THE PALM OIL INDUSTRY: Technological change; global competition; social and environmental impact
- 29 Mar 2016
Despite becoming the world’s leading palm oil producer and exporter, Indonesia is still struggling technologically to compete with the Malaysian palm oil sector. The Malaysian Palm Oil Board, the government’s main research body, alone owns 87 US patents, while its Indonesian counterpart, the Indonesia Oil Palm Research Institute has none.
Research by Lars Bruno, to be presented at the Economic History Society’s 2016 annual conference in Cambridge, looks at the Indonesian-Malaysian interrelationship over time in the light of trade theory and analyses the differences in its technological development.
The palm oil industry has a mixed legacy. On the one hand, it has fallen on hard terms as the fear of deforestation and destruction of the natural habitat of many animal species has come under increased focus. On the other hand, it is a highly successful agricultural industry that has lifted many out of poverty and is an example of how developing countries potentially can use natural resources to improve living standards.
Regardless of which view one deems as more important, technology is a key component to both concerns. For example, a new technology that 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.
Malaysia is largely responsible for the birth of the modern day palm oil industry, with an active government policy aimed at increasing production and exports from the 1960s onwards.
From the 1970s, the focus has been on increasing the higher value-added products. First in the form of processed palm oil and later higher value-added products that used palm oil as an ingredient such as food products and soap. To be able to allow for technological improvements over time, the government was actively promoting research by encouraging private companies through what today is the Malaysian Palm Oil Board.
The modern Indonesian palm oil industry first started its major expansion from the 1980s onwards. With Indonesia having a larger landmass and a cheaper labour force compared with Malaysia, it was only natural that the former eventually overtook the latter to become the world-leading producer and exporter in the previous decade. But Indonesia has not been able to generate the same degree of technological improvements as in Malaysia.
This has led to an industry structure in which Malaysia has become the technological leader and Indonesia the low cost country. It is a pattern that Indonesia has been desperate to break, but despite efforts to promote research and higher value-added products in Indonesia, thus far with limited success.
Part of the reason is that many palm oil companies located in Indonesia are of Malaysian origin with preferences to have palm oil processed in their home country. Another reason is the lack of funds in Indonesia in comparison to Malaysia for agricultural research.