The Implication of Wood Price Changes on Deforestation in Indonesia: A Market Integration Approach

Abstract

Being one of the largest tropical countries in the world, Indonesia faces increasing problems with deforestation. Timber industry is one of the main sources of income from forestry sector in Indonesia. It is commonly assumed that deforestation is driven by the dynamics of supply and demand of forest products, particularly with regard to wood products. Based on the economic theory, price is an indicator of how market works and thus drives supply and demand reactions. This research is aimed to investigate the market integration between domestic and world market of wood products and the implications of wood price changes on deforestation in Indonesia. We conducted price transmission analysis which uses Error Correction Model and regression model to see the relations between wood prices with deforestation. According to the results of price transmission analysis, it is found that domestic logwood market of Indonesia is integrated with the world market as well as in the plywood and sawn wood market, though the domestic logwood market is protected by the enactment of export ban since 1987. The results of regression model show positive correlation between wood prices and deforestation which concludes that the higher prices of wood products will lead to the more potential deforestation in Indonesia. In the presence of market integration of some processed wood products between domestic and world market, the deforestation may not be hindered only by imposing export ban on logwood.