Working Papers

Economic Dynamics and Forest Clearing: A Spatial Econometric Analysis for Indonesia - Working Paper 280

12/19/11
David Wheeler, Dan Hammer, Robin Kraft, and Susmita Dasgupta
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David Wheeler and co-authors use detailed monthly data from FORMA (Forest Monitoring for Action) to determine the factors that contribute to deforestation in Indonesia. The FORMA data are sufficiently fine-grained to allow short-run economic variables to be among those tested econometrically.

Their analysis tests variables such as expected product prices, quantity demands, interests rates, and exchange rates along with factors included in more traditional analyses, such as rainfall, terrain characteristics, and population density. The results show strong effects from economic variables with highly variable lag times: less than a year for product prices; around one year for product demands and the exchange rate; and closer to two years for the real interest rate. All variables are highly significant in the panel analysis, and their fluctuations, along with variations in rainfall, explain a major portion of the changes in Indonesian forest clearing.

The results highlight the importance of incorporating economic dynamics into financial compensation arrangements for forest conservation while casting doubt on the efficacy of tradition protection arrangements. But as the perceived worth of forested land fluctuates over time in response to many factors, fixed compensation schemes may prove to be difficult to negotiate. The authors propose employing an incentive system that pays national governments for forest conservation and leaves them free to make flexible arrangements with local forest proprietors.

Data disclosure: The data and Stata code behind this analysis are available as a data set.