Economy-wide impacts of palm oil downstream in North Sumatra: A CGE approach

Abstract

Commodity downstreaming is a key strategy in increasing value added and driving structural transformation of the economy in Indonesia. This study investigates economic impact of palm oil downstreaming policies in North Sumatra using the Computable General Equilibrium (CGE) approach based on the IndoTERM model. By simulating scenarios of increasing productivity in the palm oil downstream sector, this study evaluates its impact on macroeconomic indicators, employment, trade, and sectoral and spatial distribution. Empirical results indicate that downstreaming has a significant positive impact on GDP, investment, exports, and real wages at both regional and national levels, although creates economic disparities between regions, especially for CPO-producing regions such as Riau and Jambi. Downstream sectors such as cooking oil, cosmetics, and soap experience a high investment surge, while the upstream sectors actually show contractions. Downstreaming improves value added and national export competitiveness, eventhough import of intermediate inputs and dependence on foreign technology increases which must be anticipated. These findings emphasize the requirement for an inclusive, long run oriented downstreaming policy design accompanied by strengthening infrastructure, workforce capacity, and cross-sectoral governance to drive economic benefits distributed more equally and sustainably.