Indonesia and BPS, 2007. The econometric data covered the period from 2000 to the first quarter
of 2007 hence the analysis was on the quarterly basis interval.
RESULTS AND DISCUSSION
From the estimation of the results using econometric model, the mean values of the variables
were found as reported in Table 2 below. Palm oil mature area was estimated as 871,160 tons while
production was 322.5 tons.
Table 2. Model estimation.
INPOA 20 868.95
INPOY 20 3.68 0.20
INPOC 20 849.85
INPOX 20 2353 624.53
INPOQ 20 3217 656.26
INPOC 20 849.85
INPOP 20 4088 515.98
871.16 203.21 PO Area (000 ha)
3.68 0.18 PO Yield (Tons/ha)
849.84 65.03 PO Consmpn (000 tons)
2360 724.25 PO Export (000 tons)
3225 839.15 PO Prodn (000 tons)
849.84 65.03 PO Consmpn (000 tons)
4089 487.33 Dom. Price PO (Rp/Kg)
J. ISSAAS Vol. 15, No. 2:107 -119 (2009)
After estimating all the equations, the model was solved simultaneously in a simulation
program using SAS (Statistical Analysis System v6.12). Historical simulation of the model’s
equations was used to validate the estimated model using the components of the Mean Squared Error
(MSE) and the Theil inequality coefficients. Table 3 presents the decomposition of the MSE and
Theil U coefficient. The decomposition of MSE provides two sets of statistics. The first
decomposition suggested by Theil gives bias (UM), variance (US), and covariance (UC) statistics.
The second decomposition, as suggested by Maddala, consists of bias (UM), regression (UR), and
disturbance (UD) components.
An adequate model produces projections in which UM approaches zero, i.e. the model is
without consistent bias; US approaches zero, implying variability of the predicted series closely
resembles the variability of the actual series; and the random deviation (UC) is a large number. In the
second decomposition, the bias and regression components capture the systematic divergence of the
prediction from actual values. Therefore, for a model that fits the data well, the proportion of UM and
UR should approach zero. The UD component, which captures the random divergence of the
prediction from the actual values, should approach one. The Theil U coefficient should approach zero
when the predicted series is close to the actual series.
Table 3. Model validation statistics.?
Variable RME % Bias
INPOA 20.4975 0.000 0.515
INPOY 1.8588 0.000 0.000
INPOQ 20.7416 0.000 0.395
INPOS 16.4653 0.000 0.243
INPOC 1.6342 0.000 0.000
INPOX 28.5781 0.000 0.302
INPOP 3.5065 0.000 0.003
The MSE and its decomposition reported in Table 3 show that the majority of the UM values
are close to zero. This suggests that those simulated values are close to their actual values.
Consequently, disturbance terms are low, which implies that errors of these simulated variables are
not captured by the randomness contained in the actual data series. Contrary to UM and UD, some of
the UR values are close to zero. In the second decomposition, US component performs well;
however, UC values in some instances are fairly low. Compared to the decomposition of MSE
statistic, almost all the Theil’s U-Statistic are close to zero for the endogenous variables for the model.
This suggests that overall the simulation model has reasonably good forecasting ability.
Evaluation of the Impacts of Crude Palm Oil Export Tax
From the study, it has been realized that the export tax policy has had significant impact on
the CPO industry in Indonesia. For the period under study, 2002-2007, while the export tax fluctuated
from 3 percent in the year 2002 to 1.5 percent in 2004, and then 6.5 percent in 2007, the average
effective tax of the entire period stood at 2.31 percent for the entire period. For the time horizon of
beyond 2007, the impacts of three export tax rates of 7.5, 15, and 20 percent were simulated. In this
case, the export tax is not charged on the price but on the difference between the current world price
of CPO and the minimum price taxed locally in Indonesia so as to take into account the welfare of
both consumers and producers.
The impact of these tax rates are summarized in Table 4. With export tax of 7.5 percent, the
mature area will reduce by 0.521 percent. An increase in export tax has a negative impact on the
mature area of oil palm in Indonesia. When the government increases export tax to 15 percent, there
was a dramatic reduction in area under palm oil cultivation. The mature area reduced by 1.043
percent, indicating that 9 086 ha of land lost. This was low as compared to that of 20 percent
increase in effective export tax that resulted in 1.38 percent reduction, and this implies that the
imposition of the export tax has significantly depressed the development of oil palm plantation in
In addition to its negative impact on mature area, the export tax has also depressed
production. The impact of export tax was evident on the quantity of CPO produced in Indonesia.
With 7.5 percent export tax implemented, production reduced by 0.124 percent or 16 000 tons per
year. In case the tax is increased to 20 percent by the government, the Indonesian CPO production
reduced by 0.341 percent translating to 44 000 ton reduction in production level in a year.
The negative impact of this policy is more substantial in terms of export volume. If the
government imposes more export tax on CPO, the export volume of CPO reduces significantly. From
the simulation analysis, if the government imposes 7.5 percent export tax on CPO, export volume
decreases by 3.263 percent that can be reported as 77 000 tons reduction in export, 15 percent export
tax reduces the quantity by 6.271 percent or 148 000 tons reduction while 20 percent export tax would
lead to 8.22 percent hence resulting in 194 000 tons less export to other countries by Indonesian CPO
On the other hand, this export tax policy has provided substantial benefit to consumers. Table
4 shows that the implementation of this policy has caused domestic CPO price and by extension
cooking oil price to be lower than they should be. For example, if the government imposes an export
tax of 7.5 percent, then the domestic price of CPO will be about Rp 112/kg or 2.739 percent lower
compared to that without export tax. A further increase in export tax on CPO would be beneficial to
Table 4. Projection of impacts of export tax on crude palm oil industry.
Mature area (000 ha) 871.16
CPO consumption (000 tons) 849.84
CPO Export (000 tons) 2360.00
CPO Domestic price (Rp/kg) 4089.00
Palm Oil Productivity (Ton/ha) 3.68
CPO Stock (000 Tons) 930.79
Production (000 tons) 3225.00
Clearly, the export tax policy reduces not only competitiveness of the Indonesian palm oil
industry but also hurts producers of CPO (some of them small-holder farmers) due to the lower price
of CPO relative to the world market price. On the other hand, refiners that process CPO into various
products - such as cooking oil, margarine, shortening - gain from this policy since they get CPO at
lower prices. Finally, consumers may or may not gain from this policy since there is no guarantee
Predicted values (percent)
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that the processors will pass on the lower price of cooking oil. Considering that the concentration
ratio (CR4) in this industry is large, which indicates a potential oligopolistic market structure, it is not
likely that the consumers fully benefit from the lower price of cooking oil. The imposition of an
export tax diverts CPO from the export market to the domestic market, lowering all cooking oil
prices. This leads to competition with the domestic coconut oil industry, which otherwise would
provide more of the raw material for domestic cooking oil. Considering that significant amount of
copra is made from coconuts that come from small-holder farmers, the export tax policy on CPO
could further lower price of coconuts and pressure farm incomes.
An Alternative Formulation of Export Tax Rate
From the analysis undertaken considering the effects of export tax government policy on
Indonesian CPO industry, the results indicate that the implementation of the CPO export tax has
significant advantages and disadvantages to the CPO industry. It has been realized that export tax
policy has a redistribution impact to all stakeholders involved in the industry and government
revenue. This policy has benefitted both consumers and the government making them better off. On
the contrary, producers have become worse off, indicated by the decline in mature oil palm area,
production, export, farm income and employment.
Considering the benefits and costs of the policy, the government is likely to maintain this
policy in the future. This is because it would enable the government to redistribute income to the
majority of the population who are consumers of CPO by products like cooking oil. The government
also depends so much on the revenue earned from export through export tax policy. As this policy
has substantial impacts on the industry, it needs to be reformulated in such a way that consumers are
fairly protected from a sharp fluctuation of the international market, while producers still gain a
normal profit or incentive to develop their plantations. Following this, the magnitude/rate of CPO tax
should consider the following facts:
Investment in oil palm plantations is a long-term venture and therefore, price fluctuation
cannot be avoided by the investors/ producers. Within a certain period of time, CPO price
may well be above production cost and vice versa. Production cost in this case includes
variable cost and capital accumulation for reinvestment or rehabilitation (sustainable
Using this approach, production cost (assuming that the exchange rate is Rp 9000/USD) is
around USD 165.2/t or Rp 1 487/kg. therefore, the value to be taxed should be the profit
between the market price and the production cost;
Profits/losses strongly depend on the world price (WDPOP) and exchange rate (INE).
Therefore, these two factors should be explicitly considered to determine the rate of the tax.
Thus, profit (P) = (WDPOP*INE - 1 487);
When the price of CPO is below the production cost, the producers/smallholders suffer from
a loss. Using world CPO price in the last two decades, it was found that the number of times
that CPO prices were below the production cost, or probability (P) to get profit is around 0.7
(P =0.7). This means that if the producers/smallholders have to transfer part of their profit to
consumers and government, it is only around 0.7 of the time can that be transferred. This
coefficient acts as the first weight in distributing welfare as represented by Equation 6;
On the basis of the secondary rights theory which states that profit gain of an industry is not
merely enjoyed by the people involved in the industry, but also by people, who because of
some obstacles cannot participate in the industry. In line with this argument, it is assumed
that 75 percent of the profit belongs to producers as primary right, while the rest of about 25
percent will belong to consumers as a secondary right (SR);
The magnitude of the tax should also consider the number of producers and consumers, as a
proxy of political power/pressure group. The number of producers together with their family
members is assumed to be 5 percent of the total population in Indonesia. In this study, the
number of consumer (NC) and producers together with family members (NP) are 232 million
and 11.6 million, respectively; and
The magnitude of the tax should also consider the income share of oil palm plantation to total
farmers’ income (IS), and share of cooking oil expenditure to total household expenditure
(ES). Within this study, the former is estimated to be around 80 percent and the latter to be 4
percent (BPS, 2001).
Following all these arguments then, the formulation of an alternative export tax is as follows:
PE = ??* P * SR * (NC/NP) *(ES/IS)
= (WDPOP*INE-1 487)*0.7*0.25*(232/11.6)*(4/80)....................... (6)
= (WDPOP*INE-1 487)*0.175
= (WDPOP*INE-1 487)*17.5 %......................................................( 7)
Therefore, nominal tax is 17.5 percent
PE = Export tax rate (Rp/kg)
WDPOP = Export price (USD/t)
INE = Exchange rate (Rp/USD)
Estimating effective tax for Indonesian CPO industry using the above formulated equation is
5 . 17*
= 11.13 percent
Where: WDPOP = USD 454/ton (average price for entire period studied)
INPQ = USD 165.2/ton (average cost of production)
Tax = Nominal export tax rate (percent)
Effect of Recommended Export Tax on CPO Industry
The Indonesian government should implement the CPO export nominal tax of 17.5 percent
that translates to 11.13 percent effective export tax. With this export tax rate, the mature area will
reduce at the rate of 1.228 percent. In other words, the mature area will reduce by about 42 300 tons
per year due to tax implementation as reported in Table 5. According to the plan of the Ministry of
Agriculture of Indonesia of reducing the area under palm oil so as to have a stable price, an increase
in the export tax would be of importance as it will lead to voluntary reduction in production area
under palm oil as it would result into reduction of export to other countries. In this scenario, with
implementation of export tax policy recommended, the export volume will reduce by 7.331 percent
) 2 .(
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or about 170 000 tons for quarter year period hence increasing the quantity of CPO in Indonesian
The domestic consumers of CPO and cooking oil will be the greatest beneficiaries in the new
tax scheme. With tax implemented at 11.13 percent, the price of palm oil will reduce by 6.261
percent. This will make the consumers of palm oil in Indonesia to pay for palm oil at Rp 255.12/kg
less than without an increment in tax. The cost of cooking oil will be expected to reduce as a result of
the reduction in CPO price since it is the main source of raw materials for the cooking oil industry in
The main losers with the implementation of the proposed export tax rate will be consumers
in the importing countries and the local producers of CPO. The production reduces by about 6 000
tons in that period (0.186 percent) translating to over 24 000 tons reduction per year. This effect of
the export tax is great on the producers than on traders because the exporters always shift the tax
bundle to the producers hence offering reduced prices for their products.
Table 5. Effect of the recommended export tax on the crude palm oil industry
Mature area (000 ha)
CPO consumption (000 tons)
CPO Export (000 tons)
CPO Domestic price (Rp/kg)
Palm Oil Productivity (Ton/ha)
CPO Stock (000 Tons)
Production (000 tons)
This export tax formulation has some sound justifications. Firstly, the tax will be effective if
the producers gain profit, at least enough to rehabilitate their plantation. This represents sustainable
development argument. Secondly, the benefits gained due to price increase or currency depreciation
are distributed among producers, consumers and the government after considering secondary rights
(equity argument), the number of producers and consumers that could be a proxy of political power or
pressure group (political argument) and the importance of CPO in the producer and consumer
perspective (economic or welfare argument).
CONCLUSIONS AND RECOMMENDATIONS
The study found out that the export tax policy has significant impact on the CPO industry in
Indonesia. The export tax led to the reduction of the mature area of oil palm plantation. It can also be
concluded that the export tax policy benefitted the domestic consumers of both CPO and cooking oil
as it was effective in controlling domestic cooking oil price as it reduced the domestic prices of these
products. With this export tax policy, the government can successful to keep the cooking oil price
down when the world CPO price increased or when rupiah was substantially depreciated.
The impact of export tax led to depression of production resulting to reduced quantity
produced. Producers, mainly smallholders, have suffered a great deal due to the policy. As the
domestic price of CPO is depressed by this policy, the farm gate price of the farmers’ product (fresh
fruit bunch or FFB), declines substantially.
Indonesian CPO in the world market.
There should be an increase in investment in research and development in the palm oil
sector. This would result in improved human resources technology that would result in
improved production by the farmers hence would result in high productivity.
The government policy on imports should promote investment in the agricultural sector by
guaranteeing security, permit ownership of plantations by individuals, reducing import cost
on farm machines and implements used in palm oil industry, provide incentives on imports
of agricultural machines.
The Indonesian government in conjunction with investors in the CPO sector must invest in
infrastructure to make them competitive. This investment should be in the fields of transport
network, production firms and marketing systems. There should be the provision of credit to
the palm oil producers. The banking system can enable the palm oil investors to access loans
that would increase their production and the pay back at an appropriate interest rate after an
The export tax formulation with well considered and much sounder justifications is needed
so that benefits gained from price increases or currency depreciation are distributed among
producers, consumers and the government after considering secondary rights (equity
argument). The results of this study show that the effective export tax rate should be around
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