Humboldt-Universität zu Berlin - Quarterly Journal of International Agriculture

Quarterly Journal of International Agriculture No. 4/06

Transaction cost analysis of upstream-downstream relations in watershed services: lessons from community-based forestry management in Sumatra, Indonesia

Bustanul Arifin
University of Lampung, Indonesia


This study analyses transaction costs occurring in the existing set-up of upstream-downstream relations and reward mechanisms in watershed services in Sumatra, Indonesia. The rewards are manifested in property rights reforms that provide ‘recognition’ and remove ‘fear of eviction’ among local communities by granting them the right to utilize land within the ‘protected forest’, such as implemented under the community-based forestry management (CBFM) policy. The study sites of Sumber Jaya watershed in Sumatra, Indonesia, have acquired notoriety due to conflicts between state and society over watershed functions, and among stakeholders such as coffee growers, domestic water-users, the hydroelectric power company, etc. The estimated transaction cost of implementing the rewards is US$ 55 per household, which is relatively high by rural standards. This total comprises the cost of searching for information (70%), of organizing the group (27%), and of enforcing working rules and regulations (3%), implying non-efficient economic organization of society and non-clear policy structures at regional and national level. The role of intermediaries such as NGOs (national and international) is extremely important in implementing a negotiation support system and developing a multi-stakeholder strategy to reduce transaction costs, and especially to ensure conflict resolution, improve trust and sharing of responsibility to achieve more sustainable resource management.

Keywords: environmental services, transaction costs, Indonesia

JEL: Q15

Vol. 45 (2006), No. 4: 361-375