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Government Policy for Facilitating Export (FREE TRADE AGREEMENTS (FTAs

FTAs negotiated bilaterally, and at the ASEAN level further enhanced market access for Malaysia’s products. Apart from ASEAN, Malaysian government made a bilateral Free Trade Agreements with Japan, Pakistan, New Zealand, Chile and India; with ASEAN, Malaysia has concluded agreements with the PRC, the Republic of Korea (ROK), as well as Australia and New Zealand, and the FTA in goods with Japan and India. For 2010, there was an increase of 35.8% in the utilisation of Preferential Certificate of Origin based on the 509,897 Certificate of Origins issued compared with 375,589 issued in 2009. Exports performance under FTAs and GSP, recorded an increase of 37.9% in the FOB value of exports to RM103.83 billion compared with RM75.30 billion in 2009.

TRADE PERFORMANCE FOR THE MONTH OF DECEMBER 2010 AND THE YEAR OF 2010# Malaysia’s total exports in December 2010 increased by 4.6% to RM57.16 billion compared with December 2009. This was the highest exports value ever recorded for the month of December. Imports expanded by 11.5% to RM47.48 billion, resulting in a total trade of RM104.64 billion, an increase of 7.6% from the corresponding month in 2009. A trade surplus of RM9.69 billion was registered, making it the 158th consecutive month of trade surplus since November 1997. Compared with November 2010, exports in December 2010 increased by 8.5% while imports expanded by 8.6% and total trade was 8.6% higher. Total trade in 2010 was valued at RM1.169 trillion, an increase of 18.3% from RM988.24 billion in 2009 and 1.2% lower compared with RM1.183 trillion registered in 2008, the highest total trade ever recorded by the country. This

was contributed by exports of RM639.43 billion and RM529.19 billion of imports. Exports expanded by 15.6% while imports rose 21.7% compared with 2009, resulting in a trade surplus of RM110.23 billion. Total trade in the fourth quarter of 2010 was RM304.15 billion, an increase of 3.0% compared with the third quarter of 2010. Exports expanded by 3.8% to RM164.84 billion, while imports grew by 2.1% to RM139.30 billion. Compared with the fourth quarter of 2009, exports and imports in the fourth quarter of 2010 were higher by 3.7% and 10.1% respectively. Total trade increased by 6.5% compared with the same quarter last year. EXPORTS IN DECEMBER 2010 The increase in exports in December 2010 of RM2.49 billion from a year ago was largely contributed by higher exports of palm oil, refined petroleum products, chemicals and chemical products, manufactures of metal, crude rubber, iron and steel products as well as optical and scientific equipment. On a month-on-month basis,exports expanded by 8.5% attributed mainly to higher exports of electrical and electronic (E&E) products, refined petroleum products, chemicals and chemical products, machinery, appliances and parts as well as iron and steel products.The performance of major export products is shown in Chart 1, while Chart 2 shows the performance of the top five major export destinations in December 2010.

Exports to ASEAN was valued at RM15.03 billion, accounting for 26.3% of Malaysia’s total exports in December 2010. Total exports to this region increased by 5.7% compared with

RM14.22 billion registered a year ago due to higher exports of refined petroleum products, palm oil, manufactures of metal and jewellery. Exports to ASEAN:  Singapore RM 7.90 billion  Thailand RM 3.02 billion  Indonesia RM 1.60 billion  Viet Nam RM 1.23 billion  Philippines RM 1.01 billion  Brunei Darussalam RM 134.3 million  Myanmar RM 74.3 million  Cambodia RM 59.0 million  Lao PDR RM 3.0 million Exports to major EU countries:  Netherlands RM 1.66 billion  Germany RM 1.66 billion  United Kingdom RM 645.1 million  France RM 610.6 million  Italy RM 364.1 million  Belgium RM 197.6 million  Spain RM 164.0 million  Sweden RM 105.6 million  Finland RM 91.4 million  Poland RM 70.4 million

Base of above information we are going to evaluate the government policy about Palm oil. Introduction: Malaysia, along with some of their Southeast Asian neighbors, has managed to combine high export growth in natural resources with industrialization in the early years of their take-off. Palm oil is a potentially sustainable resource sector that in recent decades has increased the forward linkages into manufacturing sectors which use palm oil as its main input. Both the fact that palm oil is sustainable and can promote manufacturing sectors make it a good object of study to understand how other developing countries potentially can manage their natural resource sectors. The Malaysian palm oil sector did have a large degree of technological development. In the 1960s started out by exporting mainly crude palm oil; in the 1970s the country started to export the more highly value added processed palm oil. From the 1980s and onwards palm oil was increasingly being used in downstream activities such as the oleochemical industry and more recently biodiesel.

The technological learning in the Malaysian palm oil industry was influenced by all four mechanisms which were; incentives, skills, market building and institutional support. At first, Malaysia did not have a large domestic market which limited the attractiveness of investments in general. For palm oil the limits of home-market led development led to an early exhaustion of the easy phase of import substitution. Government Policy Regarding to Palm Oil Export : The Investment Act of 1968 was a more export-oriented attempt to promote investments (Gopal 2001 pp.251–252). It provided several incentives:

The investment abatement allowance: Allowed for a 40 percent tax deduction of corporate income tax for two years. This deduction could be extended to at most eight years (Gopal 2001 p. 254).


Pioneer status: The status could be given if there were good prospects for further development or it was in the public interest to do so, in the case of palm oil it was both (Fong and Lim, 1984 p.399). Those palm oil refineries obtaining a pioneer status got a tax holiday for seven years. In all nine palm oil refineries obtained pioneer status between 1969 and 1974. Following 1974 palm oil refineries were not considered eligible for the pioneer status.


Investment tax credit: Allowed tax exemptions through investments. Export allowance: Tax deduction of 5 % of export sales the same year. Deduction of Expenses Incurred on Promotion of Exports Overseas: These were deductions of expenses occurred when attempting to promote Malaysian products abroad.


Accelerated Depreciation Allowance: Those companies exporting at least 20 % of their production value and incur costs for the purpose of modernizing their plant could get an accelerated depreciation allowance of 20 percent.

Production structure of palm oil: The current production structure of the palm oil sector can be divided into three. On the first level are plantations that produce the palm oil fruit, which will be called the Fresh Fruit Brunches (FFBs). On the second level are the mills that process the FFBs to produce two main products, crude palm oil (CPO) and palm kernel (PK). To be economic viable the FFBs have to arrive at the mills within 24 hours of being released by the tree, therefore the mills have to be in close range of the plantations. On the third level are the refineries that process CPO into processed palm oil (PPO) products.

The ownership structure in the plantation sector can roughly be divided into three, the private plantations, the government schemes (with FELDA being the largest) and the independent smallholders. According to Fold (1994) it is the private estates which have the largest areas and are the most productive given the economics-of-scale. Government schemes attempt to organize smallholders to exploit some degree of economics-of-scale, but these cannot match the productivity levels of the private estates. The independent smallholders are the ones with the lowest degree of productivity. In figure 5 the ownership structure and their land areas are shown over time. The expansion of government schemes seems to have been important for the initial growth in the industry in the 1970s and 1980s. However, private estates took over as the most important factor in during the 1990s.

The government started to promote the higher value added PPO from the late 1960s. This was controversial as many economists at the World Bank and other agencies did not believe that Malaysia had a comparative advantage in the production of PPO. To promote the investment in refineries investment incentives were given through the already mentioned1968 Act.

As a result: Oil palm cultivation and downstream processing has enjoyed considerable government support in Malaysia. In Malaysia, government efforts have been dominant as Export Oriented interventions were instrumental in the deliberate shift from CPO to PPO production, and providing the leadership necessary to motivate private firms to participate in new product development.

Malaysian Government Intervention Regarding to Subsidy: Under British rule, planters of oil palm specialized in primary production and received no subsidy or protection from the government. Specialization in primary production continued after independence. The government’s first intervention came in the late 1960s, when foreign-owned estates were acquired by parastatals—among them the state economic development corporations, Permodalan Nasional (PERNAS) and later Permodalan Nasional Berhad (PNB). In the 1950s and 1960s the government extended the Rural Industry and Smallholders Development Authority (RISDA) to include oil palm cultivation and launched FELDA and the Federal Land and Crop Authority (FELCRA) to alleviate poverty. When launched in 1957, FELDA applied to rubber cultivation. Oil palm (375 hectares) was added in 1961 (Tunku, Shamsul, and Thong 1988). Unlike the estate cultivation, which was motivated by market expansion and the search for profit, FELDA focused on alleviating poverty while improving efficiency. In line with the Second Malaysia Plan’s objective of engendering restructuring along ethnic lines, only poor Bumiputeras, primarily those with experience in agriculture, were targeted (Malaysia 1971; Arif and Tengku Mohd Ariff 2001). Government efforts to diversify Malaysia’s exports to reduce the negative effects of poor terms of trade in rubber and tin1 focused on oil palm (Malaysia 1971, 1981, 1984; Rasiah, Osman and Rokiah, 2001). As a consequence, rubber plantations gave way to oil palm plantations (Sekhar 2000). While agricultural land use has gradually expanded, rubber acreage has declined in absolute terms (Table 1). Oil palm acreage grew from 320,000 hectares in 1970 to 3.3 million hectares in 2000.

Export: For exports, the first real incentives came with the Investment Act of 1968. However, the export allowance and the deduction of expenses incurred on promotion of exports overseas were not as effective as the investment incentives as the benefits from them were small (Gopal, 2001 p.260). International agencies such as the World Bank warned Malaysia against a policy to attempting to shift from CPO to PPO production as Malaysia did not enjoy a comparative advantage in processing but The Malaysian government went against their advice and implemented an export tax on CPO exports in 1976. This tax meant that world prices for CPO would increase which would reduce demand for CPO by European PPO producers. The increase in CPO prices would effectively mean an increase in the production costs for PPO producers in Europe. Given the supply of CPO, those willing to invest in PPO production in Malaysia would enjoy a considerable competitive advantage over their international competitors. The government also increased tariffs on bleaching earth which is a major input in the production of PPO. To avoid adverse effects the government tied prices on bleaching earth sold domestically with world prices. According to Gopal (2001 p.290) the government imposed the duties to i) Make PPO production more economically attractive; ii) Avoid overburdening CPO producers; iii) Protect duty revenue as much as possible; and iv) Avoid providing financial support from other sources, even when the industry was not profitable. To promote the export of PPO an export tax on CPO was introduced in 1976. The export tax had several effects. First, it made the CPO more expensive for foreigners, effectively reducing exports and the supply of CPO for PPO producers in Europe. Second, it increased the supply of CPO for local Malaysian refineries. Thirdly, it lessened the supply constraints plantations and mills had as they did not have the capacity to supply demand. Finally, it signaled to potential investors that the government would promote refineries making it a safer investment prospect. The effect was an increase in PPO export and a reduction in CPO exports as can be seen in figure 6.

Export taxes: Malaysia taxes exports of palm oil, rubber, and timber products in order to protect domestic processing production. Malaysia is the second largest producer and largest exporter of palm oil and products made from palm oil, which account for approximately 15 percent of world production and 30 percent of world trade in vegetable oils. Malaysia uses export taxes of 10 percent to 30 percent ad valorem to discourage the export of crude palm oil and to encourage development of the local refinery sector. Refined palm oil and products are not subject to export taxes. The Malaysian government waives export taxes on exports of crude palm oil to Malaysiainvested foreign vegetable oil refineries, giving Malaysia-invested plants an advantage in foreign markets, including the United States. Conclusion: Palm oil in Malaysia grew from virtually nothing to the most important agriculture sector with strong linkages to the rest of the economy. There was a strong government effort to promote palm oil and the technological development of the sector.

Tentative conclusions are based on online data and a literature overview. The first is that industrial policy was effective in increasing production, but less so in promoting productivity. The most productive estates, based on an interview with an industry representative and Fold (1994), are the private estates. United Plantations, one of the main players, has an OER of 28 %, while the average for the country is around 20 %. It is hard to assess the spread of technology given the lack of data, but it does seem that the spread of technology was less effective as has been claimed by the MPOB. Second, industrial policy was effective in promoting the refinery sector in Malaysia and move into the higher value-added production of PPO. I still need to assess the role of the government in promoting the further downstream activities.

History Of The Malaysian Palm Oil Industry Oil Palm Introduction and Commercialisation _ The oil palm tree was first introduced to Malaya by the British as an ornamental plant in 1875 but it was only commercially planted in Tennamaran Estate, Selangor 1917 by Henri Fauconnier. Crop Diversification Efforts _ Despite threats of the Emergency during the 1960s, the oil palm expansion in Malaysia was rapid as its economic potential was recognised by the Malaysian Government as a complementary crop to rubber in the poverty eradication programme. _ The Federal Land Development Authority (FELDA) first introduced the oil palm in 1961 on an initial size of 375 ha to help the landless farmers. _ Due to the fall in rubber and tin prices, estate planting of oil palm tended to be on old rubber estate land when the prospects of high yields and profitability of palm oil were recognised. _ In 1966, Malaysia overtook Nigeria as the world’s leading exporter of palm oil. _ Compared to Malaysia, the Indonesia government only started to directly invest in state owned plantations in 1968. Export Diversification _ Realising from historical experience with rubber and tin that dependence on narrow product lines can bring price downswings, the Malaysian government embraced diversification as a way to sustain production and exports. _ Acting against the advice of international agencies, the Malaysian government began in the late 1970s to encourage a shift from CPO exports to refined products through taxation and incentive policies. _ The 1980s saw the “Malaysianisation” of 3 major plantation companies previously run by the British i.e. Sime Darby, Guthrie and Harrison & Crossfield (later Golden Hope Plantations) _ 1980 also saw the founding of the Kuala Lumpur Commodity Exchange (KLCE), a key instrument for price setting, hedging and dissemination of market information to reduce market risk in the trading of palm oil. Industrialisation & Market Expansion _ Seeing the need for product development to sustain the upstream development of palm oil, the industry was flagged for sectoral support under the Industrial Master Plan of 1986 (IMP1). _ The IMP1 emphasised on the rationalisation of refining and fractionation to increase efficiency and competitiveness of Malaysian palm oil in the world market. _ As a result, Malaysia became a hub of palm oil downstream processing as it was more economical to export refined products than to have them processed in Europe. _ While Malaysia became a leading exporter of refined oil, demand for CPO exports then shifted to Indonesia as further oil palm expansion was encouraged through Indonesian government initiated smallholder schemes. _ By the time the Industrial Master Plan 2 (IMP2) was launched in 1996, Malaysia’s processing

capacity has exceeded the supply of CPO. _ IMP2 led to the expansion of oil palm hectarage to East Malaysia and also encouraged the private sector to seek raw materials from abroad. _ IMP2 also saw stimulated participation in R&D to meet the call for productivity gains and further value-added product development along the value chain. _ The Malaysian Palm Oil Council (MPOC) was tasked to develop a comprehensive strategy to position Malaysia as an international leader in the oils & fats market through promotional activities. _ Despite Indonesia having overtaken Malaysia as a leading producer of palm oil since 2007 due to its vast landbank expansion and labour opportunities, the industry is still thriving in Malaysia. _ Malaysia is still a leading exporter of palm oil to major consumers in China, EU and India. _ In fact, Sime Darby and FELDA, both Malaysian-based companies are today the world’s largest plantation companies (based on planted area).

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THE NATIONAL BIOFUEL POLICY MINISTRY OF PLANTATION INDUSTRIES AND COMMODITIES MALAYSIA 21 March 2006 Paraphrased shode neveshte khodam. (Aabi ha) Since fossil fuels are being depleted rapidly and regarding the fact that the prices of petroleum, green house gas emissions and awareness of environmental issues has increased, countries are trying to come up with an idea to use environmentally-friendly and renewable sources of energy like biofuel. In the recent years, the use of methyl esters as diesel has increased especially in EU. In 1982, Malaysia began to establish the use of palm methyl esters as a suitable fuel and a comprehensive palm biofuel program embarked at the time. According to the foreword of the article published by the Malaysian ministry of plantation industries and commodities on biofuel policy on March 21st 2006, …

The National Biofuel Policy envisions
• Use of environmentally friendly, sustainable and viable sources of energy to reduce the dependency on depleting fossil fuels, • Enhanced prosperity and well-being of all the stakeholders in the agriculture and commodity based industries through stable and remunerative prices.

The biofuel policy of Malaysia is based on Malaysia's National Biofuel Policy document. It was launched by the federal government of Malaysia on 10 August 2005. The policy is primarily aimed at reducing the country's fuel import bill, further promoting the demand for palm oil, which is expected to be the primary commodity for biofuel production in Malaysia, as well as to shore up the price of palm oil especially during periods of low export demand.

The Malaysia's National Biofuel Policy (interchangeably known as the National Biodiesel Policy) entails a four-prong strategy, which encompass:
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Producing a biodiesel fuel blend of 5% processed palm oil with 95% petroleum diesel. Encouraging the use of biofuel among the public, which will involve giving out incentives for oil retail companies to provide biodiesel pumps at fueling stations. Establishing an industry standard for biodiesel quality, which will be the responsibility of SIRIM. Setting up of a palm oil biodiesel plant, which is targeted to be built in Labu, Negeri Sembilan.

Yanmar, a Japan-based global manufacturer of diesel engines planned to build a research facility in Malaysia to conduct research on the development of palm oil biodiesel. It plans to develop and test biodiesel for the industrial diesels it develops for its machines and generators. The research facility will be set up in Kota Kinabalu.