Abstract
Supply response of rubber to changes in economic incentives is analysed using co-integration approach. Time series data is taken for the period 1990 to 2014 and the vector error correction model framework has been applied. The empirical results confirmed the existence of a unique long-run equilibrium relationship among planted acreage, the relative price of rubber and price of fertilizer. Further, the estimates suggested that rubber supply is significantly influenced by the relative price of rubber and the price of fertilizer. The estimated short- and long-run elasticities of acreage with respect to relative price are respectively 0.04 and 0.77, while the short- and long-run elasticities of acreage with respect to fertilizer price are -0.20 and -0.28 respectively. The study recommends the design of an appropriate economic incentive structure to stimulate output and hence the income of farmers.
Highlights
Rubber (Hevea brasiliensis) is an important perennial crop for the Malaysian economy and in 2015 the rubber industry contributed about 4.27% of national exports (Department of Statistics, 2016)
In order to significantly increase farm output and the income of farmers, developing an appropriate incentive structure should be the objective of Malaysian agricultural pricing policy
The supply responsiveness of agricultural commodities to economic incentives has received the attention of policy-makers in recent years due to its role in determining the efficacy of government intervention in the agricultural sector
Summary
Rubber (Hevea brasiliensis) is an important perennial crop for the Malaysian economy and in 2015 the rubber industry contributed about 4.27% of national exports (Department of Statistics, 2016). Supply response analysis is a tool used to evaluate the success and effectiveness of pricing policies regarding allocation of farm resources and provides inputs for formulating economic policy in agricultural production. Empirical point of view, this study deeply looked into the factor affecting the production of rubber so that farmers’ competitiveness and their earnings can be increased This is the main agenda of Malaysian government in 2020 plan to push the farmers out of the middle income trap. The structure of the rest of the paper is as follows: The second section highlights the theoretical and empirical literature of supply response of both annual and perennial crops.
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