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
Most of the existing literatures have emphasized the important role of timber production as one of the major drivers of deforestation, with greater
relevance to the international trade. However, the current debates have been emphasized on the discussion whether the reduction of international timber trade
can bring a significant benefit to reduce deforestation as well as its impacts on the economy. Consequently, those impacts may in turn threaten the environment
rather than positive effects. Anmelung and Diehl 1992 pointed out that a large
10 reduction of international trade in tropical hardwood might not directly lower
logging significantly, since the reduction of export revenues implies the losses of economic growths potential and at the same time, the hardwood is consumed in
tropical countries as well. Furthermore, deforestation may even increase because
the economic value of forest will decrease when there is insufficient attention to cultivate forest areas, and also due to the uncounted ecological function. In
addition to that, if the forestry sector becomes less profitable, it may lead to the other conversion of forestland to agriculture or industrial uses, which may
consequently accelerate the rate of deforestation Maestad, 2001. Export restriction of unprocessed timber products is one of the favoring
policies of large producer countries in order to mitigate degradation of forest stock as well as facilitating domestic wood processing industry. This restriction could
implicate an increase in price and severe regional disparities during the adjustment process in the industrialized countries, since some countries heavily rely on
tropical resources, as, for instance, Japan on tropical round wood Amnelung and Diehl, 1992. On the contrary, this is not always the case. Even though Log
Export Ban LEB policy might increase volume share of value-added products, but it cannot guarantee the increase in wood products prices Amoah et al, 2009.
By applying this restriction, the exporting countries might face the reduction of log price which may lead to inefficient logging and processing techniques. High-
cost local wood-processing industries will occur, commonly characterized by lower capacity utilization to produce Repelto-Gillis, 1998. Subsidized and
inefficient wood-processing industries may cause a higher waste of logs relative to wood production Pearce-Brown, 1994. This situation consequently would lead
to a greater pressure on the forest resource Tumaneng-Diele et al, 2005. Though there is an increased processing capacity in the concerned country as expected
during the restriction, but in fact, exporting countries have to pay an economic price in the form of subsidy and inefficiency Boscolo and Vincent, 2000. In
addition, LEB policy could reduce the potential the country‟s potential export
revenue from forestry sector in total Manurung and Buongiorno, 1997. Although log export restriction may not be the first best policy Goodland
and Daly, 1996, but it could support forest conservation in a short run. In spite of
11 inefficient instrument in terms of economic welfare, log export ban is still
necessary mainly under situation of inability to control corruption and illegal logging, relative to less restrictive forest and trade policies. It may allow required
incentives for the revival of the wood-based industry Tumaneng-Diele et al, 2005.
Along with the increasing trade liberalization in the world market, reducing tariff of wood based products is discussed within the existing literatures,
particularly with regard to its impact on forest sustainability. Turner et al 2005 emphasized that the impact of removing tariff on forest products solely would be
relatively small, but stronger impact would be the case if complete multi-sector liberalization effect on country
‟s income is taken into account. Reductions in tariffs on forest products are likely to generate merely very modest increases in
worldwide trade, and production as well as the price [Zhu et al 2001, Sedjo and Simpson 1999]. The timber harvest would change in a number of countries, but
the net effect at the world level would be small as well, whereas the composition of commodity would shift from raw materials to more processed products as
expected Zhu et al, 2001. As the consequence, the increased harvest pressure on forests due to tariff reduction should be quite modest Serdjo and Simpson, 1999.
Incorrect pricing of forests which is revealed by low level of rent out of forest exploitation relative to the real costs of reforestation, compared to public
programs for other sectors, reduces the incentives to sustainable development. This is implied by the situation in which the existing institutional and legal
framework do not involve forests in the domain of markets which is un-owned, unpriced, and unaccounted for Von Amsberg, 1994, pushing up the excessive
use and destruction of forests, in spite of their growing true economic value Scrieciu, 2003. Tropical timber prices which is associated with a permanent loss
of forest areas, should take into account the cost of the foregone economic value entailed by deforestation Barbier et al, 1995. If the producer country considers
its tropical forests solely as an income source of timber export, then it will cause a smaller forest stock in the long run which is significantly smaller than if the other
values provided by the forest, such as watershed protection, genetic diversity, tourism, microclimatic functions, and so forth are taken into account. Meanwhile,
12 if importing countries expect the exporting countries to conserve more forests,
trade interventions may appear to be the second-best way to achieve this. However, under some certain conditions, those interventions may be counter-
productive. Barbier and Rauscher 1994 proved that international transfers, which in contrast can reduce the dependency of the producer country on the exploitation
of the forest in gaining export earnings, are more effective in promoting conservation of the forest stock.
Some notions are proposed with regard to market power associated with its implication on the possibility to conserve more forest stock. Theoretically, market
power has positive correlation with the possibility to the act of conserving since the general rule is : the greater the market power, the higher the returns per unit of
output and the less the need to exploit tropical forests more heavily, even in the monopoly case. According to this rule, some producer countries with a higher
market power and a relatively more diversified production base tend to set restrictions to unprocessed log exports, while at the same time aim to promote
domestic processing activities. Moreover, the aim to increase market power might encourage a conservationist approached by these countries, particularly supported
by international financial assistance Barbier and Rauscher, 1994. When the government favors logging as an export earning source, as well as land conversion
due to agricultural export expansion, the policies have often attempted to redress pressing macroeconomic constraints, such as the decrease of foreign exchange
earnings from other alternative sources and the need to service foreign debt obligations. Devaluation of the exchange rate appears to stimulate logging
activities to export, and thus enhance deforestation Mainardi, 1998.
2.3 Review of Economic Modeling of Deforestation
