1. business and industrial
2. agriculture and forestry
3. forestry

The Forest Resources
Their Economics and Development
Raj Kumar
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lIlgaporc
OXFO RD UNIVERSITY PRESS
Oxford
1986
New York
Contents
Preface
Ackrlowledgements
Tables
Figures
Selected Forest Product Meastms and Metric Equ ivalents
I
2
••
VII
•
IX
•
XIV
•
XV I
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XVII
Forestry and the Malaysian Economy
Forestry: Definition and Economic Characteristics
The Malaysian Economy: Its Problems and Government
Policies
The Forest Economy of Malaysia
Past Studies on the Economic Aspects of Malaysian Forestry
Economic Issues in Malaysian Forestry
16
The Forest Resource Base
Forest Area and In ventory
The Characteristics of the Main Commercial Species
Growth Rates of Hardwood Trees in Malaysia
19
19
23
27
1
1
3
9
14
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3 Malaysia and the World Hardwood Trade
World Forest Resources and Trends
Developments in the Character of the World Hardwood
Trade
Price Behaviour of Malaysian Wood Products
52
4 The Historical Background
Key Features in Malaysian Forest History
The Development of Forestry in Peninsular Malaysia
The Development of Forestry in Sara wak
The Development of Forestry in Sa bah
Main Developments Since the Formation of Malaysia (1963)
64
64
65
70
71
73
5 Log Disposal
Wood Dispo al Policy
The Economic Implications of the Log Concession Policy
82
82
84
30
30
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XII
CONTENTS
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6 The Wood-based Industries
A Broad Overview of Wood-based Industries
The Logging Industry
The Saw milling Industry
The Plywood and Veneer Industry
Other Wood-based Industries
88
88
90
100
I05
110
•
7 An Econometric Analysis of the Supply and Demand
of Malaysian and Regional Wood Products
Methodology
Objectives of a Supply and Demand Study
Survey of Supply and Demand Models Used in Forestry:
The World
Survey of Supply and Demand Models Used in Forestry:
Malaysia
A Proposed Econometric Model for Malaysian W ood
Products
Data Used in Computation of Models
Interpretation of the Results
Conclusions
8 Employment Implications in Forestry
The General Issue of Employment in Malaysia
Employment in Malaysian Forestry
Some Methods of Measuring the Relationship between
Employment and Output
Model to Estimate Employment Elasticities and Speeds of
Labour Adjustment
Data and Estimation Problems
Analysis of the Results
Export and Home Demand Elasticities of Employment
Conclusions of Study and Further Suggestions
Degree of Employment Stability in Forestry and Agriculture
Factor Intensity Comparisons among Forest-based and Agrobased Industries
114
114
I I
5
116
12 5
126
135
138
148
152
152
154
157
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9 Fiscal Issues in Malaysian Forestry
Forest Taxation and Efficient Exploitation
A Case for Special Tax Treatment for Forestry?
Timber Appraisal and Royalties
An Assessment of Royalty Rates in Malaysia
Guide-lines for a Royalty Review
Other Fiscal Dues
Further Suggestions
161
161
163
167
170
170
173
183
r83
18 4
185
188
193
193
194
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CO NTENTS
10
X111
Conclusions and Directions for Future Efforts
196
Discussion on Main Findings
Future Direction of Forest Policy and Administration in
Malaysia
196
Appendices
205
A Forest Policies of Peninsular Malaysia, Sarawak and Sabah
B Methodology, Data and Computational Procedure
C Model to Estimate Employment Elasticities and Speeds of
Labour Adjustment
D Instability Measurement of Selected Malaysian Commodities and Other Macro Variables
E Investment Incentives
F Royalty Rates for Sarawak
G Main Results of Employment Demand Functions
H Some of the Data Used in the Estimations in Chapter 7
205
Bibliography
Index
199
214
220
226
229
235
238
241
246
261
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Forestry and the Malaysian Economy
Forestry: Definition and Economic Characteristics
FORE TS are one of the world's natural resources, which include all
those that originate from biological, chemical or geological processes.
Physically speaking, exhaustible resources are those not capable of being
replenished, such as petroleum and tin, while renewable (or replenishable)
resources, such as trees, fish, other forms of wildlife, and solar energy, can
be reproduced or replaced. The consumption patterns of renewable
resources, such as forest, are }low in character, while those of exhaustible
resources are like stock, whose inventory diminishes with use. However,
economically speaking, a renewable resource can sometimes take on the
character of stock. For instance, trees that are felled and not replanted,
with the land being put to other lIses, could in some ways be regarded as
a stock resource. Another example is the over-exploitation of certain
species of animal, making them extinct.
Our interest is in forestry which can be broadly defined as the art and
science of managing forests. Management covers all those activities
related to planning, production, distribution and replenishment offorest
products, principally wood. The scientific aspect of foresty is physicobiological in character, covering such areas as classification of species,
mensuration, silviculture and all those factors that influence the growth
and maintenance of trees. The physico-biologist is concerned with
ecological aspects like the relationship of the forests to their surroundings- the effect on climate, soil, waterflow, plants and animals. His
focus is on the technical aspects of the forest science which enhance
knowledge about the natural attributes of forests.
The economist's interest is in the art of managing forests, i.e., the
optimal allocation of scarce resources (in this case, forest land), over both
space and time, to maximize the total benefit to society. At one level he
deals with allocating resources like land, labour and capital to forestry visa-vis alternative uses like agriculture. At the next level is the allocation
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THE FORE T RESOURCES OF MALAY SIA
process within forestry, like deciding whether to produce only sawlogs,
or extend to downstream industries like sawmilling and wood panelling. At the third level, the economist is involved in the choice of techniques for a particular activity like logging or sawmilling. Should it be
labour intensive or capital intensive? Here he would also be interested
in the timing of the harvest, in other words, when to market. In other
areas the economist will be more concerned with cost, price and welfare
implications than with purely technical aspects. Nevertheless, biological
factors like the yield and growth rate of trees would influence the
econom ic calculus; so would environmental effects. More specifically,
the interest is in economic efficiency, given the aim to maximize the value
of benefits produced by the given stock of forest resources to the
optim um .
T here are certain economic characteristics of forestry that are in some
respects sui gel1eris in nature, as follows:
I. The tree is simultaneously both the capital plant and the finished
prod uct. This has special implications in forest accounting and planning
of investment, particularly where both private and public sectors are
involved.
2 . The gestation period of forestry is longer than that of other
renewable production processes, and marked by a higher degree of
uncertainty than in extractive and manufacturing industries. Tropical
forests can take from 20 to 200 years to mature; this means that the forest
owner cannot expect to have a regular flow of income from the same
wood-lot. Within certain limits, the production period is elastic in the
sen e that there is no clearly defined age of maturity or fixed date of
marketing, unlike other renewable resources like wheat.
3. Tropical wood is something very different from a standard
product. It may be difficult to find two logs, particularly from tropical
species, exactly similar as in the case of standardized industrial products.
This has repercussions in terms of techniques of production and grading,
both of which affect the cost and price of the product.
4. The elasticity of substitution, firstly among wood products and
secondly with other non-wood products, is high. Sawn wood, plywood
the fibreboard co mpete with one another and are almost interchangeable
despite differences in production processes, and most of them face
competition from steel , plastics, aluminium and fibreglass.
5· The multiple-use character offorest lands gives rise to problems in
defining underlying production functions and of allocating the area for
their different uses. Besides producing commercial wood, other uses of
forests include recreation, wildlife preservation, watershed protection,
climate amelioration and overall environmental preservation. A large
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proportion of these benefits are non-marketed, making quantitative
analysis of cost and benefits an onerous task. The 'joint supply' nature of
forestry complicates economic analysis.
Taken singly, none of these characteristics can be particularly special
but the fact that they occur together to a much greater degree than in
other industries makes forestry complex in terms of economic analysis.
The scope of forest economics is therefore wide. Here, however, the
broad objective is to focus attention on some selected major issues in
Malaysian forestry, and evaluate their economic implications. Forests and
forest industries arc components of the general economy, influencing and
influenced by other sectors. They have an important role to play in the
economic development of Malaysia, like the other major primary
commodities such as rubber, palm-oil, tin and petroleum. To appreciate
this role, it would be useful to see Malaysia in the setting of its economic
performance, problems and government strategies .
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The Malaysian Economy:
Its Problems and Government Policies
Malaysia, lying in the tropical zone of South-East Asia, is generally
divided into two parts: Peninsular Malaysia (the former Federation of
Malaya), and the north Borneo states ofSarawak and Sabah (formerly the
British colonies of Sarawak and British North Borneo). Peninsular
Malaysia and Sabah and Sarawak are separated by between 800 and
1 500 km of the South China Sea. The Federation of Malaya (Peninsular Malaysia) forged a union with Sarawak, Sabah and Singapore in
1963 under a federal system of government. Although the different
units were run separately prior to 1963, all share a common British
colonial heritage. The Federation of Malaya itself became independent
in 1957, while Singapore gained its independence in 1965 when it left
Malaysia after friction with the federal government in Kuala Lumpur;
Sabah and Sarawak achieved their independence from colonial rule
within the context of Malaysia. The various stages in the political formation of present-day Malaysia have created a country marked by a
heterogeneity of culture and race, economic and social development,
and political maturity, that have given rise to problems that are unique
compared with other less developed countries in Asia.
From an economic perspective, Malaysia can be classified as an open
economy, with an Export/Gross National Product proportion that has
varied between 35 and 60 per cent since 1960; in 1982 this was estimated
to be about 53 per cent (Table 1. I). The export mix (Table 1.2) comprises
mainly primary commodities, with manufactured goods, mostly pro-
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6,019
8,776
12,155
21,606
50,018
5 8 ,797
Year
1960
196 5
1970
1975
1980
19 8 2
60·4
43·1
4 2 .5
47. I
59·7
53·0
(%)
Share of
Exports
in GNP
954
1,169
1,822
3,673
4,079
820
Per Capita
Income
(MS)
92·3
94·7
101.9
144. 0
179·5
195. 0
1967: 100
95
70
n.a.
II4
100
68
1970: 100
Terms of
Trade
(Peninsu lar
Malaysia)
3·06
3·06
3.08
2·58
2.20
2.3 2
Exchange Rate
(MSto USSl )
Sources: Department of Statistics, Peninsular Malaysia, Annual Bulletin oj Statistics, Peninsular Malaysia, 11)68-'77, various issues; Ministry of Finance,
Malaysia, Economic Report. 1974- 84. various issues; Fourth Malaysia Plan, 1981- 1985.
GNP at
Market
Prices
(MS million)
Retail Price
Index
(Peninsular
Malaysia)
TABLE 1.1
Malaysia: Main EcononUc Indicators, 1960-1982
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primary products, making up between [0 and 20 per cent of the
total. The import basket comprises predominantly consumer goods and
capital items. Malaysia can be described as being in the process of
evolving from a British colonial economic structure (commonly described as the classical export system), dominated by a thin specialization
in a few primary commodities, particularly rubber and tin, to one of an
industrialized country, with manufacturing and domestic processing of
raw materials playing an important role.
Malaysia's economic growth is highly dependent on world conditions, while on the supply side it is very sensitive to the availability of
human and capital resources to exploit and process its raw materials.
Given the upswings and downswings of the world business cycle,
Malaysia is potentially susceptible to a degree of economic instability that
is greater than countries which are less open and more balanced structurally. This is accentuated by two other factors, a high degree of
market concentration of its exports, and the nature of the elasticity of
demand and supply of primary commodities. The United States,
Western Europe (principally the European Economic Community
(EEC)), and Japan have absorbed 60 per cent of all its exports, with
Singapore taking another 15 to 20 per cent, which eventually ends up in
the Organization of Economic Cooperation and Development (OECD)
countries which include all industrialized· Western countries, Japan,
Australia and New Zealand. For its major imports such as machinery and
other manufactured goods, but not including oil which comes from the
Middle East, it is also dependent on these markets. The demand for
Malaysia's primary commodities is price and income elastic, while the
supply is price inelastic, at least in the short run. The elasticity of
substitution of its major commodities, rubber, palm-oil, and timber, is
high. Export proceeds have therefore exhibited a fluctuating pattern, and
one can expect this instability to be transmitted to the rest of the
econom y, although some studies have not found evidence to support
this. I
Nevertheless, specialization in a few commodities has proved a
Robertsonian 'engine of growth', giving the country a standard ofliving
which is among the highest in Asia. Except for the pOSH 973 period, the
growth has taken place under relative internal price stability. This is
despite the fact that generally its terms of trade have been falling since
1965, a common feature of most less developed countries (Table I. I). Till
197 ,Malaysia's balance-of-payments position had been healthy, showing con istent but varying surpluses. This to some extent promoted a
stable currency, a rare feature in commodity-dependent less developed
economie . However, in 1979, 1981 and 1982, the accounts showed an
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overall deficit, partly due to recessionary conditions affecting the value of
exportS, and partly due to an increase in external debt servicing. The
excessive buildup of the external public debt, rising by 42 per cent
between 1982 and 1983 to S17.8 billion and representing 22 per cent of the
Federal Government revenue and about 5 per cent of the exports of goods
and services, has given rise to some concern in various circles that if the
trend continues, the country might expetience the Mexico-Brazil debt
dilemma. The 1983 /4 budget has made a start to check this by introducing
restraints on public expenditure by government and public-sector
agencies. The external loan/external equity capital nUx will also require
an assessment if progress is to be made in avoiding the debt trap.
Despite the impressive economic record, this trade-biased economy
has produced lopsided growth characterized by a dualistic structure, with
a slow-growing subsistence sector coexisting with the dynamic export
sector. As a result, there are sharp regional disparities and income
inequalities that represent a threat to civil order and stability in the
country. 2 In comparison with other similar less developed economies, the
'economic dualism' is not especially marked, but it assumes a more
sensitive dimension since there is a strong correlation of the dualism with
racial differences. As a result of cultural and social factors, the Malays and
other indigenous groups (collectively referred to as bumiputera) were not
in the past attracted to the commercial se.ctor. They have therefore been
predominantly confined to low productivity occupations in the primary
subsistence sector. The energetic and ambitious immigrant population,
especially the Chinese, are concentrated in the export and commercial
sectors. A small segment of the bumiputera in recent years have entrenched
themselves in the commercial sector arising out of a deliberate policy of
promoting bumiputera entrepreneurship. Recent studies on income
distribution suggest that this has exacerbated the income inequalities
within the Malay group.
In terms of wealth distribution, foreign.ers still own the major share
capital in limited companies, although their share is falling-about 48 per
cent in 1980 compared to 63 per cent in 1970. The bumiputera and nonbumiputera shares in 1980 were 12 per cent and 40 per cent respectively.
The Malaysian government has adhered to a philosophy of free
enterprise, but the state intervenes where it considers it necessary in order
to alleviate economic and social problems. The government has used
planning as a means of implementing its development programmes. So
far, there have been six Five-Year Plans, the first two solely for Peninsular
Malaysia. The Plans formally lay down the basic objectives of the
government, give reviews and forecasts of the development programmes and the financial allocation to the major sectors. The estimates
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