Dynamics of Illegal Logging Systems in Indonesia:
An Initial Investigation
Richard G. Dudley“!
PMB#226
14657 SW Teal Blvd.
Beaverton, OR 97007
62-251-236396 (Indonesia)
rdudley@ indo.net.id
ABSTRACT
Many factors have accelerated deforestation in Indonesia. During the Soeharto era large
forest concessions were awarded to friends and family of the president who were able to
dictate forest policy while the military and police protected their interests. Soeharto's fall
in 1998 and democratic elections in 1999 led to the hope that equitable and sustainable
forest management would be instituted. This has not yet happened. A large government
forestry bureaucracy remains, but its limited control of timber harvest declined further.
Weakening of central authority allowed local level, illegal, timber harvesting systems to
flourish. Central government commitments to reform, especially decentralization aimed
at appeasing restive provinces, will likely accelerate illegal logging, especially with
continuing economic uncertainty.
Investigative field reports from Sumatra and Kalimantan, macro-level studies, plus
conversations with stakeholders provided information for developing qualitative system
dynamics models which help explain causes of, and possible solutions to, illegal logging.
Keywords: illegal logging, system dynamics, Indonesia, deforestation.
INTRODUCTION
Tropical forests have been one of Indonesia's most important natural resources, contributing
substantially to export earnings, employment and the livelihood of local people. Roughly 300,000
people are employed in the wood processing sector and at least 14 million are in some way directly
dependent on the forest for their living. Forest products accounted for over 11 percent of export
earnings between 1994 and 1999. While it is clear that forests have contributed substantially to the
economic and social well being of Indonesia's people, these benefits have been produced without due
regard for forest sustainability. Also asmall political and economic elite have manipulated policy for
their own benefit. As forest cover declines, the under-appreciated local, national and international
ecological benefits of these forests are also lost (Scotland and others 2000).
The rate of forest loss in Indonesia is alarming by any standard. Between 1985 and 1997 almost 30%
of the existing forested land on Sumatra disappeared. In Kalimantan (the Indonesian part of Borneo)
21% of the existing forest was lost over the same period. Essentially 100% of these areas was
originally forested. In 1997 only about 35% of Sumatra and 60% of Kalimantan remained forested
with 16.6 and 35.1 million hectares of forest respectively (Scotland and others 2000).
Conversion of Indonesian forest land to other uses has occurred for several reasons. In many cases
conversion has been a direct result of official policy. Such policies include creation of large oil palm,
pulp and rubber plantations. Politics and corruption have played a major role in the awarding of
plantation sites. An additional economic attraction of such conversions is the ability to sell timber
from the sites as they are cleared for other uses. _In the case of pulp plantations (to supply newly
built paper mills) the original intent was to provide sufficient plantation area to supply the mills with
fast growing tree species. However, mill owners found it more profitable to manipulate policy in
order to continue to clear forest (with no fees paid) to get needed pulp logs from natural forest while
land cleared remained unplanted (for a discussion of these issues see Barr 2001a).
Over-harvest within forest concessions has also led to forest loss . Since the late 1960s large forest
concessions were awarded to entrepreneurs closely associated with President Soeharto (e.g. see Barr
1998). Over time manipulations of policy led to an over capacity of sawmills and plywood
production facilities. This over capacity led to over harvest which further degraded the ability of the
forest to produce logs. In addition, the awarding of concessions was made with little regard for local
peoples' rights to forest and land. People whose traditional rights were mostly ignored carried out
‘unofficial’ logging within forest concessions. This ‘illegal logging’ remained a minor problem because
police and military were willing to enforce laws and regulations. This willingness was related to their
strong loyalty to the central government, which resulted, in part, from income they or their bosses
received from their own forest concessions. Nevertheless, other factors also led to unsustainable
harvest rates even within the concessions (Barr 2001b).
In late 1997 serious economic difficulties, and a growing resentment of increasingly obvious
cormuption, led to the downfall of Soeharto in mid-1998. The resulting evaporation of central
government control led to interethnic unrest in parts of the country. Democratic elections in early
1999 stabilized the situation and much of the country has remained calm. However under the new,
enigmatic President Abdurahman Wahid, the central government remains weak. Long sought for
decentralization, which has also been promoted by international agencies, is planned and is probably
unavoidable.
Will decentralization provide relief to the forestry sector? Some expect that more local control will
bring less corruption and more sustainable forest management. Given recent indicators this seems
unlikely. Prior to official decentralization, de-facto local control resulted from a decrease in central
authority created by the political and economic uncertainty. Also, in 2000, a special law was created
permitting local officials to grant small scale forest concessions. These changes have both led
respectively to illegal logging, and to legal over-harvest on a massive scale (see McCarthy 2000,
Casson 2000, and Obidzinski and Suramenggala 2000). In some parts of Kalimantan local people are
now resigned to the fact that their forest will be completely converted to non-forest use in a matter of
years (e.g. Wadley 2001).
The current situation is somewhat depressing. A 35 year domination of the forest resource industry
by a small, powerful and corrupt, political elite has left a legacy of acceptance of feudalistic corrupt
and illegal behavior. The current weakening of central authority has left a power vacuum in provinces
rich in forest resources. The disappearance of the central elite may merely be replaced by corrupt
networks at the provincial and local level which may include significant national and international
components. This paper represents an initial attempt to investigate these issues using a system
dynamics approach to discover policies which might to protect, and sustainably manage remaining
forest resources. The focus herein is illegal logging.
APPROACH USED
The work reported here was carried out during a short term consultancy at the Center for International
Forestry Research and represents one attempt to formulate methods to work with various
stakeholders on the growing problem of illegal logging. Numerous governmental and non-
governmental organizations are reporting incidents of illegal logging, but are largely powerless to take
action. Both aid donor and governmental agencies have held workshops to discuss the issue, and to
propose various action plans and policy proposals. But these fora have only limited means of
analyzing short and long term implications of proposed policies. For example, new laws will have
little impact if the legal system cannot enforce them, and additional taxes might merely stimulate
illegal logging activity as people strive to avoid them.
A system dynamics approach can provide a framework for analysis of illegal logging. It is believed
such a framework can guide meaningful discussion of realistic policy options. System dynamics can
portray mental models of illegal logging which various groups, or stakeholders, report, in the
literature or in person. These differing views can be discussed and perhaps consolidated into a shared
understanding of the problem.
While the use of quantitative system dynamics is an ultimate goal, activities to date have focused on a
qualitative system dynamics approach (causal loop diagramming). Causal loop diagrams are a
convenient and powerful way to clarify and display various mental models of a system.
Unfortunately analysis of policy options using causal loop diagrams is difficult even with only
moderately complex systems (e.g. see Richardson 1986). Nevertheless a qualitative approach can
provide a useful starting point for examining factors which make illegal logging difficult to control.
Several authors (cf. Richardson 1996, Coyle 2000) have discussed the relative merits of using
qualitative versus quantitative system dynamics approaches under various circumstances.
The first step in building the models was to review recent reports about illegal logging which
accurately detailed information from the field (McCarthy 2000, Casson 2000, Obidzinski and
Suramenggala 2000, Wadley 2001). Recently completed comprehensive reviews of the Indonesian
pulp (Barr 2001a) and timber industry (Barr 2001b and 2001c) were also examined.
Initial causal loop diagrams based on these perspectives were created and discussed with colleagues
knowledgeable about the illegal logging problem. Additional information was then gathered in
informal settings from non-governmental organizations, government agencies, and timber industry
representatives. Models were revised and when possible discussed with stakeholders from whom the
original information was obtained. In some cases there was a desire, on the part of colleagues, to
return to a more general model if model details became too complicated. This was particularly true if
models contained stock and flow components typical of quantitative sd models.
Here this problem of illegal logging is examined from three perspectives: 1) the evolution of the
current situation, largely based on macro political-economic views, 2) the local area perception of
illegal logging based on field reports, discussions with report authors and with NGOs, and 3)a
perception from the logging industry based on interviews with industry representatives and
colleague's reports on the timber industry.
SYSTEM VIEWS OF ILLEGAL LOGGING
The Soeharto Era and Its Legacy
In this section I have presented a progression of four qualitative models to describe how the problem
of illegal logging evolved in Indonesia. These models are based on preliminary ideas as to how
factors affecting illegal logging evolved to the point that created the situation we find today. They do
not describe the detail of today's situation, but rather factors leading to it.
The first model represents a somewhat idealized view of a well managed timber industry working in
cooperation with government. Sustainability of the resource is an important issue. The second model
represents the role industry had in subverting sustainability for the sake of additional and more
immediate profits. The third model attempts to explore how, during the Soeharto years, a timber
industry largely controlled by the Soeharto family and friends, supported by the military, managed to
exaggerate this control by industry. The fourth model examines lingering effects of the Soeharto
legacy which tend to exaggerate other factors leading to illegal logging at the local level.
Idealized View
An idealized view of the wood processing industry might look like the representation in[Figure I] In
this view, demand for logs is driven directly by demand for, and profitability of, wood products.
Demand for logs is also created by wood processing mills. As demand for logs increases, the
purchase price increases stimulating increased harvest of logs using existing harvest capacity. An
increase in profitability also stimulates creation of more harvest capacity (purchasing of more
chainsaws, hiring of more forest laborers, etc). As the amount of timber cut increases, the supply of
logs also increases causing the price for logs to drop which lowers potential profits from log harvest.
Eventually the price for logs stabilizes (stabilizing loop A). An increase in demand for logs will
cause an increase in the price which will ultimately tend to lower demand (stabilizing loop D). Note
that, taken together these two loops also form a positive feedback loop (not labeled) whereby the
increasing supply of logs lowers the price which increases the demand.
Under this idealized view the amount of timber cut is linked to an allowable timber harvest which, in
tum is based on the availability of timber for harvest. As amount of timber cut increases the
availability of timber for allowable harvest will eventually decrease (stabilizing loop B) with a delay.
This negative feed back from timber cut to the availability of timber drives stabilizing loop C which
will limit construction of new wood processing capacity if timber supplies and allowable harvest start
to drop. Importantly, availability of timber is influenced by the sustainability of forest management
practices. In this idealized view forest industry supports long term management of forest for
sustainable harvests over many years. Clearly this view does not present the current or past situation
in the Indonesian timber industry.
Excess Influence of Industry
In Ihave presented a simplified view of what has happened in the Indonesian industry.
This illustrates the situation that has evolved over the past several decades, the results of which still
strongly influence the Indonesian forest sector. The stabilizing negative feedback loops prominent in
Figure have been overpowered by several positive feedback (growth) loops linked directly to forest
industry. Powerful interests within the forest industry were able to manipulate forest policy to
directly benefit themselves. As their strength in the industry, and wealth, grew, their influence on
policy also grew (reinforcing loop Q). Some of this policy was directed at the opening of new forest
areas which increased the availability of timber (at least in the short to medium term) (reinforcing
loop R). Other policy manipulations sought to bypass limits on harvest set by sustainable
management practices (reinforcing loop S). Both these actions essentially negated the effects of
balancing loop B in
At the same time greatly increasing demand, and special government policies, led to increased milling
capacity. At first Indonesian logs were exported. Subsequently log exports were gradually
discouraged via taxation, and finally banned in 1985. This ban stimulated the growth of the domestic
wood products industry. By 1992 when the log export ban was replaced with export taxes, increased
milling capacity had created an strong domestic demand for logs. Increased demand allowed log
prices to remained high enough to stimulate continued high harvests. The relative profitability of
timber harvesting has increased during the last few years as local labor costs have dropped in relation
to international timber product prices. This situation benefited the large scale timber processing
industries as long as the central government could enforce the export tax.
How Did Excess Influence Develop
Figure 2] does not fully explain why these changes came about. [Figure 3]examines some additional
information which helps to explain how the Soeharto era situation evolved and what potentially
destructive system components remained in place when the Soeharto government collapsed in 1998.
In Figure 3]the relationship between Soeharto's power and timber interests is more clearly illustrated.
A portion of Soeharto's power resulted from the strong support he received from the military, and a
portion of that support was due to Soeharto providing timber concessions to the military (reinforcing
loop T). A spin-off from this loop is the support the military provided to the lobbying power of the
timber industry further reinforcing loop Q.
Also, as the involvement of the Soeharto family and associates grew, their influence on forest policy
became dominant, providing for policies that further enhanced their own wealth and thus further
strengthened their role in the industry (reinforcing loop U). These relationships weakened the role of
the balancing loops illustrated in particularly those policies related to sustainability of forest
resources:
Importantly, as these factors further strengthened the role of the centrally controlled wood products
industry resentment began to build in the rural forested areas. The amount of dissatisfaction with
central forest policy grew, but people were largely unable to do anything about it. To a certain extent
illegal logging was also a part of the centrally controlled system. Selective enforcement and
insufficient monitoring allowed timber harvest outside formally agreed upon terms for forest
concessions leading to the degradation of the forest resource base. In a sense this type of illegal
logging can also be viewed as a manipulation of policy by industry. Other than this the amount of,
locally based, illegal logging was kept in check by military and police whose bosses had timber
interests themselves, and also because of the strength of the Soeharto regime in general.
Disappearance of the Soeharto Regime
With the fall of Soeharto some of the model components disappear, some become less important,
while others become more important. These changes are illustrated in Here model
components representing strength of Soeharto and associates, and support of Soeharto by military and
police have been removed. With this change, positive feedback loops T and U disappear, and the
strength of loops Q, R and S is greatly reduced. That is, the influence of the central timber interests
on policy formulation was greatly diminished.
Although the lobbying power of central timber interests decreased, the wealth of these interests, and
resentment against them, did not disappear. There remained a significant amount of local area
dissatisfaction, plus factors causing that dissatisfaction did not disappear immediately, causing this
dissatisfaction to grow further. At the same time the major constraint on illegal logging, support of
Soeharto by military and police, disappeared. It seems likely that residual timber involvement by
military and police may tend to support, rather than limit, illegal logging. In any case the police and
military retained only limited power and thus were largely unable to enforce the law. These factors
all conspired to set the framework for large amounts of illegal logging.
The above qualitative models help to explain reasons why illegal logging became such a big problem
in Indonesia. These models do not explain why it persists at such a high level. The next step is to
explain factors reinforcing illegal logging with the ultimate goal of examining policies that could lead
to its control.
£ Demand for
>) J > cost ot
urchase Price Logging
Demand for Wood eae es
Products ottogs > /
jowable Timber Supe { :
Alowsble Tn ppl of Log awattvikee
ae from we Harvest
8. ‘Amount ait
Timber Cut
=
Policies to Support the
Wood Products Industry
“1
Sustainability of Forest
Management Policies
a
Figure 1. A simplified view of an idealized wood products / timber industry
system. In this view several negative feedback loops stabilize the system and
prevent both over harvest and the construction of too many processing mills.
Br aadttionat
Demand for Demand for
fe Logs Logs
GC) Ri P ad of
Wood Products
Policies to Support L
the Wood Products or,
Indust Purchase Price Costs of
of Logs
tena
Demand for
Gy Wood Products
| }.
|
| sig ot \ Proft From
| a Log Harvest
\+ (Go) ‘Allowable Timber
\ ‘a Harvest J
\
\ Opening of New +
\, “Forest Avas ee
Timber Cut
Sustainability of
Forest ‘ *
Management
Figure 2. In Indonesia, over the past decades, the timber industry had close
ties to government. Consequently the industry was able to directly influence
policy, supporting policies which led to a larger allowable timber harvest and
more wood processing mills. Atthe same time rapidly expanding demand
for wood products continued to create an unfulfilled demand. These changes
created positive feedback loops (Q, R, and S) which overpowered the
balancing loops illustrated in Figure 1.
Additional
Demand for
Logs
+ Demand for
ff Indonesian Logs.
Profitability of
Wood Products
‘Support of Soeharto by
Military and Police
Costs of
2 Logging
+
Purchase Price of ui
Logs
Demand for Wood
Products .
Potential Profit From
Lobbying Power of Qe
Timber Interests
+
Policies to Support the
Centrally Controlled Wood
Products Industry
ut
‘a Supply of Log Harvest
pee Gy Logs
Involvernent of Soehartn an s+
‘Associates in Wood Products
Indust, x +
4
‘Allowable Timber
[ perce Amount of
+ RH Tiber Cut
| +
Opening of New
Forest Areas
Sustainability of
Forest
Management
‘Kmount of illegal Logging
OA et
arto by
Support of S:
<involvernent of police and military Military
in timber industry>
Figure 3. This expansion of Figure 2 examines some of the causal relationships which conspired to strengthen the power of centrally
controlled timber interests. Of primary importance is the power of Soeharto and his own links to timber interests and military who
also had timber interests. Although dissatisfaction within communities in forested areas grew, efforts at locally controlled illegal
logging during that period were kept in check by relatively powerful police and military.
Additional
Demand for
+
Logs
Demand for
fi Logs
Profitability of 4
Wood Products
Lobbying Power of i Costs of
Timber Interests
Logging
Purchase Price
Demand for of Logs .
Wood ‘. +
Products
Potential Profit From
4
Policies to Support the
Centrally Controlled Wood
Products Industry
Supply of Log Harvest
es *
Involvement of Soeharto and 7 ]
Associates in Wood Products
Industry
4 Amount of
Allowable Timber phen t
| Harvest a. +
Sustainabiliy of Pening of New
rel forest Areas
Management
Amount of lllegal
Logging
<involvement of poli
Figure 4. The timber industry shortly after the fall of Soeharto might be presented as above. Soeharto lost his power as
well as police and military loyalty. His family and associates retained their forestry holdings but with influence on policy
greatly diminished. Factors leading illegal logging became intensified because support of Soeharto by military and police
had been removed. A major factor initiating the wave of illegal logging was the lingering resentment caused by the
amount of local area dissatisfaction with central forest policies. The remaining constraint on illegal logging, involvement of
police and military in timber industry, may have changed to a support illegal logging.
The View of Illegal Logging at the Local Level
The previous section illustrates the situation created by the weakening of Indonesia's central
government. A lingering result of the years under Soeharto, at least in the forest rich rural
areas of Indonesia, was a feeling of resentment that little of the wealth gained from forestry
had been returned to the local areas. As central government power diminished there was an
initial hope that decentralization would permit some form of sustainable forest management
with benefits remaining in the local area. This hope tumed to concem as reports of rampant
illegal logging started to come in from all parts of Indonesia. This section examines factors
that caused illegal logging to flourish at the local level, and which allowed illegal logging to
expand so rapidly.
There are three groups of factors which could each be sub-divided further: 1) factors related
to community values and the human situation in rural villages near forests, 2) economic
factors of normal supply and demand related to the logging industry, and 3) factors related to
entrepreneurs and their influence on, and collusion with, local politicians and leaders.
At the community level, as illustrated in[Figure 5, what matters most is the provision of jobs
and income. The willingness to work illegally is strongly influenced by the fact that one's
neighbors and friends are also working illegally. As epre people work illegally in forests
and sawmills that source of income becomes acceptable.’
Community ideas concerning the long term value of forests may limit the participation of
community members in illegal logging, but several factors may weaken community resolve in
these matters. Chief among these are the lingering dissatisfaction with central forest policy
and the perception that the communities' long term access to its surrounding forest resources
is threatened. Interestingly, the perception of long term access being lost is made more severe
by increasing illegal logging. In some cases alternates to forested land may arise and the value
of these alternate uses my also change community perceptions regarding forest management.
As more and more community members participate in illegal activities the activities become
acceptable. The additional income is certainly welcome. But this logging increases forest loss
which weakens community values related to the long term view of forest benefits. The
weakening of this collective, positive, view of the forest encourages additional participation in
illegal logging and milling. This whole process will be reinforced if resentment of central
forest policy is strong, the legal system is weak, and the economy is poor.
The isolated view of business at the local level appears in Here the likelihood of
profits generates a direct demand for logs and also causes an increase in milling capacity
which creates additional demand for logs. This demand for logs creates a demand for labor
and jobs for the local community.
Legal businesses provide jobs for the local communities, but because of time lags in building
mills, the creation of over-capacity is possible. Over-capacity can lead to excessive demand
for logs and excessive harvests even if profits drop. In striving to maintain profits mills may
resort to purchase of illegal logs if they are cheaper and the risks associated with buying them
are low. For simplicity, in{Figure 4 risks (of prosecution for example) are included in
domestic log price.
At the political - entrepreneurial level the likelihood of collusion appears [ame 7. This
happens because politicians have power to grant contracts for access to forest Iands and
ensure that various laws and regulations are enforced or ignored. Entrepreneurs on the other
hand have money gained from profits in the logging business. As indicated in this
sub-system contains of a number of positive feedback loops that tend to reinforce and
exaggerate existing conditions. As profits grow, the influence of the entrepreneurs grows
allowing more illegal arrangements to be made with local officials. Importantly, however, the
loops could act with the opposite effect. If, for example, the legal system were suddenly
strengthened causing a decrease in the participation in illegal activities by local officials, then
the amount of illegal arrangements and illegal profits would decrease causing a decrease in
the influence of illegal entrepreneurs. In this particular sub-view the strength of the legal
system is important, but as indicated in the overall view (Figure 8} other factors could also set
such change in motion.
Combining the above views, the causal loop diagram am Figure represents, with many
simplifications, the major forces contributing to illegal Togging at the local level.
Entrepreneurs tempt local officials to allow them to cut illegally to increase their profits. In
some cases collusion may be necessary to gain access to forest currently allocated to other
uses, especially if much of the forest is already allocated. To carry out their operations
entrepreneurs hire local people, or if they are not available or willing, people from distant
cities or towns who are drawn by the chance for work. As illegal logging activities increase
and the potential income becomes obvious, the acceptance of illegal activities by
communities increases. People become dependent on this new activity and see its
inevitability whether or not they participate.
Stren
Legal $
desired workers cash available
income ( Pa available palette
7 ,
: 7” willingness of a +
villagers to work] — !ocal labor pool
worker income illegally other labor pool
to desired Wore pe amount of
income ratio Lae + + illegal logs
influence of existing —_
a 4 illegal labor harvested 3
current 4 +
income +
available for
illegal harvest
~N amount of timber
I
Local Area
Dissatisfaction with
Central Forest Policy|
Jobs J
Available i
2
political ———-M™ perception of
stability longterm access
to forest
"
Community Suppor]
for Sustainable
resources
Forest Management|
immediate
income
needs
intra
community
tust
perceived value of
alternate land uses
cultural closeness to
the forest
Figure 5. A close up view of factors directly related to forest communities and people living
in them. From this perspective, the other factors shown in [Figure 8 may appear irrelevant.
amount of
profits
i .
cash available
for salaries
+
x
Number of Local
Saw Mills
amount of
workers —i t+ rs logs
eed harvested
J\.
domestic’
log price
amount of timber|
local demand|
available for
for logs
illegal harvest
expected
demand for
log export
wood, ‘amount profitability of
Product log exports
profitability of
sawmills +
Figure 6. A view of the local level situation from a business
perspective. Opportunity for profits coupled with availability of raw
materials and labor is sufficient incentive if markets are available.
Illegal activity is not necessarily a part of business.
Amount of Participation in Strength of
Illegal Logging by Local Legal System
Government Officials |g
officials desired
income ratio
cash available
for illegal
payments
influence of local
entrepreneurs and
logging bosses
\ amount of illegal
amount of arrangements
profits
. +
G cash available
for salaries
amount of
wilingness of 7 illegal logs
villagers to work harvested
illegally
+ workers
— used
Figure 7. A view of illegal logging activities at the entrepreneur -
local government level. This view is dominated by positive feedback
loops which tend to push the system in one direction or the other
depending on the strength of other factors.
+ Amount of Participation in| ~
a | Illegal Logging by Local
Government Officials
officials desired (strength of
income ratio + Legal System
influence of local
entrepreneurs and + cash available
Lo forilegal
amountof g payments
profits =
. —
workers mount of illegal
i "as available arrangements
willingness of cash available *
villagers to work | local c. for salaries
| illegally pool
worker income , Bags. __ amount of
sire
workers oF illegal logs
ak influence of existing ised A\
lu i
ilegal labor)
+ a
Le
: log price
esked Number of Local
income Saw Mills jecal domand amount of timber|
+ for logs available for
ilegal harvest
expected demand f+
for wood products
current
income
profitability of
log export log exports
amount
profitability of se
sawmills
Local Area
Dissatisfaction with
Central Forest Policy
political
stability
perception of
+ longterm access
forest
resources
immediate
income needs
Community Support for
intra Sustainable Forest
community Management perceived value of
tust alternate land uses
cultural closeness to™ +
the forest
Figure 8. An overall local level view of illegal logging.
. In this view there are 18 feedback
loops directly se aroun of illegal logs harvested. This view combines information
found in figures Figure 5] Figure 6nd Figure 7}
A Business View
Obviously large business interests see illegal logging from a different perspective. The
primary issue for business is possible profits associated with the production of wood products.
In simple terms this means business must consider costs, potential sales, and risks associated
with producing such products. Illegal producers will have a rather different view of the same
issues. For simplicity we might consider two components of a timber related businesses:
1) logging, and selling logs, and 2) processing logs into wood products and selling those
products:
A simplified view of a legal logging and milling operations is presented in If
profitability increases, mill operations will also increase creating a higher demand for logs.
Higher demand will drive up log prices stimulating logging operations, if logging costs are
not too high. As logging increases log prices will drop and eventually stabilize at a price
suffiggntly high for the logging business and sufficiently low for the purchase of logs by the
mills!
From the perspective of businesses ‘Amount of
wishing to operate legally, illegal logs on rin
the market create problems. This is °~ ~ Append
because illegal logs can be profitably sold y eect legal ogs
at lower prices and this will depress the apiane Oo
overall price of logs in general. Also, other: fog Xe re
illegally harvested logs may be sold as if SG =
they were legal if false documentation is ia map
purchased. While these cheaper logs are Iino Demand )
potentially profitable for milling for Legal Logs
operations, the depressed _ prices odcbon cost
discourage legal logging, creating a 4 eat
difficulty for mills wishing to buy only helit leg operation cass
legal logs. That is, the log market Mill Operations Prati of egal
becomes flooded with low priced, but C
illegal, logs which may give processors “aang
little choice but to buy illegal logs or none.
The perspective of illegal logging Ie
operations is different (Figure 10)| The
primary difference between this and the Figure 9. A representation of legal logging and
legal perspective is the source of the costs milling operations. One problem for legal
and resultant profitability of each type of logging operators is that illegal logs depress the
operation. Some of the costs are log price and increase the apparent number of
illustrated in Figure 1] Whereas legal legal logs on the market causing the log price to
operations have several taxes imposed, drop well below that which would support legal
illegal operations don't pay taxes but, logging. This is especially true because high
instead, pay bribes and payoffs to taxeson legal logging operations push up the
officials, the police or military. The final legal logging costs (Figure 11]. Note: Small
outcome for the manufacturing portion of circles indicate links to other figures in this
the business is dependent on the pricing of section. Components in brackets < > indicate a
the final product (Figure 12). If the costs component that originates from another figure.
for producing an illegal product are lower
than the price of a legal product then the legal product cannot be competitive. This is because
the market price for the two is the same, unless there is a risk, or premium, paid on illegal
products, such as a risk of fine or confiscation of the products. In this model we assume that
there is no way to determine if a product is produced from legal or illegal wood.
In spite of the similarity between Pique 9 and|Figure 1q, the differences between them
produce a very important outcome. If the illegal activities are more profitable than the legal
activities, then illegal activities will
become dominant, other things being
equal. Legal logging and milling
will disappear. Field reports indicate
that illegal logging and milling is
significantly cheaper, and illegal
logging has become dominant in
many areas. From the perspective of
legal business, a major component of
this problem is the level of
government tax on logs. Because
taxes of various sorts account for
almost 50% of the cost of legal logs,
a drastic reduction in this tax would
make costs of legal and_ illegal
logging more comparable.
In addition to the operating costs of
illegal and legal approaches to
business, there is another related
component which we can call ‘risk.'
Risk occurs in both legal and illegal
operations. Here we can limit the
discussion of risk to ‘risk of legal
action, illegal action, or political
action' against a business. Such
action might result in jail terms or
fines for illegal activity, or severe
limitation of business activity
effect of bribes on’
log legality +
quasi-legal
profitability of
- illegal logging
+
illegal logs Q
ilegal mil
operation costs
ilegal 6g
available
price of illegal
logs
Nw
Milling
Demand for
Illegal Logs
+ +
illegal Wood Product
“tT Costs
4
A ofillegal Amount of illegal
wood products Mill Operations
Figure 10. Illegal logging and milling operations
have a structure similar to the corresponding legal
activities. However the costs of the illegal activities
are different. Illegal costs include bribes which are
paid to avoid taxes and restrictions on logging
location and methods. Because bribe payments are
lower than taxes illegal logs can be sold at a lower
price than legal logs. Mills buying legal logs thus
also have a profit advantage.
through confiscation of property and
facilities. Risks are also faced in
areas where local communities may be free to take revenge for perceived injustices by
logging firms. We might imagine that these risks are only faced by illegal operators, but if
other businesses and politicians are involved in illegal activities then legal operators may also
face risks. These might involve grossly unfair business practices, biased, or no, enforcement
of existing laws, or threats, for example.
Figure 13]represents a model of the risks faced by logging and milling businesses as well as
ie actions businesses might take to minimize these risks. The major risks in the current
situation might be viewed as the risk of prosecution if caught violating laws. However, if
arbitrary power of the political elite (local or national) is high, then risks might be created by
actions that oppose these elites, legal or illegal. Thus, a stronger legal system may increase
risk from one source (prosecution) but at the same time may lower the risk from another
source (arbitrary power).
In general all businesses will attempt to have some connection to political power in order to
protect them selves from these risks. As the ‘strength of political connections’ increases the
‘size of wood related business' will also tend to increase since political connections will help
in the acquisition of new contracts, for example. This will further increase their ability to
obtain powerful partners but, because of the increased business, will also increase potential
losses if something goes wrong. These two loops work together increasing both the need for
political partners and the ability to obtain and keep such partners.
In summary, there are both
legal and illegal options for
business. Legal operations
require the payment of
relatively high taxes on
logging operations and
milling operations. Illegal
operators, in addition to
cutting trees illegally, avoid
tax costs partly by paying
bribes to appropriate
officials. For that reason
illegal logs are currently
considerably cheaper than
legally produced logs. If a
mill chooses to use legally
produced logs (produced at
tax for
taxes on log reforestation fund
volume
Mg, }
a eestor prowling
legal logs Q
+
pro-rated cost of we +
concession +
a costs of
value of trees equipment fuel
illegally cut etc
transport
bribe
other
teen bribes
land
cost of producing
ilegallogs ©
labor costs
Figure 11. Partial list of costs incurred by legal and illegal
logging operations.
a higher price than the illegal logs) then they will produce a more expensive final product.
This product will not be able to compete with the products produced by mills using illegal
logs. In order to protect themselves from risk both legal and illegal business interests will try
to align themselves with powerful political interests who can help to minimize those risks.
The reinforcing nature (or positive feedback) within this relationship means that the system
will tend to move toward more legality or
toward more illegality depending which
becomes well established _ first. Once
established either of these modes will be
become more difficult to change. Because
mutual benefits of this sort are possible via a
number of business opportunities, none of
these relationships are tied directly to healthy
forest resources, and __ business-political
partnerships could be transferred to oil palm,
mining, road contract or other endeavors. It
seems possible, however, that mutually
beneficial systems, for which forest wealth
formed the basis, could be established.
confiscation of
illegal products
total amount of
product available
wood product:
other factors
increasing product
demand
selling prices
fi
Ca
total demand for
wood products
Figure 12. Model components related to
wood product pricing and demand. To a
large extent the legality of products produced
is unknown. Thus both legal and illegal
products enter the same market and their
abundance helps determine the price. Other
factors affecting the demand for Indonesian
products might include pricing of competing
products and possible substitutes.
a
Arbitrary Power 5
of Political Elite err Legel
> System
:
: Risk of
amount of Successful
ilegalty used Procecution if
Stability of Caught Using
Business r /. _ | Illegal Methods
Environment
need to create and
maintain power
wa partners
ability to absorb a ability to Strength of
potential losses obtain power Poltesl
partners Connections
amount of
potential
losses +
Size of Wood
Related
Business
Size of Other
Business Holdings
Figure 13. A business view of risks associated with doing business in
the logging and wood processing sectors. Risks are increased by the
effectiveness of the legal system if one is involved in illegal activities,
and by possible arbitrary power of political elites in both legal and
illegal cases. In order to counteract these risks businesses tend to create
and maintain power partners who can minimize these risks via political
influence.
Not shown in this diagram are the arrangements made to maintain these
power partners. If civil society is strong such links would be
maintained by a clean reputation, support for good causes and
appropriate political parties. If civil society is weaker then links are
more likely to be maintained by bribery, questionable business
partnerships and perhaps violence.
Evolving ‘Illegal’ Logging Systems
Obidzinski and Suramenggala (2000) and Obidzinski (2001) reported on the changing
circumstances in areas where illegal logging has been common. As a part of its
decentralization plans, the central government, hoping also to prevent further damage from
illegal logging, passed several laws in 1998 and 1999 giving legal authority for local
government to issue forest harvest permits! According to Obidzinski (2001) this change
immediately created a situation where buyers sought rights to cut timber via arrangements
with local communities, with permits supplied by local government. This increased the role
of local communities via two channels: 1) the value of their forested lands became more
obvious to them, and 2) their legal authority over the land became clearer? Following these
changes communities were interested in protecting their lands from illegal logging forcing
logging interests to make legal deals with communities instead. (Obidzinski 2001).
How do these changes affect transparency of forest operations? The fact that log buyers are
now dealing with communities and local government officials within some legal guidelines
means that, technically speaking, less illegality is involved. But the arrangements whereby
permits are issued by local government offices are uncontrolled. Legal and illegal fees for
these permits now make up a very large portion of cash flow at this governmental level. The
very high number of permits issued leads one to conclude that sustainable forest management
is not the primary motivating force, and that short-term profits, both legal and illegal, are still
of primary interest. Only the mode of gaining access to timber resources has changed.
Under the new systems more of the profits remain within forest communities compared to the
past when profits went to Jakarta business and political interests. But the structure of the
system is still similar to that presented in Fue 2 wbaraby forest entrepreneurs have captured
the decision making apparatus with cash payments (legal and illegal) to both officials and
villagers. At this level there are few, or no, forestry advisors and even if such advice were
offered it would have little effect.
Sadly, the effect on the forest of this new logging system may be worse than the old system.
Immediate economic needs, rather than a long term view of forest profitability, is likely to be
the major component of community thinking given current political and economic
uncertainties.
A MODEL BUILDING DILEMMA: CAN 'STAKEHOLDERS' BE INVOLVED IN MODEL
BUILDING FOR TRANSPARENCY?
To ensure success of model building, and the creation of models which accurately represent
the real system, persons knowledgeable about the system should be consulted and involved in
the model building process. Many authors believe that if mental models are communicated
and shared among stakeholders a better overall understanding of the issues can result (e.g. see
Vennix 1996). Applying this principle to the modeling of transparency issues raises a number
of questions, some similar to those raised by Vennix (1999).
How can we get accurate information about bribery and theft from the people who are
involved in such activities? Even if these people are willing to discuss their actions and
rationale, can we be sure their statements are honest representations of what they believe and
do? The situation described in this paper involves stakeholders in illegal logging operations.
Some are corrupt officials and businesses people, but others might be classified as partially
innocent, accidental participants. At this level of participation it appears that obtaining
accurate information is less difficult.
Forest workers, for example, appear quite willing to -discuss their wages, working
arrangements and even payoffs made to police and military Thus the reports of McCarthy
(2000), Obidzinski and Suramenggala (2000) and Casson (2000) all record information of this
sort which was used in building sd models.
At higher governmental levels obtaining a clear indication of actions taken and the rationale
leading to them is more difficult. The highly bureaucratic nature of Indonesian government
makes a clear understanding of the Indonesian regulatory system difficult under the best
circumstances: Learning how these regulations are actually implemented is a major
problem. Such difficulties create a barrier to the realistic involvement of government officials
in model building.
In a celebrated illegal logging case, a member of parliament has been regularly accused of
masterminding large scale illegal logging within a national park, but has, for various reasons,
remained untouched by the law. Can one determine how, and with what rationale, he
operates? My information about him came from a report of an international NGO (Curry and
Ruwindrijarto 2000), whose members were beaten by police when investigating this particular
case. On the other hand some informants seemed strangely naive. One university forestry
professor asked where I had received information that police and military were involved in
the timber industry, even though such information is commonly reported in newspapers, some
being a matter of public record.
Getting accurate input for modeling is also difficult if individuals have an incentive to subvert
the modeling process. This need not necessarily be a desire to protect their personal interests,
but could stem from a perception that the interests of their boss or agency is being challenged.
For example, showing that a particular government policy will 'work' may be a hidden goal of
a modeling informant, not because of corruption, but because of loyalty. In all these cases
creating a balance between ‘participatory' approaches and a need to create accurate models
becomes difficult.
Of course the desire to ‘prove’ that favored policies ‘work' is not limited to goverment
officials with ulterior motives. Sometimes colleagues wanted to use the modeling process to
‘show that a policy works.' For example some colleagues wanted me to show that a ‘log
export ban' was a reasonable policy, even though many of the illegal logs were being
processed into sawn timber within Indonesia (and then exported). Another colleague wanted
to built a model to show that the export ban was not a good policy. Even when the utility of
the modeling process is understood, it is sometimes seen not as a tool for investigation, but
rather a tool for explanation of previously determined ‘solutions’. During the very short term
model building process the use of sd to investigate possible policies and discover new policy
options became apparent to participants. At the end of this period we were just starting to
discuss the need to quantify models.
CONCLUSIONS
The use of causal loop diagrams is helpful in elucidating the factors contributing to illegal
logging. The approach has been helpful in explaining how Indonesia got it to its present state
during the many years of the Soeharto regime which created, inadvertently, a situation in
which sustainability of forest management was largely ignored and dissatisfaction at the local
level was increased.
Subsequently local level dissatisfaction was an important cause, along with poor economic
conditions, triggering the current illegal logging disaster. But many inter-linked factors have
reinforced illegal logging at the local level. In order to gain access to forest lands, and to
avoid taxes, entrepreneurs conspire with local officials to carry out illegal logging. Members
of local communities who may normally have an aversion to becoming involved with illegal
logging are more willing to do so in light of their long-standing dissatisfaction with central
government policy. As more and more timber is cut illegally, traditional views of the forest
are eroded so people no longer see any sense in trying to protect what was once their
traditional, and primary, source of livelihood.
The remaining large timber interests feel that they are significantly limited by illegal logging
unless they want to become direct participants. Illegal logs on the market are significantly
cheaper than legal logs from forest concessions. High taxes are claimed to be a major
component of this problem. Large timber interests find it difficult to compete in a market
dominated by wood products based on illegal timber. Business interests, at both the national
and local levels, attempt to minimize their risks by forming alliances with powerful politicians
or community leaders. Given a weak central government, it seems likely that the large timber
interests will be forced to create and strengthen such alliances at the local, rather than the
national, level and this trend will be reinforced by decentralization.
Causal loop diagrams are helpful in a elucidating the above situations, and allow us to
understand more clearly factors contributing to illegal logging. This understanding can help
in formulation of corrective policies. However, a full analysis of such policies is best done
with quantitative system dynamics models which can be based on the understanding provided
by causal loop diagrams.
ACKNOWLEDGMENTS
A number of people provided helpful advice and discussion during the preparation of the
information presented here. Among these are: Joyotee Smith, Krystof Obidzinski, Anne
Casson, John McCarthy, Chris Barr, Graham Applegate, Carol Colfer, Herry Pumomo and
Lini Wollenberg of the Center for International Forestry Research. Erwidodo, Doddy S.
Sukadri, and Subarudi of the Indonesian Center for Forestry Economic and Social Research,
Ministry of Forestry. Benny Luhur, Riza Suarga and Herman Prayudi of the Association of
Indonesian Forest Concession Holders. Agus Purnomo and A gus Setyarso of the World Wide
Fund for Nature, Indonesia. A. Ruwindrijarto of TELEPAK Indonesia. Dave Curry of the
Environmental Investigation Agency (UK). Elias of the Faculty of Forestry, Bogor
Agricultural University.
Although I am thankful for their help, I in no way hold these colleagues accountable for what
I have done with their suggestions, and I hope that after reading this they will have many
additional comments.
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Endnotes:
' This article was prepared for presentation at the Nineteenth International Conference of the System
Dynamics Society. Atlanta, Georgia USA. 23-27 July 2001. It is adapted from: Dudley, R. G.
(2001). The Changing Dynamics of Illegal Logging in Indonesia: An Initial Investigation. To
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34 similar loop structure could be equally applied to the role which Soeharto and associates had in
most other industries (e.g. mining, petrochemicals).
* Obidzinski (2000) reports that forest workers can also originate from urban areas. Nevertheless,
seeing other people earning money is a powerful incentive for a villager to take part in logging
work.
5 Herein we focus on the sawn timber industry. Issues related to illegal logging are somewhat different
for the plywood industry, and entirely different for the pulp and paper industry.
° Vertically integrated mills may have a different perspective. We might just consider that they have
slightly cheaper logs... no profit needed, but the costs of logging will be the same (inclusive of
taxes).
7 The relevant laws are still changing, but typically individual permits involved areas of only 100 ha,
though other laws implemented at the provincial level allowed larger areas. Buyers typically
have many such agreements to fulfill their log supply needs.
8 Note that land ownership in Indonesia is seldom clearly known and even temporary resolution of land
disputes may require many years of negotiation.
° This may be a characteristic peculiar to Indonesia where people are generally quite open to revealing
all manner of personal information to interviewers.
1° This situation became extremely confusing in 2001 due the implementation of decentralization
policies which have given many governmental functions to the provinces with only vague
guidelines as to which government is responsible for which activities.
" Until recently one of the largest timber concessions in Kalimantan (Indonesian Bomeo) was
officially owned by the military.
