Could Palm Oil Plantation Increase Individual Expenditure? The Dutch Disease Implication in Indonesia

Abstract

Accepted: 15 August 2020 Abstract Indonesia is the largest palm-oil producing country, covering almost 80 percent of global production. With the extensive production capacity, this research seeks to analyze the linkages between palm oil production and its impact on the economy by the individual monthly expenditure. To reveal the connections, this research analyzes the Dutch Disease phenomenon in Indonesia, which explains how the non-tradable sector, palm-oil industry, affects the tradable sector like the manufacturing industry. The panel data variables are selected from 2011 to 2015 within 22 provinces to see the Dutch Disease’s implications. As the model is suffered from the endogeneity, the correlation of explanatory variables with the error term, the research uses the InstrumentalVariable Regression method. The analysis indicates that Indonesia was not suffered from Dutch Disease. Therefore, palm oil production could increase individual expenditure. Finally, the extension of palm oil plantations could benefit Indonesia’s economy without affecting other sectors.