Efficiency and Productivity of Palm Oil industry in Malaysia and Indonesia
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Abstract
Palm oil is the highest producing commodities both in Malaysia and Indonesia. The Palm oil industry is significant to the economy of both countries which known to be the two largest producing countries in the world. Nevertheless, in the recent years, the industry has undergone several controversial threats which implicate a decreasing trend of demand due to the global economic uncertainties, environmental concerns, and the boycott of palm oil-based products amongst the Europian Union and other Western countries. Besides, the industry also faces challenges involving a high-dependency on foreign labour, dry wheather, and authority matters related to land for plantation. Currently, the outbreak of the Covid-19 pandemic has worsened the productivity of the industry with several shutdown of the estates and mills. Based on the MPOB and IPOC data for the first half of 2020, Malaysia and Indonesia have recorded a decline in the production by 5.8 percent and 9.2 percent respectively. Against these continuous market pressure, it is only ideal that palm oil industry to demonstrate efficiency in optimizing available resources to pursue increased competitiveness in the long run.
Future expansion of palm oil industry of one country is crucially relying on the efficiency gain as comparative advantage. While there are growing documentations on the determinants of palm oil productivity, it is very limited in the context of efficiency and its effect on productivity. A number of studies indicated low-to-moderate levels of efficiency (20-70 percent) for palm oil mills in Malaysia and Indonesia which varies across size, ownership and location. To fill the gap, the study attempts to evaluate the determinants of efficiency and productivity; and their relations for palm oil industry in Malaysia and compare the results with those in Indonesia from 1999 to 2019.
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