An economic analysis of deforestation mechanisms in Indonesia : empirics and theory based on stochastic differential and Fokker-Planck equations

Wibowo, D. H. (Dradjad Hari) (2001). An economic analysis of deforestation mechanisms in Indonesia : empirics and theory based on stochastic differential and Fokker-Planck equations PhD Thesis, School of Economics, The University of Queensland.

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Author Wibowo, D. H. (Dradjad Hari)
Thesis Title An economic analysis of deforestation mechanisms in Indonesia : empirics and theory based on stochastic differential and Fokker-Planck equations
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2001
Thesis type PhD Thesis
Supervisor Clem Tisdell
Kevin Burrage
R. Neil Byron
Total pages 373
Language eng
Subjects 1402 Applied Economics
0705 Forestry Sciences
Formatted abstract This study aims to observe empirically why and under what mechanisms farmers clear a forest. Also, it attempts to analyse various forms of government failure in the area of conservation management, that may lead to increased deforestation. Based on the empirical evidence obtained, the author developed deforestation models with the aid of stochastic differential and the Fokker-Planck equations, using the theory of intertemporal consumption.

The field work was undertaken from May to August 1995 in the Kerinci- Seblat National Park (KSNP) of the province of Jambi, Indonesia, with the district of Kerinci chosen as the research site. Primary data were collected from interviews with farmers living in villages located at the forest frontier. The term "forest frontier" is underlined because deforestation in the study area is associated with establishment of cinnamon farming on ladangs (dryland farms) at the forest frontier. Three villages in the upper region of Kerinci and one (including its forest frontier settlements) in the lower region were selected on the basis of their deforestation problem and/or history. A randomly-selected sample of 115 farmers, 55 from the upper Kerinci region and 60 from the lower region, were interviewed with the aid of a questionnaire. The household was used as the level of aggregation. Official statistics, including time-series data on cinnamon planting areas, were collected from relevant government agencies. To obtain accurate and reliable cinnamon yield data, a cinnamon harvesting experiment was undertaken.

To put the thesis into the broader deforestation context, previous analyses on the cause(s) and mechanisms of deforestation were reviewed. These analyses were categorised into four groups, i.e. Neo-Malthusian, government-failure, microeconomic and macroeconomic approaches.

A simple time-series analysis was performed to obtain general ideas of how deforestation and/or cinnamon-planting areas are related to the dynamics of cinnamon market. Using the autoregressive-integrated moving average (ARIMA) and the combined autocorrelation and distributed lag (ADL) models it was shown that the dynamics of export price does influence the size of cinnamon-planting areas in Kerinci. Despite this result, for both modeling and practical reasons, the exact shape of the relationship between these variables is still open for further deliberation.

The econometric results suggest that KSNP programs have been somehow ineffective in halting deforestation trend in Kerinci. In addition to the failure to establish KSNP's boundaries, this problem also results from other forms of government failure, resulting in overlapping spatial planning in KSNP areas. The KSNP authority also fails to institute a detection policy that ensures a high level of detection probability. This failure leads to the adoption of the "cat-and-mouse" game, which could result in the more worrying problem of shifting cultivation with short fallow periods. The study also shows the cases where road development provides "official legalization" for previous deforestation.

The field study reveals that the benefits of KSNP flow mostly to individuals not directly involved in forest clearing and/or whose livelihood is not dependent on lands cleared from a forest. This distributional imbalance has led to forest frontier farmers having unfavourable attitude towards conservation.

While in some cases deforestation can be associated with poverty, this study shows that deforestation can depend on the capital accumulation behavior of richer farmers and holders of capital. Poverty is a deterrent to deforestation because poorer farmers have inadequate capital to finance forest clearing and to support themselves during the idle-period. The decision to clear a forest rests mostly with more established farmers such as landowners.

Because forest lands are available at a fraction of their "true" economic worth, forest clearing and the subsequent agriculture are capable of producing high financial returns for farmers. In the early years, the net income generated from these activities enables poorer farmers to support themselves. Later, i.e. at the time of cinnamon harvest, a large cash capital is generated. This enables both poorer farmers and landowners to finance the next round of forest clearing. The social values held by the society, which result in greater land ownership giving a higher social status, motivate farmers to own land and to increase their land ownership. Because the crops planted in the study area are mostly export commodities, increased deforestation could be expected during the current economic crisis facing Indonesia.

The deforestation models developed in this thesis aim to show analytically how deforestation is linked to capital accumulation behavior. Using the multiplicative Verhulst system, a Fokker-Planck modeling was performed and the boundary conditions associated with the modeling were exploited. The results show that only when the level of uncertainty is not sufficently large does capital accumulation give the farmer a financial capability to clear a forest. Regardless of the level of uncertainty, without capital accumulation the representative farmer cannot have adequate cash capital to clear a forest.

To see how consumption optimization affects deforestation behavior, some stochastic control models were developed and solved by the Hamilton-Jacobi- Bellman (HJB) equation. The farmer's capital accumulation was treated as a jump process approximated by the Poisson process, while the control variables were assumed to be of Markovian type. The analysis shows that there appears to be no easy closed form solution to a stochastic control problem using the system of multiplicative Verhulst model. For this reason, a stochastic control problem involving an ARMA(1,1) specification was used.

The results shows that capital accumulation does not always lead to the farmer having the financial capacity to clear a forest. In the case of a risk-averting farmer, the farmer tends to spend more on saving, while at the same time setting his or her lay-out for forest clearing to zero. Precautionary motives seem to have discouraged farmers from clearing a forest. This result should, however, be interpreted with caution because of the restrictiveness of the model.

A risk-taking farmer is shown to be prepared to sacrifice consumption in order to invest in forest clearing. Thus, risk-taking farmers are more likely to pose a threat to forest reserves than risk-averting ones. Consumption optimization is shown to reduce the farmer's financial capacity to clear a forest. This is because the optimization increases the farmer's consumption to a level above the subsistence level, resulting in less money allocated for forest clearing costs. Finally, because of some limitations of the models, the results of the modeling should be seen as a precursor to a more complex deforestation analysis.
Keyword Deforestation -- Indonesia.
Forest policy -- Environmental aspects -- Indonesia.
Forests and forestry -- Economic aspects -- Indonesia.

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