Local and national concerns: criteria and indicators
“Best bet” Land-use Systems
Country reports
Alternatives To Slash-And-Burn In Indonesia
Unique id: IDAZAZYB
Source file: D:\Projects\ASB\ASB Country and Thematic reports\Indonesia PhaseII report\Part IV-V .xml
Authors: Thomas P. Tomich, Meine van Noordwijk, Suseno Budidarsono, Andy Gillison, Trikurnianti Kusumanto, Daniel Murdiyarso, Fred Stolle, Ahmad M. Fagi, Iswandi Anas, A.F.S. Budiman, Kenneth Chomitz, Rebecca Elmhirst, Chip Fay, Hubert de Foresta, Dennis Garrity, Danan P. Hadi, Suryo Hardiwinoto, Kurniatun Hairiah, Genevieve Michon, Nu Nu San, Cheryl Palm, Soetjipto Partoharjono, Djuber Pasaribu, Eric Penot, Robert Simanungkalit, Martua Sirait, S.M. Sitompul, F.X. Susilo, David Thomas
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Alternative systems and
technologies must be profitable and socially acceptable for smallholders; if
not they have little prospect for adoption (hence impact). Part IV reports the empirical results of
application in
Assessment Criteria.
Empirical results for
Criteria for smallholders’ socioeconomic concerns:
production incentives, labor constraints, and household food security.
Criteria for policymakers’ objectives: growth and
aspects of equity and stability
This part of the report will
conclude with sections on tradeoffs and complementarities among smallholders’
concerns and policymakers’ objectives and on ‘scaling up’ the assessment from
plots to landscapes and watersheds. Criteria for institutional barriers to adoption, which are concerns to both
smallholders and policymakers, will be considered in Part V.
IV.1Profitability indicators
Since many of the land use
alternatives in Sumatra involve perennials, the appropriate measure of profitability is the net present value (NPV, present
discounted value) of revenues less costs oftradable inputs (fertilizer, fuel,
etc) and of domestic factors of production (land, labor, management) over the
full 25 year period considered in the analysis. Because it can account for input and factor
costs as well as outputs and can handle time by discounting future values, this
measure of total factor productivity is superior to partial measures of
productivity (e.g., yield or output per unit labor).
The policy analysis matrix (PAM) technique
provided the framework for estimating profitability indicators as well as the
indicators of labor requirements and cash flow constraints discussed
below. The ‘PAM’ is a matrix of
information about agricultural and natural resource policies and factor market imperfections
that is created by comparing multi-year land use system budgets calculated at
private and social prices (Monke and Pearson 1989 is the basic reference). Private
prices are the prices that households and firms actually face, so private
profitability – the NPV at private prices -- is a measure of production
incentives. Social profitability, calculated at
economic (shadow) prices, removes the impact of policy distortions and market
imperfections on incentives for adoption and investment. Thus social
profitability —the NPV at social prices -- is an indicator of
potential profitability(or comparative advantage). Divergences,
the difference between private profitability and social profitability, are
indicators of distortions, arising either from policy or from market
imperfections and failures. The
structure of the PAM is described in Table IV.1, which is taken from Monke and
Pearson (1989, p. 19).
As pointed
out by our colleague, Arild Angelsen, the list of potential corrections to
arrive at social prices is quite long.
The adjustments to derive social prices in these analyses focus mainly
on policy distortions arising from trade restrictions. As discussed below, we also used a lower real
discount rate (15% instead of 20%) to capture a rough approximation of the
impact of capital market imperfections on the private cost of capital. We have used the same wage rate in both sets
of calculations, implicitly assuming that there are no imperfections in the
market for unskilled labor. While this
is not completely true, it also seems that these imperfections do not have a
significant effect in the unskilled labor market (see discussion of labor
markets in Section V.4 below). The main
omission here is that prices are not adjusted to reflect costs and benefits of
environmental externalities arising from these production activities, such as
smoke, ecological changes, and loss of watershed functions. These adjustments, which probably would be
significant and which are necessary for the complete analysis, are not possible
at this time because of lack of data.
Filling this gap is a priority for future research, as discussed below
in Section IV.5.
These
studies focus on primary production in agriculture and forestry. To get the complete economic picture,
especially regarding comparative advantage and growth potential, it would be
necessary to extend these analyses ‘downstream’ to include the private and
social profitability of processing activities, especially for timber, rubber,
cassava, and palm oil. Each of these
studies of processing activities (described in Appendix E) would be a major
undertaking in its own right and was not feasible during Phase II work in
Table IV.1 Policy Analysis Matrix
|
|
|
Costs |
|
|
|
|
Revenues |
Tradable inputs |
Domestic factors |
Profits |
|
Private
prices Social
prices Effects
of divergences and efficient policy |
A E I3 |
B F J4 |
C G K5 |
D1 H2 L6 |
1 Private profits, D, equal A minus B minus C.
2 Social profits, H, equal E minus F minus G.
3 Output transfers, I, equal A minus E.
4 Input transfers, J, equal B minus F.
5 Factor transfers, K, equal C minus G.
6 Net transfers, L, equal D minus H; they also equal
I minus J minus K.
Ratio Indicators for
Comparison of Unlike Outputs
Private cost ratio (PCR): C/
(A – B)
Domestic resource cost ratio
(DRC): G/ (E – F)
Nominal protection
coefficient (NPC)
On tradable outputs (NPCO):
A/E
On tradable inputs (NPCI):
B/F
Effective protection
coefficient (EPC): (A – B)/ (E – F)
Profitability coefficient
(PC): (A – B – C)/ (E – F – G) or D/H
Subsidy ratio to producers
(SRP): L/E or (D – H)/E
Source: Taken from Monke and
Pearson 1989, Table II.1, page 19.
To assure comparability
across land use systems (and across ASB sites in Indonesia and Thailand), a
regional short course on application of the PAM approach to natural resource
management and policy analysis was be held in Chiang Mai, Thailand, 1-13 June
1997. Through participation in lectures and computer-based exercises, teams
developed a common methodology for analysis of land use systems. The course,
which was funded by ADB, involved eleven participants from
Table IV.2 ADB-Funded
Grants for Socioeconomic Research in
|
Research Topic |
Researchers |
Institution |
|
Does shifting cultivation
really cause deforestation? Economic analysis of shifting cultivation and
five-year bush fallow in |
Bustanul Arifin
Agus Hudoyo |
Department of Agricultural Economics and Rural
Sociology, |
|
Economic analysis of land
use system for large scale plantations of oil palm and industrial timber
estates |
Retno Maryani
Setiasih Irawanti |
|
|
3. Economic analysis of large scale logging |
Machfudh
Wesman Endom |
|
|
Analysis of the economic
efficiency and comparative advantage of the Sumatran small-holder rubber
using ‘PAM’ method |
Gelar Setya Budhi |
Center for Agro Socio-Economic Research, Agency
for Agricultural Research and Development, Department of Agriculture |
|
Economic analysis of NTFP
extraction in Rantau-pandan, |
Arif Aliadi
Wibowo A. Djatmiko |
The Indonesian Tropical Institute (LATIN) |
Operational definitions for
the six land use types were given at the end of Chapter I.
1. Community-based forest
management,
2. Large-scale commercial
logging
3. Smallholder rubber,
including both rubber agroforests and rubber monoculture.
4. Large-scale plantations of
oil palm and industrial timber estates
5. Upland rice with bush
fallow
6. Transmigration systems,
focusing on cassava and Imperata
cylindrica (alang-alang)
See Tables I.2, I.3, and I.4
for additional specifications of these systems.
Annex E contains the PAMs for the various scenarios and more information
on each of the studies.
All of these studies use the
macroeconomic parameters tabulated below because the data were collected in
July 1997, when the exchange rate was about Rp 2400 / US dollar. By most assessments of economic fundamentals (e.g.,
purchasing power parity), the Indonesian Rupiah was not greatly overvalued at
that time. The consensus was that the
overvaluation of the Rupiah relative to the dollar may have been 10-15% in June
1997. Some expert analysts even expected
the Rupiah to appreciate if it were floated in 1997 (Mc Leod 1997). To almost everyone’s surprise, the collapse
of the Thai Baht in July 1997 spread to the Rupiah (among others). By January 1998, the Rupiah had fallen to over
Rp 17,000 per US dollar. After a recovery below Rp 10,000, it had fallen again
to over Rp 14,000 per dollar in June 1998.
The reasons why Indonesia’s currency fell the furthest and has stayed
down the longest rest with profound problems in its banks and other financial
institutions compounded by the worst social instability and political
uncertainty in 30 years.
The impact on land use
incentives resulting from this monetary, social, and political crisis will be
examined in Part VI. Although the causes
of the regional financial crisis are not yet fully understood, they do not reflect
fundamentals of the productive sectors of
|
Macroeconomic parameters for PAMs |
July 1997 |
|
Exchange
rate |
Rp
2400 / US$ 1 |
|
Wage
rate in |
Rp
4000 / day |
|
Real interest rates (net of
inflation): |
|
|
Private: |
20
% per year |
|
Social: |
15
% per year |
Real interest rates – that is interest rates net of inflation -- are the discount factors
used to value future cash flows in current terms. As in most developing countries, capital
markets in
On the other hand, as
Angelsen has pointed out, ‘desire to claim or secure land rights may modify the
effect of high discount rates.’
An activity with NPV less
than zero is ‘unprofitable’ by definition.
This does not necessarily mean that there are no positive cash
flows. Instead, it means that it would
be more profitable to do other things with the land, labor and capital than to
devote them to this activity. If land is scarce, the NPV estimates
measure returns to land because they are the ‘surplus’ remaining
after accounting for costs of labor (including imputed value of family labor),
capital (through discounting), and purchased inputs.[1] (To the extent that management is a scarce
factor, it also would be included in the residual.) We also present a measure of returns to labor, the wage rate that
sets the NPV equal to zero. This
calculation converts the ‘surplus’ to a wage after accounting for purchased
inputs and discounting for the cost of capital; no surplus is attributed to
land. This measure of returns to labor is
valid when land is abundant and labor is scarce. Returns that exceed the wage, Rp 4000 per
day, mean the activity will be attractive to family members compared to
off-farm work or would justify hiring labor.
Although local land abundance
with household labor scarcity has prevailed historically and certainly
continues in the ASB sites in
For these reasons, and to
facilitate cross-site comparisons, returns
to labor valued at private prices was selected as the indicator of
profitability for smallholders’ production incentives. Private prices are used in this indicator to
reflect actual incentives smallholders faced under policies in effect in
mid-1997.
At the same time, local and
national policymakers increasingly are making public policy decisions under
conditions of land scarcity and labor abundance. Land certainly is a constraint that should be
considered by policymakers in choices regarding development of large-scale
estates versus smallholders and there are other reasons to believe these
development strategies are mutually exclusive (Tomich et al 1995).
Returns to land valued at social prices will be
used as the indicator for potential profitability from policymakers’
perspective. Social prices are used to indicate potential value
added from this alternative if policy distortions and market imperfections were
removed. This impact on value added is
directly linked to policymakers’ growth objectives.
|
Table IV.3 Profitability Matrix, July 1997 |
|
|
|
|
|
|
Land Use System |
RETURNS TO LAND |
|
RETURNS TO LABOR |
||
|
|
|
|
|
|
|
|
|
|
|
|
Wage to set NPV to Zero |
|
|
|
NPV Private Prices |
NPV Social Prices |
Divergences |
Private Prices |
Social Prices |
|
|
Rupiah 000 / ha |
Rupiah 000 / ha |
Rupiah 000 / ha |
Rp / person-day |
Rp / person-day |
|
Community - based forest management |
8.0 to 16 |
9.4 to 18 |
(1.5) to (2.5) |
11,000
to 12,000 |
11,000 |
|
Commercial Logging |
(804) to
(131) |
(32) to
2,102 |
(2,233) to (773) |
(17,349)
to 2,008 |
7,,917 to 31,400 |
|
Rubber agroforest (seedlings) |
1.6 |
73 |
71 |
4,000 |
4,100 |
|
Rubber agroforest (clones) |
(95) to 2,202 |
234 to 3,623 |
(330 to (1,420) |
3,900 to 6,900 |
4,200 to 7,700 |
|
Rubber monoculture |
(167) |
(993) |
(826) |
3,683 |
2,600 |
|
Oil palm monoculture |
275 |
1,480 |
(1,204) |
5,797 |
9,981 |
|
|
(220) to
(76) |
(180)
to 53 |
(37)
to (130) |
2,700 to
3,300 |
3,000 to 4,500 |
|
Monoculture cassava/Imperata cylindrica |
(71) to
360 |
(315) to 389 |
135 to 243 |
3,895
to 4,515 |
4,085 to 4,455 |
Estimates of returns to land
and returns to labor, each evaluated at private and at social prices, are
presented in Table IV.3. The upland rice
/ bush fallow rotation stands out as being unprofitable, either in terms of
potential profitability (returns to land at social prices) or smallholder
production incentives (returns to labor at private prices). For the upland rice / bush fallow system, the
higher (less negative) returns are for the fallow of ten years or more, which
is no longer feasible. The lower (or
more negative) numbers in the range correspond to short fallow shifting
cultivation. These results are
consistent with the disappearance of shifting cultivation in most of
Returns to labor are highest
for community-based forest management (extraction of NTFPs), but these high
returns are dependent on some mechanism to exclude outsiders. Thus, this system plays an important role for
existing communities that can regulate access to forest lands. If, on the other
hand, communities could not regulate access to their forests, one would expect
the returns to labor from extraction of forest products to decline toward the
wage rate. However, even under ‘open
access’ one would still expect returns to labor to exceed the wage rate by some
margin equal to a risk premium. The
risks involved include possibility of failure to find products to extract and
also the risk (and associated costs) of detection by officials, since many of
these activities are prohibited.
The relatively low returns to
land – only slightly above rubber agroforests – suggest that NTFP extraction is
not a feasible alternative for large numbers of people, because there is not
enough land for everyone to practice this extensive livelihood strategy. These results must be interpreted with some
care, however, for three reasons. First,
these extractive activities are highly site-specific. It may be that the study site is not
representative. Only additional studies
can resolve this. Second, as often is
the case, at least part of this community forest is on
The results for commercial logging appear paradoxical,
but this is because of policies that produce the biggest divergences for any of
these land uses. First, the sustainable
logging regulations – if they really are followed – reduce profitability,
mainly by slowing timber extraction.
Second, high export taxes (effectively an export ban) for logs and sawn
timber depressed the domestic prices of logs from 50-70% below comparable world
prices. (Timber export taxes were to be
reduced to 30% by the end of 1998.)
However, timber companies could get around both of these problems. First, as mentioned above, many companies
circumvent regulations on timber extraction. Second, these typically are
vertically-integrated firms producing products like plywood for the export
market. Therefore, the best indicator of profitability of these activities for
logging companies is the figure of just over Rp 2 million per ha, valued at
social prices that reflect world prices of forestry products. When comparable estimates are available for
industrial timber plantations, it seems likely that these will be more
profitable than logging.
By all accounts, illegal
logging is common, which seems inconsistent with these results of negative
returns to logging at private prices.
However, the major cost item for logging concessions -- establishing and
maintaining logging roads -- is not incurred by illegal loggers. If one can get access to timber without
having to invest in infrastructure (and at the same time circumventing various
fees), logging can be very profitable.
One could argue that the estimated NPV of logging activities of over Rp 2.1 million per ha (about US$ 875) in mid-1997 should be added to the social profitability for all the other activities and to private profitability, at least for large-scale estates that often can market timber felled as a by-product of land clearing. Recall that natural forest cover is the starting point underlying these calculations (and all the other estimates in this report). Thus all the forest-derived land uses (rubber, oil palm, cassava, and even upland rice) started out with felling of forest timber. And, as already noted, there is substantial (but as yet unquantified) timber felling in conjunction with NTFP extraction.