• Working Paper

Complementarity of Forests and Farms: A Spatial Econometric Approach to Ecosystem Valuation in Indonesia


Pattanayak, S. K., & Butry, D. T. (2002). Complementarity of Forests and Farms: A Spatial Econometric Approach to Ecosystem Valuation in Indonesia.


This paper responds to responds to three challenges posed in the literature by measuring the importance of watersheds protection to poor farming communities in the developing world. First, recent reviews show that (a) valuation studies have overlooked livelihood values of natural resources in developing countries, focusing largely on amenity values in developed countries, and (b) ecosystem valuation studies have framed the valuation question incorrectly and have applied inappropriate methods. Second, a detailed consideration of the spatial aspects of ecosystems and ecological processes, such as spatial interdependence, has been omitted from most valuation studies. Third, valuation of ecological services that are inputs into production processes have typically relied on data intensive approaches, such as the measurement of full profits, instead of focusing on demand for weak complement, which substantially economize on data from Indonesia in which forest protection policies in upstream watersheds in Ruteng stabilize soil and hydrological flows in downstream farms. We focus on the demand for a weak complement to the ecosystem services— farm labor—and find evidence of spatial dependence. The estimated economic models have theoretically expected properties that are robust across 12 different specifications. The estimated coefficients show that forest ecosystem functions provide economically substantive benefits to local people. Failing to account for spatial dependence leads to a substantial undervaluing of the ecosystem services in some of the models. The overall findings suggest that protection of tropical forest watersheds is a direct way to meet the twin goals of conserving ecologically rich landscapes and developing poor economies.