The economic cost of an abatement of tropical logging activity: the case of Malaysia

Abstract

In this paper we measure the possible costs to the Malaysian economy that might follow its acceptance of constraints on the scale of its tropical logging activities. We measure these costs using M4, an applied general equilibrium model of the Malaysian economy. M4 shares many of the features of the small open economy models that have been used in other contexts to examine the effects of resource booms. We model 'abatement costs' against the background of a growing economy in which we assume there is resource augmenting and Harrod neutral technological progress, and whose long-run equilibrium is of a balanced growth character. Under a range of assumptions, our estimates of the costs of the abatement are surprisingly large, given the initial modest contribution to income of the logging sector. The scale of losses is explained by the requirement that the domestic economy must permanently forego consumption to enable it to service the higher level of net foreign indebtedness that follows from the loss of logging export revenue and, to a lesser extent, because the public sector must raise tax revenue to ensure its 'solvency' following a loss of commodity taxes on Forestry.