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
Along with the increasing concern on deforestation issue as one of major environmental problems, there have been some economic models which have
been developed with various kinds of approaches. Those various models are mainly developed to answer the questions on what factors cause deforestation, and
thus have emerged with some conclusions on the policy formulation. However, these economic models still have to deal with the problem of data limitation, both
13 in quality and availability. With this kind of situation, those models have come up
with the use of proxy variable as emphasized by an econometric analysis. It is important to distinguish the use of different proxies for the phenomenon and to
compose relevant explanatory variables Scrieu, 2003. Based on the level of analysis, Kaimawotz and Angelsen 1998 identified
at least three variations of deforestation models i.e. 1 households and firm-level models, 2 regional level models, and 3 national and macro-level models. Within
the existing literature, magnitude and location of deforestation is the main dependent variable for most models. While explanatory variables were developed
commonly starting from the question of which part of society have driven deforestation, the so-called agents of deforestation in some literature, and what
factors influence their decisions. Agent of deforestation refers to the individuals or companies involved in land-use change. The characteristics of these agents are
mostly considered as exogenous in the models, whereas the variables related to the activities of agents are on the other way around. For any particular agent or
group of agents, the decisions with respect to the choice variables could determine the amount of forest cleared. Most models classify the factors influencing the
agents‟ decision as exogenous. However, sometime this is not the case, for example, the case of general equilibrium model, which considers prices as
endogenous macro-level variables and explicitly model the markets Furthermore, some macro-level variables are also developed with regard to policy instruments,
which do not affect the agents‟ decision directly. These variables are usually exogenous.
14 Magnitude and Location of Deforestation
Characteristics of deforestation agents : Initial population
Objectives and preferences Initial resource endowments and
knowledge Cultural attributes
Choice Variables : Land allocation
Labor allocation and migration Capital allocation
Consumption Other
technological and
management decision Agents‟ decision parameters :
Output prices Labor costs
Other factor input prices Accessibility
Available technology
and information
Risk Property regimes
Government restrictions Other constraints on factor use
Environmental factors Macro-level
variables and
policy instruments :
Demographics
Government policies World market prices
Asset distribution Macroeconomic trends
Technology Source: Kaimawotz and Angelsen 1998
15
3 THEORETICAL FRAMEWORK
This chapter provides the theoretical framework of this study, which underlines the analysis on how market is working to answer the research
objective. From the perspective of economic science, price is an important instrument with many implications, not only on the economy, but also external
effect such as on environment as discussed in this study. A good understanding on how the wood market works, especially on how the wood price is transmitted
from world market to domestic market, is undoubtedly required prior to the analysis of the impact of wood price changes on deforestation. Moreover, such
understanding could also give useful information how shock in the wood market is reflected either in the short or long run equilibrium. Therefore, several theories
on market integration, particularly with regard to spatial market integration is presented, along with the underlying assumptions used in this study.
2.4 Market Integration
