3. Towards a strategy for better law compliance in the forest sector

CONSEQUENCES OF ILLEGAL ACTIVITIES AND CORRUPTION

Illegal activities have far-reaching economic, social and environmental impacts, including government revenue loss, ecological degradation and greater income inequality.

Lack of social and ecological sustainability

Many forest laws prescribe the adoption of sustainable management objectives, including social welfare (livelihood support, recreation, etc.) and the protection of forest ecosystem services (watershed protection, carbon sequestration, biodiversity conservation, etc.), which have no market price and may therefore be of little interest to private operators and governments working towards short-term political and private gains. Operating in illegal ways precludes achieving these societal and environmental objectives and can lead to widespread environmental damage. Illegal activities can be a threat to biodiversity, and in some cases may breach the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES).

Market distortions

Illegal activities may distort the entire global marketplace for a number of key timber products, thereby hampering sustainable management, which is subject to higher costs associated with good husbandry, proper tax declaration and so on. Illegal operations depress the market value of forest products, reduce the comparative profitability of sustainably produced forest products and give a competitive advantage to illegal operators. The difference between legal and illegal production costs, and thus the magnitude of price rises expected if illegal activities were eliminated, can be substantial. For example, an analysis carried out in the United States estimates that domestic roundwood prices would be 2 to 4 percent higher if "suspicious" global roundwood production were eliminated. United States exporters, in the absence of competition from illegal operators, would be able to increase their exports of wood products by an estimated US$460 million per year (Seneca Creek Associates and Wood Resources International, 2004).

Lack of responsible investments

While responsible investors shy away from countries where the rule of law is weak and where investment risks are consequently high, unscrupulous corporations find this kind of environment favourable. Over time, corporations which engage in illegal operations may manage to dominate the sector in such environments.
If financial proceeds of these illegal operations are sent abroad, they limit possibilities of re-investment in the forest sector.

Decreased government revenues

Illegal activities represent a major loss of revenue to many countries by depriving governments of income from taxes, stumpage fees and other costs associated with legal forestry. For instance, it is estimated that government losses due to evasion of the Felling Tax alone are between US$5 and US$10 million per year in Cameroon (Auzel et al., 2002). The World Bank estimates that illegal logging results in additional losses of at least US$10 to 15 billion per year of forest resources from public lands alone (World Bank, 2005). A Senate Committee in the Philippines estimated that the country lost as much as US$1.8 billion per year from illegal logging during the 1980s. The Indonesian Government estimated in 2002 that costs or foregone revenues related to illegal logging were US$3 billion a year.

Increased income inequity

It is sometimes argued that the rural poor may benefit from weak law enforcement as they may illegally enter public lands and use forest resources without paying taxes or other usage fees. While the interactions between illegal activities and inequality are very complex, the cases examined for this publication show that when the rule of law is weak, major stakeholders wielding considerable power eventually tend to dominate the utilization of forest resources (Box 8). Corruption affects the livelihoods of the poor more than those of the better off (Transparency International, 2004a). Benefits of illegal acts accruing to the poor are therefore likely to be transitory. Moreover, illegal acts also weaken the capacity of government to provide services to the forest-dependent poor, such as technical assistance and proper delimitation and consolidation of property rights.

Political instability

Illegal forest operations can be linked to conflicts and wars. In some countries, timber is traded by armed groups, be they rebel factions or regular soldiers, or by a civilian administration involved in armed conflicts to either perpetuate conflict or take advantage of conflict situations for personal gain. "Conflict timber" trade undermines the development of democratic institutions and political stability. The substantial revenues from illegal logging sometimes fund and thereby exacerbate national and regional conflicts, as in Cambodia, Liberia and the Democratic Republic of Congo.

NEED FOR A STRATEGIC APPROACH

Factors contributing to the occurrence of illegal operations in the forest sector are multiple as well as inter-related. Thus, any strategy aimed at addressing the problem of illegal activities needs to be holistic and include a wide range of policy, legal, institutional and technical options (see Figure 2) in order to:

• rationalize the policy and legal framework (Chapter 4);
• build capacity for law enforcement (Chapter 5);
• improve data and knowledge about the forest resource and the forest sector in general (Chapter 6);
• address corruption.

A strategic approach should carefully balance measures to discourage illegal activities, such as stricter controls and punishments, with activities that encourage legal behaviour such as incentives and simplified regulations. Measures aimed at increasing control alone are seldom successful where the economic attractiveness of illegal behaviour remains. In these cases, illegal operators will always find a way to circumvent controls.

A few countries have already recognized the urgent need to develop a comprehensive and coherent strategy to tackle the problem of illegal logging in consultation with a range of stakeholders. Costa Rica and Indonesia, for instance, are developing strategies based on prevention, detection and suppression of illegal activities (Boxes 9 and 10).

In carrying out the above-mentioned steps, four elements appear critical:

• Addressing the underlying causes of illegality. Any strategy to curb illegal activities in the forest sector should be based on a sound understanding of the root causes behind the current situation. It is fundamental to identify the root causes of illegal acts and ways to combat them, as well as the leverage points.
• Prioritizing remedial actions. A comprehensive package of complementary actions is needed in order to address illegality in the forest sector. A step-by-step approach might be necessary, as it will be difficult to address all elements of the strategy at once. Depending on the social, economic and political context, different countries might prioritize different interventions among the wide range of guidelines and best practices provided in this report. Entry-points and sequencing must be carefully analysed and planned at the national level and must reflect governmental and donor resources available.
• Economic and political feasibility. In ranking and prioritizing the remedial actions, a central factor is their economic and political feasibility. It is important to analyse the financial costs of any intervention and the sources of necessary funds. The political question concerns the degree to which different levels of governments are willing to cooperate in an overall strategy to fight illegality in the forest sector. Without comprehensive political will to improve forest law compliance, any measures taken have only a limited chance of success (see also Chapter 7).
• Stakeholder participation. Any strategy to fight illegal activities should be based on an open, highly inclusive, multistakeholder process, based on effective participation of all interested parties. The participation of the private sector, NGOs and civil society is crucial. Although this may slow down the process, there is no doubt that a participatory approach is the best, if not the only way to produce a strategy capable of delivering long-term improvements in forest law compliance and enforcement.
  

• Illegal forest activities have far-reaching economic, social and environmental impacts including government revenue loss, ecological degradation and greater income inequality.
• Any strategy aimed at addressing the problem of illegal activities needs to be holistic and include a wide range of policy, legal, institutional and technical options in order to discourage illegal activities and encourage/facilitate legal behaviour.
• Four elements are critical to ensure a successful strategic approach to better law compliance in the forest sector: addressing the underlying causes of illegality, prioritizing remedial actions, assessing the economic feasibility and social acceptance of reforms and ensuring stakeholder participation.

Figure 2 Elements of a strategy to promote legality in the forest sector