In the aftermath of the destabilizing 1997 Asian economic crisis, with the Father of Development gone, and the Soviet Union and Yugoslavia as threatening examples, there were fears that the multi-ethnic Indonesian island state would also break-up into smaller units. Off-Java regions which were rich in natural resources like forests, oil and gas were particularly strident in their demands for more political power and for more of the revenue from the resource extraction to accrue to them.

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Starting in 1998, the post-Suharto "reformasi" era began that was supposed to bring democracy and a more even distribution of wealth. Suharto's successors radically decentralized the Indonesian government and implemented strong regional autonomy. This process happened without much preparation and came, so to speak, with a Big Bang.

Below the central government in Jakarta, Indonesia has four administrative levels at the regional level: a) province, b) regency or city, c) district and d) village. What was remarkable in the division process is that a large portion of regional governance was delegated from the central government in Jakarta directly down to the regency or to the district level. Under the new decentralized system, the regency (second-layer regional administration) and district (third-layer administration) governments have a greater responsibility for controlling resources and providing services to the people than the provincial governments (first-layer administration) (Nawir et al. 2007).

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The reason for the move to transfer power to the approximately 300 regencies, rather than the approximately 30 provincial governments (34 in 2020), was that regencies, unlike provinces, were perceived to be too small for separatist tendencies.

Western New Guinea was heavily sub-divided with three new provinces, South Papua, Central Papua and Southwest Papua, and 26 new regencies. This has infuriated many Papuans, pro-independence and pro-autonomy alike, who have a deep attachment to Papua as a single political unit with a distinct history and who see the decree as a divide-and-rule tactic by Jakarta.

The decentralization laws, which were passed in 1999 and took effect in 2001, devolved approximately 25% of the national budget to the regencies in the form of block grants and dramatically increased their authority over almost all sectors of government. Local governments also received a substantial share of the natural resource royalties originating from their regency.

The head of a regency is called a bupati (cities are ruled by mayors). Under the precolonial monarchies of Java, bupati had been regional lords. When the Dutch abolished or curtailed those monarchies, the bupati were left as the most senior indigenous authority. They were not, strictly speaking, "native rulers" because the Dutch claimed full sovereignty over their territory, but in practice, they had many of the attributes of petty kings, including elaborate regalia and palaces and a high degree of impunity. After the independence of Indonesia in 1945, the bupati became a leading civil servant at the second level of adminstration.

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Under the division process, the power and status of the bupati greatly increased. It was said that, the petty kings of precolonial times, the raja-raja kecil, were now back in business. Many of those civil servants lacked the professional skills to fill out their more responsible positions. But they were very quick on the uptake when it came to grasp the extremely profitable opportunities that their new powers brought. Suharto was the big overlord, he had made sure that most of the nation's riches ended up in his coffers. But now, with decentralisation, “money politics,” patronage politics and endemic corruption blossomed wonderfully all over the huge archipelago.

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The allure of self-government where regencies could enjoy new political and fiscal powers and reap the profits of natural resource exploitation led to a significant amount of district splitting. The number of provinces, regencies and cities had stayed stable during all the Suharto era, now quickly expanded: the number of provinces increased from 26 in 1998 to 34 in 2018, and the number of regencies rose from 292 in 1998 to 483 in 2008 and to 514 in 2018. The number of civil servants rose accordingly, creating many new jobs where bribes could be collected.

The decentralization of the Indonesian government first held high hopes for local and especially indigeous communities, that had long tried to get involved in managing the local resources, especially forests. Causing much disappointment for the villagers, the central government did not implement community-management programs but rather allowed the bupati to issue small scale, short-term timber harvesting permits. The new logging permits were quickly seized by local entrepreneurs and elites who were able to "reward" the petty kings. If timber merchants (cukong kayu) had to get a licence or protection from powerful individuals in the local government or law enforcement offices, they had to pay bribes.

Between 1998 and 2005, regency heads, who were elected by local legislative councils, could act almost without control mechanisms. It was pure paradise for elite capture, corruption and predatory practice. Logging companies were granted access to resources outside of official concessions and inside of national forests, as well were given concessions for clear-cutting, thereby disregarding national law. These practices led to a surge in "newly legal" logging.

One aspect of new logging is the so-called "subdivision logging cycle". Indonesian regional governments compete in timber extraction from their forests. Any increase in administrative jurisdictions drives down prices in the local wood market of the province because of increased competition. When a province or regency is subdivided, the initial disorganization, such as forest officials’ reassignment, disrupts legal logging activities. In response surrounding districts in the same province increase both illegal and overall extraction in anticipation that the prices will fall once the district manages to establish itself and resumes its legal logging activity. Districts do not split at the same time; therefore, this process occurs over and over again with each new regency formation. When the officials' market power diminishes due to administrative splits, they increase the rate of rent extraction. A study by Burgess et al. showed that subdividing a province by adding one more regency increased the overall deforestation rate in that province by 7.8 percent (Burgess et al. 2011).

Indonesian forest policies have been consistent in their push to maximize forest destruction by establishing inefficiencies and market failures, and furthering unsustainable and wasteful production systems.

Theoretically, the logging concessions come with selective cutting guidelines stipulated in the HPH contract. In practice, mechanisms for monitoring concessionaires’ harvesting practices have been inefficient or non-existant.

The government deliberately failed to fully capture timber rents implying the loss of funds that might otherwise be used by the state for formal budgetary allocations. It rather encouraged the flow of resource rents - that is, revenues above a ‘normal’ rate of return - to concession-holders in patron-client-relationships, i.e. paying off political supporters. In terms of sustainability, access to excessive profits leads concession-holders to undervalue the resources under their control, which effectively undermines their incentive to manage their HPH concessions sustainably over the long term.

Since the government has prohibitive restrictions on log exports since the early 1980s, logging concession-holders have to sell virtually all of the legally harvested timber they produce to Indonesia’s wood processing industries at prices that are well below international market rates. The log export ban has undermined sustainability by encouraging the forests to be treated as a low-value resource by both the private sector and government agencies. Underpricing of this sort promotes inefficiencies both at the point of log harvesting and during processing operations.

Most concession only run for 20 years and are not transferable, undermining incentives to manage the forest sustainably and encouraging Rape & Run behavior.

Logging activities had already flourished in the "forestry concession areas" (HPH) during the Suharto regime, but were still more or less controlled in a system of politically organized corruption (Mulholland, 2006). The awarding of concessions was made with little regard to local people's forest and land rights. People whose traditional rights were mostly ignored carried out "unofficial" logging within forest concessions. But the illegal logging was rarely large-scale. Local military and police officers showed strong loyalty to the central government, in part, because they received good extra-income from their connection with legal timber harvesting activities. They were, in an ad-hoc fashion, willing to enforce some laws and regulations.

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With the fall of Suharto and political fragmentation after 1998, both the power of the central government and the willingness of the police and military to enforce the law greatly decreased. As a result, illegal logging activities surged. Disorganized corruption emerged in the forestry, among other sectors, and exacerbated the intensity and scope of illegal logging especially in protected forests and conservation areas.
 

Suharto was the capo dei capi (the boss of all mafia bosses). He chose who would benefit from the concessions, and his police and military officers had the control over the logging business. During decentralisation, since 1998, illegal logging became dominant. Hundreds, if not thousands of competing petty mafia bosses emerged, who could act with almost complete impunity because of the inherent weaknesses in Indonesia's law enforcement process. Criminal networks colluding with corrupt regional state agencies blossomed.

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Most of logging activities in Indonesia were illegal during the decentralisation process. For example, illegal logging contributed to 64% of total timber production in 2000, and 83% in 2001 (Nawir et al. 2007). A 2007 United Nations Environment Program report estimated that 73 - 88% of timber logged in Indonesia was illegally sourced (Nellman 2007).
 

Private corporations, motivated by economic profits from local and regional market demands for timber, pulp and paper, are mainly culpable for deforestation. These agro-industrial companies often do not comply with the basic legal regulations by inappropriately employing cost effective yet environmentally harmful deforestation methods such as forest fires or bulldozing to clear the land for agricultural purposes. The 1999 Forestry Law states that it is essential for companies to be endorsed by authorities in respective regions with a timber harvesting permit (IPK) for legal approval of their deforestation activities. Many of these corporations could circumvent this red tape, maximise revenue profits by employing illegal logging activities as lax law enforcement and porous law regulations undermine forestry conservation efforts.

Timber-based industries are receiving and using illegal timber since their demand is three times greater than the legal supply of available timber. Indonesian timber-based industries have an installed capacity of more than 60 million m³ per year. Indonesia’s wood panel producers harvest roughly 20 million m³ of round wood annually while unofficially harvesting a similar volume. Pulp industries harvest another 20 million m³ per year, and will continue to harvest increasing amounts every year. The demand for timber has far exceeded the sustainable level of wood supply, which stood at 25 million m³ per year in 1999.

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Indonesia’s economic problems during and after the Asian economic crisis, coupled with corruption and collusion by the authorities and paralysis by central government fostered the emergence of regional timber barons and well organised criminal syndicates earning huge amounts through the illegal timber trade. The military and police were heavily involved in illegal logging operations. Even the forests in Indonesia’s national parks were rapidly destroyed.

In the golden years of the timber barons, between 1996 and 2000, Indonesia had an annual deforestation rate of 3.5 million hectares ((MoEF, 2018a).

Much of the timber stolen from Indonesia’s dwindling forests was smuggled to the international market either directly or via neighbouring states, especially Malaysia and Singapore, where the timber was effectively laundered and sent on to the US, Europe, Japan, Taiwan and mainland China.

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This was orchestrated by powerful regional timber bosses often linked to smuggling networks in neighbouring countries and beyond. In the years after Suharto, Indonesia had an annual log harvest of around 78 million cubic metres, more than three times the government’s sustainable yield, and the capacity of unlicensed sawmills was double that of legal operations. Illegal loggers targeted precious national parks in the search for commercial timber species, and violence and intimidation was used by the bosses controlling the trade. Internationally famous became the exploitation of Tanjung Puting National Park in Central Kalimantan, one of the last strongholds of the orangutan, by the politician and timber baron Abdul Rasyid (Timber trafficking EIA, 2001).

Log shortages faced by Japan, China, Korea, Malaysia and Thailand fuelled the escalation of timber theft in Indonesia. Malaysian companies faced with declining round wood supplies at home profited from a ready supply of cheap illegal timber from Indonesia.

While the Indonesian authorities must take responsibility for failing to take decisive action against the timber barons and the widespread collusion of enforcement officials, neighbouring countries are also culpable for failing to stop the illegal timber from entering their territories. In the case of Malaysia, huge amounts of illegal timber from Indonesia were effectively being legalised by the government. In the early 1990s, Malaysia’s domestic log production stood at 40 million cubic metres annually, but by 1999 it had almost halved to 22 million cubic metres. Yet while log supply has fallen, the country’s wood processing industry has maintained an installed capacity of 40 million cubic metres a year. It is clear that considerable quantities of timber stolen from Indonesia’s forests were destined for the wood industries in Sarawak, Sabah and Peninsular Malaysia. Four major smuggling routes were and still are used: West Kalimantan to Sarawak, East Kalimantan to Sabah, Jambi and Riau to peninsular Malaysia and Singapore.

After Kalimantan's forest had been widely exploited, most timber barons redirected their energies to exploiting Papua's forests. More 300,000 cubic meters of Merbau trees were smuggled illegally from Papua to China, but also to India, on a monthly basis'. These illegal logging and smuggling practices in Papua involved a multinational crime syndicate comprising of - mostly ethnic Chinese - actors from Indonesia, Singapore, Malaysia, China and India. As a result, the Indonesian government lost billions of US$ in tax revenue from forestry.
 

Corruption in Indonesia worsened in the post-Suharto era during the Big Bang decentralisation of government. Transparency International gave Indonesia a perceived corruption score of 8.0 and 8.3 in 1998 and 1999, respectively, compared with scores of 7.4 and 7.3 in 1996 and 1997, respectively, with 10 being the most corrupt.

The surge in legal and illegal logging hit indigenous communities, such as the Dayak of Borneo or the Papua in Western New Guinea, hard. Many found their traditional forest areas logged, burned and converted into plantations, mostly for pulp and paper, rubber or oil palms.

Indonesia has the largest rubber plantations in the world, totaling 3.5 million hectares in 2019. However, these areas are dwarfed by the gigantic dimensions of oil palm plantations, totaling officially about 18 million hectares. Logging natural forests usually creates enough profits to establish lucrative cash crop plantations, that is why forest conversion is much preferred to replanting or rehabilitating degraded land.