Professional Documents
Culture Documents
Linda Christanty
Raymond Atje
Kurnya Roesad
February 2004
Part of the policy paper series on “The Impact Of the Economic Crisis On The
Forestry Sector In Indonesia”, a CSIS-John D. and Catherine T. MacArthur
Foundation Project. The authors thank the support of the MacArthur Foundation
Grant# 98-55536 for this research.
The CSIS Working Paper Series is a means by which members of the Centre for Strategic and
International Studies (CSIS) research community can quickly disseminate their research findings and
encourage exchanges of ideas. The author(s) welcome comments on the present form of this Working
Paper. The views expressed here are those of the author(s) and should not be attributed to CSIS Jakarta.
© 2004 Centre for Strategic and International Studies, Jakarta
Decentralization and the Forestry Sector: Opportunities and Challenges
Linda Christanty, Raymond Atje and Kurnya Roesad
CSIS Working Paper Series
WPE 080
February 2004
ABSTRACT
This paper looks into Indonesia’s recent experience with the decentralization process and
assesses opportunities and challenges for the forestry sector. Despite its brief existence since
only 2001 and the limited data available, decentralization in the forestry sector has shown
some significant trends. The paper finds that co-ordination between different levels of
government is still lacking, lacking a clear division of tasks between central, provincial and
district governments. Indonesia’s move to a more market – based forestry governance system
is currently impeded by the lack of a sound and secure property and tenure rights system,
exacerbated by legal uncertainties, and weak monitoring and enforcement capacities on the
local level. Overall, when compared to other forest-rich countries, decentralization has not
sufficiently empowered regional and local governments in the forestry sector, as the central
government retains most of the power to manage the country’s forests.
Kurnya Roesad
Department of Economics
CSIS Jakarta
DECENTRALIZATION AND THE FORESTRY SECTOR:
OPPORTUNITIES AND CHALLENGES
Linda Christanty, Raymond Atje, and Kurnya Roesad
1. Introduction
Forest management is one of the most important issues in the face of the
implementation of the regional autonomy in January 2001. In many resource-rich area
like East Kalimantan and Riau, forests are a source of regional revenue. However, in
many instances there seems to be a misperception/ misunderstanding on the essence
of decentralization, even among the elite in East Kalimantan and Riau.
Decentralization has not been perceived as an opportunity for the local people to
govern themselves. Rather, it has been given a narrow interpretation, i.e., opportunity
for the region to earn as much revenues as possible regardless of how these revenues
will be raised.
Until recently, the centralized system under the rule of Jakarta has been
regarded in some provinces as the main factor in exploiting their natural resources at
the expense of the local people. As a result, there is a tendency among local
governments to limit the central government’s role in the formulation of local
policies, including those related to natural resource management.
1
forestry resources. It could ignite conflicts between different communities, between
community and business establishments operating to exploit natural resources,
between community and local government, as well as between different districts.
It has been argued somewhere else (Atje and Roesad, 2002, and Christanty
and Atje, 2001) that the command-and-control system applied to the forestry sector
during the Soeharto government had failed to ensure a sustainable forestry
development. One of the reasons was the inability of the government to monitor and
enforce its forestry policy. The inability was in turn caused by, among other things,
rampant corruption, inadequate institutional capacity in the department of forestry,
etc. It should be noted that monitoring and enforcement activities to ensure that a
policy is properly implemented are essential parts of a command-and control system.
In addition, it seems that the government was willing to sacrifice its long-term
objectives, including a sustainable forestry development, in exchange for short-term
gains, such higher export revenues from forestry sector. In pursuing its short-term
objectives the government had turned to large companies (concessionaires).
Concessionaires were coerced to build wood processing industries such sawmill,
plywood industry and, pulp and paper. This let to a rapid proliferation of forestry-
based industries in the late 1970s and in 1980s. Scotland et al., (1998) argue that the
total existing capacity of forestry- based industries during 1990s was well above the
capacity the country’s forests to provide timber in a sustainable way. It was one of the
reasons for a rapid rate of deforestation, which, according their estimate is around
1.6.million ha per annum.
During the height of the crisis, there had been a debate on how the Indonesia’s
economy should be managed. There were at least two views emerged from the debate.
One was to follow an orthodox solution prescribed by the International Monetary
Funds (IMF). The other is a more populist view that would like to give cooperative,
and small and medium enterprises bigger roles in the economy, but without a really
coherent program to follow. As will be discussed further later, these two views have,
in one way or another, influenced policy formulation in the forestry sector.
2
only more than two years old. The assessment will be based primarily on secondary
information based on studies done prior to or after the program was launched. Second,
it is also preliminary in the sense that the current stage may be regarded as a
transitional stage to a decentralized government system as is envisioned in the two
decentralization laws. It should also be noted that reliable data, especially forestry
data, are not always readily available. This study will primarily try to assess
opportunities and challenges in the forestry sector in relation to the decentralization
program.
2. Decentralizing Indonesia
The first municipalities were created in 1905, followed by the first districts
(gewesten) in 1910, and the first provinces on Java in the 1920’s (Hofman & Kaiser,
2002). More autonomy to local government was given through the issuance of the
1922 Act (Suwandi, 2001).
Law No. 1 of 1957 tried to revitalize regional autonomy, but these attempts
were called off after the outbreak of regional unrests on Sumatra, Sulawesi, and in
3
West Java. Presidential Decree No. 6 of 1959 brought back the 1945 Constitution, and
effectively abolished the 1957 autonomy law. In 1965, Law No. 18, dealt specifically
with local government matters, was passed reflecting the domination of political
parties in the national power.
Law 5/1974 raised the issue of regional autonomy again, but it was never fully
implemented. Its implementing regulations were disseminated starting only in 1992.
A trial implementation in 26 districts took off in 1996, encountering many difficulties
due largely to the fact that the devolved tasks did not have the corresponding
resources and facilities. The experiment was taken over by events, when, in the
aftermath of the 1997 economic crisis and the fall of Suharto’s New Order, two new
laws were passed: Law 22 and Law 25 of May 1999, outlining the new policy on
decentralization (Esden, B. 2002).
Litvak & Seddon (1999) classify decentralization into four categories: political
decentralization, fiscal decentralization, economic or market decentralization, and
administrative decentralization.
4
Fiscal decentralization focuses on giving more power to local government
and private organizations in financial responsibility.
Described by the Asia Foundation as one of the most important reforms that
the Indonesian government has undertaken since the democratic elections in June
1999, Law No. 22, 1999 concerning “Local Government,” and Law No. 25, 1999
concerning “The Fiscal Balance between the Central Government and the Regions,”
outline the new policy on decentralization (Esden, 2002). The two new
decentralization laws cover all major aspects of fiscal and administrative
decentralization (Ma & Hofman, 2000).
5
example: Kanwil Kehutanan/ Forestry Regional Office during the new era
Hutabarat, 2001).
Usman (2001) states that Law 22 and Law 25 are based on five principles:
democracy; community participation; equity and justice; recognition of the potential
and the diversity within regions; the need to strengthen local legislatures. These five
principles support Indonesia’s push for reformation, which aims to eradicate the
practice of corruption, collusion, and nepotism (known as KKN), within the
government bureaucracy.
6
provinces carry out certain administration tasks delegated by the president to the
governors. However, there is no hierarchical relationship between the province as an
autonomous region and the district (Hofman & Kaiser, 2002).
Esden (2002) also pointed out that scale of economies is in peril due to the
varying sizes of regions and the tendency to create new regions. The number of local
governments since Law 22 was passed has increased from less than 300 to 348 in
2002, with 20 -plus more expected in 2003. The number of provinces has also
increased from 26 to 32 (including the apparently defunct new provinces on Irian
Jaya). Population sizes also greatly vary: from less than 800,000 inhabitants in
Gorontalo province to over 35 millions in East Java province. Local governments
vary from 24,000 to 4.1 million.
7
been confirmed by another study by KPPOD, an independent ‘autonomy watch’
organization. As will be elaborated further later, the study by KPPOD finds that most
of local regulations issued after the decentralization are, in one-way or another,
defective.
4
As will be discuss further below, a more recent government regulation (Government Regulation
no.34/2002) has change this specific stipulation. Under the new regulation only the central government
can issue logging concessions.
8
One immediate task of local governments (executives as well legislatives) is to
produce local government regulations (peraturan pemerintah daerah, PERDA). The
KPPOD study mentioned earlier examines some 340 PERDA issued since January
2001 in 28 provinces (KPPOD, 2002). The result shows that only 103 PERDA or
about 31 percent are without any significant defects, leaving some 237 PERDA with
defects, ranging from less serious to very serious problems. Domestic trade barriers,
double taxation, and validity of the PERDA in question to achieve the stated
objective, are considered as very serious problems. Serious problems include
bureaucratic constraint, excessive rates of local tax and retribution, etc., whereas less
serious problem is concerning PERDA with irrelevant legal basis. Base on this
division, the study finds that out of the 340 PERDA, 35 (10 %) are with very serious
problems, 144 (42 %) are with serious problems and 58 (17 %) are with a less serious
problem. Of the 35 PERDA with very serious problems, 4 are concerning tax, 26 are
concerning levies, and 5 are concerning other things (Table 1). The central
government has the power to revoke PERDA it deems as invalid. It is likely therefore
that it will revoke some or all of PERDA with very serious problems and ask local
governments to revise the ones with serious or less serious problems.
The fact that less than one third of the PERDA examined by KPPOD are
considered as without any significant problem clearly indicate inadequate capabilities
on the part of the local governments to produce good polices. This is either because
local governments suffer from human capital shortages or the lack of understanding
among local officials about what constitutes a good policy, or both.
In January 2003, donors in the CGI meeting expressed their concerns over the
shortcomings in the supervision of regional regulations (PERDA), which might
jeopardize the sustainable management of natural resources and environmental
9
protection. The Government Regulation 20/2001 refers to facilitation and supervision.
As of April 2003, a total number of 2,147 regional regulations (PERDA) have been
verified by the central government, and 173 of which have been cancelled.
The central government will share revenue from natural resources with
subnational governments. Sub-national governments will receive 15% of onshore oil
revenue, 30% of onshore gas revenue (including offshore gas within 12 miles of the
coast), 70% of forestry revenue, and 100% of fisheries revenue—all shared on an
origin basis. In addition, Ma and Hofman (2001) indicate that the central government
must transfer at least 25% of its revenue after sharing to subnational governments
through a general purpose allocation: 10% of this will go to provinces and 90% to
districts and municipalities. This becomes the foundation of the new
intergovernmental fiscal system, which is called the Dana Alokasi Umum (DAU).
Ahmad and Hofman (2000) already pointed out the risks associated with the
decentralization policy due to the proposed implementation of the revenue devolution
provisions before there has been an effective decentralization of expenditures,
10
including the administrative staff. They view this as threats to macroeconomic
stability, as well as the continued provision of services at the local level during a
potentially volatile period of political and economic transition.
Item Central Provincial Originating Other Local Govt All Local Govt
Govt Govt Local Govt in the same in Indonesia
province (Equal Share)
Source: Hofman & Kaiser (2002): The Making of the Big Bang and its Aftermath: A Political Economy
Perspective.
Several issues related to the intergovernmental fiscal system were brought up,
i.e. the regions’ high dependence on central transfers, which might undermine
11
accountability, and the possibility that the inadequate legal provisions for local taxes
might encourage local units to resort to inappropriate taxation and unhealthy tax
exporting, coupled with the central government’s limited means to finance national
priorities at the local level (Esden, 2002).
The Minister of Home Affairs (2001 in Esden 2002) identified some critical
issues regarding fiscal decentralization, which surfaced during the first year of
decentralization:
¾ sufficiency measured by the need of the routine budget for the transfer
of personnel;
Ma and Hofman (2000) illustrate some lessons learned from the first year
implementation of decentralization in Indonesia as follows:
12
Local governments should be assigned one or a few substantive taxes over
which they have some rate autonomy, to ensure local accountability and
fiscal discipline.
Before 1967, Indonesia’s timber industry relied primarily on teak plantation, mostly
in Java, for round wood supply. Starting in 1967, the focus shifted to wood from
natural forests. Hence, in 1967 the government issued the Basic Forestry Law (Law
no. 7/1967), which provided the basis for forestry policy for the next 32 years. In
1970 the government introduced a concessionary system in timber industry. Under the
system timber companies were given concessions to extract timber from certain forest
areas. Since then the number of concessionaires multiplied rapidly. Concessionaires
were also encouraged to venture into the downstream industries. Many of them
established sawmills, plywood plants, pulp and paper industry, etc. At the same time
the government began to restrict log export and eventually banned log exports. Wood-
based industries proliferated rapidly. By the early 1990s, for example, Indonesia had
become a dominant exporter of tropical plywood.
The above development came about at the expense of the sustainable forest
management. A number of factors contributed to this. First, during the New Order
period, forestry policy was heavily centralized and based a command-and-control
system. All the decisions concerning forest exploitation, from issuing licences to
concessionaires to enforcement of the existing law and regulations were done in
Jakarta. Local governments did not have a say on how to manage forests in their
13
respective regions. Meanwhile, the central government did not have the monitoring
and enforcement capabilities to ensure that concessionaires would follow all the rules
and regulations concerning timber extraction. For instance, in 1972 the government
had introduced a selective cutting system (Tebang Pilih Indonesia – TPI), which was
prescribed for almost all natural forests. The TPI provides for, among other things, the
length of the cutting system and the minimum allowable size to be logged, i.e., 35
years and 50 cm, respectively. The system did not require concessionaires to replant
their concession areas and was perceived as its weakness. Hence, in 1989 the
government introduced a new system, selective cutting and replanting system (Tebang
Pilih dan Tanam Indonesia, TPTI), which also required concessionaires to replant
their areas. The new system retains the important characteristics of TPI, such as the
length of the cutting period and the minimum allowable cut. Nevertheless, for the
reason stated above, logging companies, in general, had failed to minimize damages
to forests when undertaking log extraction, as well as replanted the logged areas.
Second, the reforestation program had not had much success either. During the
period under consideration the government introduced a reforestation fund scheme.
The scheme has some serious drawbacks, however. Initially, the fund was introduced
as a reforestation guarantee deposit fund introduced in 1980, to be paid by the
concessionaire for the quantity of logs produced. Paid up front, the fee was refundable
to the concession holder who actually undertook reforestation. It seems, however, that
many concession holders simply considered the paid up fees as forgone costs and
would not even try to recover them back. At the same time they would not undertake
reforestation either, and simply let the government to do the job in their stead. This is
especially so after it was converted to a non-refundable reforestation fee under
Presidential Decree No. 31 / 1989.
14
Finally, there was no assurance the company would get extension on its
concession permit. Moreover, the length of the concession was considered as too
short. It is generally understood that it would take about 35 years for a tree before it
could be harvested. It should also be stated that companies did not have property
rights over replanted trees. Hence, concessionaires did have a strong incentive to take
good care of their concession areas.
One would hope that, under the regional autonomy program, local
governments would be in a better position to perform tasks that the central
government had hitherto failed to do, enforcing and monitoring the implementation of
sustainable forestry policy among others. Unfortunately, early indications suggest that
that this did not happen. Law no 41/1999, which was introduced to replace the Basic
Forestry Law, and with a decentralized government decision-making in mind, does
not resolve the above issues. Instead, it introduces new problems. On the contrary, it
seems that local governments are more interested in pursuing short-term objectives of
increasing local revenues. In 1999 the Minister of Forestry and Estate Crops issued a
decree allowing district governments to issue permits for small-scale concessions (up
to 100 hectares). The idea was to increase local income by giving local communities a
stake in forest exploitation and hence, reduce illegal logging and resource conflicts.
One unintended consequence of decree was the rapid proliferation small concessions.
For instance, it was reported that in Kutai Barat District, East Kalimantan, around 600
concession rights have been issued by mid 2001. other districts also began to issue a
large number of licenses. Acknowledging this problem, the minister of forestry
attempted to reverse the decision in the following year. He was widely ignored (DTE
Special Report).
15
would be granted concession rights was very arbitrary. But a more fundamental
question is the one associated with the nature of this particular arrangement itself.
Why should any institution be granted a concession right without it having to invest or
actively participate in the management of the concession? Since there is a serious
doubt about the ability of those institutions to actively participate in managing their
respective concession areas, the partnership may be regarded as just another form of
rent seeking activity.
3.2 Economic crisis and democratic reforms as the prime movers behind
decentralization in the forestry sector
The recent economic crisis has affected Indonesia’s forestry sector in several ways.
First, it affected the livelihood of people who lived in or near natural forests. It is
estimated that there are around 20 million people in this category. There was a broad
tendency during the crisis for those people to compensate for lost agricultural income
with income from forests, timber as well as non-timber products (Sunderlin et al.,
2000). This may partly explain the recent upsurge in illegal logging.
16
much timber as possible from the concession areas, or by allowing illegal loggers to
operate in those areas.
Finally, the resent economic crisis has affected the forestry sector in a more
subtle way. As stated earlier, it led to the emergence of two different views on how to
bring the economy out of the crisis and how it should be managed to ensure a sustain
economic growth into the future. The supporters of the IMF-led economic reform,
hereafter referred to the mainstream group, argue that the best way forward is to
consistently follow the reform package agreed upon between the government of
Indonesia and the IMF. The details of the package were given in a number of letters
of intent (LoI) from the government to IMF. In brief, as usually the case of IMF
prescribed reforms, the proposed reform was essentially a pro market reform. The aim
is to give the market bigger role and at the same time reduce the role of the
government in the economy.
In the forestry sector, there were several problems and issues that received
special attentions of IMF as well as of countries and other international organizations
that were included in the Consultative Group for Indonesia (CGI). As stated earlier,
Indonesia has been losing its forest at an alarming speed. The reasons varied from
excessive logging, under valuation of forest, the absence of rule of law, the absence of
well-defined and secure property rights, especially within forest areas, etc. Examples
of such problems are ample (see, e.g., Walton, 2001). For instance, according to one
estimate, Indonesia’s plywood and pulp industries together, at full capacity, require up
to 46 million cubic meters of logs every year. If one adds domestic timber demand to
this number, then annual log demand exceeds annual supply by more than twice. In
addition, there are a large number of unlicensed sawmills operating in Indonesia, and
many of them are obtaining timber illegally. As an example, around 60 percent of the
17
183 sawmills found around Kerinci Seblat National Park in Jambi was without
license.
Recurrent forest fires resulted from land clearing also received a lot of
attention from the international communities, not only because smokes from such
fires affect the neighboring countries, but also because usually a large fraction of the
land cleared are forest areas. According to one estimate, the total economic loss to
Indonesia of the 1997/98 forest fires was around US$7.8 billion, with an additional
cost of $1.5 billion in damage to global environment (Walton, 2001).
Indonesia has been under pressure from CGI to address the above issues as
well as other forestry-related issues. As a result, in 2000, the government issued a 12-
point forestry action plan, in which it committed itself to the following actions
(Hutabarat, 2001, and Walton, 2001):
18
8. To take advantage of the decentralization processes as a tool to enhance
sustainable forest management;
Although the mainstream view seems to have prevailed, the populist view has
nevertheless filtered into some the policies, including the forestry law, issued since
the crisis. The Government Regulation No. 6/1999, for instance, includes provisions
concerning small-scale concession rights (hak pemungutan hasil hutan, HPHH), given
to individuals or cooperatives to collect timber and other forest products from forest
areas of up to 100 ha in size. The permit for HPHH is given for one year and issued
by a bupati (district head). As will be elaborated further later, the issue of HPHH has
created a lot of problems before and after the implementation of decentralization
program.
The populist view has also filtered into the new Forestry Law (Law No.
41/1999). This includes a requirement that concessionaires should include local
cooperatives in their activities. At a glance, it seems that the main reasoning behind
the populist idea was to provide local people with greater access to forestry resources.
They argued that the past arrangement, whereby concessions were given only to large
establishments did not benefit local communities. Furthermore, it was the large
companies who were responsible to many problems in the forestry sector, including
rapid deforestation. Small companies and cooperatives would not be as irresponsible
as large concessionaires.
19
such a provision in the law was mainly because the insistence by the proponents of
the cooperative idea, i.e., the populist group. One unintended consequence of the
provision is that many of the cooperatives established in response to Law No. 41,
were actually set up in Jakarta. In addition, it should also be noted, as some recent
studies show, that small concessionaires are as capable to create damages to forests as
large ones.
The working group statement on Forestry in the CGI Meeting in Bali, January
21-22, 2003 indicates that:
When compared to other countries, Indonesia’s forestry policies are still fairly
centralized. A brief look at Table 4 reveals that the decentralization process in many
countries has brought about a clear reduction of the central government’s role in
managing forests. In most countries, the government provides the overall forestry
policy framework and technical guidance to the regions. Federal governments usually
focus on general policies, international relations, trade and research. State and
provincial governments have considerable powers in determining the use and
20
exploitation of forests within their boundaries. For instance, state governments control
most of Malaysia’s forests, while in India state forest departments manage 80% of the
forests. An extreme case is Nigeria, which does not have a federal forestry legislation,
with each state completely autonomous in determining the classification and use of
forestland (CIFOR 2002).
Indonesia’s Ministry of Forestry still exerts two main control functions over
the regions. First, it determines the status and functions of forest areas and second, it
still controls the management of conservation and protected forestland. Moreover,
districts cannot enact legislative environmental standards that are deemed below
national standards. Clearly, most forest-rich countries discussed in Table 4 have
moved away from such a centralized forest authority.
United States Federal government owns 35% States own around 5% of forests
of America of forest land States regulate forest use on 60% of
Must pay up to 50% of privately owned forests
revenues from timber sale to Each state has own legislation determining
counties logging practices for companies
Federal and state governments Some forest directly controlled by tribal
each manage own protected authorities
areas
21
Table 4: A Comparative Perspective on Federal Forestry Systems (continued…)
One pressing issue that needs to be resolved by the central, provincial, and local
governments together is how to harmonize their policies, especially in the forestry
sector. It has been mentioned somewhere else (Atje and Roesad, 2002) that one of the
problems confronted the government in the past was its inability to pursue a
consistent forestry policy. This had let to excessive investment in the forest-based
industry, which had created massive demand for logs, and eventually led to rapid
deforestation. By the early 1990s the demand for logs by the industry had exceeded
the capability of the existing concessionaires to supply logs legally. The problem had
been aggravated by the lack of government capability to enforce and monitor the
implementation of its forestry policy. As a result, rampant illegal logging also took
place to fill in the gap between demand and the legal supply of logs.
One would hope that with the decentralization program many of the problems
in the forestry sector could be addressed as well. That seems to be the hope of the CGI
22
members as well. For instance, the central government could delegate the task of
monitoring and enforcement to local governments. Unfortunately, this has not been
the case. The main constraint is an institutional one. There has not been any real
attempt to harmonize the central, provincial and local governments’ forestry policies.
As stated earlier the lack of institutional capacities on the part of local governments
might have worsen the problem. In addition, the earlier decentralization attempt in the
forestry sector has also exacerbated the problem. The latter refers to the issuance of
HPHH permits in many places. It should be noted that the introduction of HPHH
preceded the decentralization program. Based on the Government Regulation
No.6/1999, the Minister of Forestry and Estate issued a Ministerial Decree
No.310/1999 in 1999 that provided a bupati with the right to issue HPHH permits for
the local community. The holder of a permit has an exclusive right to harvest timber
and non-timber products from a small-scale concession area (up to one hundred
hectares).
23
areas. The condition is also worsened by the fact that the allocation of small
concessions is not determined using a good management plan, nor a good silviculture
management system. As a result, the small concessions are often completely
deforested, resulting in a loss of several thousand hectares of forest land within
merely one year.
Another example is the different treatment for forests in the upstream and
downstream districts. A district located upstream and only covering protected forest
areas may not benefit financially compared to a downstream district receiving
financial benefit from the exploitation of its production forest areas. As the
downstream district receives the ecological benefit from the upstream forest
conservation, there should be a mechanism on how the downstream district should
compensate or share the financial benefit with the upstream district.
As noted, the central government has been trying to reclaim back some of the
authorities given to local governments under the decentralization program. In the
forestry sector, the government issued a new regulation in 2002, i.e., Government
Regulation no 34/2002 concerning Forestry Plan and Formulation of Forest
Management Plan, Forest Use and Utilization of Forest Areas (Tata Hutan dan
Penyusunan Rencana Pengelolaan Hutan, Pemanfaatan Hutan dan Penggunaan
Kawasan Hutan). The regulation specifically mentions that the right to issue logging
licenses rests with the central government (the ministry of forestry) upon
recommendations from district heads, mayors, or provincial governors. In addition,
24
the central government retains the right to formulate forestry strategy, forest
management, forest use and utilization of forest areas. It remains to be seen whether
with this new regulation the government will be able to stop all activities associated
with small-scale concessions.
The recent crisis has increased the pressure on the country’s forests. People who lived
in and around natural forests became even more dependent on forests for their
livelihood (Sunderlin et al., 2000). To reduce that dependency, local governments
need to promote faster economic growth since it will improve the wellbeing of the
people in general. A recent study by Dollar and Kraay (2000) shows that income of
the poor rises one-for-one with the overall growth. That is, as overall income
increases, on average incomes of the poor, i.e., the bottom 20 percent of the
population, increase by exactly the same amount. The result is important because it
goes contrary to a popular belief that economic growth only benefits the upper
fraction of the society. A similar effect also observed in Indonesia. During the period
of rapid economic growth, the number of Indonesians living under the poverty line
dropped significantly, from 60 percent of the population in 1970 to 11 percent at onset
of the financial crisis in 1997.
It is quite logical to assume that, as people have more stakes in the sustained
economic growth they will, in general, be less like to get involved in activities that
will undermine the process itself. This includes people refraining from activities that
may cause damage to forests, such as over logging, illegal logging, etc. Moreover,
faster economic growth also provides local governments with more revenues. To
achieve faster economic growth local governments need to adopt policies that are
conducive to local investment. These include lower local tax rates, good governance,
well defined and secure property rights, etc. Unfortunately, as the KPPOD study
suggests (KPPOD, 2002), it seems that many local governments are more interested in
securing higher local government revenues through higher tax and retribution rates,
including from forestry-related activities. The latter are likely to be detrimental to
sustainable forestry management and development in their own regions.
25
illustrates the enormous role of entrepreneurship in the development process,
especially in small and medium size companies (Lindbeck, 1991). It has been argued
that small and medium enterprises (SMEs) play an important role in Indonesia’s
economic development (Atje, 2003). It may therefore be argued that the way forward
for most local economies is for local governments to stimulate entrepreneurial
activities. However, there are reasons to believe that quite often government policies,
including the ones associated with SME development, have been hindering the very
activities they are supposed to promote. Hill (2001) provides a number of examples of
government policies that, in one way or another, have harmed SME development in
the past. First, trade policies have been biased against SMEs in that major recipients
of trade protection have been predominantly large corporations. Second, the
regulatory framework has often harmed SMEs. For instance, incentives for investors
may benefit larger establishments because of the minimum investment size
requirement. Finally, when it comes to SME development, government officials tend
to favor a paternalistic approach and are suspicious of markets and economic
liberalism.
5
For further discussion concerning rural credit in Indonesia, see Robinson (2002)
26
there is still a need to build credit market institutions in many parts of the country that
could reach a larger fraction of the population, especially in rural areas. It has been
suggested that Indonesia’s entrepreneurs perceive lack of access to credit as a greater
problem than the higher interest rates that they have to pay for formal credit (Sandee
and others, 1994). This assertion has been corroborated by Goeltom’s (1995) finding.
According to her, although facing the highest interest rates, small firms have
experienced the greatest relative increase in their rate of investment, their leverage
ratio, and the productivity of their capital.
There is also a need for the introduction of a sound and secure property right system.
The importance of sound and secure property rights is yet to be promoted in
Indonesia. Property may be regarded as a bundle of rights specifying what a person
can do with a resource. These rights are constrained by various statutes, law and
details of contracts that have been established. From an economic point of view, there
are three important characters of the rights attached to private property. They are:
private property rights are saleable; the owner is free to exercise rights or neglect
them; and, the interference of others is forbidden.
27
as people’s forests (hutan rakyat). As a result, many stakeholders have only limited
control rights over forest areas upon which their livelihoods depend and, hence, as we
shall see later, limit their ability to improve the efficiency of their control rights
through market mechanism.
To be able to extract the maximum benefits from the decentralization program, local
governments should embark on programs for empowerment of the poor. It should be
recognized that the poor usually face multitude constraints in their economic pursuits.
There are economic constraints such as credit constraint where people are unable to
borrow, or lack of access to market, or lack of access to resources, etc. There are
political constraints, e.g., people cannot participate in certain activities because they
are not members of a certain party. There are institutional constraints, e.g., people
cannot participate in a certain economic activities because they do not belong to the
related association, etc. The empowerment may then be defined as attempts to
loosening up those constraints so as to allow people more freedom to engage in
activities of their own choice. Put it differently, the empowerment means a right to
28
economic initiative where individuals are given maximum latitude to make choice for
themselves, and should be held accountable for the consequences of their choices.
4.5 The need to resolve legal uncertainty, inadequate control and weak enforcement
There have been continuing problems arising from shortcomings in the legal
framework of decentralization and regional autonomy, and from inconsistencies
between sectoral and decentralization laws and related regulations. The central
government recognizes that both Law 22/1999 on decentralization and Law 25/1999
on fiscal balance between the center and the region have shortcomings that give rise
to serious constraints to their implementation. The Working Group Statement on
Decentralization presented at the Mid-Year Review CGI meeting in June 2003,
suggests that the government is preparing a revision to Law 22/1999, which is to be
signed in January 2004. In the attachment to the government’s statement on progress
of decentralization in Indonesia presented at the 12th meeting of the CGI, January
2003, the government stated its intention to have resulted in their implementation; the
new law is to be introduced in early 2004.
29
Illegal logging, failure in fulfilling contract obligations, disputes over land
titles, and forest fire are reflections of the absence of legal certainty, coupled with
inadequate control and weak enforcement in all parts of the country. Therefore, it
needs concerted actions by government at all levels.
5. Conclusion
This paper has looked into Indonesia’s recent experience with decentralization and
how it affected forestry policies. Due to its young age of two years, an assessment of
the Indonesian decentralization reforms is necessarily a preliminary exercise.
Nevertheless, some significant trends can be detected and future policy strategies
should take them into account.
Lastly, the basic governance question is one of replacing the old, centralized
command and control regime with a market-based system. Currently, Indonesia’s
30
forestry governance system is in the process of experimenting with market-based
incentive mechanisms to influence the behavior of forest stakeholders. The idea is that
people will pursue objectives of sustainable forest management, if they have enough
incentives to do so. In this regard, the introduction of a sound and secure property
rights system is a priority issue, specifically tackling land tenure issues. However,
designing such a regime is not always easy to implement, especially when it involves
mitigating the adverse impacts of some negative externalities. Forest exploitation
necessarily involves some externalities, and it is imperative that any market-based
mechanism would minimize their negative impacts. Eco-labeling, for instance,
although not exactly a market-based mechanism, is likely to force concessionaires to
internalize the negative costs of logging and wood processing industries. An eco-
labeling certificate is essentially a statement that a product has been produced in an
environmentally sound process. Some countries, especially in Europe, have required
that all wood products exported to them have received such certificates. As more and
more countries apply the same rule, wood-based companies, especially
concessionaires, will have no other choice but apply for eco-labeling certification.
Companies that fail to do so will loss their business. Similarly, it will be the interest of
a kabupaten (district) government to require companies operating in their regions to
be certified, since it is liable to lose a part of its income caused by its inaction.
31
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