This chapter extends the Global Trade Analysis Project (GTAP) model to include the effects of land degradation for the Indonesian economy. For Indonesia, soil erosion appears to be one of the most significant environmental problems caused by agricultural production. We simulate the off-site environmental damage and onsite productivity impacts of erosion, along with the standard intersectoral and interregional economic effects of trade liberalisation. We then analyse the welfare implications of trade policy changes where soil erosion occurs and land productivity is reduced.

Land degradation may have significant adverse effects, particularly in developing countries (Scherr and Yadav 1996; Rosegrant and Ringler 1997). For example, in countries such as Costa Rica, Malawi, Mali and Mexico, soil erosion is estimated to cause national economic losses of between 0.5 and 1.5 percent of annual GDP (World Bank 1992a). Countries with fragile tropical land are particularly problematic, and rural poverty in developing countries may force people with no other options to exploit available resources beyond their sustainable capacity (Pinstrup-Anderson and Pandya-Lorch 1994).

Indonesia also appears to suffer significant negative effects from land degradation, with World Bank estimates suggesting that soil erosion on Java costs the economy US$340-406 million per year in 1989 dollars (Magrath and Arens 1989). Of this, nearly 80 percent is due to declines in the productivity of agricultural land. The other 20 percent or so is due to off-site costs such as siltation of irrigation systems and the loss of reservoir capacity.