Spatial Complementarity of Forests and Farms: Accounting for Ecosystem Services

Our article considers the economic contributions of forest ecosystem services, using a case study from Flores, Indonesia, in which forest protection in upstream watersheds stabilize soil and hydrological flows in downstream farms. We focus on the demand for a weak complement to the ecosystem services—farm labor—and account for spatial dependence due to economic interactions, ecosystem processes, and data integration. The estimated models have theoretically expected properties across eight different specifications. We find strong evidence that forest ecosystem services provide economically substantive benefits to local people and that these services would be substantially undervalued if spatial dependence is ignored. Forests provide an array of ecosystem services by sequestering carbon, maintaining habitat and biodiversity, stabilizing hydrological flows, mitigating soil erosion, and improving microclimates. Deforestation and forest degradation can irreversibly and substantively impair these ecosystem functions. This raises the question of why society and governments would allow rapid or excessive deforestation. One reason is the failure to consider the full range of goods and services provided by the forests, particularly any latent and complex ecosystem services (Dasgupta). The economic contributions of forest ecosystem services are not well understood and rarely quantified. This article illustrates a method for estimating the value of watershed services from protected tropical forests in Flores, Indonesia. Specifically, we respond to three challenges posed in the literature. First, valuation studies have typically overlooked livelihood values of natural resources in developing countries, focusing largely on amenity values in developed countries (Deacon et al., Dasgupta). Second, a detailed consideration of the spatial aspects of ecosystems and ecological processes, such