Here’s an economic theory to curb haze-causing forest fires in Indonesia
While the recent haze episode in Singapore was brief, the number of hotspots in Indonesia from forest fires remains high. The haze, which comes from the slash and burn activity in Indonesia, can be analysed as a market failure with negative externalities.
The haze returned to Singapore again last month, with the Pollutant Standards Index (PSI) hitting the unhealthy level for the first time in three years.
While the episode was brief, the number of hotspots in Indonesia from forest fires remains high, as Minister for the Environment and Water Resources Masagos Zulkifli pointed out in a Facebook post on Oct 18.
The haze, which comes from the slash and burn activity in Indonesia, can be analysed as a market failure with negative externalities. Here, we want to examine in particular whether American economist Thomas C. Schelling’s idea on micro-motives and macro-behaviour can shed light on the forest burning by the farmers in Indonesia.
Slash and burn is not the only method to clear land. Land can also be cleared mechanically with heavy equipment and chemicals, but this method is far more costly.
There are mainly two types of land: Land left over from logging or old crop and peatland. The use of fire to clear leftover land typically costs around US$5 per hectare while using machines and chemicals costs around US$200 per hectare.
On the other hand, using fire to clear peatland costs US$200 per hectare while using machines and chemical cost about US$2,000 to US$3,000 per hectare.
According to Indonesian authorities, 857,756 hectares of land were burnt from January to September this year alone. If half of the land burnt was leftover land and the other half was peatland, using the average cost of US$2,500 per hectare for using machines and chemicals to clear peatland, the savings amounted to more than US$1.07 billion.
The use of fire is not only cheaper, it is also faster. Burnt land is usually ready for immediate planting which saves the land buyer time to prepare the land.
Burnt land is also typically more fertile as the layer of ash acts as a fertiliser for the cleared land, providing nutrients for the new crops. In addition, burning improves overall soil structure and enables faster development of seedlings.
This is why the slash-and-burn technique has been an integral part of large-scale land clearing process for generations.
Schelling shared two scenarios of viewing the roads from a helicopter in one of his books titled “Micromotive and Macrobehaviour”.
In the first scenario, if all the drivers, acting individually, turned on their headlights at dusk, we would see all the lights being switched on at the same time. He concluded that "the aggregate is merely an extrapolation from the individual".
In the second scenario, he shared that if all the drivers turned on their lights only upon seeing oncoming cars which already had their lights on, we would see a different picture.
He summarised: “To make that connection we usually have to look at the system of interaction between individuals or between individuals and their environment, that is, between individuals and other individuals or between individuals and the collectivity.”
This is the case of drivers responding to each other’s behaviour and influencing one another.
He added that sometimes the dynamics are sequential — if your lights induce me to turn mine on, mine may induce somebody else to do so but not you. At other times, the dynamics are reciprocal. Hearing your car horn, I honk mine, thus encouraging you to honk more insistently.
You may think what has this got to do with haze? On deeper reflection, Schelling's theory can explain that if only a few farmers use fire to clear land, it will not cause haze as the rest will not join in. However, if the number of farmers reaches a certain threshold, the rest of the farmers will then join in, resulting in haze.
The bandwagon effect can be both a psychological and economical phenomenon in which people tend to do something primarily because other people, especially a lot of them, are doing it. This is regardless of whether what is being done aligns with their original beliefs.
Schelling’s theory aligns very well with the bandwagon effect. The slash-and-burn situation in Indonesia is an example of the bandwagon effect. If only a few Indonesian farmers use fire to clear land, these few farmers would benefit but other farmers can still survive as their market share is not affected.
Our hunch is that if the number of culprits reaches a threshold figure of about 15 per cent, their market share can lower the crop price. Farmers who do not follow suit would not be able to survive due to high costs and low returns.
To avoid losing out, the rest will have to join in. When more farmers join forces, it is also difficult to pinpoint who are the culprits when the authorities come knocking on their doors.
This is the survive-out scenario for all farmers. Authorities said that about 80 per cent of fires were set intentionally to make room for palm oil plantations. This is no surprise as palm oil is a lucrative business in Indonesia. If you are one of the few farmers who uses a more expensive method, you will be forced out of the palm oil market.
The policy implication of Schelling’s theory is that the authorities must go after the initial culprits fast before the bandwagon effect takes over. The crime rate in New York City is very low now because the authorities came down very hard and fast on petty crimes. Once the crime rate is down, it will encourage more people to go to the streets, and the crime rate will decrease further.
To be sure, the Indonesian government has strengthened enforcement against errant farmers who start fires. But it can do more.
Since 2015, the Indonesian government has won lawsuits filed against 10 companies for burning forests. They have been ordered to pay a total of US$190 million. However, none of the culprits has paid anything to date. Some have appealed while others have counter sued the government.
If guilty verdicts are not upheld and obeyed, they will not deter companies and forest fires will only continue. The Indonesian government should consider relooking its legal processes to tighten them.
With this in mind, we know that if this issue of externality is not solved, we will see future fires in Indonesia that are bigger in magnitude.
However, if the Indonesian authorities manages to apply Schelling’s theory successfully, we might get clearer skies for longer periods in the future.
ABOUT THE AUTHOR:
Chew Soon Beng is a senior fellow at the S Rajaratnam School of International Studies, Nanyang Technological University (NTU). Previously a professor of economics and industrial relations at NTU, he has written many books on business, industrial relations and labour markets. Daniel Ong Qi Ming is a Master of Public Administration student at NTU.