Pulp industries developed rapidly in Indonesia after large investments in this sector in the late 1980s. The total pulp production in the country rose from 3 million tonnes per year in 1997 (Barr 2001) to 5.6 million tonnes per year by 2002 (FAO 2003).

Large areas of State-owned forestlands were allocated through Industrial Timber Plantation (HTI) permits and nearly US$100 million of State-owned capital was allocated to promote the development of industrial timber plantations in the country (Barr 2001). The total area allocated for the development of such plantations up to 2002 was 5.38 million ha (DEPHUT 2003), with approximately...

Economics, optimisation and scarcity are three interrelated concepts. Human needs increase over time and the way to satisfy such needs is to consume resources. Social development has been based on the consumption of resources. For various reasons (e.g. biophysical differences, natural extinction processes, high rates of consumption, social accumulation), some resources have become scarce—sometimes generally scarce, sometimes scarce in specific areas, and sometimes scarce for certain groups. Economic science has developed as a response to the need to optimally allocate scarce resources to satisfy the increasing needs of society. Optimal allocation is observed when there is no option to...

Between 1984 and 1996, the GOI allocated a total area of nearly 1.4 million ha of forest land to five plantation companies in Sumatra (Fig. 1), to harvest (clear cut) the areas for the production of pulp wood and establish tree plantations. These concessions were granted to groups that were developing or expanding pulp or pulp and paper mills with the purpose of sustaining their production⁷. From 1984 onwards, the related pulp mills initiated operations and increased their installed capacity to make use of the large sources of raw material made available for their pulp production.

Supply and demand are...

The economic benefits were calculated using the volume of pulp wood (m³) produced per year for the length of each of the concession periods. This volume was calculated by adding the logged (from the available resources) and harvested (from the plantations) amounts of wood available each year, taking into consideration (for each specific area) the standing volume of logged-over forests, the percentage of forested area, the percentage of previously occupied area, the mean annual increment (MAI), tree mortality rates, conversion factors and mill requirements.

The price used to value the pulpwood corresponds to the market price for this product when...

This study used specific information and data related to each of the plantation companies in the analysis and the areas in concession to demonstrate that the allocation of the 1.4 million ha of forest land, for the development of industrial tree plantations in Indonesia, represents an economic loss for the country. The economic benefits generated by the increases in the production of pulpwood, calculated using an efficiency price of US$40/m³ of wood, are well below the economic costs incurred in the conversion of this land.

Measuring only the ‘observable’ financial benefits can lead to wrong perceptions and decisions. The allocation...