World Bank, IMF chided on Indonesian forests



By Danielle Knight

27^th October, 2001.

Economic reforms driven by the International Monetary Fund (IMF) and World Bank in the aftermath of Indonesia's 1997-98 financial meltdown have spurred deforestation while undermining macroeconomic stability, charge environmental groups.

Despite declarations of intent to protect Indonesia's biologically-rich tropical forests, the institutions' policies encouraged speculative investment in the forest sector and increased timber harvesting by debt-ridden Indonesian pulp and paper companies, the World Wildlife Fund and Indonesia-based Center for International Forestry Research (CIFOR) say in a new report.

Bank and IMF officials acknowledge that some things could have been done better but dispute the environmentalists' conclusions. Jim Douglas, lead operations officer for the World Bank's Rural Development Department, says the report lacks context and does not "appear to be aware of the Bank's long-term approach in the forestry sector". Structural adjustment measures, says Douglas, are "largely transitional measures with the intention that you follow up".

In signing a US$43 billion IMF emergency financial package in 1998, the Indonesian government committed itself to structural adjustment terms put forth by the Fund and World Bank that included a number of policy reforms aimed specifically at restructuring Indonesia's forestry sector. These included "conditionalities" designed to reform Indonesia's timber concession system and to raise efficiency levels in Indonesia's timber and wood-processing industries.

Chris Barr, a forest policy scientist at CIFOR and author of the report, argues that the reforms were largely based on faulty assumptions. While the Bank argues that increased efficiency reduces the flow of raw materials to the forestry sector, Barr says the policy has actually increased the harvesting of young trees and a broader variety of tree species. "The reforms pose new threats to the nation's forests in that several of the policies encourage increased rates of timber harvesting," says Barr. The World Bank, he adds, largely overlooked expansion of Indonesia's pulp and paper industries and timber plantation efforts.

"This lack of attention is paradoxical given that over $12 billion has been invested in these industries since the late 1980s and Indonesian pulp mills consumed over 100 million square meters of wood from natural forests between 1998 and 1999," he maintains.

Major pulp and paper companies failed to bring adequate areas of pulpwood plantations into production and are now facing raw material shortages.

"Indonesian pulp and paper producers have made large-scale investments in high-risk projects both because these enterprises have been heavily subsidized and because financial institutions have failed to adequately assess the risks involved," says Barr.

According to Agus Purnomo, executive director of WWF-Indonesia, 40 percent of the log inputs to these pulp and paper mills are from domestic sources, and 75 percent of this timber has been illegally cut.

"The scale of illegal logging is huge," says Purnomo, who estimates the market to be between $4 billion and $6 billion per year.

Indonesia has the world's third largest tract of tropical forests, considered by scientists as among the most biologically diverse ecosystems on Earth. During president Suharto's 32 years in power, when forest-based industries were heavily promoted, approximately 40 million hectares of natural forest were cleared.

Heike Mainhardt, senior forest program officer at WWF's macroeconomics office, argues that IMF-supported financial and corporate sector restructuring and trade liberalization measures further encouraged timber extraction and accelerated conversion of forestland by facilitating "unsound investments" in Indonesia's wood and palm oil industries. "The overall effect of IMF intervention perpetuates conditions responsible for rapid deforestation," she says.

Besides environmental costs, adds Mainhardt, social conflicts over land rights and land status surround oil palm development in Indonesia. Since Suharto's resignation in May 1998, she says, "there has been a marked increase in social unrest in and around oil palm estates often involving fires, demonstrations, intimidation of local people, injury, and death".

Michael Keen, head of the IMF's environment unit, says while the Fund recognizes that macroeconomic policies can have environmental impacts, the institution "does not pretend to be an expert on forestry management issues". He points to what he calls successes, such as efforts by the Fund to dismantle some of the corrupt linkages within Indonesian conglomerates that are involved in both the forestry and banking sectors. Since the end of 1998, Keen says, there have been bank restrictions on how much lending can go to any one corporate interest. "A bank can't lend more than 10 percent of its capital to any related party," he says.

But civil society groups maintain that the Fund continues to cause harm to forests through its forestry reforms because it does not have the capacity to properly assess the possible impacts of the structural changes.

"Far too many conditionalities went far beyond the expertise of the IMF," says Carol Welch, deputy director of international programs at Friends of the Earth. There has been little contact, she says, between the IMF and civil society organizations that could have assisted in evaluating the proposed forestry sector reforms. "The IMF has been very resistant to include the environment when evaluating its policies," says Welch.

Francis Seymour, program director for institutions and governance at the World Resources Institute, argues that any significant positive change in Indonesia's forestry sector is dependent not on the World Bank and IMF but on building political coalitions within Indonesia that favor reform. "Even if the World Bank gets the policy right," says Seymour, "at the end of the day it depends on the domestic political arena."