Failure of Forestry Political Economy of Indonesia

Indonesia's natural forest has been persistently declining, even with the fastest rate in the world, regardless of various efforts to stop the decline or at least to reduce the rate significantly. At the same time, development of plantation forest has been very slow. Amongst the various causes of the natural forest loss that have been identified, financial nonprofitability was not one of them. That being said, the fundamental reason as to why utilization of natural forest for timber production will not survive in the long run is because of financial nonprofitability.   In order for a business to stay in the industry of the natural forest utilization, the government should provide financial incentives using public's money. Hence, the public support for the forestry is vital for the survival of the industry?. However, improper implementation of forestry laws can have damaging impacts to the public's perception and support.   Moreover, the five policies, namely forest land establishment, fees, and royalties, log export ban, certification, and forest management unit establishment, which have failed to deliver sustainable natural production forests, are shortly discussed. Finally, the more appropriate approach of natural forest utilization is basically not as a sustainable forest management but rather as the optimal timber mining, which consequently requires different set of policies.

Internalizing Externalities through Payments for Environmental Services

Forest ecosystems, including plantation forests, provide goods and services that are marketable and non-marketable. Positive externalities produced by forest ecosystems are rarely considered in pricing of marketable products that result in economic inefficiencies. Internalizing externalities is required to improve the economic efficiency. The traditional way to internalize an externality is by providing subsidies or imposing taxes. Recently, payments for environmental services  are receiving more attention as an instrument for internalizing externalities provided by forest ecosystems. This promising alternative to improve our environment needs to be studied more extensively. In this paper, it can be indicated theoretically that the Pigovian tax, as a traditional way of addressing environmental problems, is able to mimic the result derived from the employment of environmental services payment. The difference is that environmental services payment improves the welfare of environmental service producers, whereas the Pigovian tax reduces it. A positive Pigovian tax increases the optimal rotation, which is positively associated with environmental improvement, but certainly reduces forest owner's welfare. This difference should be taken into account in the public policymaking so that perverse incentive may be avoided. Payment for environmental services  as an additional income to forest growers, not as alternative source of income, is a potential tool to address simultaneously issues of environment and poverty that are frequently contested

Total Economic Value in Investment Analysis

Forest ecosystems are often defeated in decisions about investment and economic development.  There is a very wide gap between policy makers and development investment on the one hand and environmentalists on the other hand, who see the forest ecosystem from the perspective of ecology and environment.  The first party considers that forest ecosystems have a low value, while the second party often shows very fantastic figures about the economic value of forests. From the second party's point of view, the first party could be ignorant or having a short-term interest; while from the first party's point of view, the second party loves to produce the figures that are too good to be true.  As a result, the total economic value of ecosystems is not only ignored as a consideration in investment decisions, but the total economic value of ecosystems has been seen as a boring scientific joke.  Why did the gap occur and how to close the gap will be discussed in this paper.  Economic valuation of ecosystem needs to be done more realistically so that the results are more plausible before policy makers. On the contrary, policy makers need to be aware that once a species vanished it never goes back.Keywords: ecosystem, goods and services, value, trade-off, double counting DOI: 10.7226/jtfm.19.3.20

Total Economic Value in Investment Analysis

Forest ecosystems are often defeated in decisions about investment and economic development.  There is a very wide gap between policy makers and development investment on the one hand and environmentalists on the other hand, who see the forest ecosystem from the perspective of ecology and environment.  The first party considers that forest ecosystems have a low value, while the second party often shows very fantastic figures about the economic value of forests. From the second party's point of view, the first party could be ignorant or having a short-term interest; while from the first party's point of view, the second party loves to produce the figures that are too good to be true.  As a result, the total economic value of ecosystems is not only ignored as a consideration in investment decisions, but the total economic value of ecosystems has been seen as a boring scientific joke.  Why did the gap occur and how to close the gap will be discussed in this paper.  Economic valuation of ecosystem needs to be done more realistically so that the results are more plausible before policy makers. On the contrary, policy makers need to be aware that once a species vanished it never goes back.Keywords: ecosystem, goods and services, value, trade-off, double counting DOI: 10.7226/jtfm.19.3.20

Political Economy of Land Use in Indonesia: Trap and Curse of Natural Forests

The allocation of land use in Indonesia is very inefficient, while the distribution of tenure is unequal. Half of the land for cultivation is held by forestry, and the other half is used by various other sectors. Most Indonesian farmers are small- scale farmers who do not meet economies of scale. Agrarian reforms aimed at overcoming inefficiency in land use, eliminating inequality in land tenure, and promoting rural areas’ prosperity need to involve land for cultivation allocated for forestry. This paper is written based on the author’s experience of interacting with various parties related to land issues, forest areas and agrarian reform through various forums, such as official meetings, focus group discussions, seminars, workshops, symposiums, one-on-one discussions (interviews), and interactions through social media. Agrarian reform, which has been launched since 1960, has not been able to be realized until today. The fight seems to involve two large groups, namely environmentalists and developmentalists, but this kind of grouping is likely to be misleading. Environmental issues may only be used as an instrument to obtain economic benefits as well, not for the environment itself

Double Dividend from Tariff Differentiation of Reforestation Fund

Distortionary levy applied uniformly to all diameter classes of logs from logging natural forest can lead to inefficiencies; certain diameter should be left in the field because it is not economical to be used. Win-win or Pareto improving solution can be achieved if the government is more flexible. Social welfare is higher because of the waste that can be utilized to create employment, production and additional benefits for employers, as well as revenue for the state. Even if the levy rates are forced to zero for small-diameter timber, governments is actually not harmed at all because from the beginning the government does not get any revenue from small timber that is left in the field as waste. In scarcity situations of timber from natural forests, it is desirable if the government is considering differentiating charges in order to reduce or possibly eliminate the volume of waste generated by the levy. In general, tariff differentiation done in the form of higher tariffs for higher diameter logs. If possible, the lowest diameter limit of logs is forced down to its technical limits. That is, the processing tool that will determine how the minimum diameter logs can be processed profitably.Keywords: tariff differentiation, efficiency, timber utilization, government revenue, win-win solutionDOI: 10.7226/jtfm.19.2.16

REDD+, Conservation, and Conversion

The effectiveness of periodical payment for forested lands as an incentive system to stop a conversion of forested lands is analyzed. Four simple models are outlined and analyzed to investigate behavior of the land manager whether to maintain the lands remain forested or to convert them to other uses. The analysis is pure theoretical employing the optimal control theory. A key element to induce the land manager to adopt forest conservation rather than forest conversion is a combination of periodical payments for the forested lands and the desirable scrap value. Without the desirable scrap value, periodical payments of carbon stock, regardless of the tariff, cannot stop the conversion; the tariff affects only the time when the conversion will be conducted but it is not sufficient to induce the land manager not to convert the forested lands. On the basis of this analysis, then policy implication is outlined. In order to provide the desirable scrap value, then a policy change is required. However, its implementation very likely encounters serious challenges from the land manager.

Hydrological Services of Forests and Their Compensation Initiatives

Rapid decreas of natural forest, and more frequent disaster related to the roles of forest on precipitation, flood, drought, erosion, and sedimentation as well as landslides, biodiversity, and carbon sequestration have driven initiatives to find out economic instruments for raising incentives for better land rehabilitation and forest management. Payment or compensation for hydrological services of forest is one of economic instruments that was initiated  to address water availability, flood and drought, erosion, and sedimentation issues.  Hydrological services of forest to some extent are still debatable, and the magnitude of the services or influences of forest varies depending on the quality of forest cover and soil, climate, and physical characteristics of land. In most cases, payment or compensation schemes of forest services to the land owner or manager that have been implemented already, do not consider the actual forest hydrological services yet. Nevertheless, those payment schemes have been driving the activities of better land and forest uses, although they are still limited to small scales relative to the whole required area to produce forest hydrological services. This article reviews the hydrological services of forests and their compensation scheme developed in Indonesia

Types of Forestry Charges from Natural Resource Economics Perspective

Capturing economic rent from natural resources, particularly forests, frequently still creates disagreement between the government and businesses. The charges imposed by the government in the forms of reboisation fund (DR) and forest resource provision (PSDH) have been in place for very long time, accepted by all stakeholders, and supported by laws. Government policy regarding compensation for forest stand value (GRNT) creates controvercies. This paper intends to clarify problem of forest charges by returning it to its fundamental theories, e.g. economic theory of natural resouces. Economic rent of forests that are controlled by the government is the right of all Indonesia people.  Henece, the government has responsibility for capturing the rent as much as possible in the most efficient way. If the stumpage is too low then it potentially promotes overcutting, whereas if it is too high then it makes forest business less attractive that potentially promotes illegal activities. In forestry, economic rent of forest has a special name, it is stumpage price. There are some difficulties in estimating a competitive stumpage price, wheter the one obtained through a direct competitive auction of standing timber or through calculation of residual price. Partly, the difficulties were generated by the government’s own policies that strongly distorted log prices. Log export ban and vertical integration are the two most influential policies in distorting log prices. Actually, the government is able to design and implement a single charge to capture PSDH, DR, and GRNT so that their administration becomes much simpler and more efficient

REDD+, Conservation, and Conversion

The effectiveness of periodical payment for forested lands as an incentive system to stop a conversion of forested lands is analyzed. Four simple models are outlined and analyzed to investigate behavior of the land manager whether to maintain the lands remain forested or to convert them to other uses. The analysis is pure theoretical employing the optimal control theory. A key element to induce the land manager to adopt forest conservation rather than forest conversion is a combination of periodical payments for the forested lands and the desirable scrap value. Without the desirable scrap value, periodical payments of carbon stock, regardless of the tariff, cannot stop the conversion; the tariff affects only the time when the conversion will be conducted but it is not sufficient to induce the land manager not to convert the forested lands. On the basis of this analysis, then policy implication is outlined. In order to provide the desirable scrap value, then a policy change is required. However, its implementation very likely encounters serious challenges from the land manager.