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
Recent evidence points to a leveling off in Malaysian lumber harvests following a period of rapid growth Government Press,
1994. But stationary or even declining harvests do not necessarily imply the sustainable management of lumber stocks zero net
harvests. In Malaysia, lumber harvests would have to fall substan- tially to be brought into balance with the growth of lumber. Con-
cern over available stocks prompted a temporary ban on log ex- ports that has been in force in Sabah since 1992. Sarawak has also
announced plans to severely curtail logging in its forests.
14
The absence of good data about stock levels and the shifting nature of policies toward logging raise some uncertainty about
what “business as usual” might entail. For this reason, we measure
13
By 1999, we assume that both secondary and tertiary sectors of Malaysia contribute about 38 percent each to aggregate output. This is close to the 1990 Korean figures. To
some degree these assumptions have been overtaken by the Asian crisis.
14
In Sarawak, the state government plans that the current 1993 log harvest of 18.8 million cubic meters will to fall to 15.0 million cubic meters by the end of the century.
502 F. Harrigan
income changes from two alternative baselines. The first baseline A assumes that lumber harvests and related output remains
stationary at their initial 1990 levels through to the end of the decade. The second B envisages that harvests will decline at an
average rate of 8 percent per year. Such a decline in harvests could occur because of the “hollowing out” of forest areas or
because of the adoption of policies intended to lead to the better management of Malaysia’s forest resources. It seems likely that
the actual outcome will occur somewhere within the band defined by our baseline assumptions.
15
By applying these baselines in the measurement of income losses, we hope to identify a range within
which actual losses might lie. Unfortunately, it is not possible to identify our baseline assump-
tions either with projected rates of deforestation or with reductions in lumber stocks. The stock-flow identities that govern the evolu-
tion of lumber stocks require information on opening balances, lumber growth rates, stocks destroyed by nonlogging sources of
deforestation, in addition to assumptions about lumber harvested and replanted. Projecting the area under forest cover is more
difficult still see FAO, 1993. The data required for such projec- tions are not available for Malaysia. However, we can infer from
the FAO data that, absent other changes, stationary harvests would mean that deforestation would continue at a rate of at least
2 percent per annum. This would imply that by the turn of the century a maximum of only 44 percent of Malaysia’s land area
would remain under natural forest cover. An 8 percent decline in harvests will probably secure a larger stock of lumber stands,
but this is unlikely to increase Malaysia’s forest land area. Indeed, the Malaysian government currently plans to transfer another 3.5
million hectares of state forests to other land uses, which is a little over 10 percent of its remaining forest area.
The issue of whether an incentive-based approach to conserva- tion is preferable to a command-and-control approach is complex.
In practice, elements of both approaches may have to be applied, and the dividing line between the two is not always clear.
16
Markets in forest and ecological resources are difficult to create but,
15
Recent data indicate that largely because of quotas imposed by state governments sawlog production fell by 5.1 percent on its 1993 level. Exports of sawlogs fell by 14 percent
in volume terms. See Government Press 1994.
16
For example, even for tradable permits associated quantities or units still have to be administratively determined.
TROPICAL FOREST CONSERVATION 503
equally, the administrative and efficiency costs of regulatory ap- proaches to conservation may be large. Command and control
policies make most sense where either there is considerable uncer- tainty about the effects of incentive based approaches, or the
objective is to eliminate an unwanted activity altogether.
17
The types of conservation policy we have in mind include permanently
gazetting larger areas as protected or reserve forest and, more generally, tightening land use regulations in relation to existing
forest areas. In our model, we represent “conservation” in terms of lower lumber harvests flow outputs, and a commensurate
reduction in stock inputs composite land and capital used in lumber production. To reflect possible constraints on agricultural
extension, we restrict net investment flows in agricultural sectors.
Limiting the encroachment of other activities, principally tree crop plantations, on forest area is likely to be an important aspect
of conservation. In our model, tree crop output is endogenous, but will depend on the growth of exogenous net investment
expenditures. The conversion of forest area for plantations entails substantial net investment in land conversion. Therefore, by reduc-
ing net investment expenditures in tree crop and other agricultural sectors we can, to the extent that capital and land are complemen-
tary, mimic land use restrictions.
We measure conservation costs using a “compensating varia- tion” measure. The compensating variation is the amount that
households would have to receive to leave their consumption unchanged following conservation. In our model, we identify the
compensating variation through the increase in unrequited trans- fers from the rest of the world to domestic households needed
to satisfy the consumption constraint. Note that although these compensation payments are nondistortionary in the sense that
they have no direct substitution effects, alternative lump-sum transfer could yield different results.
18
Our measure of the compensating variation is:
NCV 5
o
1999 t
5
1990
dY
row t
1 1 r
t
2
1990
4
o
T t
5
1990
Y
t
1 1 r
t
2
1990
3 100
u C
t
dY
row t
. . . 5 C
t
. . . ∀
t ,
T P
h
1990,1999
j
, 1
17
However, the announcement of a pending ban on logging might succeed only in accelerating deforestation if it further weakens concession holders tenure.
18
This is because their general equilibrium indirect effects will usually be different. Note that small changes in the value of the compensating variation can occur when we
vary the elasticity to consume from income.
504 F. Harrigan
where dY
row
is the change in real endogenous income transfers that, in each period, maintains private real consumption at its
preconservation baseline level, C
t
, r is the discount rate, Y is real gross domestic income GDI in the preconservation base-
line economy, and t indexes time. We report income losses both in base year T 5 1990 GDI units and in units of the present
value stream of GDI T 5 1999. We measure real income using a GDI rather than a constant price GDP measure because there
are, as we shall see, large terms of trade changes associated with tropical forest conservation. GDI is equal to constant price GDP
plus a terms of trade adjustment defined as the “capacity to im- port,” less the volume of exports. The “capacity to import” equals
nominal exports divided by the import price deflator. This defini- tion of GDI is that used in the World Bank’s World Tables.
To draw “welfare” implications from our analysis, our measure of the compensating variation would have to be adjusted to reflect
the increase in the nonlumber value of forests created by conserva- tion. Note, however, that because we assume that trees and land
area is permanently transferred to nonlumber uses, we do not have to account for the increase in the value of the terminal lumber
stock. Our assumptions imply that the lumber value of trees is lost as nonlumber values are created through conservation. Although it
would be interesting to consider policies that preserved trees today with a view to supporting larger sustainable harvests in the future,
we do not have the stock-flow information that would be needed to calibrate the required model of lumber growth. Also, were the
policy issue one of sustainable harvesting, the income losses in Equation 1 would be offset by the present value of the potentially
infinite sequence of future lumber harvests made possible by the deferral of harvests in earlier periods.
5. SIMULATION RESULTS 5A. The Anatomy of Income Changes
