6.1 Trade and Governance: Definitions and Problematique

6.2 Conflicts of Values in Debates on the Trade-SFM Nexus

6.2.1 Major issues at stake

6.2.2 Key areas of conflict and convergence

6.3 Actors and Their Perspectives: The Basis for Forest Governance

6.3.1 Background: Complexity of Stakeholder Involvement

6.3.2 Societal Groupings and Their Networking

6.4 Governance Dynamics and Linkages between Trade and SFM

6.4.1 Theories and Analytic Frameworks on Impacts of Trade Liberalization on Forest Governance

6.4.2 Attempts to Establish Holistic Societal Processes of Forest Governance at the National Level

6.4.3 Empirical Evidence on Trade-Related Governance Impacts at the National Level

6.4.4 Evolving Dynamics in Global Governance related to Trade and SFM

6.4.5 Role of information and transparency

6.4.6 Linking International and National Levels in the Trade-SFM Nexus

6.4.7 Initiatives in multi-layer governance: models, instruments and experiences

6.5 How to harness trade to create enabling environment for SFM?

6.5.1 Introduction to Governance Issues for an Enabling Environment

6.5.2 Macroeconomic/Fiscal Reform/Development Processes and Structural Adjustments

6.5.3 Interactions between Foreign Direct Investment and Governance

6.5.4 Ownership and Control of Forests and Socially and Environmentally Acceptable Solutions

6.6 Conclusions on Trade, Governance and SFM Interface

6.6.1 Trade Liberalisation as a 'magnifier' of Forest Governance?

6.6.2 National Preparedness and Capacity to engage in Dialogue on Forest Trade Issues

6.6.3 Other Factors of Impact at the Trade-SFM Nexus

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6. Interface of Trade and Forest Governance

The purpose of this chapter is to analyse the governance interface between the trade in forest products and services and SFM looking for possible ways of improving co-ordination and coherence. The chapter focuses on two forms of causality between forest governance and trade: policies and institutions determine and influence patterns of trade, whilst the scale and dynamics of trade can influence the nature and quality of forest governance and thus SFM. In most situations both forms of causality can be expected and have measurable impacts on the quality and scale of sustainability of forest management.

6.1 Trade and Governance: Definitions and Problematique

Governance: an evolving concept

In the international development dialogue, the concept of governance has evolved from “public sector management, accountability, the legal framework for development and information and transparency” (WB 1992) towards a much wider definition, including a broad set of actors and formal and informal structures. The World Bank Institute currently defines governance as: “the traditions and institutions by which authority in a country is exercised for common good”.

This includes:

• the process by which those in authority are selected, monitored and replaced,

• the capacity of the government to effectively manage its resources and implement sound policies, and

• the respect of citizens and the state for the institutions that govern economic and social interactions among them.

(WBI 2003)

The Governance Working Group of the International Institute of Administrative Sciences (IIAS1996) gives an even more explicit role to the civil society in governance with the following definitions:

• Governance refers to the process whereby elements in society wield power and authority, and influence and enact policies and decisions concerning public life, and economic and social development.

• Governance is a broader notion than government, whose principal elements include the constitution, legislature, executive and judiciary. Governance involves interaction between these formal institutions and those of civil society.

• Governance has no automatic normative connotation. However, typical criteria for assessing governance in a particular context might include the degree of legitimacy, representativeness, popular accountability and efficiency with which public affairs are conducted.

UNDP defines governance as “the exercise of political, economic and administrative authority to manage a society's affairs. While the economic, political and administrative aspects of governance are often the focus, the summits and international conferences sponsored by the UN over the last decade reflect a growing recognition of the need for a more holistic concept. Governance comprises the mechanisms, processes and institutions through which collective decisions are made and implemented, citizens, groups and communities pursue their visions, articulate their interests, exercise their legal rights, meet their obligations and mediate their differences. Governance, as defined in this manner, emphasises the nature and quality of interactions among social actors and between social actors and the state”. (http://magnet.undp.org)

In summary, current definitions of governance are based on the recognition that governments are not the only actors in governance, but that a wide range of other societal interest groups and actors have an important role to play in decision making structures. They are also related to the wider discussion on principles on democratic decision-making, rule of law and respect for varying interests within a given society.

Discussions on forest governance tend to focus either on the local/national or regionnal/international levels. At the national level, the analysis is often limited either to state-centric or (civil) society centric issues. Basically three different approaches can be identified:

(i) reductionist approaches, that focus on either internal, external, society- or state-centric variables exclusively;

(ii) integrative approaches, that still separate internal and external perspec tives but which attempt to integrate society- and state-centric strategies,

(iii) synthetic approaches, which attempt to unravel the divide between in ternal and external factors as well as the reduction to either public or private actors

(Albrecht and Obser 2003).

An attempt is made in this chapter to look at the trade, governance, SFM impacts and interactions in as much of a “synthetic” way as the available knowledge permits i.e. integrating local/national, regional/international variables, and looking at both society-centred and state-centred governance mechanisms and responses (Figure 6.1).

Figure 6.1 Conceptual model to analyse complex global governance issues that incorporates public and private actors

Source: Grande and Risse, 2000

Due to the local/national and regional/international dimensions of forest governance, addressing trade-related impacts to SFM is a shared responsibility of both forest product/service producing and consuming countries. At the same time it is obvious that the main responsibility is at the national level: sovereign countries have the right and responsibility to govern their natural resources. Action at the international level is needed primarily to create the preconditions for and support to effective forest sector governance at the national level.

Trade and Governance: What is at stake?

The conventional trade theory predicts mutual economic benefits from trade to both trading partners. However, three types of problems tend to be present in any trade scenario:

(i) unanticipated levels of benefits and costs due to market imperfections,

(ii) inequitable distribution of those benefits and costs, and

(iii) disputed values ascribed to different types of benefits and costs, especially as regards market and non-market values.

These problems impact on forest products trade perhaps more than that of many other sectors, due to the characteristics of the sector: long time scales of production, extensive land-use impacts affecting other land-use options, and multiple products and services associated with forests. These characteristics also greatly increase the numbers of groups with a stake in SFM, and the relative importance that these problems are given, and consequent solutions proposed, depend inevitably on the agenda of the interest group that perceives them.

Some of the more common trade debates that spill into the forest sector include the following:

• Mutual gains or winners and losers? Does free trade in the forest sector lead to benefits for all or do some groups lose out?

• Intensifying competition or increasing market power? Is the predominance of trade through transnationals in the forest sector leading to greater competition and more efficient production or is it allowing companies to exercise market power?

• Rising returns or deteriorating terms? Have the historic differences between developing and developed countries in the forest sector led to a decline in the terms of trade for the former and a widening gap between the two country groupings? What responses in terms of governance are needed by governments and civil societies as a whole to address changes in the terms of forest products trade?

• Free choice or international conditionality? Is there evidence that forest trade liberalisation is adopted voluntarily by countries, or are countries persuaded by the international momentum of trade liberalisation without appropriate adaptation of the existing systems of governance as to safeguard national interests?

• Rise to integrity or slide to corruption? Is there evidence that trade liberalisation has led to improved governance to foster SFM and to increase compliance with the law (e.g. combat corruption and decrease illegality in the forest sector). Or is it implemented without major changes in the governance structure, giving rise to worsening the situation in the forest sector?

• Wealth first or sustainability first? Is there evidence that, in meeting international demand through liberalised forest products trade, that social and environmental externalities are addressed, or is the reverse the case?

When dealing with such complex issues, it is vital to adopt a pluralist perspective - one that recognises multiple and potentially irreconcilable interests associated with forest products trade and trade in environmental services. It is also important to acknowledge the validity of different value systems and perspectives on trade impacts. Just as SFM itself requires a negotiated coordination between multiple different societal groupings, equally trade impacts on SFM cannot be adequately assessed without taking into account the many valid perspectives on forests and trade, and the interaction between the different interest groups involved in this debate. What to one might be a great increase in national efficiency might to another be the loss of their environment and livelihood. It is less a question of whose view is right and more an issue of whose view counts - which becomes particularly problematic when there are major differences in power between the advocates of different views.

The outcome of trade debates is currently decided more by the relative power of interest groups than by the strength of their arguments. Hence this debate and its outcomes are related to governance structures both in countries and at the international level. Unfortunately trade and forest debates at both levels tend to have little convergence and co-ordination. They are commonly carried out separately, by different interest groups within different governance structures and without much systematic analysis of the impacts of one on the other.

It is also recognised that trade impacts on SFM are largely defined by the comparative values of forestland, agricultural land and property right functions - not by the value of forest resources in isolation. In many cases revisions in distorted agricultural trade policies or improved regional development policies will have greater beneficial impacts on SFM than forest or forest trade policies. Due to their extreme complexity, these wider governance issues and linkages are, however, only addressed to a limited degree.

6.2 Conflicts of Values in Debates on the Trade-SFM Nexus

Given the array of interest groups involved in the trade-SFM debate, each with its own agenda and perspective, it is not surprising to encounter conflict lines based on strong differences of opinion and objectives. Arguments about the impact of trade on forest management are part of a broader debate about the impacts of globalisation and trade liberalisation on the environment and on the development prospects, in particular of developing countries and countries in transition. These include disagreements on what impacts trade liberalisation might have, e.g. disputes over facts and their interpretation on the promotion of economic growth as well as disputes over societal values.

From a sociological point of view, it is evident that these diverging views and interests do not necessarily result in public - or in any other way transparent disputes and/or negotiations between different societal groups and/or governments.

These debates between interest groups and/or governments can be roughly grouped under three main themes: economic, social and political, and environmental. It is, however, ever more paramount that such categorization does not reflect the common overlap of interests driving the agendas and the respective actions of societal interest groups and governments.

6.2.1 Major issues at stake

Mutual gains or winners and losers?

The standard economic arguments for the benefits of trade, and hence trade liberalisation, hinge on the opportunities for countries to specialise in activities in which they have a comparative advantage and to import products for which they have a comparative disadvantage. The theory of comparative advantage is based on differences in the relative abundance and hence relative price of factors of production (land, labour and capital). Countries that have an abundance of labour relative to capital might be expected to gain by exporting goods that are labour intensive in production and by importing capital intensive goods. Opening up trade should allow goods and services to be produced in the most efficient way possible as given by relative factor endowments. Differences between countries in consumer preferences should also provide opportunities for gains from trade. In addition to these static effects there are also dynamic efficiency effects through the ability to exploit economies of scale as the market is broadened, through increased intensity of competition as trade is liberalised and through stimulus to technological innovation. For these reasons, trade is considered to result in or at least contribute to higher rates of long-term growth. (Bourgignon et al. 2002). However, the fact that growth in world trade has greatly exceeded growth in world real GDP over the last two decades is widely cited (eg; McGuirk 2002).

Estimates at a global level of the potential gains from trade, by eliminating remaining trade barriers, range between US$ 80 billion and US$ 500 billion per year with 40% to 60% of this accruing to developing countries (WTO 2003). This is comparable in magnitude to the value of development assistance that such countries currently receive. Studies of trade liberalisation in the forest sector have concluded that world exports of forest products would increase as a result of tariff reductions but that the overall impact would be quite modest (Barbier 1999; Sedjo and Simpson 1999; USTR 1999). This reflects the fact that tariffs in the forest sector have historically been low relative to other sectors. While there is private sector support, for reducing tariffs further in the forest products sector, it is recognised that other aspects of liberalisation are important. The position of the Confederation of European Paper Industries (CEPI) for example, is that new issues such as trade and environment and multilateral rules for competition and investment will have a much greater influence on future trade than tariffs (CEPI 2000).

Critics of these economic arguments, while in some cases acknowledging efficiency gains from trade, point to the inequality in the distribution of the gains from liberalisation, both between and within countries. This to some extent has been accepted by proponents of free trade who, while stressing that economic growth can raise average income levels, acknowledge that policy changes associated with greater openness to trade will cause changes in distribution, some of which may impact on the poor. But it is claimed that whether this happens is an empirical question and not an automatic outcome of trade liberalisation (Bourgignon et al. 2002).

In the forest sector, the studies of tariff reductions referred to above estimated that trade liberalisation was likely to have most impact on production and export levels of developed countries but did not suggest that developing country producers would be adversely affected. Concerns about distributional effects of trade liberalisation in the forest sector have focused more on indirect impacts at the country level, and the impetus given by forest sector expansion to encroachment on land held by local communities. The World Bank in its revised Forest Strategy notes that more liberal trade under current circumstances of widespread market failures, is likely to exacerbate the undesirable impacts of globalisation and market liberalisation in the forest and other industrial sectors on forest-dependant local communities (World Bank 2001 p 25).

Rising returns or deteriorating terms?

A long-standing argument against free trade associated with Raul Prebisch is that over time because of structural differences between developed and developing countries, there is a decline in the terms of trade between primary commodities and manufactured goods. This reflects a number of factors but primarily differences in the income elasticity of demand. Demand for primary commodities tends not to keep pace with rises in income while in contrast that for manufactured goods increases. Another factor is that labour markets in developing countries are more competitive because of the availability of a reserve labour force from the subsistence agriculture sector. Benefits of productivity gains would be transferred to purchasers in developed countries in the form of lower prices rather than increasing the returns of production in developing countries. For these reasons it is argued, irrespective of differences in productivity, developed countries will always import products comparatively cheaply and export products at a comparatively higher cost than developing countries (Edwards 1985). This argument prompted much of the import substitution activity and associated trade protection in developing countries, particularly in Latin America in the 1960s and 1970s.

Some developing countries however, have managed to move into export of manufactured goods and it appears that this shift accelerated after moves towards economic liberalisation. Between 1980 and 1998 the share of manufactures in the exports of developing countries increased from 25% to 80% (World Bank 2002). Similar trends are evident in the forest sector. As shown below in Figure XX, tropical countries and by implication developing countries, have been increasing the share of value-added products in their exports of forest products. It is argued, however, that this success can not be attributed to the overall trade liberalisation, but reflects the impact of log export bans and assistance to the forest industry. Some major forest-rich countries have lifted existing log export bans and decreased subsidies to infrastructure, local manufacturing and exports through tax cuts and other fiscal measures resulting in increased pressure in commodity exports and thus increased logging. Other countries have actively supported the establishment of forest resources in the form of forest plantations as to substitute the loss in income from natural forests.

Figure 6.2 Composition of exports from tropical countries, 1961-2000:

The enormous decrease in roundwood exports from tropical countries over the past 40 years has not resulted in an equally high increase of exports in value-added products. While the important domestic trade in value-added products certainly plays an increasingly important role in GDP development, export earnings from forest products seem again to start increasing by (mainly) tropical hardwood logs, square logs and sawn timber, in particular to emerging markets such as China (FAOSTAT 2003; China Market Review). Consequently, concerns about declining terms of trade for developing country producers still persist but the primary cause for this is perceived now as the concentration of market power amongst international buyers, including those transnational companies being equally involved as forest concessionaires in developing countries.

Intensifying competition or increasing market power?

One of the beneficial effects often claimed for trade liberalisation is that it opens up domestic markets to international competition and thus reduces the likelihood of monopoly power on the part of local firms (World Bank 2002). But it is also acknowledged that increasing trade openness coupled with investment liberalisation can lead to sectors being dominated at a global level by just a few players. Removing distortions such as trade and investment restrictions could speed up the process of market concentration.

Opponents of liberalisation in the forest products trade point to the increasingly exclusive relationships between transnationals and their subsidiaries, arguing that opening up the economy in relation to both trade and investment will increase the vulnerability of producer countries to the interests of important buyers. Concern is expressed that the percentage of world forest product trade controlled by transnationals is as high as 80-90%. Interest groups also highlight the recent mergers between large paper companies, for example between Stora and Enso and International Paper and Champion International (Rice et al 2001). However, in recent years, the change in industrial structure has come to a halt.

At a national level, consolidation in the forest products sector has also been advanced. In Indonesia, for example, the top ten timber companies recently held 47% of the total forest concession allocation, amounting to 24 million hectares - more than one fifth of the total Indonesian forest area (Forest Watch Indonesia 2002).

There is some scepticism about the potential advantages of such industrial consolidation. There is concern that the growing influence of the consolidated industrial structure having increased their size and market share will increase the demand for the commodity of roundwood, rather than value-added forest products and thus contribute to forest destruction (Gregory et al. 2000). Implicit in this concern is the fear that any economic gains from trade liberalisation will be captured by large companies rather than bringing increased benefits to local communities, landholders or governments. Furthermore, Rice et al (2001) point out that most of the new investments in the forestry sector between 1996 and 1998 were in a selected number of countries suggesting that it is not only abundant wood fibre supplies and an overall favourable investment climate, but also less stringent environmental regulations and low cost of labour that make these countries attractive locations for investors.

With regard to the dimension of governance, the interactions between the current industrial structure, local communities in their access to the forest resource and governments being responsible for policy making, law enforcement and operational support to SFM through appropriate strategies need clarification, adaptation and consolidation. In many countries, the aforementioned developments have not sufficiently counteracted to avoid or to decrease negative impacts and thus resulting in major disputes and even subversive actions by different interest groups.

Rise to integrity or slide to corruption?

Non-economic advantages of free trade are also widely advocated and economic integration seen as a powerful force against oppression, corruption and illegality and as a contributor to world peace and stability (e.g. by the IMF). An open trade regime might mean that there will be less temptation to circumvent restrictions through corrupt or illegal activity. The opposing view is that the competitive pressures implied by free trade increases the temptation for companies to cut costs through illegal activities in order to compete.

This has been a key issue in the forest sector where the debate is about whether trade has a neutral effect on governance or tends to undermine it. It is a widespread view that trade on its own does not cause forest degradation but that if combined with poor forest management and weak governance it will aggravate the situation, leading to a wide range of adverse environmental and social impacts.

A somewhat different view is given by Ross (2001) who argues from a political science perspective that the problem is not so much that trade takes place in contexts of poor forest governance but that it sets off processes that undermine good governance systems. The windfall rents from export booms lead to rent-seeking pressure from different sectors of society who want a share of the rents and to a process of rent-seizing by which state actors dismantle institutions that restrain their ability to allocate rents e.g. by reducing powers of forest management authorities. Thus Ross concludes that the international trade in timber, particularly tropical timber is a serious threat to many remaining forests and that studies such as the one prepared for ITTO in the early 1990s (Barbier et al. 1994) have underestimated the damage done by the expanded timber trade. While international trade may be small in relation to domestic trade, the weakening effect it has on forestry institutions, once rent seeking and rent seizing are set off can affect the whole forest sector.

Free choice or international conditionality?

Linked to this is the widespread view that trade liberalisation is not entered into willingly by developing countries but that countries were persuaded to adopt the free-trade doctrine by international financial institutions. Thus it is not necessarily a national preference that makes governments select policies with a strong focus on free trade, balanced budgets, moderate taxes; rather, these policies are the result of the enormous differences in the power between the international financing institutions, especially the IMF, and their client countries which stifle any discussion about alternative economic policies (e.g. Stieglitz 2002). These developments are not related specifically to trade liberalisation of forest products, rather the concern is about the reduction in the overall priority given to environmental and social issues as a result of a liberal agenda. The negative impacts of World Bank lending and IMF-supported structural adjustment programmes on the forestry sector have been analysed in various World Bank evaluations resulting in a carefully crafted new Forest Strategy and Operational Policy on Forests (World Bank 2002)

A second criticism that is made by some economists (eg Stiglitz 2002 and Helleiner 2000) focuses on unequal power relations in the formulation, interpretation and enforcement of trade rules. While developing countries are urged to eliminate tariff barriers and more generally to liberalise their economies, developed countries maintain subsidies and trade restrictions, thus restricting market access for developing countries. According to this view, many developing countries lack the financial or political clout required to implement or to influence the development of trade rules in their favour. A number of social development NGOs such as Oxfam are now advocating trade liberalisation but focused on developed countries as a means to promote market access for developing countries. The forest sector, although relatively liberalised, still shows strong evidence of tariff escalation with developed countries and countries with economies in transition like China generally imposing higher tariffs for processed products (Rice et al. 2000).

Environmental efficiency or environmental exhaustion?

The impact of trade on the environment is equally controversial. Economists drawing from standard trade theory argue that trade liberalisation may have positive effects on the environment. They see environmental endowments as a factor of production, leading to the conclusion that countries with a relative abundance of such endowments, whether natural resources used as inputs in production or assimilative capacity, will specialise in goods that are intensive in the use of such endowments (Johnstone 1996). Through specialisation, trade will lead to goods being produced in ways that minimises the use of factors of production including the environmental factor. Conversely, restrictions on trade will imply that greater levels of resource use and environmental damage will be needed to produce the same level of global output than under a free trading regime.

However, it is acknowledged that trade liberalisation could have an adverse environmental impact through its impact on the scale of production. Trade insofar as it leads to economic growth and an increase in productive activity will result in more use of environmental factors whether natural resources or pollutant assimilative capacity.

For this reason attempts to reduce tariffs on forest products and so increase trade are regarded with some concern. There was an intensive discussion about the impacts of the Accelerated Tariff Liberalisation (ATL) initiative which proposed for eight sectors, including forest products, further reductions and acceleration in the timing of tariff reductions agreed to as part of the Uruguay Round. An assessment by USTR estimated that the global effects of ATL would not be significant, increasing forest products trade by 2% and timber harvest by only 0.5% by 2010 (USTR 1999). More importantly, USTR predicted that the environmental impact would be small as it would reinforce trends towards timber harvest based on plantations and intensive management of secondary forest. One response to this analysis and to tariff liberalisation in general as typified by Rice et al. 2001 is to acknowledge that tariffs in the forest sector are already low so that liberalisation through tariff reduction will have little global impact on forests. However, some environmental interest groups continue to be concerned about the possible pressure this might cause on remaining forests, in high volume export countries in particular, where large increases in timber harvest can be expected following tariff liberalisation. Rice et al. go on to propose tariff reduction should be approached more carefully analysing the environmental impacts and the impacts on sustainable development as to design effective and appropriate policies and legislation.

Most analysts agree on the link between economic growth and environmental use - the area of disagreement is over the extent to which the scale effects are offset by other potentially positive factors such as changes in sectoral composition and technology as well as more indirect factors such as increased environmental awareness and enforcement of regulation, which affect the demand for environmental quality (Nordström and Vaughan 1999). Trade may play a role in facilitating these positive offsetting effects. In particular, it is argued that trade can have beneficial environmental effects through its influence on the production technologies used, thus offsetting the adverse effects of increased output. Firms may be able to import cleaner technology because of lifting of trade restrictions, or through economies of scale may be able to invest in more efficient production processes which are likely to be environment-friendly, or may be exposed to foreign patterns of demand that are more concerned about the environmental impacts of production (Johnstone 1996).

Based on the strength of these offsetting factors, and a view that rising incomes will increase the resources available for investment in environmental improvement, some economists have suggested that there is an inverted u-shaped relationship between income and environmental damage (the so-called “environmental Kuznets curve” or EKC), such that environmental damages incurred during early phases of economic development are subsequently rectified at later stages - environmental degradation per unit of output rises with income levels until a certain level is reached and then begins to fall (Beckerman 1992; Bhagwati 1993; Panayotou 1993; Stern 1998). This would imply that expanding trade, in spite of its impact on the level of economic activity would eventually be associated with environmental improvement.

There is some empirical evidence in support of the environmental Kuznets curve but this is strongest for localised effects such as particulate emissions and weakest for effects such as CO₂ emissions which are externalisable or diffuse (Johnstone 1996). EKC studies which have looked at the relationship between income levels and deforestation have generally been inconclusive (Kaimowitz and Angelsen 1998). An analysis of some 120 models linking deforestation to its causes has shown that higher national per capita income is associated with greater deforestation in developing countries. Results regarding the impact of rapid economic growth on deforestation are contradictory, and to be treated with caution since they are based on global regression analyses with poor data (Kaimowitz and Angelsen 1998).

There has been considerable criticism of these empirical studies and of the EKC concept, the main arguments being that empirical evidence is weak, often applying only to some indicators but not others, statistical techniques used are inappropriate and that dynamic effects are not captured well (Stern 2002). There is particular concern that the EKC takes no account of irreversible effects such as biodiversity loss (Tisdell 2001). Moreover, while the EKC relationship may hold in developed countries, this may only be at the expense of an increasing “environmental footprint“ on the global commons and on the developing countries (Daly, 1991, Andersson and Lindroth 2001).

Even if a strong relationship can be found between rising income and deforestation, this does not necessarily imply that expansion of international trade in forest products is the main contributing factor. A study for the ITTO on the tropical timber trade (Barbier et al. 1994) concluded that international trade was not a major source of tropical deforestation given that it represented only 6 per cent of total tropical non-coniferous roundwood production. This proportion has changed little since then.

Moreover, the same study reviewed the various statistical analyses of the linkages between industrial roundwood production and deforestation and concluded that the evidence was limited. A more significant threat was the conversion of forests to other uses such as agriculture. At the time this conclusion was considered by some analysts (eg Dudley et al. 1996) to be playing down the effects of the timber industry and international trade on the quality of forests. They pointed out the shortcomings of timber statistics in for example not addressing illegal logging and the fact that industrial logging was often a catalyst for subsequent agricultural conversion and human settlement because it opened up access to a forest area. There is recognition that the expansion of horticultural plantations (such as palm oil, sugar, soya etc) represents one of the main causes of forest loss (Rice et al. 2001). Therefore, the argument that international trade in forest products is not the main driver of unsustainable forest management has since been accepted widely for both tropical and non-tropical timber and the debate has shifted to the conditions under which trade takes place and its differential impact on countries and products.

A reflection of this view is given in the report of the Committee of Trade and Environment (CTE) of the WTO to the Ministerial Meeting in Cancun (WTO, 2003). It outlines the view of member states that trade liberalisation and sustainable forest management do not constitute contradictory approaches, but are mutually supportive.

Pollution havens and regulatory chill

An alternative view to that of the standard economist approach is that countries will specialise in resource-intensive and environmentally damaging activities not so much because of differences in natural endowments but because of differences in the stringency of environmental regulation. It is argued that countries will compete for exports and inward investment by making environmental and social standards less stringent, the so-called regulatory race to the bottom or eco- and social dumping.

Countries thus derive comparative advantage from their choices about environmental regulation. The empirical evidence for this relates more to inward investment than trade and is weak, the conclusion being that other factors such as macroeconomic stability, market size and growth potential, availability of infrastructure and trainable labour are more important than environmental standards in influencing the location decisions of companies (Oman 2001).

A modification of this argument is that while countries will not necessarily weaken their existing standards, there will be a “regulatory chill” effect on further environmental and social improvements for fear of capital flight or loss of competitive advantage (Esty 2002). Evidence for this is also weak and attention has focused most on greenhouse gas emissions and air pollution (Neumayer 2002).

For the forest sector however, a number of authors take the view that the trade expansion in certain countries reflects not comparative advantage based on natural resource endowments but “undesirable comparative advantage” reflecting inadequate forest policy, poor enforcement in relation to environment, tax payment, treatment of local communities and employees as well as subsidies through tax breaks and infrastructure support. This raises the issue of how legitimate comparative advantage is determined and is closely linked to the system of forest governance.

The response often made to these ecological and social dumping arguments is that a country's environmental endowment is socially as well as physically defined, reflecting local preferences for environmental quality as well as natural endowments (Johnstone 1996). The implication is that comparative advantage stemming from differences in the stringency of environmental regulations may be quite legitimate. For this reason measures proposed by environmentalists such as attempts to harmonise standards, to restrict trade or to make it conditional on minimum standards being met or to integrate environment in trade negotiations have been regarded with suspicion by developing countries governments, concerned about green protectionism (Shahin 2002). As a result developing countries tend to perceive environment as a developed country interest and as something to be bargained over in order to obtain concessions in return (Tarasofsky 2001).

The view typical of most economists and international financial institutions is that environmental problems or sources of market failure can best be tackled with environmental policies that address these issues directly and that trade restrictions are not the best option (eg: Nordström and Vaughan 1999, Irwin 2002 World Bank 2002). This is particularly the case where environmental problems are local. In the case of global environmental problems such as biodiversity loss and climate change, international cooperative action is favoured.

For the forest sector though the issue is whether trade rules will interfere with domestic environmental policies. There is general agreement that changes in non-tariff measures could have a much greater impact than tariff reduction (Rice et al. 2001; Sizer et al. 1999). The main concern is that the definition of NTMs has been broadened so much that any aspect of policy or practice in one country that discriminates against another could be considered an NTM even if not deliberate. Sizer et al. 1999 refer to over-inclusive definitions of trade barriers that would involve removing domestic environmental measures and that the “overzealous application of trade liberalisation rules to remove perceived trade barriers can interfere with efforts to protect forests”.

6.2.2 Key areas of conflict and convergence

There is general acknowledgement that tariffs on forest products are low relative to other sectors and hence that non-tariff measures have greater relevance. The extent to which non-tariff measures can be used legitimately to achieve the agendas of different stakeholders is a major issue, reflecting differences in opinion over what can be considered as trade-related. There is concern that trade rules are limiting forest policies that are essential to create an enabling environment for SFM.

It is increasingly recognised that the international timber trade is not the major driver of forest clearance, although its impact on forest degradation is less clear. Policies in other sectors that compete for forestland use are as important as policies related to the forest sector. To assess the impact of international trade and trade policy on forest management it is necessary to understand these extra-sectoral influences.

The focus of the debate is inter alia shifting from trade per se to the overall investment conditions which drive it. Will the increasing presence of transnational companies in the forest products sector lead to greater efficiency or will it lead to large companies making profitable use of weak forest governance and undermining systems of environmental control? Will the distribution of economic benefits from trade liberalisation be captured mainly by investors rather than by landholders or governments? While some investors identify environmental and social campaigning as an investment risk, others join initiatives of “socially responsible investments” or “codes on conduct” in support of SFM.

There are diverging views on how to achieve the environmental and social safeguards which would guarantee SFM in the countries' overall context. International pressure through MEA and international finance institutions like the World Bank, initiatives to address illegal logging and trade like FLEGT, NGO involvement in international cooperation through ODA and other sources as well as NGO campaigns in consumer countries are not only confrontational, but have led to major improvements in policy making and operations on the ground. However, one of the major issues involved in the current developments is the dimension of national sovereignty and national responsibility in managing natural resources leading to an important discussion on governance and the distribution of roles and mandates, in particular in poor governance situations. In this regard, forest certification and forest product labelling play a major role, even though their position vis-à-vis forest policy remains unclear.

6.3 Actors and Their Perspectives: The Basis for Forest Governance

6.3.1 Background: Complexity of Stakeholder Involvement

Forest products' trade touches directly and indirectly on numerous societal groupings both within and outside the forest sector. In assessing the impact of trade policy on SFM it is vital to engage with major societal groupings on trade and understand their many diverse perspectives on forest trade. From a sociological perspective, societal dynamics have accelerated in the recent past with increased economic opening of societies and increased mobility. Trade liberalisation and the focus on world markets rather than domestic markets have further supported this acceleration leading to rapidly changing perspectives of stakeholders, interest groups and their networking. Similarly, the international community and international environmental and social policies have greatly impacted on societal dynamics and the establishment of new pressure groups. The economic interests of these groups are not concerned with forest products, but focus on forest services that have created an important niche at least in the “development marketplace”.

The major types of societal groupings involved in SFM in the forestry sector are presented in Figure 6.3. to illustrate the complexity of the situation. The figure shows that major interests in forest management and trade in forest products and services go far beyond the traditional forestry sector.

Even though such interests are generally being addressed in various analytic studies and policy processes, mutual understanding, effective conflict management and consensus-oriented decision making have been widely lacking. Inappropriate transparency, insufficient information flow and lack of relevant forums for policy making, planning and evaluation limit the potentials to jointly work towards SFM. In particular, trade-related issues have not yet been on the agenda of the forestry sector in a way that would allow addressing the trade-SFM nexus effectively.

Figure 6.3 Major Societal Groupings involved in SFM and Trade

Source: Burger and Mayer, 2004

This section represents an attempt to provide an overview of the societal groupings, stakeholder institutions and government as well as the international community and their networking. The analysis should provide the foundation for the discussion on governance issues based on the discussion of conflicts and convergence of values. This helps to understand the alliances and conflict lines surrounding trade in forest product and services - as well as identifying the key targets for a balanced and constructive empowerment in trade discussions and the key audiences for advocacy towards policies which foster SFM.

6.3.2 Societal Groupings and Their Networking

Inevitably, any attempt to characterise societal groupings is open to accusations about:

(i) the extent to which the categories capture groups that matter - or include those that don't (legitimacy);

(ii) the degree to which different categories can be distinguished (overlap);

(iii) the characterisation of the perspectives within any group (attribution);

(iv) the weight that any group's opinion should have (representation).

In summarising and simplifying the above Figure 6.3, a checklist of societal groupings that have influence over and an interest in trade and forest policy or are influenced by it might be expected to include at least the following:

• Parliamentarians and government officials in trade and forestry-related domains, including forest authorities at all levels

• Public and private investors / financiers in forests, including transnational timber companies

• International Development Banks and UN Development Agencies

• Bilateral Donor Agencies and international NGOs, including church groups

• National timber production and NWFP enterprises

• International/national forest industry (processing)

• Environmental alliances/interest groups/NGOs (national networking)

• Social development alliances/interest groups /NGOs (national networking)

• Consumers of forest products and services

• Research community

• Local communities at the forest-agriculture interface

• Forest-based indigenous communities

In order to elaborate on this checklist of societal groupings, emphasis is laid on their interests and interactions rather than on details of their roles and mandates, which should be common knowledge. Each of these societal groupings is likely to display differences in perspective on policies on trade and forestry, but the analysis should not be limited to the description of their interests. Since some groupings are more likely than others to have the power to enforce their point of view, the positioning of each group in the societal context will determine the approaches to improved governance. It is certain that this positioning and its inherent dynamics vary from country to country and from region to region. However, some major similarities are subject to theory building and to the identification of basic elements for effective strategies to address improved governance.

It is evident that there is little correlation between a group's degree of influence over trade policy and its dependence on the forest in terms of subsistence and/or sustainable livelihoods in a rural context. Indeed, some societal groupings are often not really 'actors' or 'protagonists' in the debate over trade in forest products and services, but spectators or marginalised groups who find difficulties in expressing their views and interests in an appropriate way. Numerous efforts have been made in the context of general decentralisation, local Agenda 21 efforts, development projects and in particular in Poverty Reduction Strategies (PRSPs) to change the current situation and many interesting results and experiences have been reported. However, while existing anthropological and sociological analysis gives broad evidence of the necessity to involve currently less powerful societal groupings, the practical implications of good intentions have been insufficient at large.

While government officials are acting as trade negotiators in global and regional processes, recent world-wide research results (CPOGG, 2003) show that national parliaments and consequently parliamentarians are insufficiently involved in the decision-making processes, including the elaboration of national positions. This adds to the impression that any agreement on trade liberalisation is the result of negotiations between the government and international institutions and processes, rather than an expression of national interests deriving from an open debate within democratic institutions. However, despite international pressure, developing country representatives often reject the notion, pace or equity of further liberalisation, using structural or under-development arguments in economic debates on free trade.

Forest authorities often play a major role in enforcing tariff and non-tariff barriers to forest trade, but usually have a weak political status and are rarely included the definition of forest trade policy. The perspective of forest authorities will be shaped by the extent to which they see themselves at one extreme as conservationist stewards of the multiple values of forests or at the other extreme as industrial catalysts towards maximum revenue generation. Where export or import tariffs supply their primary source of funding, forest authorities are strongly protectionist, but this is mostly no longer the case. One of the main deficiencies in forest policy making and the development of strategies for the forestry sector is the lack of involvement of forest authorities in the trade debate. Forest institutions tend to restrict themselves to the production of timber and (partly) its processing, while the developments in trade and markets play a surprisingly minor role.

The distinction between national and transnational companies is defined by the degree to which transnational companies can access and employ international capital where the cost of production is least - and frequent differences in scale sometimes afford transnationals increasing influence on policy (Mayers and Bass 1999). Transnationals may also be defined by their limited stake in the societal benefits of the host nation, not least because corporate executives and investors are more likely to reside outside the host nation. Transnationals certainly want to see improved market access but the evidence regarding their willingness to implement sustainable forestry is mixed. Much depends on the degree to which the companies adhere to codes of corporate social responsibility (see chapter x.x).

Competitive national forest industries occasionally share transnational's liberal perspectives on trade, but in many instances export barriers, import tariffs or subsidies are affording them some measure of protection from international competition. In addition to formal national industries, which account for 16 million employees world-wide, approximately 16 million work in the informal sector primarily based on secondary forest or domesticated trees (Van Rijsoort 2000) and 13 million work in the fuelwood trade (Poschen, 1997). Micro, small and medium scale industries make up the majority of forest industries in many countries (Lewis et al. 2003; May et al 2003; Saigal and Bose, 2003; Sun and Xiaoqian, 2003; Thomas et al. 2003). The vast majority of artisanal production is traded locally rather than internationally and perspectives on international trade are likely to be protectionist due to fears about competition from imports and access to raw materials. Despite the fact that in some developing countries artisanal production dwarfs industrial timber production in employee numbers by up to 10:1 (Arnold and Ruiz Pérez 1998) these industries rarely have any say in formal surveys of private sector opinion on trade.

Private investors often support free trade on the basis of its economic arguments - but have very different perspectives particularly on the environmental consequences of free trade. Investors from the West have historically favoured fast-growing plantations in a few low-risk countries where environmental control and forest governance were strong (Argentina, Australia, Brazil, Chile, New Zealand, Uruguay or North America) - aware of the environmental arguments against free trade. Asian investors have been more ready to accept the risks of operating in natural tropical forests (e.g. in Indonesia, Korea and Malaysia) but possibly because of high returns generated by unacceptable social and environmental exploitation. (Moura-Costa et al. 2001). Conventional and often unsustainable logging can generate more attractive returns than sustainable forest management by a factor of 1.5 to 4 (Pearce et al 1999; Salmi et al. 2001).

While multilateral finance agencies and private investors do not wield any direct power over forest-trade, they can (but do not always) have a major impact through the imposition of significant conditionalities on their lending. Multilateral agencies tend to favour trade liberalisation imposing conditionalities which facilitate foreign direct investment, reduce subsidies, tighten fiscal discipline, liberalise financial systems, promote competitive exchange rates, encourage privatisation and deregulation, stimulate tax reform and support clearer property rights. There have been examples in South East Asia and the Pacific, notably Indonesia and Papua New Guinea, where specific trade-impacting forest sector conditionalities have also been imposed (Filer with Sekhran 1998; Seymour and Dubash 2000; Barr 2001). There are, of course, significant differences in outlook within any one of these institutions - for example between lending and development arms of the World Bank - and individuals or departments within these institutions often acknowledge the social and environmental concerns over free trade.

Historically, consumers of forest products and services have shown little concern for the way in which forest products are produced - with a strong predilection above all for low cost. The rising living (and often environmental) standards in the developed world as a result of expanding trade have engendered widespread support for pro-free trade arguments. In developing countries the picture is much less clear leading to many counterpoints to the economic trade liberalisation arguments. In both areas, some consumers are increasingly demanding independent certification of the production process - for social and / or environmental standards (Bass et al. 2001). There has been growing concern over timber production in relation to climate change and biodiversity loss, particularly in Europe and North America. A small but increasing number of consumers have some notion of 'sustainable forestry' involving technical, social and environmental elements (as in FSC certification) and insist on voluntary eco-labelling. Markets for environmental services also provide new avenues for consumers to express social and environmental concern through trade although only where several environmental services 'bundled' together are we likely to see this translated into demand for a balance of objectives in forest management.

Many environmentally conscious consumers are also active in environmental alliances. The perspective on trade in such groups is generally anti-liberal, countering arguments that trade is good for the environment (see 3.2.3). The timber trade is viewed through a lens of ecological sustainability (over and above financial or social sustainability). By way of contrast, social development alliances emphasise the need for improved social well being and poverty reduction over and above environmental concerns, often drawing on elements of dependency theory, and arguments about corruption, illegality and instability (see 3.2.2), to argue that the illusion of greater wealth through trade is just that (Retallack 2001). But there is often a remarkable divergence of opinion about how poverty eradication and greater equality can be achieved in practice. Some argue that liberal trade policies (but not forgetting good governance) are fundamental to economic growth, and that the continuing existence of high trade barriers particularly in developed countries is perpetuating poverty, i.e. the absence of free trade (Coyle 2001). But there are other, more sceptical views of the role of trade in poverty eradication. Many of the latter emphasise the importance of increasing 'freedom' or 'empowerment' or 'livelihood assets' as a means of tackling poverty, rather than focus strictly on financial gains (Narayan et al. 1999; Scoones 1998).

Researchers and practitioners in trade economics and forestry continue to adapt to two recent paradigm shifts: (i) away from simple financial models of economic development and well-being towards the development of multiple human capabilities (Alkire, 2002); (ii) away from the conception of a forest as a bounded primeval wilderness to one which acknowledges the place of forests in a larger natural-social system (Kanowski 2001). Both paradigm shifts have profound implications for the analysis of trade impacts on SFM - shifting the scales of measurement, the measure of good and bad impacts, into multiple new dimensions - based around a much more profound grasp of human well-being and forest sustainability. Since these recent developments are not yet widely owned the spectrum of opinion in debates on trade and forests spans the gamut of opinion.

Farming communities at the forest agriculture interface are largely marginalized in forest trade debates despite numbering approximately 1.2 billion people and despite their dependence on the forest margin or agroforestry systems which help them to sustain agricultural productivity and generate income (World Bank 2001). Farmers are not a homogenous group, and range from wealthy established land-owners to poor shifting cultivators. There is often a two-fold tendency towards increased migration into the forest followed by the development of more sedentary (and sometimes agro-forestry) systems (Byron and Arnold 1997; Peluso and Padoch 1996). It is wealthier farmers who are most able to become established and capitalise on new trade opportunities, whether these are for agricultural or forest-based products - they tend to espouse the economic virtues of free trade. Poor farmers may become more dependent on forests for subsistence over time, which can lead to conflicts over access to diminishing forest resources. In some areas, farmers have begun to plant timber species as crop alternatives or complements, sometimes as part of outgrower schemes sponsored by the timber industry (Mayers 2000; Mayers and Vermeulen 2002). Nevertheless, perspectives on trade and the call for trade protection are primarily related to agricultural crops.

One final category of forest dependent people deserve special mention because of the clarity of their views on trade liberalisation, the forest-based indigenous communities. Approximately 350 million people live within or adjacent to dense forests and depend on them to a high degree, Some 50 million of these are among the 250 million indigenous people in 70 countries worldwide (Rainforest Foundation 2001). Almost everywhere in the world, there is a record of encroachment on the lands of indigenous peoples (Bodley 1993). Studies demonstrate that such forced integration rarely allows tribal peoples anything more than a transition into the impoverished classes of the nation state and unsustainable use of the transferred natural resources (Cariño 1997). It is unsurprising therefore that the indigenous peoples perspective on trade liberalisation is unambiguous, stated in the combined “Indigenous Peoples' Seattle Declaration” (Indigenous Peoples' Caucus 1999).

6.4 Governance Dynamics and Linkages between Trade and SFM

6.4.1 Theories and Analytic Frameworks on Impacts of Trade Liberalization on Forest Governance

Prevailing theories about the forest governance impacts of trade liberalisation per se are outlined in the table below. The main features of governance that are thought to be influenced by trade liberalisation are listed down the left hand side of the table, whilst the second and third columns list the main viewpoints and theories on why trade liberalisation might improve the quality of forest governance or reduce it. The purpose of this rather dichotomised approach is to make it easier to interpret the evidence - and assess whether and where the 'truth' lies along the continuum between these viewpoints.

Table 6.1 Theories about how trade liberalisation could improve or reduce the quality of forest governance

Main sources: Hellman et al. (2002); Leite & Weidmann (1999); Neumayer (2001); Ross (2001); Bardham (1997); Pearce (2002); Repetto & Gillis (1988); Karsenty (1998); Sizer et al. (1999); Bass et al. (2001); Utting (2002); Adams (1997); Wei (2000); Laarman (1999); WWF (2001); Anderson et al. (1995); Halle et al. (2002).

Whilst the above features of forest governance are thought to be the main ones that may be directly influenced by trade liberalisation, there is a range of other ways in which trade liberalisation interacts with other factors to drive changes in forest governance. Some of these are described in Tables 6.1 and 6.2

Table 6.2 Theories about key factors interacting with trade liberalisation

Main sources: Isham et al., 2002; Ross, 2001; Treisman, 2000; Lofdahl, 2001; Tockman, 2001; Pearce, 2002.

6.4.2 Attempts to Establish Holistic Societal Processes of Forest Governance at the National Level

The processes to establish and implement policies, legislation, rules and regulations and agreements on forest governance have increasingly evolved from state centered reductionist approaches at the national level, towards more integrative and synthetic approaches. They are also increasingly involving national/sub-national and international/regional variables, as well as a combination of state centered and society-centered approaches to arrive at more holistic governance arrangements. These approaches seek to take into account the values and views of different societal groups, and to balance local/national and international demands on forests.

This new holistic and synthetic governance approach is best exemplified by the concept of the national forest programmes defined and endorsed by the IPF/IFF, and summarized by FAO (Box 6.1) as follows:

Box 6.1 basic principles of national forest programmes

1.Sustainability of Forest Development:

The essence and main purpose of the national forest programme are to ensure the conservation and sustainable development of forest resources.

2.National Sovereignty and Country Leadership:

National forest programmes are national initiatives for which the country must assume full leadership and responsibility.

3.Partnership:

National forest programmes strive to bring together all stakeholders in a process for which they will feel concerned and committed. The strength of this partnership will depend on its ability to draw upon the specific capacities of individual partners.

4.Participation:

In the national forest programme, issues, options and the resulting policies, strategies and programmes are agreed upon through participatory decision-making and consensus building among all interested partners.

5.Holistic and Inter-sectoral Approach;

National forest programme approaches forests as diverse ecosystems comprising many inter-dependent elements in dynamic equilibrium producing a variety of goods and services; forestry include trees in rural areas; forestry is practised within the context of sustainable land management, environmental stability, social and economic development. Forest dwellers are also part of this ecosystem.

6.Long-Term Iterative Process:

The national forest programme is a cyclic process comprising planning as well as implementation, monitoring and evaluation activities. It is also an iterative process which continuously reflects changes in the environment and the acquisition of new knowledge even during implementation.

7.Capacity Building:

One of the essential elements of the national forest programme. Throughout the process, actions are taken to develop the planning and implementation capacity of the national institutions and other key actors with a view to decrease dependence on external assistance when necessary.

Box 6.1 Basic principles of national forest programmes - continued

8.Policy and Institutional Reforms:

One of the priorities of the national forest programme is to ensure that the policy and institutional framework is conducive to sustainable forestry development. These must address policy and institutional issues in a comprehensive manner which recognizes the interdependencies and interlinkages between sectors.

9. Consistency with the National Policy Framework and Global Initiatives:

The national forest programme must link with National Development Plans with regional and local strategies. They should be integrated in the land-use planning at national and local levels; and furthermore into broader-scope programmes such as Environmental Action Plans and the actions to implement UNCED's Agenda 21 and related conventions and initiatives.

10.Raising Awareness:

The national forest programme must raise the visibility of the forestry sector and its priority in national agendas. The full value of forests and trees must be recognized as well as their contribution to social, economical and environmental issues.

11.National Policy Commitment:

The national forest programme must be backed by the long-term commitment of all national actors, particularly at political and decision-making levels.

12.International Commitment:

The long-term commitment of the international community and its institutions is essential. These should respect the policies, strategies and programmes approved by the countries and adapt their own priorities to the country priorities. Source: http://www.fao.org/forestry/

This type of comprehensive approaches to forest governance seem to work best where there already is a sufficient level of consensus on the “vision” of the forest in local and national development, and a tradition of long-term development planning (e.g. in the European countries and some politically stable developing countries). They also offer to the developing countries a tool to integrate the external actors (i.e. donors and international financing institutions) into a development framework that has been negotiated in a country-led process. This may be the main attraction to many developing countries. They seem to be more problematic in countries where there are major underlying forest governance related conflicts (e.g. regarding forest land tenure or the rights of indigenous forest dependent people) influencing the forest sector, where high resource values are combined with a weak overall governance capacity, and where there are major impediments to the participation of important societal groups in the dialogue and debate. A high level political commitments also seems a prerequisite for the success of this type of holistic and synthetic approaches (e.g. Savenjie 2000).

Decentralization of government responsibilities is an important factor influencing forest governance and the societal processes to negotiate related institutional arrangements. A recent World Bank study in 1999 found that more than 80% of all developing countries and countries in transition are currently undergoing some form of decentralization (Manor, 1999). These processes have led to a reconsideration of the role of the central government in administering the forest resources, and put more emphasis on the roles of the local governments and especially the local communities regarding both rights and responsibilities. This shift of balance needs to be recognized also in national forest programme processes, e.g. through increasing decentralization of the planning process and improved engagement with and empowerment of the groups who will bear the major responsibility as custodians of the forest resources. Countries with a federal structure also have their specific dynamics regarding forest governance processes. This group includes countries with large forest areas, such as Brazil, Canada, Germany, India and Russia. Much of the authority vested in the central government in the non-federal countries may in these countries be delegated to the federal state level by the constitution. The structures for forest governance tend to be complex, multifaceted and to have strong cross-sectoral linkages e.g. with agriculture, water, transportation etc. (Schmithussen et al 2003 and Broadhead 2003). This broadens the number of groups involved in the dialogue and adds to the complexity of the negotiation process.

Another major trend impacting on the societal processes for forest governance is the privatization and/or commercialization of forest and/or forest management. This trend is shifting the balance of power from the public sector towards the private sector, and requires a greater involvement of private sector actors (e.g. through industry associations) in processes that determine the normative framework and incentives for their participation. It also necessitates specific processes to negotiate public-private partnership type arrangements between different societal groups (e.g. the central or local government, private sector and local communities) focusing on concrete partnership arrangements.

In the national forest programme type comprehensive societal processes dealing with forest governance, trade as such seldom plays a major explicit role. However, such trade related issues as (i) creating a competitive environment for domestic and foreign direct investment in the forest sector, (ii) making use of the opportunities in tradeable environmental services, (iii) supporting and facilitating research and development to increase the competitiveness of the forest sector and especially the forest industries and (iv) ensuring market access to exports e.g. by promoting certification are often among the key debates between the different societal groups. The level of consensus on the “vision” of the forest sector, as well as the potential importance of the sector in foreign trade, to a large extent define the importance given to these issues as well as the nature and divisiveness of the debates.

6.4.3 Empirical Evidence on Trade-Related Governance Impacts at the National Level

Impacts on Demand for Improved Policy and Regulatory Frameworks

Evidence that trade liberalisation encourages sustainable forest management and hence improves policy and regulation, seems to be scant. Where regulation is already effective, removing a NTB should encourage more efficient processing and SFM. But when there is pre-existing weak governance or control, higher external demand pressures and producer prices are more likely to encourage unsustainable logging and trade than more efficient processing (Sizer et al. 1999). Econometric analysis shows that higher log prices are associated with higher rates of logging in tropical areas (Kaimowitz & Angelsen 1998), whilst Barr (2002) points out that there is little evidence for improved milling efficiency following removal of a key trade restriction.

A further problem is the link between economic efficiency and SFM. The international timber market, except small green 'niche' markets, does not distinguish between efficient SFM and low cost forest exploitation. Many operators are only 'efficient' and their operations economically viable because their costs are low. The main reason for this is the lack of environmental regulations and social standards, and/or the ability of the timber industry to evade them. For example, Sizer et al. (1999) noted that pulp was three times cheaper in Indonesia than Sweden, both countries using state of the art mills. In the case of Sweden, production was based on secondary forest management and certified plantations, while in Indonesia, natural forests were logged.

Although it was stated earlier that the impacts of tariff reduction are normally minimal, the elimination by China of its log import tariffs in 1998 has placed serious governance pressures on Indonesia, the Russian Far East and Siberia - countries with weak governance before 1998. There are similar concerns about the forest governance impacts on low cost plywood exporting countries like Indonesia as a result of planned cuts in plywood tariffs by the EU, Japan and China (Rice et al. 2000).

But neither is the evidence strong that trade restrictions reduce demand pressures on forest governance. A clear example of where trade restrictions have done little to dampen external demand pressures is Indonesia where the log export ban helped build up the largest plywood export industry in the world, much of the raw material coming from illegal logging (Ross 2001). The 2001 log export ban in Indonesia has had little effect on actual log export flows and the introduction of such trade restriction only increased the level of irregularities laying high pressure on governance practices to counteract negative developments in the sector.

On balance, the evidence suggests that for most developing and transition economy countries, existing regulatory and governance capacity is too weak to control external demands on the resource, and a likely outcome of trade liberalisation is an increase in unregulated logging in the absence of effective governance. Evidence also confirms that trade liberalisation has a chilling effect on environmental and social regulations, at least in developing countries. Utting (2002) reports that 'competitive fears' are often cited as the reason why developing countries have not introduced stricter environmental and social regulations. But even where appropriate policies and regulations are in place, compliance with the law remains one of the major issues of international and domestic concern.

Impacts on capacity to internalize social and environmental externalities

Uncompensated social and environmental externalities, arising from trade and in particular trade liberalisation, that undermine the prospects for sustainable growth are well recorded. A study of the economic impacts of trade liberalisation on the Tanzania forest sector found that the economic costs, including an accelerated deforestation rate (partly due to weak control), almost exactly outweighed the benefits, which included higher forest product values and a growth in forest product trade and employment even though liberalising the natural resource based economies of Tanzania was crucial for raising living standards. (CEDR/UNEP 2001).

When trade liberalisation is accompanied by a Structural Adjustment Programme, deregulatory reforms and/or privatisation, there can be serious problems in regulating an emboldened private sector. Key observers argue that there are strong social and environmental externality reasons for protecting the community forestry sector against external trade pressures in favour of the provision of social and environmental benefits of forests for the local communities.

Those who argue that trade liberalisation can improve the financial basis for strengthening institutional capacity have to face considerable evidence that, unless governance is already sound, forest revenue tends to be squandered. It has been estimated that only about 10% of the revenue from developing country logging and sawnwood prodcution, and about 35% from other timber products, remains in-country (EIA 1996). Public budgeting procedures in most countries do not allow for a direct re-investment of the necessary financial resources into the forestry sector. This has led to the well-documented strategy in Costa Rica to achieve payments for environmental and social services of forests through the direct means of fuel taxation and the creation of a special institution (FONAFIFO).

However, that is not to say that the record of protective trading governance regimes in managing non-market values is strong in the overall analysis. Laarman (1999) points out that state control and ownership of forest resources in Latin America in the 1990s reinforced social inequities, and that state regulation of private forests can result in fraud and injustice. Considerable political strength and courage, plus research and administrative capacity, are needed to establish the necessary economic incentives for SFM and to internalise costs (Richards 2000). It is also a question of reducing externality-inducing subsidies.

Major international institutions and organisations, including the World Bank and FAO as well as bilateral cooperation agencies and NGOs are supporting governments world-wide in their efforts to internalise social and environmental externalities. However, the attempts remain at a project support level and have not yet led to major policy and legislative changes, with the exception of Costa Rica. This limits the potentials of emerging markets for environmental services, including the ones for carbon sequestration forestry.

Impacts on corruption and rent seeking

Corruption occurs both in the public sector, where it may involve senior politicians, departmental heads, customs officers, and other senior public sector officials, and in the private or corporate sector where bribery and other unofficial payments may be aimed at securing influence over those in the public sector ('state capture') or securing contracts from government ('public procurement kickbacks') (Hellman et al. 2002). It is probably the most studied indicator of the quality of public and private sector governance - although there are rather few analyses in the forest sector to date.

Empirical studies find public sector corruption is higher in economies characterised by greater state intervention and trade restrictions (Treisman 2000). Economic protection and corruption are correlated in many environmental studies (Ades & Di Tella 1999; Damiana et al. 2000). One case study shows that complex import and export procedures involving a high level of discretionary powers led to rampant high-level corruption before trade liberalisation swept many of these procedures awey. In some Amazon countries, the attempt to use trade restrictions to encourage mahogany conservation, mainly in response to international pressures, shows how trade policies tend to be ineffective in achieving environmental objectives, and often lead to opposite effects - in this case to the diversion of mahogany exports to unregulated markets.

Forest trade liberalisation may not reduce the overall level of corruption - Treisman (2000), for example, concluded that an increase in trade openness has a “depressingly small” impact on corruption - but it may change the pattern of winners and losers from it. This is the argument of some observers, such as Khan (1996), who see liberalisation altering the distribution of corruption benefits or 'surplus' rent to different stakeholders, since it changes the balance of power among the main beneficiaries.

Where the state does not effectively regulate or tax the forest sector, rent-seeking opportunities shift to the private sector, especially international or transnational companies. For example, a study of economic and institutional reforms in Tanzania, Zambia and Zimbabwe by Reed (2002) shows that there has been a transfer of the control of natural resource wealth from the state to the private sector. While reducing some corruption by state elites, this has resulted in collusion between national elites, senior public officials and corporate interests including transnationals.

In summary, the evidence mainly supports the contention that removing or reducing trade restrictions is likely to reduce public sector corruption and other illegal activities. But there are important caveats: liberalisation alone will not secure this outcome, it needs strong regulatory and institutional back-up; it may be much more difficult where windfall resource rents are involved; and sometimes it may not represent a real reduction - merely a change in the pattern of winners and losers. In all of these cases, ways to improve governance involving civil society as a whole as well as government institutions need to be designed on a country-specific basis approaching any irregularities in a broader context than the one of forestry.

Impacts of economic growth on forest governance

To what extent trade liberalisation generates sustainable economic growth is a discussion beyond the scope of this paper. It can be noted here that there is a strong positive correlation between per capita incomes and the quality of governance (Kaufmann & Kray 2002), just as higher levels of corruption associated with trade restrictions are correlated with lower economic growth and per capita incomes (Hellman et al. 2002). Corruption hinders growth because it reduces foreign direct investment (FDI), and because the FDI it does attract is of lower quality and less growth-inducing.

However, in examining date from transition economies¹²⁸, Kaufmann and Kraay (2002) find that while there is a strong positive causal effect running from better governance to higher per capita incomes, there is a weak and even negative causal effect in the opposite direction, i.e., rising incomes can be associated with a decline in governance quality. These authors then used more qualitative diagnostic data from Colombia, Honduras and Peru, to argue that as countries become wealthier, higher incomes are appropriated by captor firms and elites, and the very success of these captor firms undermines public policies, regulations, law and order. In a growth situation there is an increasing demand for 'state capture' which is often abetted by an a la carte supply of laws, regulations and policies offered by corrupt politicians. But the authors admit that these explanations are speculative, and the relationships need further research.

Certainly, proceeds from illegal logging have been used to finance civil disturbance and wars in a number of countries, for example, in Liberia (Global Witness 2001), Cambodia (Le Billon 1999), Nicaragua and Indonesia (Halle et al. 2002). But there is little credence in blaming trade liberalisation per se for this. Such conflicts are rooted in profound social and political problems. Indeed some of these problems have been built up through the power of protected elites in closed economies (Reed 2002). Some observers note that the risks of destabilisation and conflict are probably less than the political and security benefits of more open trade, including those stemming from increased international integration and cooperation (Halle et al. 2002).

6.4.4 Evolving Dynamics in Global Governance related to Trade and SFM

Governance Issues deriving from the International Trade Regime

The negotiations on the compatibility with WTO trade rules of the forest related trade measures included in the multilateral environmental agreements takes place in the WTO Committee on Trade and Environment. In the Fourth Ministerial Conference in Doha, Qatar, in November 2001, Ministers agreed to launch negotiations on certain aspects of the trade and environment linkage. These negotiations aim at clarifying the relationship between the multilateral trade and environment regimes, and cover also information exchange between WTO committees and MEA secretariats, as well as the liberalisation of trade in environmental goods and services. The negotiations will focus especially on

(i) environmental measures on market access especially in relation to developing countries, (ii) Trade-Related Aspects of Intellectual Property Rights, and

(iii) labelling requirements for environmental purposes.

The negotiations are informed by an information session with different secretariats of the multilateral environmental agreements. The strength of the arguments and positions of the negotiating parties will define whether the outcomes will strengthen or weaken forest governance. ¹²⁹

In the international trade debate linked to WTO, country positions and alliances between countries concerning these issues continuously evolve. A striking example of this fluctuating landscape is seen in the emergence of the G20+ at the WTO Ministerial Conference at Cancun and the marked shift by Brazil from the so-called “Cairns Group¹³⁰” into that new alliance (Choike 2003). Three important considerations are likely to influence countries' views on liberalising trade and its impacts on SFM: (i) the comparative benefits of forests and forest trade compared with other, particularly agricultural land use and trade alternatives; (ii) the degree to which the development of trade in forest products and services needs to be nurtured or is considered able to compete internationally; and (iii) the extent to which other non-commodity societal benefits of forests outweigh and are threatened by the forest products trade. Some commentators have noted the under-representation of forest advocates and expertise in recent negotiations on trade and the environment at the WTO which perhaps reflects government assessments of forests significance (Araya 2001).

Many commentators also note that the decisions regarding agricultural products may have far more profound impacts related to forest governance, thorough wider land-use impacts, than those directly related to forest products. There are still contrasting views as to whether agriculture should be fully integrated into the rules and disciplines of WTO. There are at least three country groups with divergent views on this issue; (i) the Cairns Group pressing for full and speedy integration, (ii) the group of developing countries pressing for the concept of special and differentiated treatment (SDT), and (iii) the group of mainly industrialised countries and transition economies, putting emphasis on non-trade concerns (Horgan 2003). The role of SFM experts and advocates in these discussions is even more limited than in the trade dialogue directly related to forest products' trade. Due to the complexity and site specificity of the agriculture-forestry linkages, it is difficult to foresee what the impact on SFM of the WTO decisions on agriculture will be.

Global forest policy debate, trade and governance

The International Tropcial Timber Council (ITTC) , as an intergovernmental forum for dialogue for the producers and consumers of tropical timber, has been effective in its purpose of facilitating discussion and international cooperation on the international trade and utilization of tropical timber and the sustainable management of tropical forests. Overall, perhaps the major contribution of ITTO was its role as the first (and until the 1990s the only) forum for debate between wood producer and consumer countries. The forum has always depended upon consensus which all 58 country parties tend to be committed to it.

However, both debate and progress of the member states has been too slow for many NGOs, which 'defected' in the mid 1990s to more 'fast-track' initiatives such as the Forest Stewardship Council (FSC) in which they could be drivers rather than observers, as in ITTO. The focus of ITTO tended to shift in the late 1990s from its normative functions towards project funding, and in doing it lost some of its policy edge.

Whilst, for some, ITTO has not shown the leadership on critical governance issues that might have been expected (largely being constrained in tackling contentious issues by its membership) - there are signs that is starting to play an increasingly influential role. The recent meetings of the International Tropical Timber Council (ITTC) have perhaps been most remarkable for their lack of controversy as well as for the fact that delegates have debated and made progress on what had previously been highly contentious issues, including certification, illegal logging and the role of civil society within the ITTC. These are the very issues that have long paralyzed the Council and drove many NGOs to dismiss it as an irrelevant, if not destructive, force in tropical forestry.¹³¹

NGOs have re-engaged with the ITTA process since 2002 with the establishment of the Civil Society Advisory Group by the International Tropical Timber Council and re-negotiation of the ITTA. Key issues being dealt with in ITTA re-negotiation through the workings of this group include: expansion of the agreement to non-timber forest products; promoting the interests of local and indigenous communities, including core labour standards; and, trade related aspects of GMOs and invasive species. Most of these are issues with a significant global impact on forest governance.

UNFF derives its mandate from the ECOSOC and constitutes the principal intergovernmental fora where forest issues are debated. Through the establishment of the Collaborative Partnership on Forests (CPF) UNFF has a direct influence on the work of the major international organizations active in the forest sector. It also has set up a multi-stakeholder dialogue of major groups identified in Agenda 21 to enrich its deliberations, and promotes inter-sessional work by ad hoc expert groups and country-led initiatives. UNFF represents what could be labeled as a “modern” intergovernmental negotiation process, incorporating strong elements of civil society participation in its dialogue and debate.

While the UNFF was intended to address trade issues, the view of NGOs (e.g. Tarasofsky 2001) is that virtually no substantive agreement or progress on these issues has occurred and that little further contribution to trade policy can be expected from UNFF. This view is reinforced by a review of the reports from the UNFF sessions 1-3 to ECOSOC. Although, according to the UNFF multi-year programme of work, trade is one of the common items on the UNFF agenda no discussion or actions by the Forum in this area are reported (http://www.un.org/esa/forests/documents-unff.html). Neither have trade issues - with the exception of certification and labeling of products from sustainable managed forests - been the focus of any of the government and organization led initiatives that have been organized during the IPF/IFF/UNFF process. This would seem to indicate that relatively little weight has been given to trade issues by the actors involved in the intergovernmental dialogue on forests.

Regional processes - intermediaries or independent governance tools?

There are more than 100 regional agreements affecting a range of processes from political and economic issues, to security and trade. Regional trade agreements (RTAs) are the most prominent of these - some have major forest trade impact such as those within the Asia-Pacific Economic Cooperation (APEC), North American Free Trade Alliance (NAFTA), and European Union (EU). The countries belonging to these “trade blocks” are also the major players regarding the WTO discussions on forest products' trade, and the negotiations within the blocks are an important basis for common positions.

There are divergent views as to whether these agreements complement or challenge the global multilateral trading system. WTO has in place a Committee on Regional Trade Agreements (CRTA) to examine individual RTAs in this respect. The Dispute Settlement Body (DSB) of WTO also seems to serve as a higher level appeals court for disputes arising within the boundaries of individual RTAs -. the example of this is the softwood lumber dispute between Canada and the US which was referred to WTO to find an acceptable resolution within the framework of NAFTA (Horgan 2002).

In Africa the important regional trade agreements include the Arab Maghreb Union (AMU), the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of Central African States (ECCAS), the Economic Community of West African States (ECOWAS) and the South African Development Community (SADC). Due to the strong overlaps of agriculture and forestry in many regions of Africa, the WTO negotiations related to agricultural products have a special relevance to forestry in Africa, especially in terms of potential land-use impacts.

The countries belonging to the Latin American Economic System (LAES) belong to three regional groupings with RTAs, the Common Market of the South (MERCOSUR), the Andean Community (CAN) and the CARICOM. They account for one quarter of the global forest cover, include countries with a well developed export oriented forest industry, and can consequently be expected to have a considerable interest in trade impacts on forest governance. The Central American countries seek to promote economic integration through the Central American Common Market (CACM). Trade in forest product does not, however, play a significant role in CACM (Horgan 2002).

The cooperation within the Association of the South East Asian Nationas (ASEAN) covers several areas, which include among others trade, agriculture and forestry. Forestry is included as a cross-cutting issue in the ASEAN Action Plan to implement the ASEAN vision 2020. In the area of forest products' trade the ASEAN member countries have coordinated common positions regarding early voluntary sector liberalization (EVSL) program for forest products in preparation for the APEC meeting.

The post-UNCED era has also seen the emergence of a number of regional and sub-regional forest related environmental agreements (e.g. the establishment of the Central American Council for Environment and Development - CCAD - in a meeting of the presidents of the region in 1989) and processes (e.g. the Yaounde Declaration in 1999). These agreements and processes have mainly centered on forest and biodiversity conservation, with trade related issues heavily biased towards the problems of illegal logging and related trade. In the new millennium also specific regional initiatives and processes have emerged to address this issue (see chapter 6.4.7) but the effectiveness of these still remains to be validated.

6.4.5 Role of information and transparency

Access to information and effective systems for information management are a precondition for effective governance and empowerment. Without access to reliable and transparent information and knowledge on specific issues, informed participation of a wide range of actors in forest governance related processes at different levels is not possible. Information is important especially for:

• enabling the civil society to press for changes in forest governance to effectively deal with such issues as corruption and illegal logging,

• promoting understanding and broader support in the society for the role of the forest sector, and enabling a commonly shared “vision” on its role to be negotiated,

• raising public awareness on the multiple functions of forests and the forest sector and generating political commitment for change,

• helping to address cross-sectoral issues by articulating the linkages between the forest sector and other sectors,

• helping to agree on viable sectoral policies, strategies and actions on specific issues.

Currently tens of research institutions, NGOs and governmental agencies maintain forest related web-based information services, however, very few of these provide information related to trade impacts on SFM (with the exception of information related to illegal logging and trade and environmental services). There is certainly a gap in this area, and designing specific actions e.g. within FAO NFP Facility and/or the WWF - WB Alliance to disseminate information on specific trade and SFM related issues would provide a better basis for dialogue and debate on these issues in national forest governance processes. Specific measures would need to be taken also to bridge the “digital gap” i.e. reach those societal groups, especially in the developing countries, with no access to the internet. This would be a legitimate area where development cooperation funding could be targeted.

6.4.6 Linking International and National Levels in the Trade-SFM Nexus

Establishing the link between the international forest dialogue and national and local forest related processes is one of the main challenges in implementing the synthetic approaches to forest governance. Expanding this linkage to the governance of trade at different levels is an even more taunting task. Although in many countries the participants in the international forest dialogue are also somehow involved in, or at least aware of, the national processes, only in some cases have inter-ministerial working groups or similar structured bodies been established to facilitate the flow of information between the international and national processes. Even less frequent are attempts to ensure coherence of the positions and actions in the forest and trade dialogues.

During the IPF/IFF process two major initiatives were launched to improve this linkage, the “Six Country Initiative on Putting the IPF Proposals for Action into Practice”, involving Finland, Germany, Honduras, Indonesia, Uganda, and the UK, and the “Three Country Initiative on Implementing International Forest-Related Agreements through National Forest Programs in Latin America” which was a joint initiative of Ecuador, Germany and the Netherlands. The aim of the “Six Country Initiative” was to enhance the implementation of the IPF proposals of action at the national level, and to develop guidance from country experiences for consideration by the IFF. The “Three Country Initiative” sought to increase the understanding on the international forest-related initiatives and their relevance to national forest programmes, and to formulate joint action to support nfp processes based on this.

These two exercises demonstrated the value of the international forest related dialogue to national and local processes by establishing that many of the outcomes of the international agreements and processes had been internalized in the national forest programmes. These include the predominance given to the conservation and sustainable management objective, the inter-sectoral approach, the major concern given to stakeholder participation and attention given to their forest related values (Synthesis Report 1998). It is less evident, however, how the experiences from the implementation of forest related processes at the national and local levels is channeled back to the international forest related processes. The linkage to international dialogue on trade is even less clear. The IPF/IFF Proposals for Action include several trade related ones (e.g. related to market access for forest goods and services) but how these are addressed in the national processes, and whether or not this national level dialogue is linked to the trade dialogue, has not been systematically assessed.

In addition to these two initiatives linked to the IPF/IFF process, also other types of mechanisms have been set up to bridge the gap between international and national forest governance processes. An example of these is the World Bank-WWF Alliance which has been created to effect changes in forest policy and practices, to help safeguard biodiversity, and alleviate poverty. The Alliance is working with governments, the private sector, and civil society to create 50 million hectares of new protected areas of forest. It is also helping ensure that a similar amount of existing protected areas come under effective management by 2005. In the same timeframe, the Alliance aims to have 200 million hectares of the world's production forests under independently certified management.¹³²

FAO has established the National Forest Programme Facility as a funding mechanism and information unit created in response to the IPF/IFF/UNFF meetings which recognized the essential role of national forest programmes in addressing forest sector issues. The ultimate goal of the Facility is to assist countries to put into place forest policy planning and implementation processes that effectively address local needs and national priorities, and reflect internationally agreed principles for national forest programmes. The Facility seeks to:

• improve the ways in which government and civil society actors are able to cooperate in planning and enacting policy;

• stimulate the formation of national forest programmes in countries without a process and strengthen or revive stalled processes;

• ensure that national planning processes meet globally accepted levels of inclusiveness, coherence and sustainability;

• strengthen and streamline knowledge and information relevant to national forest programme implementation and make this knowledge available where and when it is needed.

The Facility operates through an information platform in the FAO headquarters combined with a national grants' system to facilitate stakeholder participation in national forest programme processes¹³³.

So far there have been no structured efforts (e.g. along the lines of the “Six Country Initiative”) to bring together the trade and forest dialogues and processes at the international and national levels. The WTO Committee on Trade and Environment (CTE) might offer a possible venue to improve this coordination at the international level. How to achieve this at the national level, e.g. in preparation for trade and forest related international negotiations requires country specific measures, such as the setting up of inter-ministerial working groups and consultations with a broader group of actors in preparation of critical events.

In summary, since the early 1990's the linkages between the international, regional and national/local forest governance processes have evolved thorough a variety of processes and arrangements increasing the coherence and improving the coordination at different levels. These are supported by a vast network of actors at different levels with rapidly evolving means for sharing information and exchanging views on critical issues. Transparency of information on issues related to SFM from global to local levels has dramatically improved, especially among those stakeholders with access to internet and its information services. The linkages between these and processes governing trade, however, are at a more incipient stage as are networks providing targeted information on trade - SFM related issues. Trade issues still tend to remain in the domain of a relatively limited group of specialists, whether on the government or civil society side. Due to the difficulties in isolating trade impacts on SFM from other impacts, dialogue and debate on these issues remains on a rather theoretical level, with the possible exception of such clear-cut issues as illegal logging and trade in illegal timber.

6.4.7 Initiatives in multi-layer governance: models, instruments and experiences

A number of multi-layer forest governance approaches have emerged in the past decade bringing together different actors (governmental and non-governmental) and levels (local-national-regional-international) with an attempt to either restrict or eliminate negative impacts of trade on SFM, or to harness the potential of trade in supporting SFM. Some early experiences on the implementation of these approaches are discussed below.

FLEG(T): an evolving multi-layer governance model for trade and SFM

The FLEG(T) initiatives are examples of innovative ways to introduce multi-layer forest governance models focussing specifically on trade impacts on SFM. The World Bank sponsored Forest Law Enforcement and Governance (FLEG) resulted in the East Asian FLEG ministerial conference in Bali, and the AFLEG Ministerial Conference in Africa. These laid down the basis for joint multi-stakeholder action both in the exporting and importing countries to curb trade in illegally harvested timber in Ministerial Declarations at the highest political levels. Both Ministerial Declarations recognized - at least indirectly - the shared responsibility of exporting and importing countries in combating illegal logging and associated illegal trade, thus establishing the basis for a model of governance involving actors from the local to the international levels. This model is conceptually linked to the type II partnerships launched at the WSSD in Johannesburg in August 2002.

The European Union FLEGT initiative, based on a Resolution of the Council of the European Union (2003/C 268/01), thus also expressing a political commitment at the highest levels, has produced the EU Action Plan for Forest Law Enforcement, Governance and Trade (FLEGT) outlining a voluntary process aiming to curb the imports of illegally harvested timber to the EU member countries. Some of the - from the governance point of view - interesting innovative features of the FLEGT include:

At the international-level, involving governments and intergovernmental organistations:

• initiating a long-term dialogue with wood producing and consuming countries to extend international collaboration to tackle illegal logging and develop a multi-lateral framework on which actions could be based

At the national level in the EU, involving governments (central and local) and the private sector:

• exhorting EU member states to adopt policies to exclude illegally sourced timber from public procurement

• guiding public sector procurement to deal with legality when specifying procurement procedures

• promoting voluntary corporate codes of conduct and encouraging banks and financial institutions to consider environmental and social factors when assessing investments in the forest sector

At the national and local level in the partner countries, involving goverments (central and local), development partners, private sector, NGOs and local and indigenous communities:

• setting up of a voluntary scheme of licenses and a standardized procedure for verification in the exporting countries to check the legal origin of the products and issue export certificates (national dimension in exporting countries)

• setting up a regional system which would verify that timber originating from non-signatory third countries is also of legal origin (regional dimension)

• setting up of an independent monitoring and verification system and promoting transparency of information

• support to policy reform processes and capacity building

• strengthening land tenure and access rights especially for marginalised rural communities and indigenous people

• strengthening effective participation of all stakeholders, notably non-state actors and indigenous peoples, in policy making and implementation

• engaging the private sector of the timber producing countries in the efforts to combat illegal logging

• using development cooperation to promote just and equitable solutions to the illegal logging problem which do not have adverse impacts on poor people

Indonesia and the UK have developed their own bilateral MoU on cooperation to improve forest law enforcement and to combat illegal logging and the international trade in illegally logged timber, signed in April 2002. In addition to law enforcement and control, the MoU puts emphasis on the participation of the civil society and on capacity building. It has e.g. resulted in the UK Timber Trade Federation producing its own code of conduct regarding illegal timber defining sanctions to those companies that do not adhere to the code (RIIA and FERN 2002). Some other EU countries are considering or in the process of negotiating similar agreements, and Indonesia and Japan have agreed on a “joint announcement” with similar elements.

To be successful the FLEGT-type governance model needs to bring together actors from different branches of the government (forestry, local government, police, military, customs), private sector and financing institutions to NGOs and local community groups (i.e. most if not all the of the important societal groupings mentioned earlier). These groups will need to have the institutional incentives and capacity to act out their roles in what in many cases will be a difficult process of transformation. In many countries this will require fundamental changes in the overall governance environment in which the forest sector operates.

The net social impacts of the FLEGT- model are difficult to estimate, and will vary from case to case, as there will be both losers and winners in this equation. Special measures will, however, be needed to mitigate the (at least in the short term) negative social impacts of the reduction/elimination of illegal logging, as these are likely to hit hard some of the poorest groups in the society. The on-going processes of decentralization need also to be taken into account by strengthening the capacity of local governments to assume increasing responsibilities in the control of illegal activities in the forests. E.g. in Peru it is estimated that in some key timber producing regions 40% of the population get their livelihoods from forest related activities, some 80% of this based on illegal logging. There is an elaborate system of organizing and financing illegal logging operations involving thousands of illegal small-scale operators, putting political pressure on local government officials who have been recently given increasing responsibilities in forest governance as part of the decentralization process. To replace this system with a system based on legal operations requires massive efforts in control and capacity building (Chirinos and Ruiz 2003, and ITTO, 2003). In Indonesia it is argued that the breakdown of a strong central government resulted in a more insidious type of decentralized collusive form of corruption which is harder to root out (Smith, Obidzinski, Subarudi and Suramenggala, 2003).

Both the EU FLEGT process and the bilateral initiatives, are still in early stages of implementation, and it is not possible at this stage to give any assessment on their impact. However, they offer an interesting example of multi-layer and multi-stakeholder forest governance, with an attempt to by-pass some of the potentially negative impacts of WTO rules on SFM through voluntary agreements. It is, however, clear that the full elimination of trade of illegally harvested timber will require levels of resources which may not be forthcoming, and that some measure of “leakage” will be inevitable. The main factors affecting the success of the FLEGT model include (i) political will and stakeholder interest, (ii) an adequate policy and especially legal framework (to determine what constitutes “illegal” is often problematic as different laws may be in contradiction with each other), (iii) institutional arrangements for implementation (both in the exporting and importing countries), and (iv) sufficient capacity to implement these arrangements. An effective strategy and action plan defining the roles and responsibilities and building both incentives and effective control and sanctions is needed in each participating country to make this happen. It is also evident that this model is possible only in countries where trade to “environmentally conscious” countries plays a major role in forest use.

Forest Certification as a Governance Tool

Forest certification is a governance model bringing together the economic (e.g. industries and forest owners), ecological (e.g. environmental NGOs), and social (e.g. forest workers, forest dependent indigenous people) around a market based governance instrument with the aim of promoting SFM. It is a multi-stakeholder and multi-level instrument mainly governed by the civil society and private sector, although in many cases with some indirect or direct involvement of the government. It is also clearly linked to the intergovernmental forest dialogue, e.g. through the several proposals of Action of the IPF/IFF supporting the application of certification schemes, and characterizing such schemes.

The key governance related issue regarding certification is whether the different systems are geared towards maintaining the status quo or improving forest management towards sustainable forest management from what is the current situation in a given country. This in turn is related to the fact that there is no scientific definition as such for SFM, and hence the definition is always a value judgement that is determined by what societal groups participate and/or dominate the debate and whose interest they seek to promote.

FERN (2004) has carried out an assessment of the major governance related characteristic of the different schemes: (i) is the system based on a set of clear minimum performance based threshold? (i.e. are there clear performance standards instead of only systems standards), (ii) does the scheme require balanced participation in the standard setting process? and (iii) is the standard setting dominated by the forestry sector?, (iv) is consultation of stakeholders in certification process required?, and (v) is the scheme sufficiently transparent (i.e. are summary reports freely available on websites). The result of the assessment was seen by FERN as a reflection of the “too close” links that most systems have with the forestry sector. The dominance of the forest owners and industries in the governance of the systems was interpreted as an important factor orienting these systems towards maintaining the status quo and in putting their independence in doubt.

Despite of these shortcomings, according to reviews and evaluations (e.g. Bass et al. 2001; Eba'a Atyi and Simula 2002) Certification has had certain positive impacts on forest governance. Especially related to community and private forestry, it has:

• enhanced transparency of information through better monitoring, evaluation and reporting of forest activities

• increased dialogue with government and other stakeholders

• increased acceptance of community representatives in local and national policy fora, and in general increased transparency of company operations and supply-chain management.

The proliferation of certification schemes with different types of governance arrangements and power structures, reflected in differences in the stories that the schemes communicate to the market concerning the product, is a matter of concern to some actors. On the other hand other actors consider this to be the nature of a market based governance instrument, and that in the absence of an agreed scientific definition of SFM there are benefits in having a variety of schemes. Mutual recognition is one possible way forward, but requires a lengthy process of discussing the underlying values, goals and interests of stakeholders involved in the various schemes to build mutual trust and understanding. It has been promoted especially by the forest industry, but objected by many environmental NGOs who see it as an attempt to weaken the standards.

As is the case with the FLEGT, certification is a forest governance tool that works only in the case where timber/forest product imports to “environmentally sensitive” markets play a major role in forest use. The shift of trade patterns, especially as regards tropical timber and forest products, from the more sensitive European and US markets towards the less discriminating Asian markets, as has been clearly shown in the earlier parts of this study, may - at least in the short term - restrict the impact of this model of forest governance. Another major issue regarding the effectiveness of certification as a governance tool is that most of the certified forests are actually in the countries where forest governance is best developed even without certification. A recent study by ITTO (ITTO 2000) found out that less than 8% of the worlds certified forest area is in the tropics, i.e. the ITTO member producer countries. This is seen, at least partly, to reflect the lower capacity of the actors in the tropical countries as well as the higher complexity of the situations on the ground. A step-wise approach has been proposed but this has not so far been accepted by some key actors, notably the NGO community as it is seen to erode the credibility of certification.

Certification is recognized as a potentially important tool for forest governance also by the World Bank in its Forest Policy (WB 2002), which sets out certain qualitative requirements for such systems, as well as within the 'status quo' report of the WTO prepared for the Cancun meeting. A key question linking certification as a governance tool to the global trade governance dialogue at the WTO is the uncertainty on whether the certification schemes will be considered to constitute technical barriers to trade under WTO rules, or whether labeling based on process of production methods (PPM) is allowed.

6.5 How to harness trade to create enabling environment for SFM?

6.5.1 Introduction to Governance Issues for an Enabling Environment

The potential of trade to contribute towards creating an enabling environment for SFM is especially contingent on:

• the success in identifying and mitigating the potential negative impacts of trade liberalization of agricultural products

• the results on the WTO negotiations regarding trade and environmental linkage, especially as regards market access and certification an labeling,

• the development of global markets for forests' environmental services, and the success in integrating the production of these in SFM,

• the capacity of the governments, civil society and private sector to negotiate acceptable and enforceable solutions to the major governance related issues, both within the sector and regarding the major extra- sectoral issues (i.e. the success in establishing national forest programme type processes in countries), and

• the success of the FLEGT type initiatives in contributing towards curbing illegal logging and trade in illegally harvested timber

The factors counteracting these include the increasing share in the global markets of exports to countries with less environmentally sensitive markets, and the increasing share in foreign direct investment in forest industry capacity of companies and financing institutions with less stringent environmental and social safeguard requirements. One of the key challenges is to expand the reach of both the international government and civil society led forest governance related processes and mechanisms towards these actors.

Option to the above:

Effectively harnessing trade for SFM is contingent on three major issues:

• linking SFM with macroeconomic reform/development processes and programs to mitigate negative impacts on SFM and create synergies,

• creating the enabling conditions to attract socially and environmentally responsible foreign direct investment, and

• securing the ownership/and tenurial rights on forest lands through negotiation processes recognizing the divergent interests of different actors

6.5.2 Macroeconomic/Fiscal Reform/Development Processes and Structural Adjustments

Trade related and other measures defined in the adjustment processes supported by the IMF and the World Bank may impact negatively on SFM. This is the case regardless of whether these are implemented in countries in transition and/or middle income developing countries, or in the context of the HIPC related PRSP processes in the LDCs. These processes, especially the elaboration of the policy matrix, are heavily steered by the IMF/WB staff in close collaboration with the Ministries of Finance of the partner countries, with limited involvement of the technical ministries, such as the ministry responsible for forestry. Even in the case of the PRSPs it has been noted that there is no fundamental departure from the kind of policy advise espoused under what has come to be know as the “Washington Consensus” (UNCTAD 2002).

To tackle this issue, the Bank has proposed in its Forest Strategy and Operational Policy (World Bank 2002) that specific measures should be taken to systematically address extra-sectoral policy, institutional and structural issues that have particular influence on forests. This is the case especially regarding the operational policy governing the implementation of structural adjustment programmes. In the context of the PRSP processes more inclusive and participatory ways of looking into these issues from the point of view of the poor - including the forest dependent poor - are emerging through participatory poverty assessments. In some cases, also linkages between the PRSP processes and national forest programme processes are visible (Oksanen and Mersmann, 2003). However, it is evident that the adjustment operations, whether linked to PRSPs or not, still tilt the balance of power in negotiations towards the international financial institutions and the ministries of finance, at the expense of the technical ministries and civil society actors.

6.5.3 Interactions between Foreign Direct Investment and Governance

Foreign direct investment is attracted to countries offering good returns and at least a relatively stable governance environment that protects the investor from risks. This translates into attractive raw-material and labor costs, relatively good infrastructure (roads, electricity, harbors etc.), security on (forest) land tenure/ownership, legislation protecting the investor and providing a favorable overall investment climate, and governance capacity to enforce such legislation. Increasingly, with the globalization of forest industries and their markets, trans-national corporations are also concerned about the impact of social and environmental factors on their markets as well as on potential investors. The same concerns are shared by financing institutions and institutions providing investment guarantees. Socially and environmentally responsible investors do not any longer see meeting the requirements of e.g. voluntary environmental management systems (such as ISO 14 001/EMAS and certification) as an obligation. It is increasingly perceived as part of their long-term strategy of staying in the business and meeting the expectations of various stakeholders.

This concern has created new kinds of partnerships and alliances of industry, financing institutions and environmental and social NGOs working jointly to mitigate social and environmental risks and achieve positive outcomes. Examples of these partnerships include at the international level the Global Forest Watch, the Forest Integrity Network and the WWF-World Bank Alliance. The Bank has also had an active role in fostering this kind of dialogue and partnerships, as evidenced by the Forest Investment Forum hosted by the Bank in Washington in October 2003. The Forum organized by the WB together with IFC, WBCSD, WWF, Forest Trends, and PROFOR brought together representatives of trans-national forest companies, financing and development agencies, and NGOs and policy research institutions to discuss opportunities for SFM.

At the national/local level these new partnerships include different types of arrangements between industry, local communities and NGOs. The types of schemes that have been negotiated between the partners include outgrower schemes, corporate social responsibility projects, joint ventures, farm-forestry crop share arrangements, co-management schemes and cooperative business arrangements and forest services contracting (Mayers and Vermeulen 2002)

6.5.4 Ownership and Control of Forests and Socially and Environmentally Acceptable Solutions

Many of the important issues regarding trade impacts on forest governance revolve around the issue of ownership and control of forest lands. Such questions arise as: if increased trade pushes up the demand for timber how will it impact on the customary land use rights of forest-dependent indigenous groups? Will it lead to increased illegal logging, followed by migration and colonization of logged-over forest areas, and consequent change in land use? Will it lead to conversion of marginal agricultural lands back to forests or timber plantations - or will the increase in trade of agricultural products offset this and lead to increasing conversion of forest lands to agricultural use? Under what conditions can the net result be more profitable and better-managed forests providing a continuous stream of benefits to local communities, and stabilizing the agricultural frontier?

As has been demonstrated in the previous chapters, there is no single answer to these questions. The net impact on SFM of increased trade of forest (and agricultural) products will depend on whether we are talking about managed forests, degraded open access forests or unmanaged forests at the forest frontier. It will also depend on the clarity of the customary and/or legally defined ownership of the forests, as well as the capacity of the owners to enforce their rights. In many situations, especially in the developing countries, the definition (whether by law or custom) of the ownership and control of forest land is weak or subject to different interpretations by different groups of actors. A drastic change in the demand for timber - as well as a change in the relative profitability of forest based production in comparison with other alternative land-uses - is likely to impact on the interest and balance of power between these groups. It is also likely to have an impact on environmental outcomes and sustainability. In the developing countries it is likely that short-term economic benefits and interests will dominate over longer-term concerns over sustainability of land use. To manage these complicated societal processes, specific attention needs to be paid to establish processes that help to negotiate socially and environmentally acceptable solutions to these complex issues.

The national forest programme processes offer one potential platform for negotiating such solutions. Practice has shown, however, that these tend to function only when the underlying policy and legal framework on land ownership and tenure has been properly established, and when the society at large has the governance capacity to enforce these properly. From the forest sector point of view this is perhaps the most critical cross-sectoral issue that needs to be taken into account when planning for forest development.

6.6 Conclusions on Trade, Governance and SFM Interface

6.6.1 Trade Liberalisation as a 'magnifier' of Forest Governance?

One of the major conclusions of this chapter is that the impacts on forest governance of trade liberalisation are positive where there is already good governance (a virtuous cycle), and negative where governance is weak (a vicious cycle). Thus, trade appears to be a magnifier of existing policy and institutional strengths and weaknesses rather than a major driver of forest governance change.

Trade-governance impacts depend on what else is in the package, e.g. state downsizing, decentralisation, deregulation, privatisation, concession bidding and forest taxation, and the capacity and will of the government to implement it. The way in which trade policies interact with these changes determine whether they improve or reduce governance capability:

Transparency and reduced corruption and rent seeking - evidence mainly supports the contention that reducing trade restrictions reduces public sector corruption as long as there is strong regulatory and institutional backup. Where windfall resource rents occur the converse may be the case - and in some situations trade liberalisation may not bring about a real reduction in corruption - merely a change in the pattern of winners and losers.

Pressure for improved policy and regulatory frameworks - for most developing markets, existing regulatory capacity is too weak to control external demands on the resource and a likely outcome of trade liberalisation is an increase in unregulated logging. Trade liberalisation should therefore be preceded rather than followed by institutional strengthening.

Responsible behaviour of transnational companies. On the one hand more trade by TNCs may generate wealth through trade which may provide the basis for improved governance. On the other hand, there is a tendency for more exploitative TNCs to target weaker governance structures. The evidence is mixed.

Capacity to internalise externalities - forest revenues tend to be squandered when trade liberalisation is accompanied by a structural adjustment programme, deregulatory reforms and / or privatisation, and when governance is not already sound.

6.6.2 National Preparedness and Capacity to engage in Dialogue on Forest Trade Issues

The effectiveness of processes at the national level to engage with trade issues and harness the benefits of freer or more controlled trade for forest management determine to a large extent how and in which direction this magnifying effect will work.

A basic characteristic of the institutional architecture in many countries is that the people who deal with forestry and the people who deal with trade do not see much of each other. Not many forestry departments around the world are very good at managing and negotiating issues of forest trade. Whilst many are highly competent at engaging with elements of the trade chain - forestry production, forestry revenue systems, export restrictions and the like, few are used to dealing with investment needs, trade transactions, macro-economics and import restrictions (Mayers & Bass 1999). Similarly it is difficult to find examples of countries where debate on trade liberalisation has been the key lever to open up forest sector planning and the development of strategic ways forward like national forest programmes. However, in Papua New Guinea, concern about the “robber baron” timber companies freed up to roam the southeast Asia-Melanesia region by liberalisation, was at the heart of the Barnett Inquiry of 1989 which was a key early milestone in a decade of forest sector reform in that country (Filer 1998).

But more positively, trade liberalisation has certainly stimulated the rise in profile and capability of the private sector and civil society to engage on forest trade issues in a range of countries - the former in general to seize opportunities, the latter in general to protest at abuses. In Brazil, the private sector has improved its collective organisation and representation capacity, whilst the threat of Asian investment invasion stirred up civil society attention on illegal logging, thereby catalysing some key governance improvements. In several African countries, much of the identifiable shift towards more responsible and accountable systems of governance, and more effective environmental regulation, have been in response to the demands and protests of African civil society, according to Reed (2002).

In addition, in some countries liberalisation appears to have had the effect of bringing key government agencies together, e.g., the permanent secretaries and technical advisers in forestry and economic ministries. In Mexico, trade liberalisation 'shook up' governance systems and focused attention on the problems which needed new skill and will to fix. In Ghana, discussions of whether and how to introduce, remove or modify log export bans and levies have brought key government agents together over several years (Kotey et al. 1998).

Stimulated by the problems of illegal logging, multi-stakeholder groups in a range of countries in Asia, Europe and Africa are currently investigating how to improve: legislative instruments and the capacity to implement them to prevent the trade of illegally produced forest products; increased use of the Convention on International Trade in Endangered Species (CITES); and the potential of multilateral agreements like the 1999 OECD Convention on Combating Bribery of Public Officials in International Business Transactions (Brack et al. 2002a, 2002b). Although the stimulus for these groups has generally come from donor agencies, in some cases at least local motivation is high.

Greater involvement of TNCs and the generation of wealth from increased trade may provide the basis for improved capacity for thinking about and shaping forest trade to a country's benefit. Company-community forestry partnerships can be a vital complement to effective local governance decision-making (Mayers & Vermeulen 2002). But greater involvement of TNCs as a result of trade liberalisation may lead to a greater handover of governance decision-making to TNCs, and constrain national capability and preparedness. This is because some investment agreements between TNCs and sovereign states are more than contracts - they are in effect laws written to 'regulate' the projects being implemented - and often run counter to other laws of the land (for example, where they confer special forest exploitation rights, waivers on monitoring, rights to move people from the land, exemption from liabilities, etc) (Leubuscher 2003). Not only does this hinder the development of national capability, but the submission of governments to arbitrary rules set by TNCs may prevent them from carrying out reforms such as land tenure which could provide far greater national wealth (de Soto 2000).

Information is vital for transparency and civil society participation. Capital markets have been found to be sensitive to environmental information which can be used to empower pressure groups, like environmental NGOs (Fredriksonn 1999). Summarising a wider literature, Andersson et al. (1995) report that the more reliable and available information on a company is, and the easier it is for consumers to evaluate companies, the more sensitive they become to their environmental image. Information provision goes hand in hand with measures to increase public participation in forest governance, for example, public monitoring of forest management audits.

At the international level improved coordination between the trade and forest related processes is needed to ensure that the effects on forest governance are supportive to SFM:

Country delegations to WTO and regional trade organisations have tended not to have forestry expertise (Bass 2003), nor has there been sufficient coordination between the trade related international dialogue and the international forest related processes. The Special Sessions of the Committee on Trade and the Environment and meetings of the Committee on Technical Barriers to Trade are beginning to be the exception, but much important work in areas such as the Committees on Subsidies and Countervailing Measures and Negotiating Groups on Market Access proceed without the benefit of forest sector expertise from developing countries. Neither have trade issues and impacts on SFM been systematically and broadly addressed in the international forest related processes.

In addition to providing a basis for improved trade-SFM policy coordination, international/regional action can have also a key role in facilitating and supporting more effective action at the national level. The following issues are especially important to ensure that a “virtuous cycle” of trade-govenance-SFM impacts is achieved at the national level:

• capacity building for developing countries to enable effective governance responses with right sequencing and timing to trade related SFM impacts, both to make most of the positive impacts and to mitigate potential negative ones

• international cooperation on controlling illegal logging as a priority international governance related action, including also regional processes and bilateral processes between important producers and consumers

• assessment of potential negative forest governance impacts in the context of SAP/PRSC, design of effective measures to mitigate these must be included in the PRSP processes

• need for effective inclusion of trade related issues in the international processes and instruments dealing with SFM

• need for improved coordination between international trade related processes and international forest dialogue

6.6.3 Other Factors of Impact at the Trade-SFM Nexus

Finally, it needs to be borne in mind that trade related issues only have a limited impact on forest governance, and through it to SFM. In general, non-trade factors appear to have more influence on the quality of forest governance. As with trade related issues forest governance in turn acts both as a magnifier of the impact of many of these factors on SFM, and as a counterbalance to some of the potential negative impacts. In the final outcome, changes regarding these factors may be more important means for improving forest governance and through it SFM. The following figure makes an attempt to put forest products trade - forest governance impacts on SFM into the context of some of these broader issues.

Figure 6.4 Forest products trade and forest governance in the context of broader issues impacting on SFM

Many of these impacts, including those of forest products' trade are fully or partly location specific, and a meaningful assessment can only be made at the country level.

Certification has the potential to affect trade patterns as it implies discrimination between producers according to whether they are certified. This has been reinforced by the formation of buyers groups in various countries with collective objectives to phase out the sourcing of timber from non-certified sources. However, the predominant approach adopted by buyers has been to work with existing suppliers to encourage them to achieve certification. Although some suppliers have been dropped because of failure to respond, this has been rare (Bass et al. 2001). Certification has had most impact on retail sectors such as DIY or home improvements where there is a close link to the consumer. In particular, it has enabled suppliers in developing countries to get access to new markets. The need to find sources of FSC-certified tropical timber led to the UK DIY retailer, B&Q, considering Bolivian suppliers for the first time because they were certified. For the sectors which are major users of wood materials such as construction but where the link with the end user is more tenuous certification has had less impact so far (Bass et al. 2001). Certified wood and paper are still niche markets. For these reasons, certification on its own has probably had little impact on trade patterns in aggregate. However, the combined effect of certification, boycotts, campaigns, and procurement initiatives is likely to have affected trade patterns for tropical timber.

The evidence also supports the contention that tropical timber is increasingly switching to undiscriminating Asian markets¹³⁴ as a result of its substitution by northern temperate timber on the European market (Karsenty 1998). For example, African producers like Gabon and Equatorial Guinea used to export timber exclusively to Europe, but by 1996 most of their exports were going to China and other parts of Asia (Sizer and Plouvier 1998).

As a result, there is considerable concern over the potential trade-restricting impacts of certification on developing country producers. Certification is most readily applicable by producers who are in the third stage of forest development (where costs of management are already offset by the high value of forest products). This is reflected, for example, in the high take-up of certification in the Nordic countries. By way of contrast, less than ten percent of Indonesia's annual harvests come from managed forest plantations and most of its timber markets are characterized by the first two stages of forest development where sustainable management is not yet financially viable. If certification becomes more widespread it is likely to raise the value function of forests in developed countries at the third stage of forest development at the expense of forest values in developing countries, where the additional costs required to secure land and attain certification standards are formidable. This will shift the balance of trade in favour of developed countries.

Although most certification schemes are voluntary, there is uncertainty over whether they constitute technical barriers to trade under WTO rules. The key issue is the compatibility with WTO rules of labelling based non product-related processes and production methods, the type of forest management in the case of certification. The Committee on Trade and Environment of the WTO was instructed under the Doha Ministerial Declaration to give attention to the effect of environmental measures on market access and labelling requirements for environmental purposes and to report to the WTO Ministerial Conference in Cancun. However, it is clear from the CTE's report that there is still little consensus on this issue with some members of the view that existing WTO disciplines such as the TBT agreement are adequate to deal with the issue of environmental labelling, and others believing that there is a need to reach some common understanding, interpretation or guidance with respect to labelling requirements (CTE 2003). Moreover, the report states that the differences of views on PPMs remain.

Uncertainty over a potential WTO ruling could be having a negative regulatory effect, since the confidence of governments to promote certification and eco-labelling as an incentive for regulatory compliance is tempered. According to Sizer et al. (1999), the WTO uncertainty could even deter countries from introducing stricter forestry regulations, as the latter could also be interpreted as a trade barrier. For example, recent revisions to the British Colombian Forest Practices Code, which raised the cost of harvesting, were included in a list of NTMs in the APEC (2000) study.

Underlying these market access concerns is a view that voluntary certification schemes may become in effect compulsory if some of the dominant retailers in an increasing number of developed countries seem unwilling to carry uncertified products (Bourke 2002). Further issues are raised if certification is used as a criterion in government purchases. This is discussed further under public procurement.

Supply-chain Management

Some large companies have established systems to trace the source of the wood they use and to ensure that it has been harvested from well-managed forests. This has usually been in response to NGO pressure or bad publicity about one of their suppliers. In some cases this approach has been a forerunner of moves to require suppliers to achieve certification. The UK DIY retailer B&Q, after high profile NGO campaigns linking European consumption to tropical deforestation in the late 1980s and early 1990s, stated publicly that it would buy no more tropical hardwoods from Brazil because it could not be sure of its source. Its next step was to develop systems for tracing the sources of all its wood-based products. This was followed by a policy of persuading its supply base to become certified (Bass et al. 2001).

Socially Responsible Investment

Environmental niche markets for forest products are growing - in Europe and North America in particular, although social niche markets remain small. These markets are increasingly shaped by 'soft law', such as certification, which is scrutinised by civil society. Product chain-of-custody information is also becoming increasingly important as buyers, manufacturers and producers attempt to send signals through the supply chain about market demands and sustainability.

Until recently the social responsibility of a major forestry company ended with its formal obligation to pay royalties and taxes and perhaps cash compensation to communities for lost assets, a few jobs and perhaps the construction of schools and health clinics. Yet a few big companies involved in forest trade are paying more attention to a wider group of stakeholders. It is widely claimed that companies practising corporate social responsibility have a number of financial benefits which ultimately affect the returns and risks for investors. Typical arguments include:

• Secure markets - compliance with environmental and social standards can secure markets and occasionally secure higher prices;

• Changes in legislation (e.g. tightening regulations) or changes in rules on liability for damage can imply significant costs and companies that can prepare for regulatory change will have a competitive advantage;

• Less risk - Companies with good environmental and social performance will be perceived as less risky by financial markets, reducing capital costs and insurance premiums.

• Clean technologies are usually more efficient. Similarly, good working conditions can lead to higher productivity and fewer union disputes and make it easier to attract and retain employees;

• Public reputation - this can affect the company's social licence to operate, reducing the time required to secure government approval of, and community support for, new developments or expansion.

In many developing countries, the first two factors are less relevant as enforcement of legislation is weak and consumers are interested primarily in price and quality alone. So the argument hinges on the financial implications of company reputation at local, national and international level.

Institutional investors, pension funds in particular, now own a significant proportion of the shares in listed companies. This allows some influence over the way these companies are run. Socially responsible investment (SRI) funds which cater to investors who want to invest their money and meet environmental and social goals at the same time, have a number of strategies. They can operate by screening out companies that do not meet certain criteria, or by discriminating in favour of companies that are engaged in sustainable activities or by using their influence as shareholders to encourage companies to change their behaviour and to raise their awareness of certain issues. This last type of approach is the growth area in socially responsible investment. The ethical funds established in the early 1990s excluded companies engaged in tropical timber harvesting from their investment portfolios. The introduction of forest certification schemes provided a criterion for screening in, not only of forest products companies but of end users of forest products. More recently, SRI investors have been engaging with companies around specific forest management issues, for example the conversion of tropical forest to oil palm plantations.

It is difficult to assess the impact of SRI funds on forest product trade patterns and forest management. In general, this type of fund invests mainly in established companies listed on developed country stock markets and invests very little in developing country companies. They are unlikely to invest in or have much influence on companies engaged in natural forest operations in the tropics. As the forest sector globalises and foreign direct investment increases their influence is likely to grow. At present, they are important as one of a number of factors which together will influence company behaviour. The South African forest products company, Mondi, was affected by the London listing of its parent company, Anglo American. This introduced stronger pressure from shareholders and more stringent reporting and disclosure requirements. This increased investor scrutiny was one of a number of factors which in addition to market pressure, prompted Mondi to seek FSC certification for its forest operations (Mayers et al. 2001).

More direct impact can be expected from socially responsible venture capital funds which provide larger amounts of capital for company startups and expansions. Specialist Timber Investment Management Organisations (TIMOs) raise money from institutional investors to manage a portfolio of forest properties and are important players in the US. As timberland investments tend to move countercyclically with stocks and bonds they constitute an effective way for institutional investors to diversify and reduce risk. These organisations typically adopt a policy of sustainable forest management and several of them are looking beyond the US to investments in emerging markets. For example, the investment made by GMO in the company Gethal in the Amazon, Brazil, was conditional on a strategy to obtain forest certification. However, investment by the TIMOS in natural forest operations in the tropics is relatively rare. Their preference is for plantation forests in temperate countries with low political risk. UBS Timber Investments which manages over US$ 1.3 billion focuses on Argentina, Australia, Chile, New Zealand and Uruguay.

¹²⁸ Econometric analysis, based on a 1999 survey of 'state capture' corruption among 4,000 companies working in 24 transition countries.
¹²⁹ http://www.wto.org/english/tratop_e/envir_e/envir_negotiations_e.htm
¹³⁰ Formed in 1986 the Cairns Group is a coalition of 18 agricultural exporting countries, which together account for one third of the world's agricultural exports. The members of the group are Argentina, Australia, Bolivia, Brazil, Canada, Chile, Costa Rica, Fiji, Guatemala, Indonesia, Malaysia, New Zealand, Paraguay, the Philippines, South Africa, Thailand and Uruguay (Cairns Group 2000).
¹³¹ http://www.etfrn.org/etfrn/newsletter/news39/nl39_oip_4_7.htm
¹³² http://lnweb18.worldbank.org/essd/
¹³³ http://www.fao.org/forestry/
¹³⁴ Asian markets accept a wider range of species, smaller logs, and lower quality timber than northern markets (Sizer and Plouvier, 1998).
¹³⁵ www.ubsbrinson.com/timber/index.html