Tuesday, July 13, 2010

Chapter 6 Research Design, Revisited

In trying to explain how the incentive structure embodied in timber can institutionally weaken states, it is useful to consider the similarities between the timber and the narcotics sectors.  Both sectors have technologically simple and low cost methods of production.  Both have products that sell for high prices on the world market.  Both have extremely high rent earnings resulting from the difference between low production costs and high market prices.  Moreover, rent earnings in both sectors are typically magnified because of government trade restrictions:  narcotics exports are illegal and so are log exports from many tropical nations, including Indonesia.  Finally, entry into both sectors is mediated, if not by the state then by violence.  For those who think this a far-fetched parallel, consider the fact that Wong Tuong Kwang, before he became the head of the WTK timber conglomerate in Sarawak, got his start in opium smuggling.  

Wong Tuong Kwang . . . used more than two dollars to start his career. He smuggled opium during the colonial time . . . many people had learnt about it. When I was a small boy, I stayed at Chung Cheng Primary School in Sg. Ma'aw. [Wong Tuong Kwang's] youngest son, Qi Zhi was my classmate and I often visited his house at Sg. Paradom. His neighbor Ting Ming Hui was not on good terms with him. Whenever they quarreled, Ting and his family were always the losers. But they could make their opponents speechless when they told them not to be so arrogant since they were opium smugglers only (Lau 1995: chapter 19, page 1).

If the timber trade produces rent like the narcotics trade, it is not difficult to imagine that the timber trade can have just as corrosive an effect on proper governance as the narcotics trade.  The essence of the problem is that it is so easy for heads of state to obtain enormous levels of rent from narcotics, or timber, that once these sectors are up and running and providing enormous unofficial streams of rent to political elites, a set of overwhelmingly strong disincentives are created.  In this sense, it may not be the institutional weakness of states that leads to the suboptimal regulation of the timber sector.  Rather, it may be the perverse incentive structures embodied in the extraction of timber that lead to the institutional weakening of governments. 

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