Pur­wadi Soepri­hanto
For­est Prac­ti­tioner, Mem­ber of LEI’s Mem­ber Rep­re­sen­ta­tion Assem­bly (MPA)

In wel­fare eco­nom­ics, a com­pet­i­tive mar­ket will pro­mote effi­cient resources allo­ca­tion in an eco­nom­i­cal way. How­ever, it is almost impos­si­ble to find a per­fect com­pet­i­tive mar­ket con­di­tion due to dif­fi­culty in com­ply­ing the pre­con­di­tion of a ’good com­pe­ti­tion’ con­di­tion. One of the fac­tors caus­ing fail­ure in achiev­ing a com­pet­i­tive mar­ket is the asym­met­ri­cal information.

Asy­met­ri­cal infor­ma­tion is a char­ac­ter­is­tic com­monly found in busi­ness sit­u­a­tions. In sim­ple words, the pro­duc­ers under­stand their prod­uct qual­ity bet­ter than the con­sumers. In an ideal sit­u­a­tion, the con­sumers should have the power opt for higher qual­ity prod­ucts rather the lower ones. Although some con­sumers will choose low qual­ity prod­ucts for its inex­pen­sive price, there are con­sumers who pre­fer to pay more for high qual­ity prod­ucts. Unfor­tu­nately, it is not easy for the con­sumer to decide on the prod­uct qual­ity until they pur­chase one.

The mar­ket fail­ure gen­er­ated from the asym­met­ric infor­ma­tion is adverse selec­tion. This occurs when prod­ucts of dif­fer­ent qual­i­ties are sold at one price and con­sumers do not have ade­quate knowl­edge to deter­mine the actual qual­ity at the time of pur­chase. As a result of this sit­u­a­tion, more low qual­ity prod­ucts will be avail­able in the mar­ket rather than the high qual­ity ones. The above impli­ca­tion of asym­met­ric infor­ma­tion was ana­lyzed for the first time by George Akerlof in 1970 (Pindyk et al, 2001).

The expla­na­tion on the above asy­met­ric infor­ma­tion is rel­e­vant to review the cur­rent for­est prod­uct trade, par­tic­u­larly for the tim­ber prod­ucts. The ques­tion here is how to min­i­mize the impact of the asy­met­ric infor­ma­tion so that both pro­duc­ers and con­sumers can get ben­e­fits from the trans­ac­tion. In addi­tion to that, what role should the gov­ern­ment play to ensure that for­est prod­ucts are gen­er­ated from for­est resources that have been man­aged based on sus­tain­able prin­ci­ples, thus enabling con­sumers to trans­par­ently receive the product’s information.

Para­dox of Sus­tain­able For­est Man­age­ment Cer­ti­fi­ca­tion
Sus­tain­able for­est man­age­ment becomes a credo of many stake­hold­ers since 1990s. The increas­ing con­sumers’ aware­ness on tim­ber prod­ucts orig­i­nated from sus­tain­able man­aged for­est areas and the increas­ing size of for­est degra­da­tion areas all over the world have led to ini­tia­tives to set up the stan­dard of and cer­ti­fi­ca­tion on sus­tain­able for­est man­age­ment. The above ini­tia­tives derived from civil­ian com­mu­nity mem­bers. Sev­eral ini­tia­tives derived from For­est Stew­ard­ship Coun­cil (FSC) and Pro­gramme for the Endorse­ment of For­est Cer­ti­fi­ca­tion (PEFC) – pre­vi­ously known as The Pan-European For­est Cer­ti­fi­ca­tion. In indone­sia, a national ini­tia­tive also emerged and LEI is the real­iza­tion of the above initiative.

With inten­sive sup­port from envi­ron­men­tal orga­ni­za­tions, vol­un­tary dri­ven for­est cer­ti­fi­ca­tion becomes a spe­cial mar­ket con­trol tool. The pro­duc­ers must com­ply with stan­dards, in which reg­u­la­tions and lim­i­ta­tions are stated, so that their prod­ucts can be accepted by the mar­ket. On the other hand, buy­ers or con­sumers are free of lim­i­ta­tions. In other words, pro­duc­ers or for­est man­age­ments must com­mit to the prin­ci­ples of sus­tain­abil­ity while at the same time con­sumers are free from the bur­den to give more appre­ci­a­tions to cer­ti­fied tim­ber prod­ucts. Thus, para­dox­i­ally, cer­ti­fi­ca­tion as a mar­ket con­trol tool is sep­a­rated from the mar­ket itself (Cris van Dam, 2003).

Efforts on pro­vid­ing accu­rate infor­ma­tion to con­sumers will very much depend on the producer’s cred­i­bil­ity and rep­u­ta­tion. Stan­dard­iza­tion becomes the key word for this con­text. The ques­tion here is how to set a stan­dard on which all stake­hold­ers can fully trust? The stan­dards must come from parci­ti­pa­tive processes involv­ing all stake­hold­ers. Thus, vol­un­tary cer­ti­fi­ca­tion will morally binds both the pro­duc­ers and con­sumers.
Sus­tain­able for­est man­age­ment cer­ti­fi­ca­tion also becomes the instru­ment to over­come asy­met­ric infor­ma­tion through mar­ket sig­nal­ing. The mar­ket sig­nal­ing con­cept devel­oped by Michael Spence (Pindyck et al, 2001) indi­cates that in the mar­ket, both pro­duc­ers and con­sumers give sig­nals on prod­uct qual­ity. The tim­ber prod­uct label­ing (eco­la­bel­ing), is actu­ally the point in where pro­duc­ers and con­sumers com­pro­mise with each other. Pro­duc­ers, through their stan­dard­ized label, inform their product’s qual­ity, while con­sumers as end users can ver­ify the product’s qual­ity to the insti­tu­tions pro­vid­ing guar­an­tee on the products.

Government’s Inter­ven­tion
Despite the strong pres­sures from global envi­ron­men­tal orga­ni­za­tions, it does not nec­es­sar­ily mean that for­est man­age­ments and pro­duc­ers pos­sess strong com­mit­ments to imple­ment sus­tain­able for­est man­age­ment stan­dard ina vol­un­tary way. The exist­ing mar­ket gap tol­er­ant to non cer­ti­fied tim­ber prod­ucts, the low mar­ket incen­tive for cer­ti­fied prod­ucts, and the inad­e­quate enabling con­di­tions to meet the stan­dards such as ille­gal log­ging, for­est clear­ing and tenur­ial con­flicts, have all resulted in the slow devel­op­ment of sus­tain­able cer­ti­fied forests in Indonesia.

There­fore, the endorse­ment of Forestry Min­is­ter Reg­u­la­tion No. P-38/Menhut-II/2009 on Stan­dards and Guide­lines of Per­for­mance Assess­ment on Sus­tain­able Pro­duc­tion For­est Man­age­ment and Tim­ber Legal­ity Ver­i­fi­ca­tion of the Con­ces­sion­ar­ies or For­est Right as gov­ern­ment inter­ven­tion to address the low com­pli­ancet of for­est man­age­ment per­for­mance based on sus­tain­abil­ity prin­ci­ples. Nev­er­the­less, this inter­ven­tion is also due to the pres­sures from over­seas coun­tries which takes the form of Vol­un­tary Part­ner­ship between the gov­ern­ment of Indone­sia nad EUto erad­i­cate ille­gal log­ging activities.

For­est is pub­lic goods and com­mon prop­erty resources, acces­si­ble by com­mu­nity mem­bers for free. As a result, forests are exceiv­elly used and result in exter­nal­ity. This means that the usage of the cur­rent resources will dis­ad­van­tage future gen­er­a­tion. There­fore, through reg­u­la­tions, the gov­ern­ment can issue man­age­ment per­mit for pri­vate sec­tors. This can act as a legit­i­ma­tion for the gov­ern­ment once sus­tain­able for­est man­age­ment cer­ti­fi­ca­tion and legal­ity ver­i­fi­ca­tion become manda­tory in the future.

What effort should we take to increase the mar­ket accep­tance on the above manda­tory sys­tem? First, the assess­ment and ver­i­fi­ca­tion process must be able to proof the prin­ci­ples of cred­i­bil­ity, trans­parency and accountability.

Sec­ond, the mar­ket has dif­fer­ent pref­er­ences on manda­tory and vol­un­tary cer­ti­fied prod­ucts. Civil­ian community’s role, such as social and envi­ron­men­tal orga­ni­za­tion, is very pow­er­ful to pro­vide infor­ma­tion on the assess­ment stan­dards and pro­ce­dures to the consumers.

Manda­tory cer­ti­fi­ca­tion will com­pete with vol­un­tary cer­ti­fi­ca­tion, like FSC and PEFC which have pro­vided strong pref­er­ences to the con­sumers at inter­na­tional level. LEI, as national vol­un­tary ini­tia­tive, have recieved recog­ni­tion in Japan and Europe mar­kets. It would be bet­ter if KAN which has been appointed to con­duct manda­tory cer­ti­fi­ca­tion and ver­i­fi­ca­tion processes sits together with LEI, cre­at­ing syn­ergy and strate­gic alliance to com­pete in inter­na­tional mar­ket. The Gov­ern­ment should also give recog­ni­tion on the ini­tia­tives of busi­ness com­mu­nity which has imple­mented vol­un­tary cer­ti­fi­ca­tion. In this way the mar­ket will also respond pos­i­tively to government’s recognition.

Third, there should be clear infor­ma­tion on the posi­tion of sus­tain­able for­est man­age­ment per­for­mance cer­ti­fi­ca­tion and manda­tory legal­ity ver­i­fi­ca­tion, to avoid bias in the con­sumers’ side. Legal­ity should be a part of the process towards sus­tain­able for­est man­age­ment. What LEI has devel­oped through the staged cer­ti­fi­ca­tion scheme can pro­vide clear descrip­tion on both processes’ position.

It takes some time to see the market’s response to the manda­tory scheme. How­ever, consumer’s pref­er­ence level on for­est prod­uct will con­tin­u­ously change, thus the imple­men­ta­tion of sus­tain­able for­est man­age­ment stan­dards, both manda­tory and vol­un­tary, in order to reduce asym­met­ric infor­ma­tion, must be reviewed and updated continuously.

Jakarta, 16 Juli 2009
*) This arti­cle was pub­lished in AgroIn­done­sia Tabloid, No. 259, July 21 – 27, 2009