Friday, July 2, 2010

Excerpts Chapter 1 : The Unofficial Appropriation of Rain Forest Rent by Rulers In Insular Southeast Asia Between 1970 and 1999

"First, proponents of the comparative political economy of development point to the importance of states' accumulation of investment capital. Johnson (1987) for example notes that the Korean government controls up to 80 percent of the country's investment capital, which the government makes available to strategic industries in the Korean economy. The steps by which governments achieve such capital accumulation vary from case to case. In Korea, the state encouraged high personal savings rates. State-controlled banks loaned money saved by Korean citizens to businesses that occupied strategic sectors of the economy (Johnson 1987: 148-149).

In the case of Taiwan, revenue collection was the path taken by the state in order to accumulate capital. After World War II, the state extracted taxes from newly prosperous farmers and redirected those moneys toward increasingly higher valued-added types of production (Amsden 1985: 84-87). In short, in the northern tier Asian industrial economies, government financial institutions raised financial capital, through revenue collection and other means, to subsidize a succession of sectors that were increasingly higher-technology, export-oriented, and value-added. These sectors then accelerated, transforming Korea and Taiwan into high growth economies.

The relevance here to timber rent capture is that timber revenues could comprise a substantial portion of the state budgets in Indonesia, Sarawak and Sabah. Timber revenues could be targeted by these states in an economically strategic fashion as happened in Korea and Taiwan. Thus, an evaluation of the success or failure of the major tropical timber producing and exporting states to capture optimal levels of timber revenue should be a matter of practical interest to the comparative political economy of development school, which emphasizes the accumulation and dispersal of strategic investment capital. 

Less developed nations, according to comparative political economy scholars, have no long-term prospects for economic growth unless they manage to export high technology, high value-added goods. Industry of this type requires significant capital investment. Unless foreign banks, bilateral donors, or multilateral banks step in with capital, or unless there is a large domestic financial capitalist class, there is no possibility for domestic capital formation"

Under simple timber rent appropriation, timber concessions are awarded to companies run or owned by rulers, their proxies, families, friends, business partners, or political supporters. These licensees then harvest the timber and appropriate the difference between, on the one hand, the cost of extracting the timber, a margin of normal profit, plus whatever revenues they are required to pay to the state and, on the other hand, the price at which the timber sells on the world market. The difference between the two is typically quite large and represents, again, the share of economic rent not captured by the state but rather, appropriated by timber concessionaires and the powerful interests with whom, in many cases, they are aligned."

"Another form of complex timber rent appropriation takes place when heads of state, their families, and proxies control timber shipping and related insurance monopolies which provide a cash flow of $40 for each cubic meter of timber shipped. Yet another example of complex timber rent appropriation is when the head of state exacts payments from timber conglomerates, sometimes on the order of hundreds of millions of dollars in a single instance, over and above timber rent already appropriated as a result of direct or indirect managerial and equity positions held by the head of state in these conglomerates. "

"Two notable patterns emerge from the above discussion. First, capital will typically take the path of least resistance, choosing to earn profits in a monopolistic or oligopolistic fashion, rather than a competitive one, if it can convince government agencies to arrange it so. Second, government agencies must be able to withstand these types of socially unproductive, privatistic, parasitic, rent seeking demands by capital, if they wish to achieve and maintain sustained levels of economic growth.

Again, that the state apparatus withstands pressure from capital is critical. However, capital is not the only structural force from which bureaucracies must insulate themselves. In the developing world, it is a huge problem that industry tries to manipulate government agencies, with the public suffering as a result. However, just as often, the problem is that heads of state manipulate government agencies, with disastrous results. Thus, one may view the state as comprised of two analytically distinct categories: bureaucrats and rulers. Evans recognizes this trend in Zaire, where he points out that government agencies lack the autonomy to resist predatory demands made by heads of state:

Is Zaire's state 'autonomous'? If . . . 'autonomy' implies the ability to formulate collective goals instead of allowing officeholders to pursue their individual interests, then Zaire fails the test. Instead, it embodies the neo-utilitarian nightmare of a state in which all incumbents are out for themselves (Evans 1995: 45)."

"In short, in the developing world, it is likely that heads of state will place pressure upon departments of forestry to enact policies or make decisions that will be of material benefit to them. Only autonomous agencies can withstand such predatory demands. If departments of forestry do not possess autonomy from heads of state, they will put in place policies that will make the head of state or his clients material beneficiaries."

"There does appear to be evidence of the lack of autonomy of the forest departments in Indonesia and Sarawak.
Research already completed shows that heads of state, their families, and their proxies control a substantial portion of the timber concessions licensed to the top five timber conglomerates in Indonesia (Brown 1999: 12-24), and the top four timber conglomerates in Sarawak (Sarawak Tribune 1987).

Although it was eventually shown not to be so, I initially surmised that the Sabah Forest Department was autonomous, for a number of reasons. The first piece of evidence of the putative autonomy of the Sabah Forestry Department was the fact that two chief ministers, whose terms spanned almost two decades, appeared to lack significant ties to the timber sector. Harris Salleh (whose term ran from 1976 to 1985) told me that, when he assumed the chief ministership, that he did not have a high level of timber holdings (1 and 2 October 1996 interviews with Harris Salleh). As for Joseph Pairin Kitingan (whose term ran from 1985 to 1994), a member of the international press observed, "Kitingan's modest lifestyle has apparently won him the hearts of . . . villagers. Kitingan does not have 'business interests left and right' . . . and villagers perceive this as a sign of his 'withstanding corruption'" (FEER 1985a).

A second indicator of the supposed autonomy of the Sabah Forest Department is the dominant role played in the timber sector by the state-owned timber corporation, the Sabah Foundation. Although the Sabah Foundation is not formally linked to the Sabah Forest Department, both are government entities engaged, at least nominally, in ensuring the long term sustainable harvest of the state's production forests. Thus, the foundation appeared to provide the department with a degree of institutional support, seeming to reinforce the department's autonomy. Moreover, the foundation itself looked to be more capable of resisting predatory demands by virtue of two facts: that it was a state-owned corporation and possessed some degree of bureaucratic coherence and because it had a non-revocable 100 year license to timberlands under its control. This stood in sharp contrast to the state's smaller, private timber concessionaires, which by definition had no bureaucratic coherence, and had only one to five year licenses to the timberlands under their control (Gillis 1988: 132). The simple arithmetic of having a majority of the state's timberlands in the hands of the Sabah Foundation, and only a minority of Sabah's timberlands in the hands of private timber concessionaires, appeared to leave fewer opportunities for the Sabah Forest Department to be buffeted by predatory demands from the state's chief ministers. But again, the autonomy of the Sabah Forest Department turned out to be illusory."

"Several theorists, among them Dauvergne (1997), Ross (1996), and Samego (1992), argue that Indonesia, Sarawak, or Sabah have diverted timber resources to patronage. In order to find out whether these conclusions are accurate, we focus on the timber concession holdings of all major timber conglomerates to ascertain the degree to which managerial and equity positions are held by political supporters. I
n all three places timber concessions were awarded to conglomerates in which senior managerial positions and shares were held by political supporters of the government. "

"The principal hypothesis underlying this study is that Indonesia and Sarawak have failed to properly regulate their timber sectors because these states lack autonomy from the predatory demands of rulers and favor expenditures aimed at maintaining power, or even less productive ends, instead of developmental ones. I will prove that Indonesia and Sarawak have failed to administer their timber sectors in a developmentally focused fashion, by showing the extent to which they have fallen short of capturing timber rent at optimal levels. I will also demonstrate that Indonesia and Sarawak lack autonomy from the demands of rulers and use timber revenues not only for patronage, but also for objectives even less conducive to economic development, and thus fail to satisfy the dual imperative. This will be proved by showing that heads of state and their political supporters are permitted by forestry bureaucrats to run or own a substantial portion of the concessions licensed to top timber conglomerates.

It had been my intention to contrast the cases of Indonesia and Sarawak with that of Sabah, showing how that state had succeeded in managing its timber sector in a more developmentally optimal fashion. I intended to show this by verifying that Sabah had in fact captured timber rent at near-optimal levels. I had also intended to show that Sabah was autonomous from the demands of rulers and had balanced the dual imperative by showing that state leaders and political followers did not run or own a substantial portion of concessions.

While empirical evidence confirmed my hypothesis with respect to Indonesia and Sarawak, it refuted the reports of some journalists, as well as the conclusions of the economics literature, about Sabah. The leaders of Sabah turned out to have numerous personal ties to the timber industry, and the state turned out to have suboptimal levels of timber rent capture."

No comments: