Environment and Planning A 2004, volume 36, pages 1411 ^ 1425

DOI:10.1068/a3674

Modelling transboundary air pollution in Southeast Asia: policy regime and the role of stakeholders
Asif Iqbal Siddiqui Euston Quah

Department of Economics, Nanyang Technological University, Block-N4#2A-32 Nanyang Avenue, Singapore 639798; e-mail: asasif@ntu.edu.sg Department of Economics, National University of Singapore, Block-AS2, Level 6, 1 Arts Link, Singapore 117570; e-mail: ecsquah@nus.edu.sg Received 16 June 2003; in revised form 13 October 2003

Abstract. Transboundary air pollution, popularly known as the `haze', is a recent but significant environmental crisis in Southeast Asia, and is primarily the result of Indonesian forest fires. We identify that the fundamental motivation behind the practice of clearing forestland with fire by the polluters is economic in nature. We then argue that the major victims of the forest fires and haze are likely to play a vital role in the solution of the problem, at least by motivating the polluters, even if they cannot force them not to pollute. Thus, the polluters and victims can be regarded as the `stakeholders' who would take interest and participate actively in the policy regime. A regional model is developed to analyze and specifically to take account of the states responsible for and affected by the haze. The problems of the affected resident population, the forest industries, and the role of the regional governments are modeled. The model also highlights the importance of key variables in determining the severity of the haze, namely the magnitude of the investment in fire fighting, risk mitigation, and scale of fire operations; including forecasting weather conditions. We argue that optimal policy options should simultaneously satisfy the economic needs of the key stakeholders to be effective.

1 Introduction The practice of clearing land with fire in the islands of Indonesia has increased alarmingly over the last two decades especially during the dry seasons. This has caused a huge drift of atmospheric smoke haze in Indonesia and neighboring countries, creating a problem of transboundary air pollution. This has resulted in serious degradation of the air quality in the Southeast Asian region, together with the destruction of Indonesian forest resources. The region experienced its first case of transboundary pollution from the East Kalimantan forest fires in 1982 ^ 83. Since then, the recurrence of forest fires and haze has become an annual event, especially in the 1990s when the region experienced a few severe episodes of haze (1991, 1994, and 1997). Forest fires and haze have inflicted enormous environmental and economic damage on Indonesia, Malaysia, Singapore, Brunei Darussalam, Thailand, and the Philippines (Qadri, 2001; Quah, 2002). Considering the severity and probable frequency of haze, the regional community has recognized the urgent need for a solution. In 1995 the adoption of the ASEAN Cooperation Plan on Transboundary Pollution marked the severity of the problem. But the formation of the Haze Technical Task Force, three months after the Cooperation Plan targeted the transboundary air pollution as a specific problem for the first time, could not prevent the haze episode of 1997. ASEAN governments in December 1997 dealt with the issue urgently and adopted the Regional Haze Action Plan or RHAP (ASEAN Secretariat, 1997). However, the effectiveness of the initiatives has often come under criticism for their lack of operational directives as problems persisted and a detailed implementation plan for the RHAP therefore became a necessity. In order to control the fires, fire monitoring and local law enforcement

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activities would require frequent reviews, and the funding of such activities would be critical to achieving a result. In this paper we attempt to identify an action-oriented policy regime with the active involvement of all actors as well as the possible funding patterns and fund transfers. We will first review and analyze the fundamental causes of fire and haze, the impacts, and the estimated cost of the damage in order to identify the main victims and polluters. A model is constructed to demonstrate how the victims and polluters as the key stakeholders are intertwined in the policy regime and how funds can be transferred between the stakeholders to work out the options for controlling forest fires and haze. Further, the model has been extended to include other nonstate stakeholders. The policy options have been analyzed from the viewpoint of the stakeholders, as they would be primarily responsible for policy formulation and implementation. Environmental policies have initially focused on the direct regulation of polluting activities of industries by using `command and control' strategies, such as imposing specific environmental quality standards and mandatory adoption of specific clean technology. These policy instruments have attracted criticism on the grounds of cost effectiveness and efficiency. Additionally, the implementation of these policy instruments has often been followed by inadequate monitoring, with incomplete and imperfect information and costly enforcement through civil or criminal trials, given the limited government budget (Callan and Thomas, 1996; Goodstein, 1999). In order to address these problems, incentive-based strategies such as pollution taxes, tradable permits, etc have been developed (Dietz and Vollebergh, 1999; Russel and Powell, 1999). This has allowed industries greater flexibility in decisionmaking with respect to the development and choice of clean technology and pollution reduction while making pollution expensive, thereby making the monitoring and enforcement more efficient and cost effective. However, incentive-based strategies are not immune to monitoring and enforcement problems. In fact, the current environmental policy literature has as yet not adequately explored the issues of monitoring and enforcement. Furthermore, in practice, monitoring and enforcement are subject to bureaucratic discretion and political influence. Especially in developing countries, given weak governmental structures, the underpaid and inadequately trained inspectors often drag the system into corruption and inefficient enforcement. In order to address these issues, along with issues relating to efficiency and cost effectiveness, the stakeholder approach has been proposed here. The stakeholder approach is an innovative class of the incentive-based mechanism, where the focus is on the stakeholders at various stages of the policy exercise and the institutions in question. In itself, the stakeholder approach is a mechanism for developing people-specific and institution-specific policy instruments and mechanisms. So far, much of the literature on incentive-based mechanisms has been developed with reference to European and US cases of industrial pollution and the relevant governmental institutions. The policy instruments and mechanisms developed there may not be appropriate for adoption in Southeast Asia. In this paper we offer an alternative approach to the problem. 2 The scenario and issues for the policy regime A comprehensive sketch of the policy regime in question would include information and analyses of the causes of fire, and the spread and magnitude of its impacts, which will help to identify the polluters, victims, and other interest groups, and the relevant political and other institutions. The causes of haze are not separable from the causes of the forest fires and deforestation. The review and analyses of the causes of forest fires identifies similar sources and motivations for the transboundary haze. The major sources of fire as

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suggested by studies are oil-palm concession burning, planting of rubber and industrial pulpwood, government-sponsored mega-rice projects in the peat swamp forest, and mass transmigration projects. Contrary to popular perception, the evidence also shows that the contribution of slash and burn agriculture by indigenous communities is rather insignificant in large-scale fire activities (Byron and Shephard, 1998; Schindele et al, 1989; Vayda, 1999). It has been observed generally that the dry seasons are chosen for land clearing with fire in order to utilize the favorable weather. In 1997 the failure to take precautions against the onset of El Nino added fuel to the fire. Catastrophically, some parties allegedly tried to take advantage of El Nino for quick and cheap forest clearing which resulted in massive combustion (Vayda, 1999). Indeed, the huge hidden cost of apparently cheap forest fires to the ecology, the environment, and the economy is rarely considered in such practices. It has also been suggested that poor land management and forestry practice are largely responsible for fire-related disasters in the region (Quah, 2002). The environmental impacts of the forest fires and haze in the region have been diverse and devastating. The fires in 1997 occurred in twenty-seven Indonesian provinces, including the five largest islands of the republic (Qadri, 2001). The area burnt was estimated as 1.5 million ha in Sumatra and 3.06 million ha in Kalimantan alone (Liew et al, 1998) damaging enormous environmental stocks, and natural, biological, and genetic resources. Degradation of air quality resulting from the haze, however, has drawn maximum public attention and made the forest fires a burning issue in the region. The consequences of the air pollution are manifold. Primarily it affects public health and visibility. These effects result in curative and preventive expenses, loss of economic activity, and loss of welfare. The forest fire and haze episode of 1997 could be considered a case of extreme disaster, which could be ended only by the following monsoon. Several individuals and organizations have initiated studies to estimate the magnitude of the damage inflicted by the forest fires and haze of 1997. A recent study (Siddiqui, 2001) reveals that the total fire and haze damages for the major victims, namely Indonesia, Malaysia, and Singapore, are worth US$2.54 billion (table 1), where the countries shared 93.8%, 5.1%, and 1.1% of the cost, respectively (appendix). This study has used some secondary data obtained by other studies (Glover and Jessup, 1999; Quah, 1998). The share of fire and haze damages incurred by Indonesia, Malaysia, and Singapore implies that all these countries would be the most relevant stakeholders in the region to manage fire and haze episodes in future. Indonesia, besides enjoying some gains from land clearing, incurs the major share of the economic and environmental costs from the impacts of fire and haze. However, it may not be feasible for Malaysia and Singapore, which are unilaterally paying for the external cost of the haze, to claim compensation from Indonesia or to force Indonesia not to pollute their atmosphere in an international legal system. Moreover, Indonesia may find it difficult to monitor and enforce its own environmental laws adequately given the internal administrative structure and enforcement and monitoring costs. Therefore, other stakeholders, especially the forestry
Table 1. The value of fire and haze impacts in the region (in US$ million). Country Singapore Malaysia Indonesia Total Fire Haze 29.07 129.50 914.55 1073.12 Total 29.07 129.50 2382.72 2541.29 Share (%) 1.1 5.1 93.8 100.0

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industries that are using fires to clear land and derive private benefits, should be a part of the policy regime. However, in this paper we develop a regional model to analyze the role of the states primarily responsible for and affected by the haze. Thus, the model also recognizes that the regional states affected would represent the interests of their citizens and their economy. Such a regional model is based on the political and diplomatic scenario prevailing in the region. The key stakeholder states are Indonesia, Malaysia, and Singapore, which are the oldest members of ASEAN, an influential institution in Southeast Asia since 1967, instrumental in shaping the diplomatic dynamics of the region. As a first step, the affected members have brought the problem of transboundary pollution to the ASEAN for a common resolution. The member countries observe ASEAN principles of noninterference and resolution of all regional disputes through discussion and mutually agreeable nonaggressive means (Elliot, 1998). It is therefore expected that a cooperative solution to the haze problem based on mutual benefit and understanding would be the most pragmatic proposition in the ASEAN context. Further, it should be highlighted that ASEAN and other East Asian countries have experienced a state-directed development path over the last three decades unlike Western developed countries. The state has played a major role in development, industrialization, and sociopolitical governance. In particular, for three decades Indonesia observed a very centralized rule during Soeharto's new order until 1998. Although a decentralization process is now underway, it is too early to expect any major change in the country. In Malaysia and Singapore the state-led development process continues. It will be thus justifiable to recognize that the state will be primarily responsible for taking care of the public interest in these countries, at least in the current context. Nonetheless, it will also be useful to analyze the internal dynamics of policy processes in these countries in future. 3 The role of states as stakeholders: a regional model We assumed that, as and when an uncontrollable forest fire and haze occurs, the damage is estimated at a flat rate(1) of y, measured in US$ million per year. The regional haze episode of 1997 could be used as the reference event and the cost incurred in that disaster could be well defined as y as it has two potential advantages methodically. First, this event represents an extreme case of haze disaster in the region, revealing that any haze episode that is not managed would lead to similar costs in future for the region. Second, the estimated economic cost of the fire and haze impacts shared by the various stakeholders serves as useful information for the policy regime. The risk of having the event in a certain year can be denoted by a which is controllable (for 0 4 a 4 1) as it can be manipulated by human decisions. The maximum value of a 1 would occur if the fire goes out of human control. However, the cost of risk manipulation is US$ mi million for the ith country. It may be noted that the range of fire damage depends on the spread of fire. If the risk of fire disaster increases, the expected fire damage cost (that is, ay) will also increase, because an increase in a would imply that fire damage cost is approaching the maximum value, y. Hence, the focus of the policy is on manipulating the value of the risk factor, a. As the risk factor has been placed at the center of the analysis, it may be necessary to elucidate the risk factor before going further.
Given the climatic cycles in the region, once a fire goes out of control the amount of damage would in practice grow cumulatively until and unless the following monsoon occurs, as is evident from the 1997 haze episode. The range of damage is thus determined exogenously in such cases. For the given geo-economic features of the region, it would thus be reasonable to assume a general range of damage associated with particular cases.
(1)

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Indonesia actually bears the major responsibility for managing the risk in future. Nevertheless, all the affected countries would essentially be interested in reducing the damage cost of forest fire and haze and should be willing to invest in fire management in Indonesia. The management-decision process for any of the countries here could be described in the general framework. Each state economy has in general two options to face at the decision fork & in figure 1. A country can either take no measure to prevent the risk and have m 0, or can decide to spend US$ mi million to mitigate the risk. Thus, mi would represent the fire-management cost values for the ith country. Assume further that, if additional measures are not taken by the country to mitigate the risk, at the chance fork * there is a probability a1 of that country facing the fire and haze problem. If the riskmanipulation measures are taken at the cost of mi , the probability of the event reduces to a2 . The scenario can now be presented in the decision tree in figure 1. From the decision tree, if the states decide not to invest in fire and haze management, their expected payoff would be given by ya1 0 1 a1 ya1 . If they decide to take the risk-mitigation measures for a1 b a2 , their expected payoff would be given by m ya2 01 a2 ya2 m . Hence, measures of risk mitigation would be justified iff ya2 m 5 ya1 A ya1 a2 5 m . This implies that the expenses for risk mitigation can at most equal the reduction of expected value of the damage. Therefore, the objective of the state would be to minimize the expected damage by manipulating the damage risk(2) subject to the cost constraint. The problem can be stated as follows: minimize ya1 a2 , subject to ya1 a2 5 m, for ya1 a2 5 0 .
a1 0 State mi a2 y

3.1 Analysis of decision on fire management outlay m

1 a1

0 y

1 a2

Figure 1. The option for states.

(2) The risk of having the damage in this case can be manipulated, as the source of the fire is associated with human economic activities. The case is unlike other natural disasters, such as cyclones, floods, and droughts, etc, taking place in many other parts of the world. A policy issue in such a case focuses on the construction of shelters and relocating people and materials exposed to risk to the safe shelters, to reduce the expected damage when risk can only be predicted with available meteorological technology.

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The model can equally be used for capturing the issues in all three countries. For Indonesia yI would represent the damage to the relevant environmental stocks and flows and mI would represent the expenses for fire management. Similarly, for Malaysia and Singapore yM and yS would represent the environmental flow damages and mM and mS would represent the net cost of the haze monitoring, haze prevention, and the other administrative costs. We assume that the risk a has a functional relation with the fire regime defined by the initial spread of fire, f, that is the scale and rate of the initial fire, given the capacity to fight the fire locally. It is further assumed that the cost of local fire management is m0 , which is given. The risk of uncontrollable fire increases with the increase of the area brought under fire, that is, with expansion of the fire regime. The relation between the fire regime and the risk factor is such that the risk increases slowly in the initial stage and gradually faster and faster with the expansion of the fire regime, given the existing fire-fighting capacity. It implies that, in the initial stage, the risk is lower, but may be controlled. As the initial fire regime expands further, it gradually goes beyond any control. Thus, up to a certain minimum value of f, we have a corresponding minimum value of a. Let us call this a minimum risk threshold denoted by f1 (figure 2). Dry weather facilitates the easy spread of the fires. We further assume that there is a relation between the risk factor and the weather conditions. We denote the probability of having extremely dry and hot weather as P(o) such that the maximum value of P(o) is 1 for extremely dry and hot weather and 0 for extremely wet weather, so that 0 4 P(o) 4 1. The initial investment to fight the unusual spread of fire is US$ m0 million. This implies that the fire activists are aware of the danger and they have some initial preparation for fire fighting. Hence, a can be expressed as a function of f, P(o), and m: a ff, o, m , such that a b f Po , given m is fixed at m0 and b(b b 0) is a base of the exponent. The function describes the source and the nature of the risk. The variable f increases the risk of fire exponentially and the policymakers have an important role in deciding the magnitude of the variable. P(o) is exogneously given by the natural and climatic conditions. However, it is assumed that, given the meteorological and scientific services available, it may be reasonably predicted. The probability of having dry and hot weather, especially for a long duration, would increase the risk of fires spreading beyond control, given the other fixed variables. Hence, the curve in figure 2 would shift to the left (shown by the dotted line) and the risk threshold would shrink. As a matter of fact, an increase in the investment in firefighting capacity would mean that the risk would be
a amax 1

3.2 Analysis of the risk a

f1

Figure 2. Initial fire and risk.

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reduced, assuming the other variables to be constant. Hence, m increases from m0 to m (for m0 ` m). The policy decisionmakers have to decide policies on three fronts: 1. decide the investment in fire fighting m; 2. decide the fire regime, that is, that scale and rate of fire operations; and 3. predict the weather adequately and react to the climatic conditions promptly. The decision about the fire regime plays a crucial role in this context. It involves the entire forestland use pattern, especially the land-clearing techniques. To be more focused on the issue of forest fire and haze we are interested only in the use of fire as a technique of forestland clearing. The choice of the technique is assumed to be justified primarily on economic grounds. Thus, an economic analysis of the choice of technique is essential to obtain policy guidance to address the issue. The model suggests that the cost incurred in the 1997 forest fire is the approximation of the damage cost as the fire gets out of control. The economic cost of the 1997 forest fire and haze estimated for Indonesia, Malaysia, and Singapore could be fitted in the model as the value of y. As the fire is a man-made disaster, the risk factor can be manipulated so that the expected cost can be reduced. Eventually, as the risk and the environmental cost move in the same direction in the sense that, as the scale and frequency of the fire increase, not only will there be an increase in the risk of disaster but also in the environmental cost. Hence, the model suggests that the policy regime should concentrate on the minimization of the risk factor. This would serve the purpose of risk and cost minimization together. The model indicates that the risk factor has to be manipulated at some cost, as if the rate of damage were constant. However, determining the magnitude of decision variables a would be the objective of the policy regime. It should be recalled that there are three decisionmaking entities, where Indonesia can manipulate the risk factor directly and Singapore and Malaysia can play only a passive role in the decision. The policy implications would be derived from the viewpoint of active and passive decisionmakers. It follows from the model that the policy concern is the risk factor. The risk as discussed earlier is further related to the scale and rate of the initial fire in the forest and weather conditions. The modern meteorological system is sufficient to predict the weather conditions, for example, the probability of El Nino. Hence, all that are impor tant in the policy matters are the scale and rate of fire activity given the fixed initial fire-fighting capacity at the cost of m0 . The relevant policy perspective in relation to the scale of fire activities is elaborated further. Let us assume that the initial area brought under fire or the scale of initial fire (f) has a functional relation with the prevalent pattern of the forestland clearing in Indonesia, denoted by rI , with or without fire techniques of land clearing. Because the risk a is a function of f, it can be expressed as an indirect function of rI . Let us assume that a1 is associated with some rI1 and a2 with rI2. We can reasonably assume that each of rI1 and rI2 is associated with a production function b( rI1 ) and cost function e( rI1 ), where each of rI1 and rI2 contributes a net benefit to the economy. The prevalence of either is therefore determined on the basis of a higher contribution of net benefit to the economy. Because rI1 and rI2 are associated with some value of a1 yI and a2 yI for Indonesia, the alternative net benefits the economy can obtain are given by b rI1 e rI1 a1 yI A bn rI1 a1 yI , for b rI1 e rI1 bn rI1 ,
3.3 Analysis of the decision on fire regime f

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and b rI2 e rI2 a2 yI A bn rI2 a2 yI , for b rI2 e rI2 bn rI2 . Hence, the shift of land-clearing pattern from the existing one to the new one would be justified only if bn rI1 a1 yI bn rI2 a2 yI 5 0 , A bn rI1 bn rI2 5 yI a1 a2 , where a1 b a2 . This implies that the net benefit from shifting the land-clearing technique to minimize the cost of fire and haze damages has to be greater than the net benefit from the expected recovery from the damages. This can be expressed as follows: minimize yI a1 a2 ,
a1 Y a2

for bn rI1 bn rI2 5 rI .

The model implies that the present forestland clearing practice is related to environmental risk and damage to the economy on the one hand, and it is associated with the economic benefit of cheap land clearing on the other hand. Thus, it can be viewed as a trade-off between the two benefits for Indonesia. This implies that Indonesia should spend some effort to make a shift in its forestland use to maximize the net benefit to the economy. It further implies that, if Indonesia wants to minimize the probable damage of a fire disaster, it may manipulate the risk by shifting the forestland use. The formulation also has serious long-run policy implications. The present forestland use decisions indicate that there is an unlimited supply of forestland at least in the short run in Indonesia, so that the existence value of the marginal units of forestland is very low. Besides, the cost of land clearing with fire is also insignificant. Therefore, the marginal value of a forestland unit is much lower than that of agricultural or plantation land given the values assumed. However, the existence value of the forestland units is in practice perceived as trivial. In addition, land clearing with fire involves huge environmental cost. Given the environmental cost, along with the risk of environmental disaster, the marginal value of a forestland unit may not be lower than that of agricultural or plantation land. The environmental cost has been estimated to be enormous. The results of these cost studies would call for ultimate determinants of the mitigation or even elimination of forest fires from Indonesia. The passive decisionmakers Singapore and Malaysia can, however, influence the decisionmaking process when needed. In the so-called `business as usual' scenario, each of the countries produces outputs as usual with its given resources and technology. Let us denote the production function of Indonesia as b( rIe ). In the hazy days, however, the level of production is affected by the negative externality. The effect relates to the forestland utilization pattern of a neighbor. Hence, the production function of that country in this situation would look like: b( rIe , rIj , for j 1, 2), in correspondence with the alternative situations. Therefore, the expected economic cost of environmental damage in the situations described would be given by ye a1 b rIe b rIe , rIj , for j 1 , ye a2 b rIe b rIe , rIj , for j 2 . Let us assume that the alternative land-use pattern is adopted in Indonesia and that it completely reduces the risk of creating any haze to Malaysia and Singapore; so that ye a2 0, as a2 0, resulting in b( rIe ) b( rIe , rIj , for j 1, 2), which implies the absence of the externality. By manipulating the equations algebraically we

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can obtain the following in such a probable case: b rIe , rIj , for j 1 b rIe ye a1 . (1) Comparing equation (1) with the analysis of the decision on fire-management outlay in figure 2 we can deduce that the external cost of haze management, me , may at most equal the difference of economic production with and without haze, so that brIe , rIj , for j 1 brIe 5 me . The objective of the country now would be to minimize ye a1 ; however, in switching from a1 to a2 it will face an additional external constraint, which would play the most vital role in the program. Indonesia concurrently must find it rational to adopt the alternative land-clearing practice so that the reduction in the risk of haze can occur. Thus, the following equation can be used to describe the situation: minimize ye a1 ,
a1

for bn rI1 bn rI2 5 m1 , b rIe , rIj , for j 1 b rIe 5 me . The analysis suggests that the polluter state should undertake measures to manage the fire adequately if the net economic gain from the shift in land-clearing technique is positive. If the cost of changing the technique of land clearing from fire based to one which is more environmentally friendly is higher than the benefit earned by doing so, then the polluter state may not be willing to initiate such a change. The victim states, on the other hand, cannot directly control the situation and depend on the measures taken by the polluter state. The victims can only offer an incentive price in any form of cooperation to the polluter so that it takes enough control over the forest fire to eliminate the external cost to the neighbor. The incentive price certainly should not exceed the external cost saved for the victim by taking the measure. The provision of this incentive price may alter the situation for the polluter state to have their net benefit earned from domestic fire management. Thus, the analysis recognizes the role of incentive-based negotiation and cost sharing between the polluter and victim states. 4 The role of stakeholders: an extension During the 1997 forest fires Indonesia was still under Soeharto's autocratic regime. However, the 1997 economic and financial crisis and the fall of Soeharto in 1998 changed the political and institutional dynamics of Indonesia. There have been significant changes in terms of the development of democracy, proliferation of opposition parties (which also includes Soeharto's Golkar party), greater freedom of the press, growing civil societies, and an increasing process of administrative decentralization, setting the pace for a new era of the Indonesian regime. The authority of the central and regional governments was defined by January 2001. Forest-management organizations at the central, provincial, and regional levels, however, have not been specified as yet because of internal dissention. By law the provinces are now required to have a fully consensual and fully developed Rencana Tata Ruang Wilyah Propinsi or provincial spatial plans for land-use identification and land-use zoning. Furthermore, the Indonesian administration is still responsible for giving concessions and annual logging quotas to forestry industries and assessing forest-management performances. Allegedly, there are practices of power abuse, corruption, and bribery in this procedure (Colfer and Resosudarmo, 2002). The administration often does not have the capacity and infrastructure to perform the monitoring and policy-enforcement activities assigned to it. Further, there is a lack of

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community participation at the grassroots level because of a lack of awareness. In the wake of economic and political reforms environmental issues failed to receive sufficient attention at the various levels of the policy regime. Now, it is premature to try to predict or to comprehend the changes Indonesia is experiencing. Nonetheless, it is also important to comprehend the concerns in this analysis of stakeholders. In a decentralized democratic state, the formulation and implementation of environmental policies would essentially involve several other interest groups at the local, regional, and international levels including state governments. In the policy regime each stakeholder has its individual motive to maximize a certain objective whereas the state's objective can be very different from those of the stakeholders. Cohen (1999) reviewed the motivation and behavior of governments in his review of environmental policy issues. The government's compliance behavior has often been explained by various assumptions on enforcement agency behavior. They are often based on the general proposition of political economy and public choice literature. The government may behave as a political support maximizer, that is, it may work out the policy to maximize votes (Peltzman, 1976). The government may be very stringent about environmental standards and legal statutes. It may be motivated by maximization of compliance with law, which is very different from compliance cost minimization. Cohen (1999) also suggested that the different theories of government behavior might not be very different in practice. However, the most critical aspect of government motivation and behavior, which is rather more common in the real world, arises from bureaucratic discretion. The role of bureaucrats in the process of government decisionmaking and decision implementation is crucial. Bureaucrats or related government personnel may be interested in deriving private benefits rather than in a social benefit for the country (Guth and Pething, 1992). However, bureaucrats and government personnel may experience social and political pressures, which may not allow them to ignore the social optimum completely. Further, the ability of the community to pressurize the polluters is often determined by the income and education levels of the community. In order to design an effective policy framework it is important to understand the motivation and the role of each stakeholder in the policy regime. Quah and Johnston (1999) have identified the major stakeholders as the polluter and victim states, the polluter and victim industries, regional and global organizations, and other concerned institutions. The responsibility for causing and managing the pollution goes directly to the government of Indonesia and the forestry industries operating in the country. The major affected countries are Malaysia and Singapore. The polluting industries are the timber and plantation industries of Indonesia and the victims are transport, tourism, and other industries in Indonesia, Malaysia, and Singapore. As the problem is a significant part of regional as well as global environmental problems, several regional organizations, such as ASEAN, Asian Development Bank, Asia Pacific Economic Cooperation, and global organizations, such as the World Bank, United Nations, World Health Organization, and the European Union have an interest in this policy regime. The other organizations concerned civil societies and environmental nongovernment organizations (NGOs)have also significantly contributed in terms of information gathering and dissemination as well as policy advocacy.(3) The government agency (gI ) appointed by the Indonesian government is initially responsible for taking care of the interests of the citizens of Indonesia and the Indonesian local industries affected by the fires and haze. In contrast, it is also responsible for taking care of the interests of the timber and forestry industries generating employment and a substantial amount of revenue and foreign exchange
(3)

A useful list of organizations and institutions involved in managing forest fires in Southeast Asia can be found on http://www.pffsea.org.

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for the country. However, in the context of concurrent reforms in Indonesia, the government agency, especially at the local level, would not essentially represent the interests of central government. Instead, it is likely to represent a complex blend of bureaucratic and political interests as well as the pressures from nascent civil society such as the NGOs and the media. The polluter forestry industry ( fI ), on the other hand, will prefer to take advantage of cheap land clearing with fire in order to maximise its profits. As a major export-earning and revenue-generating industry, it will apparently have a strong influence in the policy regime. The Singapore and Malaysia governments will be acting to retain the welfare and economic well-being of their respective countries. Thus, each of the (i ) affected governments of the region (R i ) will have their objectives and roles defined. The three major stakeholders we have focused on here are the Indonesian government agency, the forestry industry, and the affected regional governments. The role of the stakeholders will be determined by the objective of each stakeholder. The government agency (gI ) in Indonesia would face a complex objective and difficult task, as it will have to coordinate the local priorities as well as regional issues. The selection of the fire regime would depend on the maximization of net economic benefit where the benefit, bg ( rIj ), will depend on the cost saved by using a cheap landclearing technique and the value of the yield produced from the cleared land. In addition to that, another variable called the `side payment' may be introduced at this stage, which the agency may earn by favoring the selection of a certain fire regime for the forestry industries and the regional governments. The cost, eg ( rIj ), on the other hand, will usually include the damage to society, the economy, and the environment. Nonetheless, it will include monitoring, enforcement, and other administrative costs. Hence, the so-called fire-management cost would be incorporated into these costs. The objective of each affected neighboring government will be to minimize the i external haze damages arising from the selection of a certain fire regime eR ( rIj ) in Indonesia. Now, the provision for paying the incentive price or a side payment to the Indonesian government agency to choose a favorable fire regime can also be incorporated in the costs. The objective of the forestry industry ( fI ) is profit maximization. The selection of a certain fire regime is associated with a certain benefit, bf ( rIj ), to the industry in terms of the cost saved by using a cheap land-clearing technique. The cost, ef ( rIj ), on the other hand, for the industry in this context will be the fire management and defensive expenses as well as the side payment or incentive price payable to the government agency to allow them to enjoy a favorable fire regime. The policy regime may now be described as the problems of the major stakeholders as follows: 1. the problem of government (gI ) is:
I I I I

maximize bg rIj eg rIj ; 2. the problem of the forest industry ( fI ) is: maximize bf rIj ef rIj ; 3. the problem of a regional government, (R i ) is: minimize eR rIj .
rIj
i

rIj

rIj

The above optimization arguments would provide an essential guideline for the stakeholders to be better off by negotiating and cost sharing. The Indonesian government agency may be better off being stringent on environmental law enforcement after

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receiving the incentive price. The polluter industry may find it more cost effective to comply with state environmental laws if the side payment is too high to obtain the favorable dirtier technology after competing with the regional governments in terms of paying incentive prices against their interests. The regional neighbors may be better off by reducing the net haze damage after paying the incentive prices. 5 Conclusions The paper has suggested that the role of stakeholders is crucial in the policy regime as policy implementation relies heavily on cooperation from them. Further, funding and fund transfer among the stakeholders is crucial in fire monitoring and prevention activities. Indonesian government and administration have three key issues to deal with. First, the country has certain economic interests in land clearing with fire. Second, the lion's share of the fire and haze damages is incurred by Indonesia and was estimated to be approximately 94% of the total damage cost. Third, as Indonesia is the main source of fires and haze, the regional and international community should give the responsibility for fire and haze management to Indonesia. The model suggests that reducing the risk factor could reduce the cost of fire and haze disasters in the future. This would require the Indonesian government to have adequate funds for monitoring, prevention, and other incentive management in a bid to control and influence the polluters. It could then be suggested that, if the administrative cost of reducing land-clearing activities is lower than the cost saved by preventing fire and haze for its own country, Indonesia will manage the fire. However, the victim countries may offer them assistance, technical support, funds, and other benefits as incentives. These funds and incentives must be allocated efficiently among the stakeholders, so that each of them has optimum motivation to cooperate. After the 1997 fire episode, some positive changes in the policy regime have been observed, consistent with the argument of this paper. First, the funding process from external sources for fire management and prevention has been initiated. ASEAN members and the international community have provided funds and assistance to Indonesia and ASEAN. Among others, the United Nations Environment Program gave US$750 000 for emergency response, Germany gave US$5.5 million for fire-fighting instruments, Australia paid AU$666 000 to Indonesia for fire fighting, and the USA gave US$4 million for relevant project finance and US$2 million for Indonesia to prevent fires (Qadri, 2001). These funds were mostly short-term assistance. However, in the medium and long run, an adequate flow of funds and proper allocation of the funds among the stakeholders, in line with the arguments of the model, will certainly increase the efficiency of the fire regime. Second, the ASEAN members in the third ASEAN Ministerial Meeting on Haze in 1998 endorsed the concept of subregional firefighting arrangements. It has also been agreed there that fire-fighting responsibilities will be shared by Indonesia, Malaysia, and Singapore. This provision has allowed the main victims to interact with the polluters separately according to individual needs. Accordingly, Indonesia and Malaysia agreed to sign a memorandum of understanding to extend bilateral cooperation. Again, Indonesia, Malaysia, and Singapore agreed to work closely in fire management in Sumatra. It has been observed that Malaysia, because of its geographical location is more vulnerable to haze. In 1997 cost sharing shows that it incurred 5.1% of the total fire and haze cost. Although the data showed that Singapore incurs only 1.1% of the haze cost, it is a relatively large burden given Singapore's size. The subregional cooperation among the key stakeholders could be encouraged further and the changing policy regime in Indonesia could be a very useful subject for new research initiatives.

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Acknowledgements. The authors would like to thank two anonymous referees for their valuable remarks on the earlier draft of the paper. References ASEAN Secretariat, 1997, ``Regional Haze Action Plan'', http://www.aseansec.org/9059.htm Byron N, Shepherd G, 1998, ``Indonesia and the 1997 ^ 98 El Nino: fire problem and the long term solutions'', ODI Natural Resource Perspectives 28, http://www.odi.org.uk/nrp/28.html Callan S J, Thomas J M, 1996 Environmental Economics and Management: Theory, Policy and Applications (Irwin, Chicago, IL) Cohen M A, 1999, `Monitoring and enforcement of environmental policy'', in The International Yearbook of Environmental and Resource Economics 1999/2000: A Survey of Current Issues Eds H Folmer, T Tietenberg (Edward Elgar, Cheltenham, Glos) pp 44 ^ 106 Colfer C J P, Resosudarmo A P (Eds), 2002 Which Way Forward? People, Forests and Policy Making in Indonesia (Resources for the Future, Washington, DC) Dietz F J, Vollebergh H R J, 1999, ``Explaining instrument choice in environmental policies'', in Handbook of Environmental and Resource Economics Ed. J C J M ven den Bergh (Edward Elgar, Cheltenham, Glos) pp 339 ^ 351 Elliot L, 1998, ``Fire management and transboundary pollution: national and regional policy responses'', draft synthesis paper, for Fire Management and Transboundary Pollution Workshop, Australian National University, 24 July, http://www.icsea.or.id/sea-span/SCIPOL2/ STUDY3.htm Glover D, Jessup T (Eds), 1999 Indonesia's Fires and Haze: The Cost of Catastrophe (Institute of South East Asian Studies, Singapore; International Development Research Center, Ottawa) Goodstein E S, 1999 Economics and the Environment (Prentice-Hall, Englewood Cliffs, NJ) Guth W, Pething R, 1992, ``Illegal pollution and monitoring of unknown quality a signaling game approach'', in Conflict and Cooperation in Managing Environmental Resources Eds R Pething (Springer, New York) pp 275 ^ 330 Liew S C et al, 1998, ``A study of the 1997 forest fire in South East Asia using SPOT Quick Look Mosaics'', in Proceedings of the 19th Asian Conference on Remote Sensing, Manilla, 16 ^ 29 November paper R-3, http://www.gisdevelopment.net/aars/acrs/1998/ps3/ps3003.shtml Peltzman S, 1976, ``Toward a more general theory of regulation'' Journal of Law and Economics 19(2) 211 ^ 240 Qadri S T (Ed.), 2001, ``Fire, smoke and haze: the ASEAN response strategy'', Asian Development Bank, Philippines Quah E, 1998, ``Haze and the damage cost in Singapore'', paper presented at The 6th East Asian Economic Conference, 4 ^ 5 September, Japan; copy available from the author Quah E, 2002, ``Transboundary pollution in Southeast Asia: the Indonesian fires'' World Development 30 429 ^ 441 Quah E, Johnston D, 1999, ``Haze control: share the cost'' The Sunday Times, Singapore 11 July Russel C S, Powell P T, 1999, ``Practical considerations and comparison of instruments of environmental policy'', in Handbook of Environmental and Resource Economics Ed. J C J M ven den Bergh (Edward Elgar, Cheltenham, Glos) pp 307 ^ 328 Schindele W,ThomaW, Panzer K, 1989,``The Kalimantan forest fire of 1982 ^ 83 in East Kalimantan. Part 1: the fire, the effect, the damage and the technical solutions'', FR report 5, German Agency for Technical Cooperation, Jakarta Siddiqui A I, 2001, ``Transboundary air pollution in Southeast Asia: economic cost and the options for policy regime'', MSS thesis, Department of Economics, National University of Singapore, Singapore Vayda A P, 1999,``Finding causes of the 1997 ^ 98 Indonesian forest fires: problems and possibilities'' WWF-Indonesia, Jakarta

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Appendix
Table A1. Estimates of haze damages in Singapore in 1997. Impact Value million S$ Cost of illness Loss of recreation due to illness Loss of income due to illness Protective measures Loss of income from tourism Loss of income from flight cancellation Loss of domestic tourism Total
a

million US$a 1.34 1.34 2.06 0.00 1.21 0.14 22.96 29.07

1.995 1.995 3.058 0.0052 1.795 0.214 34.1 43.1622

1 US$ 1.485 S$ (annual average exchange rate in 1997 according to IMF International Financial Statistics).

Table A2. Estimates of haze damages in Malaysia in 1997 (source: Siddiqui, 2001). Impact Value million RM Cost of illness Loss of recreation due to illness Loss of income due to illness Protective measures Emergency protection Loss from tourism decline Loss from airlines or airport activity decline Loss of domestic tourism Cloud seeding and fire fighting Total
a

million US$a 3.08 3.08 1.53 0.06 62.38 20.77 1.90 26.78 9.63 129.51

8.66 8.66 4.31 0.17 176.32 58.44 5.35 75.33 27.08 364.32

1 US$ 2.813 RM (annual average exchange rate in 1997 according to IMF International Financial Statistics).

Table A3. Estimates of total haze damages in Indonesia in 1997 (source: Siddiqui, 2001). Impact Cost Loss Loss Loss Loss Loss Total of of of of of of illness welfare due to illness income due to illness income from tourism income from airport and airlines operation domestic tourism Value (million US$) 294.70 294.70 167.30 58.63 17.54 81.68 914.55

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Table A4. Value of the haze damages to the region (source: Siddiqui, 2001). Country Singapore Malaysia Indonesia Total Value of impact (million US$) 29.07 129.51 914.55 1073.13 Share of the value (%) 2.71 12.07 85.22 100.00

Table A5. Estimates of total fire damages in Indonesia in 1997 (source: Siddiqui, 2001). Fire impact Damage to the rain forest Agriculture and plantation losses Fire fighting expenditure Total Economic cost (million US$) 986.11 470.39 11.67 1468.17

Table A6. The value of fire and haze impacts in the region (source: Siddiqui, 2001). Country Singapore Malaysia Indonesia Total Fire cost (million US$) Haze (million US$) 29.07 129.51 914.55 1073.12 Total (million US$) 29.07 129.51 2382.72 2541.29 Share (%) 1.10 5.10 93.80 100.00

1468.17

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