Long-run Determinants of Export Supply of Sarawak Black and White Pepper: An ARDL Approach

Transcription

1 Global Ecoomy ad Fiace Joural Vol. 3 No. March200, Pp Log-ru Determiats of Export Supply of Sarawak Black ad White Pepper: A ARDL Approach Wog Swee Kiog *, Khalid Abdul Rahim ** ad Mad Nasir Shamsudi *** Malaysia is the fifth largest pepper exporter i the world. About 90% of the pepper produced i Malaysia is meat for export market. Malaysia exports both black pepper ad white pepper i the iteratioal market. Sarawak Pepper is the trade ame for pepper exported from Malaysia. This paper will explore ad compare the log-ru determiats of both black ad white pepper i Malaysia by usig the Autoregressive Distributed Lag (ARDL) Model. The paper cocludes by providig some policy recommedatios to Malaysia govermet to cotiue makig Malaysia as oe of the top pepper exportig coutries i the iteratioal area. JEL Codes: P52, Q7 ad Q8. Itroductio Pepper (Piper Nigrum L.), the Kig of spices, with its varied uses ad domiace i the global spice trade, is the oldest ad widely used spice i the world. It has occupied a positio that is supreme ad uique ad is today a foreig exchage earer for several coutries icludig Malaysia. Pepper has secured a pivotal positio i food, pharmaceuticals, perfumery ad cosmetic idustries (Nybe ad Peter, 2002). With the developmet of moder sciece ad techology ad greater awareess ad demad amog people for the use of atural products, particularly i food ad pharmaceuticals, pepper ideed secured a better positio ad has a better prospect i the years to come. Malaysia is the fifth largest pepper exporter i the world after Vietam, Brazil, Idia ad Idoesia. About 90% of the pepper produced i Malaysia is meat for export market. Malaysia exports both black pepper ad white pepper i the iteratioal market. Sarawak Pepper is the trade ame of pepper exported from Malaysia either i the form of black pepper or white pepper. Most of the pepper produced i Malaysia is from the state of Sarawak. I fact, pepper is still cosidered a importat cash crop particularly i Sarawak, Malaysia. Chages i export supply of pepper would idirectly affect the icome level ad welfare of pepper farmers. This paper will explore the log-ru * Dr. Wog Swee Kiog, Departmet of Developmet Studies, Faculty of Social Scieces, Uiversiti Malaysia Sarawak, Malaysia. swkwog@fss.uimas.my ** Prof. Dr. Khalid Abdul Rahim, Faculty of Ecoomics ad Maagemet, Uiversiti Putra Malaysia, Malaysia. Khalid@eco.upm.edu.my *** Prof. Dr. Mad Nasir Shamsudi, Faculty of Evirometal Studies, Uiversiti Putra Malaysia, Malaysia. asir@ev.upm.edu.my

2 Kiog, Rahim & Shamsudi relatioship betwee the export supply of Sarawak Pepper ad its determiats for both black pepper ad white pepper i Malaysia by usig the Autoregressive Distributed Lag (ARDL) model. Idetifyig determiats of export supply of Sarawak Pepper is imperative so that appropriate policy optios ca be recommeded to the govermet to help Malaysia cotiue to be amog the top pepper exporters i the iteratioal area. After all, the welfare of more tha 67,000 pepper farmers is at stake. 2. Literature Review Mohammed (993) i his study has aalysed the performace of Malaysia pepper export. The supply equatio was regressed upo the productio of pepper, the tred variable (which captured the effect of the prefereces of the producers for pepper growig) ad the demad for Malaysia pepper export, while the demad fuctio was regressed o price of pepper, real world icome which was represeted by the idustrial productio idex ad the productio of pepper i Malaysia. The results of the study suggested that price of pepper was ot a importat determiat of the supply ad export demad for pepper i Malaysia. The supply of pepper was determied by the demad while the export demad was depedet o the capacity to supply which was proxied by the quatity of productio. Both of these variables had a positive relatioship with their respective idepedet variables (Mohammed, 993).I geeral, there is ot much study doe to fid out the determiats of export supply of Sarawak Pepper. Most studies had bee revolvig aroud modellig ad forecastig of Sarawak Black Pepper prices (Liew et al., 2003) or issues related to relatioship betwee black pepper prices ad white pepper prices (Habibullah ad Baharumshah, 994; Lau et al., 2008). Therefore, this paper is writte to fill the research gap o determiats of export supply of Sarawak Black Pepper ad Sarawak White Pepper. 3. Methodology I this study, the ARDL coitegratio procedure itroduced by Pesara et al. (996; 200) which preclude the possibility of estimatig ay spurious regressio would be employed to fid out the log-ru determiats of export supply for both Sarawak Black Pepper ad Sarawak White Pepper. This ARDL or bouds test approach is merely based o the estimatio of urestricted error correctio model (UECM) ad ca be used to test for existece of log-ru equilibrium relatioship amog the time series variables, as well as to estimate the log-ru ad short-ru coefficiets (Tag, 2003). Aual data for all related variables from 980 to 2004 were collected from the Malaysia Pepper Board 2 (MPB) ad Departmet of Agriculture, Sarawak for aalysis i this study. First, the ull hypothesis of o coitegratio agaist the existece of log-ru relatioship betwee export supply of pepper ad its determiats is tested for Sarawak Black Pepper ad Sarawak White Pepper respectively. After various trials to test statistically to see if there exists log-ru relatioship betwee export supply ad all the explaatory variables, the most parsimoious ARDL models for the export supply of Sarawak Black Pepper ad Sarawak White Pepper are ultimately derived. 79

3 Kiog, Rahim & Shamsudi I the absece of a cosistet theoretical framework i literature o the export supply of pepper, this study tries to formulate a fairly geeral model specificatio for export supply of pepper i Malaysia by icorporatig all the potetial exogeous variables that would better explai pepper export i Malaysia. Equatio () ad Equatio (2) below are the error correctio represetatios of ARDL models for export supply of Sarawak Black Pepper ad Sarawak White Pepper respectively: ΔXb = a b ΔXb c ΔIpb d ΔYb e ΔStkb 0 j t j j t j j t j j t j β Xbt β 2Ipbt β 3Ybt β 4Stkbt ε t () ΔXw = a b ΔXw c ΔIpw d ΔIpb e ΔGe f ΔYw 0 j t j j t j j t j j t j j t j β Xwt β 2Ipwt β 3Ipbt β 4Get β 5Ywt ε t (2) where Xb = Export of black pepper measured i toe per year Xw = Export of white pepper measured i toe per year Ipb = Iteratioal prices (= Average FOB prices) of black pepper measured i US dollar per toe ad coverted ito Riggit Malaysia per toe by usig official exchage rate Ipw = Iteratioal prices (= Average FOB prices) of white pepper measured i US dollar per toe ad coverted ito Riggit Malaysia per toe by usig official exchage rate Yb = Domestic supply of black pepper productio measured i toe per year Ge = Actual govermet expediture o pepper projects ad pepper subsidy scheme each year (measured i Riggit Malaysia) Stkb = Stock of black pepper stored from previous productio measured i toe ε t = Error term to capture all other uexplaied factors i ifluecig the export supply of black pepper ad export supply of white pepper respectively i Malaysia. I additio, a dummy variable to capture the effects of itroductio of steam sterilizatio plat i 998 at the Malaysia Pepper Board Kuchig, Sarawak to produce Mikroklee value added pepper (D4) ad the tred variable (T) to capture chages i tastes ad prefereces by cosumers i the importig coutries towards black or white Sarawak Pepper had also bee icluded i the models for aalysis. 4. Fidigs ad Discussio After testig the ull hypothesis for o coitegratio, results 3 of the calculated F- statistics cofirm a coitegratig relatio betwee the export supply of black pepper ad 80

4 Kiog, Rahim & Shamsudi its determiats comprisig of the iteratioal price of black pepper (Ipb), domestic supply of black pepper productio (Yb) ad the stock of black pepper (Stkb). I additio, the results also idicated that there is evidece of coitegratio relatioship amog export supply of white pepper (Xw), iteratioal price of white pepper (Ipw), iteratioal price of black pepper (Ipb), govermet expediture (Ge) ad domestic supply of white pepper (Yw). Oce the coitegratio is cofirmed, estimatio for the log-ru coefficiets of the export supply of black pepper ad the export supply of white pepper fuctios are the carried out respectively. Give the small umber of observatios, this study has restricted the lag structure to a maximum of three periods. The results of the aalysis show statistically sigificat ad egative coefficiets for error correctio term (ECT) i both export supply of black pepper ad export supply of white pepper models. This further reiforced the fidig that there exists uique stable log-ru relatioship betwee export supply of pepper ad its determiats i Malaysia i both black pepper ad white pepper cases respectively. The empirical results of these log-ru coefficiets for both export supply of black pepper ad export supply of white pepper are give i Table. Table : Log-Ru Supply Elasticities of Export Supply of Sarawak Pepper i Malaysia Black Pepper Export Supply Model (Equatio ) Depedet variable: Xb Model Selectio Criterio (SBC) (,3,0,2) Regressors Coefficiet T-Ratio Ipb * Yb.028*** 9.50 Stkb ** D ** T ** Costat * White Pepper Export Supply Model (Equatio 2) Depedet variable: Xw Model Selectio Criterio (SBC) (2,,,,0) Regressors Coefficiet T-Ratio Ipw 2.767*** Ipb *** Ge Yw * 2.06 T *** Costat 8.235*** Notes: *** Deotes statistical sigificace at % level ** Deotes statistical sigificace at 5% level * Deotes statistical sigificace at 0% level 8

5 Kiog, Rahim & Shamsudi The varied results obtaied for both models have a umber of implicatios for desigig ad embracig effective govermet policies to ehace the export supply of pepper to improve the welfare of all stakeholders i the pepper idustry i Malaysia. For the export supply of black pepper, it ca be cocluded from the ARDL log-ru coefficiet results show i Table that except for dummy variable that captures the itroductio of sterilizatio plat (D4), the positive coefficiets of all other explaatory variables show that the log-ru movemet i iteratioal price of black pepper (Ipb), domestic supply of black pepper productio (Yb), stock of black pepper (Stkb) ad chages i taste ad preferece i importig coutries (T) have positive sigificat impacts, though with differet magitudes, o the exports of black pepper i Malaysia. The domestic supply of black pepper productio (Yb) has the greatest positive effect (.0) o export supply of black pepper i Malaysia, followed by the iteratioal price of black pepper (0.32) ad the stock of black pepper gives the least positive sigificat effect (0.0) o the log-ru export supply of black pepper i Malaysia. O the other had, for the export supply of white pepper, with the exceptio of govermet expediture (Ge) variable, all other variables are sigificat ad the coefficiets are cosistet with a priori expectatios too. As measured by the magitude of their coefficiets, the log-ru ARDL result shows that iteratioal price of the competig commodity of black pepper (Ipb) has the domiat but egative effect o the log-ru export supply of white pepper with coefficiet equal to 2.99, followed by iteratioal price of white pepper (2.72), domestic supply of white pepper (0.43) ad the tred variable (T) that captures chages i taste ad prefereces of the pepper importig coutries (0.26). From the results show i Table, the export supply elasticities with respect to chages i the iteratioal pepper price of 0.32 for black pepper ad 2.72 for white pepper i log ru idicate that the export supply of black pepper i Malaysia is ielastic but is elastic for white pepper i the log ru. A % icrease i the iteratioal price of pepper will cause black pepper export to icrease by oly 0.32% but will cause white pepper export to icrease by 2.72% i the log ru. The positive relatioship foud betwee the iteratioal pepper price ad the export supply of both black ad white pepper i the log ru is i coformity with ecoomic theory. However, the egative elasticity of white pepper export supply with respect to black pepper price i the log ru ca be explaied by the iheret ature of black pepper as a competig product for white pepper. Whe iteratioal price of black pepper icreases, more black pepper will be supplied ad exported i the market, causig the export supply of white pepper to reduce, vice versa. However, iteratioal price of white pepper does ot seem to affect export supply of black pepper sigificatly i Malaysia. This might be explaied by more cumbersome procedure ivolved i producig white pepper as compared to black pepper. White pepper productio would ormally ivolve more work by soakig the ripe pepper berries i the flowig stream/ stagat tak water for about seve days before washig ad dryig them to become white pepper. This causes most farmers prefer to produce black pepper thus reducig export supply of white pepper whe the price of black pepper icreases sigificatly, ot vice versa. 82

6 Kiog, Rahim & Shamsudi Oe possible reaso to explai sigificat differece i price elasticities of export supply betwee black ad white peppers is that most pepper farmers who produce black pepper are relatively poorer. Thus, they ormally sell their black pepper directly after they process them. As pepper exporters get the supply of pepper from pepper farmers, the behaviour of pepper farmers would very much ifluece the export supply of pepper i the market. So, eve though there is a drastic chage i the iteratioal price of black pepper, the export supply of black pepper does ot chage sigificatly. However, most pepper farmers who produce white pepper are more affluet farmers. They could buy more expesive seedlig which could yield bigger pepper berries for producig white pepper. Besides, they could also use more fertilizer to esure that pepper berries are big eough to produce white pepper. After these farmers processed the white pepper ad if the price of white pepper is ot good eough, they could afford to keep their white pepper i store ad to sell them whe the price of white pepper is high eough. Cosequetly, the price elasticity of export supply of white pepper is larger. I additio, the output elasticities of black pepper export supply ad white pepper export supply at.0 ad 0.43 respectively i the log ru reveal that export supply is about uitary elastic for black pepper but is rather ielastic for the white pepper i Malaysia. This implies that for every % icrease i the domestic supply of pepper output, export supply of black pepper would icrease by about % but export supply for white pepper would icrease by less tha 0.5%. A plausible explaatio for this differece could be that most pepper exporters are more iterested i makig bigger profit. However, as the supply of pepper for export is from the farmers. As compared to farmers who produce white pepper, most farmers who produce black pepper are relatively poorer. Thus, these farmers who produce black pepper could ot afford to store pepper awaitig for higher price to sell oce they have processed their pepper. They would sell their pepper products directly after processig them. Thus, whe there is icrease i pepper productio i black pepper, there will be a more drastic icrease i black pepper export compared to white pepper. Besides that, the stock of pepper ad the itroductio of steam sterilizatio plat are sigificat determiats of export supply of black pepper but ot white pepper. This could probably be explaied by the real sceario i the pepper idustry where ot may pepper farmers i Malaysia process white pepper to be stocked as most of the pepper farmers particularly i Sarawak are poor. This would thus affect the stock of pepper kept by the exporters for export market. The stock coefficiet of 0.0 i the log-ru black pepper export supply model implies that the export supply elasticity of black pepper with respect to black pepper stock is very ielastic. The stock of black pepper stored would positively ad sigificatly affect the black pepper export supply i the iteratioal market i the log ru. The reaso is that pepper stock is ormally kept for the log-term use i the export supply of black pepper. The export supply of black pepper will icrease i the log ru particularly whe pepper price starts rocketig up. Noetheless, i cotrast to a priori expectatio, D4 dummy variable has show a iversely related relatioship betwee the itroductio of a sterilizatio plat i MPB ad the log-ru export supply of black pepper i Malaysia. The iitial itetio of buildig 83

7 Kiog, Rahim & Shamsudi the sterilizatio plat at MPB headquarters i Kuchig is to come out with more value added pepper that ca meet more striget food safety ad clealiess requiremets set by the importig coutries. Despite that, it is evidetly foud that the itroductio of steam sterilizatio plat does ot help to icrease the export supply of black pepper i Malaysia. Oe possible reaso of gettig a egative coefficiet for D4 is that iteratioal pepper prices for black pepper are i the dowwards tred after its peak i 998. This egative impact of decliig iteratioal pepper prices o pepper export might overweigh the beefit of istallig the sterilizatio plat i MPB to come out with more value added black pepper to be supplied for export market. From the iterview carried out with the MPB officers, it was told that the steam sterilizatio plat is uderutililized, particularly durig low pepper price period. Furthermore, sice the itroductio of steam sterilizatio plat i 998, pepper prices have ot rise dramatically. This might cause shortage of pepper supplied by pepper farmers i Malaysia to be processed i the steam sterilizatio plat. So, eve though there is a ew techology beig istalled with the iitial itetio to process more value-added pepper products that ca meet stricter food safety ad evirometal requiremets set by the cosumers from the pepper importig coutries, the desired outcome has so far yet to be reached as there is ot eough supply of pepper from farmers. A closer study o the steam sterilizatio plat project might have to be carried out so that MPB ad related agecies ca ip the idetified problem i the bud. Helpig farmers to produce i a more productive way ad iculcatig pepper farmers with the etrepreeurship midset are probably prerequisites for pepper idustry i Malaysia to stay competitive. Suppose Malaysia pepper farmers were to stay with their closed-mided hearts ad do ot wat to be exposed or are uwillig to use the advaced methods beig itroduced to them, the o matter how good the techology has bee ivested to process the value-added pepper such as the steam sterilizatio plat built i 998 at MPB, Kuchig, Sarawak would ultimately come i vai as well. Thus, it is importat to iculcate etrepreeurship midset amog Malaysia pepper farmers to come out with high value-added pepper products so that the farmers will cotiuously get the high premium price for the pepper that they produce. This could somehow guaratee a costat supply of pepper from farmers for Malaysia to export its quality pepper products to overseas market. It is iterestig to ote that the tred variable which captures chages i taste ad prefereces of cosumers i the importig coutries is highly sigificat ad has positive sig i both export supply models. This implies that cosumers i both black ad white pepper importig coutries have geerally shifted their taste ad preferece either towards Sarawak Pepper. Kowig that Malaysia has great potetial to expad its pepper export market, MPB, i particular should iitiate to improve the preset situatio. MPB should esure that every cet ivested is worth its value to improve the export earigs of pepper i Malaysia by fully utilizig its sterilizatio plat. MPB should also itesify its research ad developmet strategies so that the beefit gaied from the huge ivestmet made i the sterilizatio plat i MPB always overweighs the egative impact of upredictable ad highly volatile iteratioal pepper price. 84

8 5. Summary ad Coclusio Kiog, Rahim & Shamsudi I summary, the results of the data aalysis above verify some ecoomic theories but at the same time also refute the other a priori expectatios with strog empirical foudatio. With respect to the export supply of black pepper i Malaysia, the results suggest that export supply of black pepper i Malaysia is primarily affected by iteratioal price of black pepper, domestic supply of black pepper productio, stock of black pepper, itroductio of steam sterilizatio plat i MPB ad chages i taste ad preferece of cosumers i the pepper importig coutries. The empirical results for export supply of white pepper, however, show that iteratioal price of white pepper, iteratioal price of black pepper, domestic supply of white pepper ad the tred variable that captures chages i taste ad preferece amog cosumers i the pepper importig coutries are deemed sigificat factors attributable to the chages i white pepper export supply i Malaysia. The positive output elasticity of black pepper ad white pepper export supply i Malaysia reveals the fact that Malaysia govermet policies should be directed to ehace the productivity ad efficiecy of pepper productio i Malaysia. As we ca see the great potetial of higher demad of pepper ad pepper products for a ear future, the relevat miistries should therefore create a coducive eviromet for these pepper farmers to veture ad further improve their pepper platig scheme. Besides that, Malaysia should cotiue to exploit its comparative advatage as worldwide greatest stregth i pepper research by itesifyig its pepper research to come out with a more capital-itesive method of cultivatig pepper besides comig out with a more pest-resistat hybrid so that Malaysia will still be amog the top pepper producers ad pepper exporters i the world for the ext few decades. This is crucial to esure cotiuous supply of both Sarawak Black ad White Pepper i the iteratioal market. I additio, the positive coefficiet of tred variable that captures chages i taste ad preferece amog cosumers of both black ad white Sarawak Pepper by pepper importig coutries evidetly highlights the ecessity of Malaysia govermet effort to cotiuously icrease the availability ad the credibility of Malaysia pepper products i iteratioal market. I fact, Sarawak pepper has gaied promiet ackowledgemet as cosistet ad reliable quality pepper products i the iteratioal market due to the madatory requiremets to grade the pepper based o certai stadard criteria before they are exported to the importig coutries. However, i order to sustai i this highly dyamic ad competitive world, Malaysia govermet should adopt policies that would make its pepper products remai attractive eve with more aggressive iteratioal competitio. To further erich the credibility of its pepper products, Malaysia govermet should ivest more i R&D to further stregthe madatory requiremets to grade Sarawak Pepper besides developig more value-added pepper products i Malaysia for the iche markets. The related agecies such as Malaysia Pepper Board ad Departmet of Agriculture should therefore take the iitiative to get the certificatio from the iteratioal body for the labellig purpose of its high quality pepper products. 85

9 Kiog, Rahim & Shamsudi Amog the determiats of export supply of pepper from Malaysia, iteratioal pepper price appears to be the most cosequetial exteral factor. Not oly the total reveue of Malaysia particularly for the state of Sarawak is iflueced by the up ad dow of pepper export earigs resultig from the highly ustable pepper prices, the high volatility of iteratioal pepper price is udoubtedly the most detrimetal to pepper farmers lives as pepper farmig is the sole source of livelihood for majority of the pepper farmers i Sarawak. As a cosequece, i order to help these pepper farmers to get rid of episodes of hard times without eough food, ehacig market competitiveess by educatig these pepper farmers to produce oly market-accepted value added pepper products is o loger a alterative. The market-orieted midset should thus be iculcated i all pepper farmers hearts. This put a greater burde to the extesio workers both from the MPB ad the Departmet of Agriculture to educate these poor pepper farmers. Sice most pepper farmers particularly i Sarawak are poor, Malaysia govermet should provide ecessary assistace i terms of educatio ad better techology for more lucrative pepper productio i Malaysia. I short, the highly volatile pepper price i the iteratioal market further proffers the eed for developig ad producig higher-quality pepper products. By producig the value added cleaer ad safer-to-cosume pepper i Malaysia, it will ot oly ehace the market competitiveess of Malaysia pepper products (Sarawak Pepper) i the iteratioal market, the pepper farmers will ultimately be guarateed a better livelihood at the ed of the day. Ed-Notes The author would like to express her gratitude to Uiversiti Malaysia Sarawak for providig the facilities to carry out this research ad to preset the paper i The th Iteratioal Busiess Research Coferece i Mariott Hotel, Sydey Harbour, Australia. Besides that, the author would like to ackowledge the cooperatio give provided by the Malaysia Pepper Board ad Departmet of Agriculture i providig data/ iformatio eeded for aalysis i this study. 2.Malaysia Pepper Board is the ew ame for Pepper Marketig Board from st Jauary Costrait by the space available, the results are ot reported i this paper. Nevertheless, they are available upo request. Refereces Habibullah, M.S. ad Bharumshah, A.Z Ca pepper farmers predict white pepper prices usig chages i black pepper prices? A empirical study. Boreo Review, Vol. 5, pp Lau, E., Puah, C.H., Oh, S.L. & Lo, Y.C Causality betwee White pepper ad Black pepper: Evidece from six markets i Sarawak. Muich Persoal RePEc Archive. (MPRA) Paper o Jauary 4, Liew, K.S., Shita, M. & Hussai, H Time series modelig ad forecastig of Sarawak black pepper prices. Joural Academic, Vol. 9, pp

10 Kiog, Rahim & Shamsudi Mohammed, Y The Performace of Malaysia Pepper Export. I: Ibrahim, M.Y., Bog, C.F.J. ad Ipor, I.B. (Eds), The Pepper Idustry: Problems ad Prospects. Bitulu: Uiversiti Pertaia Malaysia, pp Nybe, E.V. ad Peter, K.V Haress the Potetial for Diversified Uses of Black Pepper (Piper igrum L.). Iteratioal Pepper News Bulleti. Jauary-Jue Pesara, M.H., Shi, Y. ad Smith, R.J Testig for the Existece of a Log-ru Relatioship. Departmet of Applied Ecoomics, Uiversity of Cambridge, Cambridge. DAE Workig Paper No Pesara, M.H., Shi, Y.C. ad Smith, R.J Bouds Testig Approaches to the Aalysis of Level Relatioships. Joural of Applied Ecoometrics. Vol.6, No.3, pp Tag, T.C Aggregate Imports Demad ad Expediture Compoets i Japa: A Empirical Study. Jural Aalisis. Vol.0, No.2, pp