Export tax on logs – 20% per cubic meter (m 3 )
Export tax on plywood – 0%
Why is this a subsidy to plywood makers? It heavy protection to domestic plymills relative to foreign plywood producers who have to buy logs from Indonesia that have paid the 20% tax.
1 cu meter log expor t at $100 m 3 yielded $20 in export taxes for
1 cu meter log expor t at $100 m 3 yielded $20 in export taxes for government. But there was zero tax on logs sold to Indonesian plymills, and zero tax on plywood exports.
Government official looked at the difference between 1 m 3 of log exports and 1 m 3 of plywood exports and mistakenly concluded that it was obvious that a subsidy (zero export tax on logs) was justified, because of the much higher apparent value of plywood exports. They observed that at a time when they could export logs at 100 m 3 , you could get $150 per m 3 for plywood. They overlooked the fact that you lose a lot of wood in converting logs to plywood.
In any case by encouraging plywood, not log exports, Indonesia sought to secure $150 per m 3 in more Domestic Value Added , for each m 3 of logs used. If true, with plywood exports per year at 10 million m 3 , then Indonesia would have a total of $1.5 billion in extra Domestic value Added. Case closed.
In any case by encouraging plywood, not log exports, Indonesia sought to secure $150 per m 3 in more Domestic Value Added , for each m 3 of logs used. If true, with plywood exports per year at 10 million m 3 , then Indonesia would have a total of $1.5 billion in extra Domestic value Added. Case closed.
This is yet another case in economics where things are not as they seem to be.
Wh y? The policy-makers and their World Bank advisors ignored the fact that Indonesian plymills were very inefficient because they were subsidized. They were x-efficient, did not minimize costs.
In Japan, recovery rates for converting Indonesian logs into plywood were 55%. Therefore one m 3 of log would give you, when processed, 0.55 m 3 of plywood in Japan.
But in Indonesia, recovery rates were only 43.5% - i.e. One m 3 of log would give you only 0.43 m 3 of plywood in Indonesia’s plymills.
Consider – Wood exported as a log fetched $100 m 3 and brought in to the government export tax revenue of 20% ($20) per m 2 .
Total value to economy was $120 per log exported.
Consider the same timber as the log, but processed in plymills and exported in plywood form: 1m 3 of log converted at 43.5% gives you .435 m 3 of plywood valued at $250 per m 3 . This is $108.75.
So, Indonesia did gain $8.75 per m 3 of Domestic Value Added when wood was exported as plywood, instead of logs.
But, Indonesia lost the 20% export tax it would have collected on the wood exported as log. That would be $20. So, the net gain to Indonesia was negative: i.e.
-$20.00 Lost export tax per m 3
+8.75 gain in Domestic value Added
Minus -$11.25 Total Loss, per m3 to the Indonesian economy, and total subsidy to plywood producers.
Ask yourself is this a good thing?
Things are not always what they seem in economics. See Roberto Repetto and Malcolm Gillis, Public Policies and the Misuse of Forest Resources , Cambridge University Press, 1988.