UNIVERSITI PUTRA MALAYSIA

AN ECONOMETRIC STUDY OF PALM OIL IMPORT DEMAND IN THE MIDDLE EAST AND NORTH AFRICAN COUNTRIES

AMNA AWAD ABDEL-HAMEED.

FEP 2005 9

AN ECONOMETRIC STUDY OF PALM OIL IMPORT DEML4ND IN THE MIDDLE EAST AND NORTH AFRICAN COUNTRIES

BY

AMNA AWAD ABDELHAMEED

Thesis Submitted to the School of Graduate Studies, Universiti Putra Malaysia, in Fulfilment of the Requirements for the Degree of Doctor of Philosophy

January 2005

DEDICATED TO MY LATE FATHER, MY MOTHER, MY HUSBAND AND MY CHILDREN

Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfilment of the requirement for the degree of Doctor of Philosophy

AN ECONOMETRIC STUDY OF PALM OIL IMPORT DEMAND IN THE MIDDLE EAST AND NORTH AFRICAN COUNTRIES

BY

AMNA AWAD ABDEGHAMEED

January 2005

Chairman: Professor Fatimah Mohamed. Arshad, PhD

Faculty: Economics and Management

With vegetable oils supplies at record levels, increased emphasis is being placed on

finding new and growing markets for different oils. The Middle East and North

Africa region (MENA) is one of such emerging markets for palm oil and its products.

Strong consumption growth for vegetable oils in general, and palm oil products in

particular, coupled with limited vegetable oils production capabilities in the region,

have been behind the increase in trade. Further growth is anticipated in large part due

to a strong regional GDP forecast. Palm oil has the opportunity to be a prime

beneficiary of this growth in trade, due to its export competitiveness in the global

market of fats and oils. The objectives of this study are; firstly to analyse the palm oil

import demand in representative MENA countries, namely Algeria, Egypt, Iran,

Jordan, Libya, Morocco, Saudi Arabia, Sudan, Syria, and Turkey, over a period of

time; and secondly, to identify the prospects of expanding its market in the MENA

regon. Ten single equation models are specified, following a general to specific

approach. to represent palm oil import demand functions in these countries. The

models have been estimated using multivariate cointegration and ECM methods for

the analysis through utilizing the ARDL technique.

The findings of the study show that the palm oil price variable emerged to be a

significant determinant of palm oil demand across the ten models. Soybean oil

proved to be an important substitute for palm oil in Algeria, Egypt, Iran, Jordan,

Morocco and Turkey. The major substitute oil for palm oil in Saudi Arabia and Libya

is corn oil, while rapeseed oil and sunflower seed oil came out to be important

substitutes for it in Sudan and Syria respectively. The prices of substitute oils in

almost all countries have been found to play an important role in shaping the palm oil

demand. Palm oil demand in all countries turned to be significantly dependent on

income. The remarkably high palm oil discount was an important factor in raising the

Turkish demand for palm oil. The results suggest that the sharp increase in world

petroleum prices in 1970s contributed significantly to the palm oil import demand in

Saudi Arabia.The anti-palm oil campaign came out to be an important factor that

negatively affected the palm oil import demand in Algeria and Iran. The Malaysian

market promotion effort proved to have a great influence in expanding the demand

for palm oil in Egypt. The Gulf war crisis and trade sanctions on Iraq expanded the

market of palm oil in Jordan, whereas the trade embargo on Libya suppressed the

demand. Exchange rate also proved to be an important determining factor for shaping

Libyan import demand for palm oil. Demand elasticities with respect to own price,

substitute price and income came out to be very high indicating its high

responsiveness to changes in these variables and implying the importance of

considering them in the process of formulating the marketing policies.

f ' W ' U f J A M SULTAN &DW S A W HWftsTl WiU MAlAYSlA

Finally, projections for palm oil import demand revealed that import demand is

expected to increase in all the countries under consideration, with variations in the

magnitude of expansion among them, indicating the good potentiality o f this market

for absorbing more palm oil.

Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai memenuhi keperluan untuk ijazah Doktor Falsafsh

KAJIAN EKONOMETRIK PERMINTAAN TERHADAP MINYAK KELAPA SAWIT DI NEGARA-NEGARA TIMUR TENGAH DAN AFRIKA UTARA

Oleh

AMNA AWAD ABDEGHAMEED

Januari 2005

Pengerusi: Profesor Fatimah Mohamed. Arshad, P&D.

Fakulti Ekonomi dan Pengumsan

Memandangkan penawaran penawaran minyak sayuran telah bertambah dengan

ketara, beberapa usaha dilaksanakan untuk mencari pasaran baru dan yang sedang

berkembang untuk pelbagai jenis minyak. Kawasan Timur Tengah dan Afiika Utara

(atau MENA -Middle East and North Afnca) adalah merupakan salah satu daripada

pasaran potensi baru yang semakin penting bagi minyak kelapa sawit dm produk

berasaskannya Ini adalah kerana jangkaan pertumbuhan Keluaran Dalam Negeri

Kasar (KDNK) yang pesat di kawasan ini dan pada masa yang sarna kemampuan

penge1uara.n minyak sayuran kawasan ini adalah tedxitas. Minyak kelapa sawit

memiliki peluang untuk mengambil he& dari pertumbuhan dalam perdagangan ini

kerana daya saing eksportnya dalam pasaran mmyak dan lemak dunia Objektif

kajian ini adalah; pertama untuk maganalisis permintaan import minyak kelapa

sawit daripada beberapa negara terpilih ying mewakili MENA iaitu Algeria, Mesir,

Iran, Jordan, Libya, Maghnbi Arab Saud~ Sudan S-yria dan Turki dalam satu

tanpoh masa tertentu. Kedua, uutuk magailpasti prospek permintaan di kawasan

ini. Untuk tujuan ini, sepuluh mudel 'persamaan tunggal' telah digunakan

berdasarkan pendekatan 'umum kepada khusus' untuk mewakili h g s i permintaan

vii

import m~nyak kelapa sawit bagi negara tersebut. Model ini dianggarkan dengan

menggunakan kointegrasi pelbagai variat dan "kaedah pernbetulan ralat" atau "Error

Correctron Model (ECM) " menggunakan Autoregressive Distributed Lag atau

AHDL.

Penernuan kajian menunjukkan bahawa pembolehubah harga minyak kelapa sawit

dalam kesemua sepuluh model tersebut merupakan penentu penting dalarn

permintaan terhadap rninyak kelapa sawit. Minyak kacang soya didapati merupakan

pengganti utama kepada minyak kelapa sawit di Algeria, Mesir, Iran, Jordan,

Maghribi dan Turki. Di Arab Saudi dan Libya, pengganti utamanya ialah minyak

jagung, manakala di Sudan, minyak sesawi dan di Syria, minyak bunga matahari.

Harga m~nyak pengganti di hampir kesemua negara tersebut didapati berperanan

penting dalam membentuk jurnlah permintaan terhadap minyak kelapa sawit.

Dskaun yang sangat ketara bagi minyak kelapa sawit di Turk didapati merupakan

faktor penting dalam meuingkatkan pennintaan pasaran Turki terhadap minyak

kelapa sawt. Di Arab Saudi, kenaikan harga petroleum yang mendadak pada dekad

tujuh puluhan (70an) merupakan penyumbang penting ke arah peningkatan

permintaan import minyak kelapa sawit. Kempen anti minyak kelapa sawit pula

didapati mernberi kesan negatif terhadap permintam minyak kelapa sawit di Algeria

dan Iran. Usaha Malaysia untuk mempromosi minyak kelapa sawit terbukti memberi

kesan yang besar dalam memperluaskan permintaan terhadap minyak kelapa sawit di

Mesir. Krisis Perang Teluk and sekatan perdagangan terhadap Iraq telah

meningkatkan permintaan terhadap minyak kelapa sawit di Jordan manakala

embargo perdagangan ke atas Libya mengurangkan kadar permintaan di negara

tersebut. Di Libya, satu lagi faktor penting ialah kadar pertukaran wang asing.

Keanjalan pennintaan harga minyak kelapa sawit itu sendin, harga minyak pengganti

dan pendapatan terbukti berada pada tahap yang tinggi dan ini menyarankan bahawa

pasaran adalah responsif terhadap perubahan pernbolehubah tersebut dan juga

kepentingan pembolehubah ini diambil kira dalam pembentukan polisi pemasaran.

Unjuran permintaan import minyak kdapa sawit menunjukkan bahawa permintaan

ini dijangka akan terus meningkat di semua negara yang dikaji walaupun wujud

perbezaan dari segi kadar perkembangan permintaan antara negara. Bermakna,

pasaran di MENA berkemampuan untuk menerirna kemasukan lebih banyak.minyak,

kelapa sawit.

ACKNOWLEDGEMENTS

All praise due to Allah, the most Gracious and Merciful, for giving me the strength

and determination to complete this study and throughout my life.

It is my pleasure to express and record my profuse thanks, deepest appreciation and

gratitude to my renowned supervisor Prof. Dr. Fatimah Mohammad Arshad. Her

inspiring guidance and continuous encouragement particularly at some critical times

had profoundly motivated me to complete this study.

My hearty thanks and indebtedness to Professor Dr Mad Nasir Shamsudin, the

Deputy Dean of the School of Graduate Studies, Universiti Putra Malaysia and a

member of my supervisory committee. His sound advice, constructive critique,

scholarly views and rich experience in the area of economics were instrumented in

formulating my arguments.

It is also my pleasure to abundantly thank Associate Professor Dr. Zulkarnain Yusop,

of the Department of Economics, Faculty of Economics and Management, UPM and

member of my supervisory committee for his encouragement and giving me the

opportunity to benefit from his rich knowledge.

I am greatly indebted to my husband Hassan, not only for sponsoring this study but

also for his untiring emotional support and firm belief in my ability to finish the job.

I am thankful to Mr. Balu Nambiappan, Head of Marketing Department, the

Malaysian Palm Oil Board, Mr. Ahmed Zafki Ahmed Nawawi, a Market Analyst, the

Malaysian Palm Oil Promotion Council and Madam Siti Zuraidah Hj Mohd Tohar,

Librarian, Palm Oil Registration and Licensing Authority for their friendly and

generous help providing me with access to data and valuable information required

for completion of this research.

Many thanks to my friends Dr Taufiq Hassan, Department of Accounting and

Finance, Dr. Ahlam Abd Elhadi, Univesity of Gadarif and Sulaiman Almasaied as

they were most helpful.

I will forever be appreciative to my loving mother, brothers and sister for their

blessings and encouragement. They have always motivated me to realize my

ambitions.

Finally, I like to express my heartfelt and deep thanks to my beloved children,

Osman and Muna for tbeir love, patience and sacrifices during the course of this

study.

I certify that an Examination Committee met on 24Ih January 2005 to conduct the final examination of Amna Awad Abdel Hameed on her Doctor of Philosophy thesis entitled "An Econometric Study of Palm Oil Import Demand in the Middle East and North African Countries" in accordance with Universiti Pertanian Malaysia (Higher Degree) Act 1980 and Universiti Pertanian Malaysia (Higher Degree) Regulations 198 1. The Committee recommends that the candidate be awarded the relevant degree. Members of the Examination Committee are as follows:

Khalid Abdul Rahim, PhD Professor Faculty of Economics and Management Universiti Putra Malaysia (Chairman)

Ishak Omar, PhD Professor Faculty of Economics and Management Universiti Putra Malaysia (Member)

Mastura Yahya, PhD Lecturer Faculty of Economics and Management Universiti Putra Malaysia (Member)

Pazim Othman, PhD Faculty of Economics and Administration Universiti Malaya (Independent Examiner)

zAfJ2+- DUL RASHID, PhD ~ r o f e s s o ~ ~ e ~ u t ~ Dean School of Graduate Studies Universiti Putra Malaysia

Date: 2 2 APR 2005

xii

This thesis submitted to the Senate of Universiti Putra Malaysia and has been accepted as fulfilment of the requirement for the degree of Doctor of Philosophy. The members of the Supervisory Committee are as Follows:

Fatimah Mohd. Arshad, Ph.D.

Professor Faculty of Economics and Management Universiti Putra Malaysia (Chairman)

Mad Nasir Shamsudin, Ph. D.

Professor Faculty of environmental Sciences Universiti Putra Malaysia (Member)

Zulkarnain Yusop, PhD

Associate Professor Faculty of Economics and Management Universiti Putm Malaysia (Member)

AINI IDERIS, Ph.D.

School of Graduate Studies Universiti Putra Malaysia

DECLARATION

I hereby declare that the thesis is based on my origtnal work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other degree at UPM or other institutions.

AMNA AWAD ABDELHAMEED

xiv

TABLE OF CONTENTS

Page

DEDICATION ABSTRACT ABSTRAK ACKNOWLEDGEMENTS APPROVAL DECLARATION LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS

. . 11 ... 111

vi ix xi . . . mu xvii xix

CHAPTER

1 INTRODUCTION 1.1 General Background 1.2 Problem Statement 1.3 Significance of the Study 1.4 Objectives of the Study 1.5 Hypotheses of the Study 1.6 Organization of the Study

2 OVERVIEW OF FATS AND OILS SITUATION 2.1 General Background of World Fats and Oils

2.1.1 Introduction 2.1.2 World Fats and Oils Situation in the World

2.1.2.1 World Production of Fats and Oils 2.1.2.2 World Consumption of Fats and Oils 2.1.2.3 World Imports of Fats and Oils 2.1.2.4 World Prices of Major Fats and Oils

2- 1 -3 Trade Issues 2.1.3.1 Tariff Barriers 2.1.3.2 Non-Tariff Barrier

2.2 Palm Oil Industry in tbe World 2.2.1 About the Palm Oil 2.2.2 Palm Oil Production in the World 2.2.3 World Palm Oil Exports 2.2.4 World Palm Oil Imports

2 3 Palm Oil in Malaysia 23.1 Developments in Marketing Sector 2.3.2 Pricing and Taxation 2.3.3 Market Promotion

3 OtLS AND FATS SITUATION IN THE MENA REGION 3.1 General Background of the MENA Region

3.1.1 Economic Background 3.1 .2 Overview of MENA Trade

3.2.1 Oils and Fats Production in the MENA Region 3.2.2 Disappearance ofFats and Oils in the MENA

Region 3.3 Fats and Oils Trade in the MENA Region

3.3.1 Fats and Oils Imports 3.3.2 Fats and Oils Exports 3.3.3 Import Duties on Fats and Oils Imports

3.4 Oils and Fats Situation in Individual MENA Countries 3.4.1 Per Capita Fats and Oils Consumption Pattern 3.4.2 Supply and Demand Balance of Major Fats and Oils

and Self Sufficiency Ratio 3.4.3 Fats and Oils Consumption 3.4.4 Fats and Oils Imports

4 LITERATURE REVIEW 4.1 Introduction 4.2 Definition of Large and Small Country 4.3 Perfect Substitutes and Imperfect Substitutes Models 4.4 Import Demand Model Specifications 4.5 Exchange Rates and Trade Models 4.6 Dynamic Specification of Trade Model 4.7 Agricultural Commodity Modelling

4.7.1 The Armington Model 4.7.2 The Rotterdam Model 4.7.3 The AIDS Model

4.8 Production Theory Approach to Import Demand Analysis 4.9 Review of Empirical Studies on Palm Oil 4.10 Recent Developments in the Demand for Fats and Oils

Studies 4. I 1 Forecasting 4.12 Application of Time series Analysis and Forecasting in

Commodity Modeling

5 METHODOLOGY 5.1 Introduction 5.2 Import Demand Model for Palm Oil

5.2.1 Theoretical Framework for Palm Oil Import Demand Model. 5.2.1.1 Generalized Import Demand 5.2.1.2 Palm Oil Import Demand Model 5.2.1.3 Deriving a Generalized Demand Function

5.2.2 The Functional Form 5.2.3 Expected Signs 5.2.4 Dynamic Specification

5.3 Forecasting Method 5.4 Data Plotting 5.5 Time Series Properties of the Economic Variables

5.5.1 Non-Stationarity of Time Series Data 5.5.2 Unit Root Test of Stationarity 5.5.3 Co-integration and Error Correction Model

xvi

5.5.2 Unit Root Test of Stationarity 5.5.3 Co-integration and Error Correction Model 5.5.4 Bounds Test 5.5.5 Lag length selection 5.5.6 Autoregressive Distributed Lag (ARDL)

5.6 Estimation Methods 5.7 Diagnostic Tests 5.8 Model Validation 5.9 Data Sources and Definitions

6 RESULTS AND DISCUSSION 6.1 Introduction 6.2 Determinants of Palm Oil Import Demand in MENA

Countries 6.2.1 Pre estimation Tests

6.2.1.1 Unit Root Test 6.2.1.2 Lag Length Selection 6.2.1 -3 Bounds Test Results

6.2.2 Models Estimation 6.2.2.1 Autoregressive Distributed Lag Estimates 6.2.2.2 Estimating the Long Run Parameters 6.2.2.3 The Short-run Dynamics and the Adjustment

Towards the Long-Run Equilibrium 6.2.3 Long- run and short-run import demand elasticities

6.3 Forecasting Palm oil Import Demand 6.3.1 Models Validation 6.3.2 Palm Oil Import Demand Projections

7 SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS 7.1 7.1 Summary and Conclusions. 7.1 7.2 Policy Implications 7.10 7.3 Limitations of the Study and Suggestions for Further 7.11

Research

BIBLIOGRAPHY BIODATA OF THE AUTHOR

xvii

LIST OF TABLES Table

World Production of Major Oils and Fats

World Consumption of Major Oils and Fats

World Imports of Major Fats and Oils

Annual Average Prices for Major Oils North West Europe

Palm Oil Complex Tariffs, Export Taxes and Effective Protection

World Major Palm Oil Producers

Palm Oil World Average Yield and Mature Area

World Palm Oil Exports

Palm Oil Imports by Major Importers

Annual Prices for Malaysian Crude Palm Oil

Export Duty on Crude Palm Oil

Export Duty Exemption Structure for Processed Palm Oil

POCPA Recipient Countries

Socio-Economic Statistics of the MENA Region (2001)

Growth of Output in the h4ENA Region

MENA Merchandise Exports and Percentage Share in World Merchandise Imports

MENA Merchandise Imports and Percentage Share in World Merchandise Exports

MENA Structure of Merchandise Exports Value

MENA Structure of Merchandise Imports Value

Import Duties Contribution in Some MENA Countries GDP

MENA and World Production of Fats and Oils

MENA Disappearance of Major Fats and Oils

Page

2.3

2.6

2.9

2.10

2.14

2.20

2.20

2.2 1

2.23

2.26

2.29

2.30

2.32

3.3

3.5

3.7

3.8

3.10

3.1 1

3.13

3.14

3.15

xviii

3.10 MENA and World Imports of Fats and Oils

3.1 1 MENA and World Exports of Fats and Oils

Import Duty Structure of Vegetable Oils and Fats in MENA Countries 3.19

Per Capita Daily Calorie Intake 3.21

Supply and Demand Balance of Major Fats and Oils 3.25

Fats and Oils Consumption by Selected MENA Countries 3.30

Fats and Oils Imports by Selected MENA Countries 3.35

Palm Oil Imports by MENA Countries by Countries of Origin 3.37

Summary of Literature on Import/Export Demand for Pam Oil 4.22

Definition of Variables

Unit Root Tests Results

Test Statistics and Choice Criteria for Selecting the Order of the VAR Models 6.7

F-Statistics for Testing the Existence of Long-run Relationships 6.8

Autoregressive Distributed Lag Estimates 6.13

Estimated Long Run Coefficients Using the ARDL Approach 6.27

Error Correction Representation for the Selected ARDL Model 6.34

Long-run and Short-run Elasticities for the Palm Oil Import Demand for Selected MENA Countries 6.42

Historical Simulation Results of Palm Oil Import Demand in MENA Countries 6.48

Projections of palm oil imports by MENA Countries in 2003-2012 6.54

xix

LIST OF FIGURES Figure

2.1

2.1

2.2

2.3

6.1

Page

1.3

2.1 1

2.18

2.27

The Middle East & North Africa (MENA) Map

Annual Average Prices for Major Oils (North West Europe)

Palm Oil Utilization Chart

Annual Prices for Malaysian Crude Palm Oil

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Algeria)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recmive Residuals (Egypt)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Iran)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Jordan)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Libya)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Morocco)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Saudi Arabia)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Sudan)

Plots of Cumulative Sum and Cumulative Sum of Squares of Recrusive Residuals (Syria).

Plots of Cumulative Sum and Cumulative Sum of Sguares of Recrusive Residuals (Turkey)

Simulation of Palm Oil Imports by Algeria

Simulation of Palm Oil Imports by Egypt

Simulation of Palm Oil Imports by Iran

Simulation of Palm Oil Imports by J o r h

Figure 6.15 Simulation of Palm Oil lmports by Libya

Figure 6.16 Simulation of Palm Oil lmports by Morocco

Figure 6.17 Simulation of Palm Oil lmports by Saudi Arabia I

Figure 6.18 Simulation of Palm Oil Imports by Sudan

Figure 6.19 Simulation of Palm Oil Imports by Syria

Figure 6.20 Simulation of Palm Oil Imports by Turkey

Figure 6.21 Projections of Palm Oil Imports by Algeria in 2003-2012

Figure 6.22 Projections of Palm Oil Imports by Egypt in 2003-2012

Figure 6.23 Projections of Palm Oil Imports by Iran in 2003-2012

Figure6.24 Projections of Palm Oil Imports by Jordan in 2003-2012

Figure 6.25 Projections of Palm Oil Imports by Libya in 2003-2012

Figure 6.26 Projections of Palm Oil Imports by Morocco in 2003-2012

Figure 6.27 Projections of Palm Oil Imports by Saudi Arabia in 2003-2012 6.59

Figure 6.28 Projections of Palm Oil Imports by Sudan in 2003-2012 6.60

Figure 6.29 Projections of Palm Oil Imports by Syria in 2003-2012 6.60

Figure 6.30 Projections of Palm Oil Imports by Turkey in 2003-2012 6.60

xxi

LIST OF ABBREVIATIONS

3 SLS AIDS AR ARDL ARIMA ARMA ASEAN BECM bn BVAR CAP CES CIF COMMEX CPO CUSUM CUSUMSQ DM EC ECM ECT ECU EEC EMPOPA EU EX-USSR FA0 FDA FFB FOB GATT GCC GDP GLS ha HS IBRD IMF Kg KLCE KLOFFE LAAIDS MA MARMA MDEX MENA MFN

3 Stage Least Squares Almost Ideal Demand System Autoregressive Autoregressive Distributed Lag. Autoregressive Integrated Moving Average Autoregressive Moving Average Association of South East Asian Nations ayesian Error Correction Mechanism Billion Bayesian Vector Autoregressive Common Agricultural Policy Constant Elasticity of Substitution Cost, Insurance, and Freight Commodity and Monetary Exchange of Malaysia Crude palm oil Cumulative sum Cumulative sum of squares Deutsche Mark (German Currency) European Community Error Correction Model Error Correction Term European Currency Units European Economic Community. East Malaysia Palm Oil producers association European Union Former Soviet Union Food and Agriculture Organisation of the United Nations. Food and Drug Administration Fresh Fruit Bunches Free on Board General Agreement on Tariffs and Trade Gulf Cooperation Council Gross Domestic Product Generalised Least Squares Hectare Harmonized System International Bank for Reconstruction and Development International Monetary Fund Kilogram. Kuala Lumpur Commodity Ekchmge Kuala Lumpur Options and Financial Futures Exchange Linear Approximate Almost Ideal Demand System Moving Average Multivariate ARMA Malaysia Derivatives Exch;inge Middle East and North Afikan Region. Most Favoured Nation

xxii

mn MOU MPI MPOB MPOGC MPOPC NW Europe OECD OLS P PKO POCPA PORDB PORIM PORLA PPO RBD RM RMSE RMSPE RSDAIDS RVAR SDAIDS SSR SUR T TAS UAE UD UK UN UNCTAD UR USD USDA USSR VAR WMOPA WTO

Million Memorandum of Understanding Ministry of Primary Industries Malaysian Palm Oil Board Malaysian Palm Oil Growers' Council Malaysian Palm Oil Promotion Council North West Europe Organization for Economic Cooperation and Development Ordinary Least Squares Production Palm kernel oil Palm Oil Credit Payment Arrangement Palm Oil Research and Development Board Palm Oil Research Institute of Malaysia. Palm Oil Registration and Licensing Authority Processed palm oil Refined bleached deodorized Malaysian Ringgit. Root Mean Square Error Root Mean Square Percentage Error Restricted Source Differentiated AIDS Restricted VAR Source Differentiated AIDS Self Sufficiency Ratio Seemingly Unrelated Regression Metric ton = 1000 Kg. Technical Advisory Services United Arab Emirates Domestic utilisation United Kingdom United Nations. United Nations Conference on Trade and Development Uruguay Round of trade negotiations United States Dollar. United States Department of Agriculture Union of Soviet Socialist Republics Vector Autoregressive West Malaysian Palm Oil Producers Association World Trade Organisation

CHAPTER 1

INTRODUCTION

1.1 General background

Palm oil is the most traded vegetable oil in the world, capturing about 48% of the

global vegetable oil trade volume in 2002 (Oil World, 2003). A distant second is

soybean oil with around 22% of the global trade. It is produced mainly (more than

80%) in South East Asia where Malaysia leads with more than 50% of the world

production, followed by Indonesia with about 30% of global production (FAO,

2004). Malaysia exports most of its productions (i.e. about 84%). Indonesia, on the

other hand, consumes 60% of its annual production of palm oil. Palm oil plays an

important role in Malaysian economy as an export earner and a source of living for

about 0.3 million families employed in various land schemes and in palm oil estates.

The exports of Malaysian palm oil expanded rapidly since 1980s. In order to make

use of the added value of processed oil for creating more national income and

increase employment opportunities, the government adopted policies directed to

promote the exports of processed palm oil. Palm oil production is expected to

expand rapidly, driven on the demand side by cost advantage over alternative crops,

and on the supply side by relative profitabdity over other competing crops (USDA,

1995).

The overall demand for vegetable oils is expected to grow in the 21" century due

to increasing population and per-capita income especially in developing countries

where there is latent demand to be met as purchasing power increases. Total fats

and oils supply for developing countries is 64 gmlcapita/day, compared with

125gm/capita/day in developed countries (FAO, 2004). This will give opportunity

for different vegetable oils to expand their markets. In addition to that the new

century is expected to witness liberalisation of trade due to the successful

completion of Uruguay Round of General Agreement of Trade and Tariffs

(GATT). There will be lowering of bamers to entry as well as of subsidies under

the auspices of World Trade Organisation. This might also intensify the

competition of different vegetable oils.

Middle East and North Africa region (MENA)' is home of more than 426 million

people (about 7% of the world population). The percentage of MENA to the

world population is expected to increase to 8% by 2020 according to FA0

projections (FAO, 2004).

There is no specific defmition of the MENA region The most comprehensive definition comprises 24 economies; the 21 members of the Arab League (Algeria, Bahrain, Djibouti, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Palestine, Qatar, Saudi Arabia, Somalia Sudan, Syria, Tunisia, The united Arab Emirates and Yemen), Turkey, Iran and Israel. The most restrictive being the one that embraces Egypt, Lebanon, Jordan, Israel and the West Bank of Gaza (El-Erian and Fischer, 19%). For the purpose of this study MENA is d e f d to cover four Maghreb countries (Algeria, Morocco, Libya and Tunisia) located in north Africa, four economies situated at the geographcal centre of the area Pgypt , Syria, Jordan and Lebanon), Sudan, and the six members of the Gulf Cooperation council @ahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirate), and Turkey. Iraq, Yemen, and Lebanon are not included in the analysis because of the lack of recent economic data. Israel is also excluded because there is no evidence of trade relationship between it and Malaysia (apparently because of the trade embargo imposed by members of the Islamic League against Israel).