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UNIVERSITI PUTRA MALAYSIA
NURUL NADIA RAMLI
FP 2012 66
A SYSTEM DYNAMICS SIMULATION OF THE MALAYSIAN RICE POLICY
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A SYSTEM DYNAMICS SIMULATION OF THE
MALAYSIAN RICE POLICY
NURUL NADIA RAMLI
MASTER OF SCIENCE
UNIVERSITI PUTRA MALAYSIA
2012
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A SYSTEM DYNAMICS SIMULATION OF THE MALAYSIAN RICE
POLICY
By
NURUL NADIA RAMLI
Thesis Submitted to the School of Graduate Studies, Universiti Putra Malaysia,
in Fulfillment of the Requirements for the Degree of Master of Science
2012
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Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfilment
of the requirement for the degree of Master of Science
A SYSTEM DYNAMICS SIMULATION OF THE MALAYSIAN RICE
POLICY
By
NURUL NADIA RAMLI
May 2012
Chair : Professor Mad Nasir Shamsudin, PhD
Faculty: Agriculture
Among the agricultural industries in Malaysia, the rice industry is the most highly
protected, with a web of policy intervention in place to ensure the sustainability of
the industry. There are three types of government intervention which are import
restrictions, production subsidies and price supports. This study therefore attempts to
simulate the impacts of government policy on the Malaysian rice industry in terms of
its production, demand, trade and self-sufficiency level (SSL) with changes in policy
instruments. A system dynamics model was employed in simulating the impacts of
changes in the government policies.
The simulation result indicated that the decrease in quantity of import quota leads to
a decline in rice stock. Based on the simulation results, the rice stock showed an s
shaped growth followed by a decline for the period of 2015. After that period, the
rice stock will decline gradually per year. This scenario occurs due to the imposition
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of import quota that restricts the amount of rice that could be imported.
Consequently, this leads to the decline in rice stock as the rice stock should be
released in order to meet demand. The percentage of decline is about 17 per cent as
compared to the baseline scenario.
Simulation result indicated that the fertilizers used can give a significant impact to
the yield. The removal of NPK fertilizer subsidy will lead to the decline in the yield
obtained. The percentage decline in yield is about 24 percent. This occurs because
the paddy farmers do not buy the additional NPK fertilizer, resulting in the decline in
yield obtained. Thereafter, this leads to the decline in the SSL as the population
continues to increase. Percentage decline in SSL is about 25.47 percent.
A simulation on the price support revealed that it can give a positive impact to the
farmers’ gross income. The result suggests that if the government removes the price
support policy, the farmers’ gross income will decrease about 18.4 percent. This is
because under this policy, farmers will earn additional income of about RM248.10
for each metric tonne of paddy they produce. In other words, for each metric tonne
of paddy production, the farmers will gain RM248.10. Thus, withdrawal of the price
support policy may result to the decrease in farmers’ gross income.
The simulation results indicated that the introduction of new variety of paddy leads
to increase in yield, and hence also increase in the production level. The percentage
increase in yield and production is about 3 percent per year in 2015 and 2021.
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Nevertheless this may not be able to sustain the industry in terms of the targeted self-
sufficiency level due to the increase in population. The simulation results also
suggested that from 2011 until 2014, the decrease of percentage in SSL is about 2
percent per year. In 2015 until 2016 the percentage decrease in SSL declines to 0.5
percent due to the increase in rice production because of the introduction of new
variety of paddy in year 2014 until 2016. Unfortunately after 2016, the percentage
decline in SSL is back to its normal rate of about 2 percent per year until 2021.
Again in 2021 if the new variety is being used, the percentage decline in SSL will be
0.5 percent per year.
Therefore, it can be concluded that the overall policy implication indicated that
paddy production in Malaysia cannot be sustained without fertilizer subsidy and
price support programs. However due to trade liberalization, the initiatives to support
the industry will be limited. The reduction in import quota leads to the decline in rice
stock as the rice stock must be released to meet demand. Thus it is suggested that
production must be increased to replenish the rice stock that has been released.
Thus, the major policy implications from the study suggest that attention is be given
to increase in the yield in order to meet demand. Therefore the government should
introduce a policy that can encourage the farmers to increase their yield through
acquisition of extra fertilizers or through better management practices.
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Special funds could be established to provide assistance for efficient paddy
production and also to educate farmers to increase paddy production. Investments on
research and development also should be encouraged since the introduction of new
variety of paddy leads to the increase in the yield obtained. Investments by the
government in the Research & Development, extension and technology transfer must
continue and further strengthened. These efforts would considerably improve the
agricultural productivity in order to ensure adequate supply of rice for the Malaysian
population.
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Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai
memenuhi keperluan untuk ijazah Master Sains
SIMULASI SISTEM DINAMIK KE ATAS POLISI BERAS DI MALAYSIA
Oleh
NURUL NADIA RAMLI
Mei 2012
Pengerusi : Profesor Mad Nasir Shamsudin, PhD
Fakulti : Pertanian
Di antara industri pertanian di Malaysia, industri beras merupakan industri yang
sangat dilindungi, dengan dasar campur tangan kerajaan untuk memastikan
kemampanan industri. Terdapat tiga jenis campur tangan kerajaan iaitu sekatan
import, subsidi pengeluaran dan subsidi harga. Oleh itu, kajian ini mensimulasikan
kesan-kesan polisi kerajaan ke atas industri beras Malaysia dari segi pengeluaran,
permintaan, perdagangan dan tahap sara diri dengan perubahan dalam instrumen
polisi. Model sistem dinamik telah digunakan untuk mensimulasikan kesan
perubahan polisi-polisi kerajaan.
Hasil simulasi menunjukkan bahawa pengurangan kuantiti kuota import membawa
kepada penurunan dalam stok beras. Berdasarkan keputusan simulasi, stok beras
menunjukkan pertumbuhan berbentuk s yang diikuti oleh penurunan pada tahun
2015. Selepas tempoh itu, stok beras akan berkurangan secara beransur-ansur setiap
tahun. Senario ini berlaku disebabkan oleh pengenaan kuota import yang
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mengehadkan jumlah beras yang boleh diimport. Oleh yang demikian, ini membawa
kepada penurunan dalam stok beras kerana stok beras perlu dikeluarkan untuk
memenuhi permintaan. Peratusan penurunan adalah 17 peratus berbanding “baseline
scenario”.
Hasil dari simulasi menggambarkan bahawa baja yang digunakan boleh memberikan
kesan yang siknifikan kepada hasil. Keputusan simulasi juga mencadangkan bahawa
penghapusan subsidi baja NPK akan membawa kepada penurunan dalam hasil yang
diperolehi. Penurunan peratusan hasil adalah sebanyak 24 peratus. Senario ini
berlaku kerana pesawah tidak membeli baja NPK tambahan, mengakibatkan
penurunan dalam hasil yang diperolehi. Seterusnya, ini membawa kepada penurunan
dalam tahap sara diri disebabkan oleh peningkatan populasi penduduk. Penurunan
peratusan tahap sara diri adalah sebanyak kira-kira 25.47 peratus.
Simulasi subsidi harga mendedahkan bahawa subsidi harga boleh memberi impak
yang positif kepada pendapatan kasar petani. Keputusan simulasi menunjukkan
bahawa jika kerajaan menghapuskan polisi subsidi harga, pendapatan kasar petani
akan jatuh kira-kira 18.4 peratus. Ini adalah kerana di bawah polisi ini, petani akan
mendapat pendapatan tambahan sebanyak kira-kira RM248.10 bagi setiap tan padi
yang dihasilkan. Dalam erti kata lain, bagi setiap tan pengeluaran padi, para petani
akan mendapat RM248.10. Oleh itu, penarikan balik polisi subsidi harga boleh
mengakibatkan penurunan dalam pendapatan kasar petani.
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Keputusan simulasi menunjukkan bahawa pengenalan variati baru untuk padi
membawa kepada peningkatan dalam hasil, dan dengan itu juga dapat meningkatkan
pengeluaran beras. Peratus peningkatan dalam hasil dan pengeluaran adalah kira-kira
3 peratus setahun pada tahun 2015 dan 2021. Walau bagaimanapun, ini mungkin
tidak dapat mengekalkan industri dari segi tahap sasaran sara diri disebabkan oleh
peningkatan dalam populasi. Keputusan simulasi juga mencadangkan bahawa dari
tahun 2011 hingga 2014, tahap sara diri menurun sebanyak kira-kira 2 peratus
setahun. Pada tahun 2015 sehingga 2016 peratusan penurunan dalam tahap sara diri
telah menurun kepada 0.5 peratus disebabkan oleh peningkatan dalam pengeluaran
beras disebabkan oleh pengenalan variati baru untuk padi dalam tahun 2014 dan
sehingga 2016. Malangnya selepas 2016, penurunan peratusan di tahap sara diri
kembali ke kadar biasa kira-kira 2 peratus setahun sehingga 2021. Pada 2021 sekali
lagi sekiranya variati baru diperkenalkan, peratus penurunan dalam tahap sara diri
akan menjadi 0.5 peratus setahun.
Oleh itu, ia boleh disimpulkan bahawa implikasi polisi keseluruhan menunjukkan
bahawa pengeluaran padi di Malaysia tidak boleh dikekalkan tanpa subsidi baja dan
subsidi harga. Walau bagaimanapun disebabkan oleh liberalisasi perdagangan,
inisiatif untuk menyokong industri akan terhad. Pengurangan kuota import
membawa kepada penurunan dalam stok beras kerana stok beras mesti dikeluarkan
untuk memenuhi permintaan. Oleh itu, adalah disyorkan bahawa pengeluaran perlu
ditingkatkan untuk menambah lagi stok beras yang telah dikeluarkan.
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Oleh itu, implikasi polisi utama daripada kajian menunjukkan bahawa perhatian
perlu diberikan untuk meningkatkan hasil bagi memenuhi permintaan. Oleh itu,
kerajaan perlu memperkenalkan satu polisi berkaitan bantuan yang dapat
menggalakkan petani untuk meningkatkan hasil mereka melalui pemerolehan baja
tambahan atau melalui amalan pengurusan yang lebih baik.
Dana khas boleh ditubuhkan untuk menyediakan bantuan bagi pengeluaran padi
yang cekap dan juga untuk mendidik petani untuk meningkatkan pengeluaran padi.
Pelaburan ke atas penyelidikan dan pembangunan juga harus digalakkan
memandangkan pengenalan variati baru untuk padi membawa kepada peningkatan
dalam hasil yang diperolehi. Pelaburan oleh kerajaan dalam penyelidikan dan
pembangunan, lanjutan dan pemindahan teknologi perlu diteruskan dan
diperkukuhkan lagi. Usaha-usaha ini boleh meningkatkan produktiviti pertanian
untuk memastikan bekalan beras yang mencukupi untuk penduduk Malaysia.
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ACKNOWLEDGEMENTS
All praise and thanks be to Allah the almighty for His guidance and Grace
I would like to take this opportunity to thank everyone who contributed to the
successful completion of this thesis. Special thanks are expressed to my thesis
supervisor Professor Dr. Mad Nasir Shamsudin for his invaluable advice, guidance
and support throughout the thesis completation. Without his tireless assistance,
leadership and confidence in my abilities, this thesis would not come to its timely
completion. I also thank him because he has opened my mind to a New World of
knowledge, opportunities and experiences and a beter understanding. Working
beside him was extremely demanding and challenging, and helped me significantly
to get my best intellectual shape. Sincere thanks are extended to my supervisory
committee members, Prof. Dr. Zainal Abidin Mohamed and Associate Prof. Dr.
Alias Radam for their constructive criticsms and recommendations in this study.
My sincere appreciation is also expressed to my colleagues at Department of
Agribusiness and Information System (JPSM), Mark, Muaz, Kelly and Faizal for
their support throughout these years. My sincere thank is also expressed to all
lecturers in JPSM for their advice and support throughout the thesis completation.
To my friends Kamarul Hidayah, Faezah, Zuraidah, Nuralina, Nurul Asrin, Hilda,
Shafina and Khansa and who are are not mentioned in this short acknowledgement
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for lack of space, I appreciate your help and contribution toward the completation of
this thesis.
I am especially thankful to my family for their love and support. To my husband, I
appreciated his understanding and moral support in completing this thesis. His
support gave me the focus and determination needed to complete this thesis. I am
most thankful for my brothers and sisters. I am also grateful to my parents for their
prayers and encouraging words. Their wisdom has helped me a lot.
Finally, I would like to thank to the Ministry of Higher Education Malaysia and
Universiti Putra Malaysia for the financial support in completing my Master’s
Degree.
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I certify that a Thesis Examination Committee has met on 7 May 2012 to conduct
the final examination of Nurul Nadia Binti Ramli on her thesis entitled "A
System Dynamics Simulation of the Malaysian Rice Policy" in accordance
with the Universities and University Colleges Act 1971 and the Constitution of
the Universiti Putra Malaysia [P.U.(A) 106] 15 March 1998. The Committee
recommends that the student be awarded the Master of Science.
Members of the Thesis Examination Committee were as follows:
Mohd Mansor Ismail, PhD
Professor
Faculty of Agriculture
Universiti Putra Malaysia
(Chairman)
Norsida Man, PhD
Associate Professor
Faculty of Agriculture
Universiti Putra Malaysia
(Internal Examiner)
Ismail Abd Latif, PhD
Faculty of Agriculture
Universiti Putra Malaysia
(Internal Examiner)
Abu Hassan Md Isa, PhD
Professor
Department of Accounting and Finance
Universiti Malaysia Sarawak
Malaysia
(External Examiner)
SEOW HENG FONG, PhD Professor and Deputy Dean
School of Graduate Studies
Universiti Putra Malaysia
Date:
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This thesis was submitted to the Senate of Universiti Putra Malaysia and has been
accepted as fulfilment of the requirement for the degree of Master of Science. The
members of the Supervisory Committee were as follows:
Mad Nasir Shamsudin, PhD
Professor
Faculty of Agriculture
Universiti Putra Malaysia
(Chairman)
Zainal Abidin Mohamed, PhD
Professor
Faculty of Agriculture
Universiti Putra Malaysia
(Member)
Alias Radam, PhD
Associate Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Member)
___________________________
BUJANG BIN KIM HUAT, PhD
Professor and Dean
School of Graduate Studies
Universiti Putra Malaysia
Date:
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DECLARATION
I declare that the thesis is my original work except for quotations and citations which
have been duly acknowledge. I also declare that it has not been previously, and is not
concurrently, submitted for any other degree at Universiti Putra Malaysia or at any
other institutions.
__________________________________
NURUL NADIA BINTI RAMLI
Date:
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TABLE OF CONTENTS
ABSTRACT
ABSTRAK
ACKNOWLEDGEMENTS
APPROVAL
DECLARATION
LIST OF TABLES
LIST OF FIGURES
LIST OF APPENDICES
LIST OF ABBREVIATIONS
CHAPTER
1 INTRODUCTION
1.1 The Malaysian Rice Industry
1.1.1 Area Planted
1.1.2 Production of Paddy
1.1.3 Production of Rice
1.1.4 Import of Rice
1.1.5 Consumption of Rice
1.2 Malaysian Rice Policy
1.2.1 Production Policy
1.2.1.1 Fertilizer Subsidy
1.2.1.2 Guaranteed Minimum Price
1.2.1.3 Paddy Price Subsidy Scheme (PPS)
1.2.2 Import Policy
1.3 Problem Statement
1.4 Objectives
1.5 Significance of Study
1.6 Structure of Thesis
2 LITERATURE REVIEW
2.1 Government Intervention on Rice Industry
2.2 Commodity Modelling
2.3 Rice Modelling
2.4 System Dynamics
2.4.1 Economic Models
2.4.2 Management: Firm and Market Model
2.5 Econometrics versus System Dynamics
2.5.1 Econometric Model
2.5.2 System Dynamics
2.5.3 Strengths of System Dynamics Model
2.6 Conclusion
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3 METHODOLOGY
3.1 Introduction
3.2 Theoretical Framework
3.2.1 Import Restriction
3.2.2 Fertilizer Subsidy
3.2.3 Price Support
3.3 Steps of Modelling Process
3.3.1 Problem Articulation (Boundary Selection)
3.3.2 Formulation of Dynamics Hypothesis
3.3.3 Formulation of Simulation Model
3.3.4 Testing
3.3.5 Policy Design and Evaluation
3.4 System Dynamics
3.4.1 System
3.4.2 Simulation
3.4.3 System Dynamics Model
3.4.4 Types of Data
3.5 System Dynamics Model for the Malaysian Rice Industry
3.5.1 Technical Component (First Sub Model)
3.5.2 Economic Component (Second Sub Model)
3.6 Data Sources
3.7 Descriptions of Scenarios
3.7.1 Baseline Scenario
3.7.2 Scenario 1 (Import Quota)
3.7.3 Scenario 2 (Fertilizer Subsidy)
3.7.4 Scenario 3 (Price Support)
3.7.5 Scenario 4 (Improvement in Yield)
4 RESULTS AND DISCUSSION
4.1 Analysis of Simulation Results
4.1.1 Baseline Scenario
4.1.1.1 Technical Component (Baseline Scenario)
4.1.1.2 Economic Component (Baseline Scenario)
4.1.2 Scenario 1 (Import Quota)
4.1.2.1 Technical Component (Scenario 1)
4.1.2.2 Economic Component (Scenario 1)
4.1.3 Scenario 2 (Fertilizer Subsidy)
4.1.3.1 Technical Component (Scenario 2)
4.1.3.2 Economic Component (Scenario 2)
4.1.4 Scenario 3 (Price Support)
4.1.4.1 Technical Component (Scenario 3)
4.1.4.2 Economic Component (Scenario 3)
4.1.5 Scenario 4 (Improvement in Yield)
4.1.5.1 Technical Component (Scenario 4)
4.1.5.2 Economic Component (Scenario 4)
4.2 Validation of System Dynamics Model
4.2.1 Pre- Simulation Model Validation
4.2.1.1 Boundary Adequacy Test
4.2.1.2 Model Structure Test
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4.2.1.3 Error Checking Test
4.2.1.4 Dimensional Test
4.2.2 Post Simulation Model Validation
4.2.2.1 Extreme Condition Test
4.2.2.1.1 Extreme Condition
5 SUMMARY AND CONCLUSION
5.1 Conclusions
5.2 Policy Implications
REFERENCES
APPENDICES
BIODATA OF STUDENT
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