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
Abstract
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