An investigation into the use of macroeconometric model simulation and optimal control for policy planning in the Malaysian rubber and oil palm industry

Abstract

This study examines the use of macroeconometric model simulation and optimal control techniques, for sectoral policy planning concerning the optimal allocation of rubber and oil palm in the Malaysian plantation industry. Optimal crop allocation, which illustrates sectoral planning problems in the developing economy, provides an alternative diversification strategy for tackling the commonly encountered problem of income instability associated with the exports of primary commodities.

Rubber and palm oil contribute significantly to the Malaysian economy and this leads to the selection of a macromodelling approach as the appropriate methodology for studying the impact of sectoral policy changes in the plantation industry. Both historical and futuristic policy experiments were carried out within the consistent framework of a macroeconometric model constructed for this study. An evaluation of the competitiveness of rubber and palm oil is also presented to complement the results from the macroeconometric model.

The simulation results show that the pattern of crop allocation for the plantation industry was not optimal, especially for the rubber smallholding sector, and that an optimal strategy would have been to maximise the planting of oil palm during the 1970-1983 period. Policies for the projected period of 1984-1995 were examined by the optimal control technique. Besides providing some ideas of the optimal paths for various planting strategies for rubber and oil palm, the technique was also shown to be complementary to traditional simulation procedures in macromodel analysis. The results, though exploratory, support the formulation of policies which slightly favour reverting towards increased planting of rubber relative to oil palm for the 1990s.

It was shown that the macromodel simulation and optimal control techniques could be effectively used for sectoral planning, and they provided a way of quantifying the impact of past and future sectoral policies on the country's economy. Ways of improving and adapting the model for actual applications were discussed.