5 threaten the profitability of wood industry and therefore, it also can impact on
illegal logging and deforestation. Given this situation, basically, it is needed to investigate the implication of wood price changes on deforestation in Indonesia In
addition to that, with regard to the position of Indonesia as one of the largest producer as well as exporter of several tropical wood products in the world, it is
also interesting to see whether the Indonesian wood market is integrated with the world market in order to give better understanding on how wood market works
and its implication on deforestation. Based on the explanation above, the research questions of this study are:
1 Is the Indonesian wood market integrated with the world market ?
2 How is the wood prices in the world market are transmitted to the domestic
market of Indonesia? 3
How is the implication of wood price changes on deforestation in Indonesia ? 4
If the Indonesian wood market is integrated with the world market, then what is its implication to deforesation in Indonesia?
1.3 Research Objectives
According to those research questions, the objectives of this study are: 1
To investigate the market integration between domestic and world market of wood products
2 To investigae the implications of wood price changes on deforestation in
Indonesia
6
2 LITERATURE REVIEW
2.1 The Concept of Deforestation: Definition and Causes
Tropical deforestation is a global issue concerning environmental problem regarding the value of tropical forests in conservation of biodiversity and its role
in limiting green house-effect Angelsen et al, 1999. One of the main problems in quantifying the extent of deforestation is coming from the definition itself of
deforestation. The term deforestation refers to the complete destruction of the forest cover Amnelung and Diehl, 1992; the removal of trees from forested site
and the conversion of land for another use like agriculture Van Kooten, 2000. However, according to the scope of definition, deforestation can also be defined
with narrower or broader concept. The broad definition takes into account both forestland conversion and reduction on forest quality i.e. density and structure,
ecological services, biomass stocks, species, diversity, and so forth also known as forest degradation. Meanwhile narrower version only refers to changes on forest
land use Mahapatra and Kant, 2005. The relevant concept of deforestation is important to precisely identify
what factors cause deforestation and which sector gives the greater contribution. Pearce and Brown 1994 identify two main factors affecting deforestation: 1
competition for the remaining land as indicated by the conversion of forest land to uses of agriculture, infrastructure, urban development, industry, and so forth. 2
Failures of economic systems in reflecting the value of environment as the result of no market for many tropical forests functions and thus being ignored by the
decision makers. In addition to that, fiscal and the other financial incentives have played role in the decisions to convert tropical forests. Rudel and Roper 1997
identified entrepreneurs, companies, and small farmers as the important agents of deforestation.
Within the existing literatures, the distinctions have been drawn between direct and indirect causes of deforestation, as well as specific deforestation among
developing regions [Mainardi 1998, Thorkil et al 2004]. Shafik 1994 and Thorkil et al 2004 observed that direct causes of deforestation are fairly obvious
such as by timber harvesting activities, and the land conversion for agriculture and
7 livestock. Regarding the link between timber harvesting and agriculture activities,
Hartwick 2001 found three stages which have occurred i.e. first, starting with clearing with net costly forest removal; second, clearing with profitable timbering;
and third, profitable timbering but with a net loss on the land switched from forest to agricultural use. Similar to this, in some cases, deforestation process is
also observed as the replacement of logging activities by widespread forest clearing for subsistence agriculture Pearson, 1995. This conversion from timber
harvesting to agricultural is mainly driven by high initial price of agricultural output and land Hartwick, 2001. He confirms the same result with Angelsen
1995 in the case of shifting cultivation in Indonesia. This occurs when they have few other economic opportunities and thus decide to clear additional land Rudel
and Roper, 1997. The direct causes of deforestation, which is usually known as sources of
deforestation Caviglia, 1999 or first level of proximate causes [Panayotou 1992. Barbier and Rauscher 1994] are sometime difficult to be distinguished
notably in the practical matter due to the interaction between different types of agents. Therefore, it is difficult to separate their impacts and determine their
relative importance and to blame one specific sector for deforestation, when the forest resources have been used jointly by several sectors. For example, ranchers
and loggers often facilitate small farmers to enter into forested areas, whereas farmers engage in logging to finance agricultural expansion, and ranchers follow
small farmers into agricultural frontier areas Anmelung and Diehl, 1992. Thorkil et al 2004 identified some indirect causes such as migration,
export prices, property rights, and government policies. Mahaprata and Kant 2005 also found that growth in population, road construction, and debt service
growth has significant effect on deforestation. In most of less-developing countries with forest-resource abundant, a relatively larger timber processing
activities are likely to be less associated with the level of development and thus generally have serious implications on the forest exploitation rate. High pressures
brought by population in urban and rural areas have encouraged governments to establish large-scale infrastructural projects commonly such as hydroelectric
power, irrigation, and transport system.
8 The indirect causes of deforestation tend to be more complex and
debatable covering both factors which bring immediate effect on the decisions of agents to deforest e.g. output and input prices and those with delayed impact on
agents‟ decision-making e.g. underlying terms of trade and technological progress Scrieciu, 2003. The identification of the sectors involved is always
dealing with the complex system of incentives and disincentives that indirectly cause the forest disruption Amnelung and Diehl, 1992. Furthermore, in the case
of forest degradation, the estimation is even more difficult since degradation is sometime gradual. Moreover, forest destructions are varied from one particular
location to another as well, e.g. from places with large forest and those with small forest Rudel and Roper, 1997. The major drawback of the direct-indirect
classification is that it incorporates both the immediate and the underlying causes with the same label as indirect or second level factors. Because the underlying
causes determine the decision parameters, these mixing may have an implication with regard to the cause-effect relationship and thus produces serious problems in
the empirical workings and regression models, in particular, such as high level of multicollinearity Angelsen et al 1999. Therefore, Scrieciu 2003 suggested to
classify the factors into three distinct groups : sources of deforestation, local-level of deforestation, and macro-level causes of forest depletion in order to avoid this.
Most authors seem to agree that market and policy failures, coupled with demographic pressures and poverty, have been the most relevant structural
determinants of deforestation in less-developing countries. Without denying the relevance of market and policy failures, some empirical analysis focus exclusively
on population pressures and poverty as the underlying causes of all sources of deforestation Cropper-Griffiths, 1994. The situation where total social costs are
not accounted entirely in the economy is called „economic failures‟, which can be
classified into three types of failures i.e. local market failures, policy failures, and global appropriation failures Panayotou, 1990. Market failures are present when
the prices are fail to reflect the real social costs and benefits from resource use and thus deliver bias information about resource scarcity. Meanwhile, policy failures
are exist when misguided intervention to mitigate the failures produces worse outcomes. Global appropriate failures are present because, in the case of tropical
9 forests, market allocation poorly depict the benefits of preservation, biodiversity,
and the value of the genetic pool in developing new medicines, crops, and pest control agents. The absence of first best policies that could effectively internalize
the externalities arising from the economic failures strengthen the factors which drive the people to deforest. Scrieciu, 2003
With the regard to the government policies on sustainability, Grainger and Malayang 2006 identified three phases of forest policy evolution: 1
exploitative, when both actual and stated policy promote exploitation, 2 ambiguous, when the stated policy promotes sustainability but at the same time,
the actual effect is quite the contrary, and 3 sustainable, when both the actual and the stated policy promote sustainability. The progress of this evolution is
dependent on political situation which relates to democratization and pluralization. The shifting from exploitative policy into sustainable policy is
influenced by the effectiveness of pressures strength on policy maker, mainly from internal protectionist group in the system rather than external pressure. The
external pressures might change stated policy but cannot guarantee the changes on actual policy. Deacon 1995 examined some policies such as transportation
improvements, taxes and royalties on timber harvests, control on log export, a variety of agricultural policies, tax incentives to promote domestic processing
industries, and employment opportunity enhancement, to assess the relationship between policy and deforestation. The results showed the importance to
emphasize patterns of substitution among inputs and outputs in cases where forests are free to be exploited.
2.2 The Role of International Timber Trade on Deforestation
