The effects of export taxation in the rubber industry in West Malaysia

Abstract

The rubber export tax system in West Malaysia consists of the following elements: 1) the Schedule I export tax, which varies with the price level of RSS 1 rubber 2) the Schedule III research cess, which is a fixed amount of 1 cent per pound of rubber exported 3) the Schedule IV replanting cess, which is a constant amount of cents per pound of rubber exported. The explicit objectives of the Schedule I export tax are to raise revenue for the Government and to act as a countercyclical tool during periods of price fluctuations. The other two cesses are earmarked taxes. The research cess is collected for the purpose of funding research in the rubber industry. The replanting cess is collected for the purpose of subsidizing replanting amongst the rubber producers. To accomplish this a replanting grant is given to the rubber producers. The problem to be investigated in this thesis centres on the relationship between the imposition of the export taxes and the provision of the replanting grant on the one hand and rubber investment and production on the other. Owing to differences in the administration of the export taxes, particularly the replanting cess, for the estate and smallholding sectors and because of their different economic background, the effects on the two groups of producers are quite different. The details of the above issues are explained in Chapter 1, which outlines the objectives and methodology of the thesis. It also explains the manner in which detailed new data on the rubber production and marketing system and on the decision making of estates and smallholdings was collected by an extensive sample survey during 9 months fieldwork in West Malaysia. These new data form the basis for a large part of the analysis in the thesis. In Chapter 2, the development of the rubber industry and its role in the Malaysian economy are discussed. Differences in the organizational structure and resource use between smallholdings and estates are highlighted. In Chapter the major theoretical conclusions on export taxes in international trade and public finance studies are reviewed. The development of the rubber export taxation system is then traced. An attempt is also made to reinterpret the Nurkse effect of the use of export taxes. Chapter 4 examines the process of price formation in the rubber sector. The major variables affecting the prices received by smallholders and estates are examined by a simple model. In this Chapter, there is also an attempt to estimate the effect of a change in the rubber export taxes on the domestic prices received by the rubber producers. Chapter 5 discusses the concept and measurement of progressivity of the rubber export taxes. It also analyses the burden of the taxes and its impact on the profitability of rubber production. A simple Nerlovian supply response model is constructed for smallholdings and estates in Chapter 6. The aim is to establish evidence on the influence of the export taxes and replanting grant on short run production and long run investment in the rubber industry. In Chapter 7, survey data and information are used to verify the conclusions of Chapter 6. The decision making process and the variables considered significant by rubber producers in their production and investment policy are analyzed. The long term planning decision in replanting a stand of rubber trees is examined in Chapter 8, The Farris model is applied and the effect of the replanting grant on optimal replacement ages is analyzed. In Chapter 9, the problems involved in restructuring the rubber export tax system are explained. A few hypothetical cases are used to illustrate the issue. It also provides a summary of the main conclusions of this study. Show more