The different sources of high protection have resulted in an inordinate amount of wood 

resources channeled into plywood manufacturing, with no accounting for the different values of 

various wood species.  Surprisingly, even the high quality woods (e.g., teak, ebony, mahogany) 

were being used to manufacture plywood.  At the same time, other wood using sectors must 

compete in the "open" market for which the price of wood is believed to be much higher than 

that paid by the plywood manufacturers.  Because of the protection on their output (as well as 

the higher prices paid for logs as compared to plywood), producers in these markets have no 

incentive to produce for the export market.  They receive a higher price due to protection in the 

domestic market, and thus face no incentive to be as efficient as possible.  In the long term, this 

will make them uncompetitive in international markets. 

Lesson One: Aiming for Protection Neutrality  

Trade policy needs to aim for neutrality assurance with regard to levels of protection provided 

both within and between individual natural resource sectors.  This requires not only neutrality in 

the structure of nominal tariffs but also in non tariff barriers.  What is needed is a reduction in 

the price distortions resulting from protection.  This is true for the entire economy, not just the 

forestry sector.  A good starting point would be existing policy reformation, such that use and 

management of wood resources become responsive to the differing values of the wood species.  

This would begin the process of achieving more efficient resources allocation. It is also 

important that the distortions across the different wood using sectors be reduced. That is, 

plywood manufacturers, furniture makers, and builders of wooden structural materials should be 

allowed to compete for different types of wood.  In this way, a more efficient allocation of 

resources would arise, with high quality wood being put to its highest valued uses (e.g., 

mahogany used for furniture), and low quality woods being used for production of commodity 

grade plywood. 

1.3.4  Foreign Direct Investment and Marketing Associations  

This section briefly highlights two subsequent NRMP studies, which followed from questions 

raised from the study previously described.  These studies analyzed impacts of protection levels 

on distribution of foreign direct investment and the effects of export marketing arrangements on 

levels of effective protection. 

Foreign direct investment provides a good means to quantify the impact of trade policy on 

investable resources. The extent, distribution, and use of foreign direct investment was 

estimated from Bank Indonesia data sources.  The impact of sectoral protection was apparent in 

the distribution of foreign direct investment throughout the economy.  Although Indonesia has 

separate policies to manage foreign direct investment, NRMP found that these policies only 

impact the volume of investment (NRMP Report No. 57).  The level of effective protection 

provided to various sectors determined the sectoral composition and the country of origin.  

Foreign investors have targeted either the most protected sectors or extractive activities that 

supply raw materials for further processing outside Indonesia.   

Overall, foreign direct investment has been concentrated in the manufacturing sector, where 

effective rates of protection remain higher relative to agriculture and mining sectors from which 

raw materials are sourced.  Within the manufacturing sector, investment was concentrated in 

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