TROPICAL FOREST CONSERVATION 495
forest land area against other uses. The transfer of forest land to permanent tree crop agriculture palm oil and rubber has
undoubtedly generated substantial income for Malaysia. Equally, concession royalties and other taxes extracted from lumber and
tree crop sectors have long provided an important source of fi- nance for the Malaysian government. Nor should it be overlooked
that land settlement has made a significant contribution to en- abling Malaysia’s rural poor IBRD, 1993. But the benefits of
other policies are in doubt. For example, Vincent 1992 concludes that attempts to foster the development of local wood-based indus-
tries through log export bans and other measures have been costly. For every sawmill job created in Peninsular West Malaysia be-
tween 1973 to 1989, the economy sacrificed both value-added and export revenue Vincent, 1992. Also, by reducing the local price
of lumber, and subsidizing inefficient producers, log bans may have accelerated deforestation Braga, 1992.
Our objective in this paper is not, however, to determine whether Malaysia has managed its tropical forest resources pru-
dently, or to suggest how they ought to be managed in the future. Dasgupta and Ma¨ler 1991 explain the complex nature of “sus-
tainable development” and identify its relationship to renewable resource exploitation. And when preferences vary widely within
or between societies, the identification of a socially “optima” pro- gram for resource use may not even be possible. In isolating the
income repercussions of tropical forest conservation, we provide information that policy makers may weigh against the nonlumber
value of tropical forests. But, in the absence of complementary information about conservation benefits, no welfare inferences
can be drawn from our analysis.
3. THE MODELING APPROACH
Conceptually, we portray tropical forest conservation in terms of the permanent withdrawal of an immobile resource from the
traded goods sector of a small open economy. Malaysia is, of course, small in the sense that its activity has little impact on the
rest of the world, but it is not necessarily small in the sense that it is a price taker in world goods markets see below. We know
from Corden and Neary 1982 that, in general, the withdrawal of an immobile resource from the traded goods sector of an econ-
omy will lead to a reduction in “metered” aggregate income,
496 F. Harrigan
an accompanying depreciation of the real exchange rate,
5
and a movement of resources from the non-traded to the traded goods
sectors. Because the magnitude of the resource shock that we consider is large, these interlocking general equilibrium repercus-
sions cannot safely be ignored. It is for this reason that we use an empirical general equilibrium model of the Malaysian economy
to illustrate the effects of conservation. As we shall see, a partial equilibrium analysis would give seriously misleading results, and
an empirical macro model would not cover well the mechanisms through which income changes are propagated.
Our applied general equilibrium model Demery et al. 1992 is not unlike the family of models described by Robinson 1991,
and more fully articulated by Bourguignon et al. 1992. It identi- fies traded and non-traded goods sectors within a broader classifi-
cation of 13 commodities. “Lumber” and “Tree Crop” activities and commodities are separately identified. The commodity out-
put of both these activities is traded. A third agricultural activity “Other Agricultural” produces commodities such as fish and
fruit that are primarily destined for domestic consumption. There are three manufacturing sectors, one of which is “Resource
Based.” This “Resource-Based” manufacturing sector includes some downstream lumber activities, including the manufacture
of wooden furniture, and paper and pulp products. The other manufacturing sectors are classified as “Export Oriented” and
“Domestic.” Non-traded goods and activities include “Construc- tion,” “Dwellings,” and “Public Services.” The outputs of “Private
Services” and “Utilities” are largely but not completely non- traded. Finally, “Oil and Gas” and “Other Mining” activities com-
plete our sectoral division of economic activities.
There are both mobile and immobile factors of production. Capital and land, which are aggregated in a Hicks composite
factor, are quasi-fixed, with their sectoral allocation responding to relative rewards through the allocation of net investment. The
aggregation of capital and land is dictated by a lack of data. Such aggregation is valid if the relative rewards to capital and land do
not change, or if technology is separable in capital and land. We consider the significance of the aggregation of capital and land,
and its quasi-fixed nature, further in Section 5 below. Labor is
5
Throughout, the “real exchange rate” refers to the price of nontraded to traded goods, and the “terms of trade” refers to the price of imports to exports.
TROPICAL FOREST CONSERVATION 497
intersectorally mobile. We distinguish between three different skill types “Unskilled,” “Semiskilled,” and “Professional and Skilled”
and between workers in “Land-Based” and “Nonland-Based” ac- tivities.
Producers in each sector, except lumber, solve static profit max- imization problems subject to multilevel constant returns CES
technology constraints. These determine input demands and out- put supplies. In the lumber activity the representative producer
faces an output constraint and, given output, minimizes cost. Pa- rameteric variation of this output constraint facilitates the mea-
surement of changes in income associated with lumber conserva- tion. The market for Malaysian lumber is cleared through rationing
exports. Unsatisfied domestic demand is met through imports. This treatment seems reasonable given the priority that Malaysia
has given to securing lumber for local supply see above. In other sectors, equilibrium is achieved through relative price adjustments.
Where lumber stocks are managed as a renewable resource, producers maximize the expected net present value of their lumber
stock by harvesting lumber until the real interest rate equals the lumber growth rate plus the rate of expected appreciation of
its stumpage value. This assumes that stumpage values are non- negative, and that second-order conditions are satisfied. However,
a conjunction of insecure property rights, old lumber, and slowly growing stumpage values has encouraged concession holders to
“mine” lumber in Malaysia Gillis, 1988; Vincent, 1992. In circum- stances like these, where planning horizons are short, intertempo-
ral first-order conditions are irrelevant, and producer behavior can reasonably be represented in static terms.
In our model, aggregate consumption is a function of household disposable income and private sector nonhuman wealth.
6
A repre- sentative household then allocates its aggregate expenditure be-
tween goods using a linear expenditure system. We model import and export demands using Armington 1969 functions. Activity
investment demand is exogenous in lumber and tree crop sectors, and is an increasing function of Tobin’s “q”
7
elsewhere. Transactors’ stocks of net wealth measured at the beginning
of the period are supplemented by their end of period financial
6
We assume that all transactors form their expectations adaptively. If we were instead to assume that consumers optimized intertemporally and that they formed their expectations
rationally, then income losses would, by definition, be reduced over those we estimate.
7
Specifically, the ratio of the marginal revenue product of capital to its user cost.
498 F. Harrigan
surpluses. Net wealth is then allocated over assets using portfolio selection models in which relative returns and perceived risks are
important. End-of-period asset market equilibrium occurs through the endogenous adjustment of asset yields, and the nominal ex-
change rate.
Lumber workers, who are predominantly “unskilled,” sell their labor services in the “Land-Based” labor market that covers work-
ers in agricultural, fishing, and lumber sectors. In the remaining sectors of the economy, there are separate labor markets for each
of the three skill categories. In each period, wages adjust to clear the Land-Based labor market and the markets for Semiskilled
and Professional workers. In the Unskilled labor market, we allow for the possibility that some workers who loose their jobs may
experience a spell of unemployment. However, our wage adjust- ment function is parameterized so that unemployment reverts
to its equilibrium rate quickly. This reflects the flexibility that Malaysia’s labor markets have exhibited for many years.
8
Workers migrate from the land-based to other labor markets in response to
lagged real consumption wage and unemployment differentials. Other than through migration, labor is inelastically supplied, and
labor force growth is exogenous.
There are four main departures in our treatment of the Malay- sian economy from the analytical framework employed by Corden
and Neary 1982. First, there is no requirement for trade balance in the sense of zero net exports. Second, and related to this, the
terms of trade is endogenous. Third, the “behavior” of government is explicitly modeled. Finally, our model is dynamic rather than
comparative static in nature. Each of these modifications lends greater realism to our calculations.
External balance in a real trade model, such as Corden and Neary’s, is normally identified with a balanced trade restriction.
Usually this “closure” requires that domestic absorption adjusts to ensure that net exports are zero or some other exogenously
determined number. In our model, the current account balance is endogenous. The nominal exchange rate adjusts together with
other asset yields to satisfy the conditions for asset market equilib- rium requirement, which include the requirement that the total
8
In fact, Malaysia for a long time imported significant quantities of labor and faced shortages of both unskilled and skilled workers Government Press, 1994.
TROPICAL FOREST CONSERVATION 499
demand for foreign exchange be equated with its supply.
9
Never- theless, domestic absorption still responds to the current account
balance through the influence the latter exerts on domestic wealth. Deficits, for example, reduce private wealth and consumption,
thus allowing resources to be released from the non-traded to the traded goods sectors of the economy. This imparts stabilizing
feedback to the balance of payments. In most simulations, we assume that the supply of foreign capital to the Malaysian economy
is elastic. This assumption is not unrealistic, given Malaysia’s his- torical reliance on foreign saving.
10
We do, however, also provide estimates of the income losses that could occur if foreign saving
were inelastically supplied. In our model, the repercussions of the current account are felt by domestic transactors through accompa-
nying changes in their net private wealth.
The endogeneity of the terms of trade has important implica- tions for our analysis. To the extent that conservation leads to a
reduction in foreign exchange, the Malaysian economy may have to endure a fall in the price of its nonlumber exports and an
increase in the local price of its imports to replace lost foreign exchange. The magnitude of such changes will be larger; the larger
is the price elasticity of demand for Malaysian lumber, and the smaller the price elasticity of demand for nonlumber exports.
Vincent 1992 notes that there are ready temperate substitutes for industrial roundwood and plywood produced from tropical
lumber,
11
and notes that competition from temperate woods is one reason why tropical lumber prices have not risen more quickly
as world stocks have become depleted. Available econometric evidence supports this view and indicates that imports of tropical
9
The balance of payments condition is, in effect, the external closure, and the exchange rate is determined together with endogenous asset yields to satisfy the condition for asset
stock equilibrium demand 5 supply in each period in each asset market. Ours is a Branson-like model of exchange rate determination in which long-run equilibrium is
characterized by the adjustment of the real exchange rate to ensure a current account balance consistent with a stable ratio of external debt to income. The steady-state debt
to income ratio depends on initial conditions, the path of autonomous variables, and the model’s structure.
10
Malaysia has frequently run current account deficits in the range of 5 to 10 percent of its GDP, although they have also posted more modest deficits in some years. Debt
servicing has not proved problematic due to the fast nature of its income and export growth. Malaysia, of course, experienced a large withdrawal of foreign capital in the wake
of the Asian crisis.
11
There are of course specialty woods such as teak, mahogany, and nara for which substitutes are not so readily available.
500 F. Harrigan
lumber are highly sensitive to price see the studies cited by Vin- cent, 1992, and Parthama and Vincent, 1992. Therefore, our base-
line assumption is that Malaysia is a price taker in world lumber markets.
For Malaysia’s manufacturing exports we impose export price elasticities that are comparatively large 5. Our values are close
to those estimated by Riedel 1989 for Hong Kong’s manufac- tures. However, Muscatelli et al. 1992, 1994 suggest that manu-
facturing export price elasticities may be as low as 0.5. It is possible, therefore, that the nonlumber export price elasticities that we use
in our reference simulations are upwardly biased. If such bias is present, we will tend to understate the terms of trade losses that
would accompany lumber conservation. Because there is some uncertainty about the magnitude of export price elasticities for
both nonlumber and lumber commodities alike, and because these play a central role in determining terms of trade changes, we also
test the sensitivity of our results for departures from our baseline parameter assumptions.
A loss of lumber output and export revenue would result in an erosion of Malaysia’s tax base. It is unlikely that a fiscal deteriora-
tion would go uncorrected. In our simulations, we assume that the Malaysian government is precomitted to real levels of recurrent
expenditure, to a path for monetary and bond stock expansion, and to targets for public debt expressed as percentage of GDP.
To accommodate these, we assume that the government adjusts equiproportionately income taxes and its capital expenditure.
The last important departure from a real trade model that we make is to provide a dynamic setting for our simulations. We
consider income losses over a 10-year period. A comparative static analysis of the effects of conservation could be misleading because
the adjustments to relative price and sectoral balance sheets are likely to be slow working in the presence of stock adjustments.
Equally, the modeling of the steady-state effects of conservation is problematic.
12
A 10-year period has been chosen because it is not too long to render our assumptions about the growth and
structural evolution of the Malaysian economy fanciful, but it is sufficiently long to facilitate analysis in a context where there may
12
We would, for example, have to define precisely what is meant by “balanced resource technological change” Nordhaus, 1991 and to make conjectures about the composition
of Malaysian far into the future.
TROPICAL FOREST CONSERVATION 501
be further rapid tropical deforestation and significant structural change in the economy.
The dynamic properties of our model resemble closely those of a neo-classical growth model. Aggregate economic growth reflects
both factor augmentation and productivity growth which is as- sumed to be Harrod neutral. We calibrate the model using 1990
Malaysian national accounts and related data. These data are then reproduced as our base year solution. The model is parameterized,
and its exogenous data inputs set to generate a trend growth rate of GDP of 8 percent through to 1999. This growth rate is very
close to the actual outcome over the period 1987–94. We configure our model in such a way that about 1 percent of aggregate GDP
growth is attributable to growth of the “raw” labor force, and 3.5 percent each to the growth of the capital stock and to total factor
productivity. The accumulation of human capital is subsumed in total factor productivity gains. Our assumptions imply substantial
capital deepening over the period. In broad terms, we assume that the structure of the Malaysian economy evolves in such a
way that it arrives by 1999 to the point the Korean economy had reached by 1990.
13
A technical appendix provides fuller details of the model’s structure.
4. SIMULATION DESIGN
