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LUC LERUTH, REMI PARIS, and IVAN RUZICKA

products. The forests’ degradation through over-exploitation generally implies an economic cost far beyond the loss of timber production potential. 2 Governments’ initial response, namely a strengthening of existing “command and control” management regimes, met with limited success and it soon became apparent that more effective instruments were needed. In the late 1980s, attention focused on economic incentives. Insufficient timber taxation was identified as a leading cause of forest depletion. 3 An effective alternative to “command and control” policy seemed to

Mr. Saji Thomas and Mr. Arnim Schwidrowski
Countries generally tax the forestry sector to achieve the twin objectives of revenue maximization and sustainability of logging levels. In an ideal world of perfect markets and information, auctions would be the best instrument to determine the price of extraction rights. However, a number of factors-including a lack of information on the forest resources under consideration, uncertainties as to the stability of property rights over time, and a lack of access to credit-have limited the use of auctions so far, particularly in low-income countries. To establish transparency of the forestry sector's financial flows, this paper discusses a radical simplification of Liberia's current timber tax structure, including a proposal to reduce the sector's current tax system to two instruments, an area tax and an export tax.
Mr. Saji Thomas and Mr. Arnim Schwidrowski

Front Matter Page African Department Authorized for distribution by Edouard Maciejewski Contents I. Introduction II. Liberia’s Timber Sector A. Evolution of Liberia’s Timber Sector B. Liberia’s Timber Revenue System III. Why Are Forestry Taxes Different from other Taxes? IV. Assessment of Fiscal Instruments Used in Forestry Sector V. An Interim Proposal for Timber Taxation References Tables Table 1. Advantages and Disadvantages of Forest Taxes and Fees Figures Figure 1. Flow of Timber Through the Forest Sector and

International Monetary Fund. Research Dept.

considerable economic as well as environmental benefits, provided the resulting increased demand is met from sustainably managed forests. 6 Taxation-based approaches to environmentally sound forest management have also been studied. Leruth, Paris, and Ruzicka (2001) argue that, given the complex nature of factors that influence a given level of exploitation—ranging from logging techniques, to site-specific characteristics such as topography and proximity to urban centers—the basic Pigovian framework may not work for forest and timber taxation. It is not always possible

Mr. Arnim Schwidrowski and Mr. Saji Thomas

of a transparent system of revenue collection. To establish transparency of the sector’s financial flows, Liberia is taking a number of actions with external assistance . To this end, this paper discusses a radical simplification of Liberia’s current timber tax structure. The paper proceeds as follows: After a description of the evolution of Liberia’s timber sector and of its tax structure, it provides an overview of the theory of timber taxation. Based on a theoretical model, a range of taxes and fees applied to forestry activities is being evaluated in light of

Mr. Nalin M. Kishor, Mr. Muthukumara Mani, and Mr. Luis F. Constantino

of the LEB. Under a plausible scenario efficiency gains can be more than US$14 million per annum, forming about 0.1 percent of its GDP. At the same time, government revenues from timber taxation will increase by US$ 7 million per annum. If the increased timber demand, resulting from the removal of the LEB is met from old-growth forests, the additional forest area required is about 47,500 hectares. This is less than 4 percent of the area under natural forest cover; less than 10 percent of the area currently under commercial exploitation; and equal to 2.5 times the

Mr. Luc E. Leruth, Remi Paris, and Ivan Ruzicka

resource management was, and largely remains, very attractive indeed. The resulting policy prescriptions, superficially based on the “polluter pays principle,” have often been embraced by international development institutions, which have encouraged their clients to make increased timber taxation the cornerstone of forest management policies. 7 To a large extent, fiscal approaches to improved management are presented as effective alternatives to traditional command-based and control-based regimes centered on the monitoring and enforcement of quantitative logging rules

Mr. Nalin M. Kishor, Mr. Muthukumara Mani, and Mr. Luis F. Constantino
An increasing number of tropical timber producing nations have enacted bans on export of logs. Proponents argue that a log export ban is a second-best policy tool for addressing environmental externalities; it also creates more jobs and improves scale efficiencies domestically. Theoretical arguments suggest that log export bans are largely incapable of achieving their objectives. However, little quantitative evidence exists. The authors maintain that eliminating log export bans in Costa Rica could generate economic gains as high as $14 million annually in addition to the environmental benefits.
Mr. Luc E. Leruth, R. Paris, and Mr. I. Ruzicka
This paper examines the role and impact of taxation on sustainable forest management. It is shown that fiscal instruments neither reinforce nor substitute for traditional regulatory approaches. Far from encouraging more sustainable forest management, fiscal instruments such as an inappropriate tax policy can actually undermine it. The paper uses the arguments at the root of the Faustmann solution to draw conclusions on the incentives for sustainable tropical forest exploitation. The paper also proposes a bond mechanism as an alternative market-based instrument to encourage sustainable forest logging while reducing monitoring costs.
International Monetary Fund. Research Dept.
The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.