Indonesia’s forests have been disappearing rapidly since the 1980s: 1.8 million hectares per year are estimated to have been deforested between 1985 and 1997. Consequently, there is a possibility that in some areas, the forests will cease to function as a viable resource base in the near future.This paper examines the role of economic incentives in causing deforestation, focussing on policies that distort prices and create the conditions for unsustainable harvesting. It reviews theoretical approaches to the economics of resource use and analyses the ways in which Indonesian government policy affected the incentives of the various stakeholders.It argues that:government interventions such as restrictions on log exports and tax concessions to processing industries encouraged the expansion of wood processing industries in Indonesia and resulted in unsustainable levels of deforestationlarge-scale land conversion for commercial purposes, such as the development of oil palm plantations, were responsible for accelerating deforestation in the 1990suncertain tenurial arrangements and property rights, unenforceable contractual obligations, and weak monitoring and enforcement by the government exacerbated this situationthe forest management system does not provide efficient structures of control rights to any of the sector’s many stakeholdersas the state exerts sole control rights over most forested area in the country, other stakeholders depending on incomes from the forests have only limited control rights over their livelihoodsthe lack of well-defined property rights prevented stakeholders from being able to trade their control rights so as to improve the efficiency of forest management.Considering directions for future research, the paper argues that, given the many unresolved land conflicts between local communities and government/private interests, research on the interaction between market-based and common property rights or community-based property rights regimes would be of particular importance.The paper concludes by recommending that:the charging system used by the government for access to the forests should be simplifiedrigorous inspection and monitoring systems should be establishedadequate forest resource accounting systems should be provided.
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