Forests contribute to the livelihoods of more than 1.6billion people. Forests and the forest products indus-try are a source of economic growth and employ-

ment, with the value of global forest products traded inter-nationally reaching US$270 billion, of which developingcountries account for more than 20 percent. Worldwide,forest industries provide employment (both formal andinformal) for approximately 50 million people.

Forests are home to at least 80 percent of the world’sremaining terrestrial biodiversity and are a major carbonsink regulating global climate. Forests also help to maintainthe fertility of the soil, protect watersheds, and reduce therisk of natural disasters, such as floods and landslides.Global deforestation and degradation threaten biodiversity,forest-related ecological services, and rural livelihoods.

Covering 26 percent of the Earth’s land surface, forestsplay a significant role in realizing the Millennium Develop-ment Goal (MDG) of halving the number of people livingin absolute poverty by 2015. Unfortunately, rural develop-ment strategies often neglect forests because forests havebeen mistakenly viewed as being outside the mainstream ofagricultural development. In addition to the lumber andwood products industry, the gathering and marketing ofhundreds of forest products, such as forest fruits, fuelwood,and medicinal products, constitute an economic activity ofenormous scale.

As human populations grow and countries around theworld become more affluent, the demand for wood prod-ucts, both solid wood and pulp and paper, will increase, too.

1

OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR

I N T R O D U C T I O N

In 2005, removals of roundwood were valued at aboutUS$64 billion, an increase of about 11 percent overremovals in 1990. The demand for nonwood forest productshas also increased since 1990, with removals estimated atUS$4.7 billion in 2005.

The contribution of forests to the maintenance of vitalecosystem functions and societal well-being is increasingly amatter of public concern. People are realizing that water sup-ply and quality, flood protection, soil conservation, local cli-mate, and conservation of biodiversity all rely on the existenceof functioning forest ecosystems. Most developed-countrygovernments have now committed to increased funding forcarbon sequestration and effective protection of forest biodi-versity, and these commitments are likely to be extended toreducing emissions from forest land conversion.

WHY THE POTENTIAL OF FORESTS HAS NOT BEEN FULLY HARNESSED

Forests house global public goods, which, to be maintained,must be both protected and managed sustainably. At pres-ent, however, less than 5 percent of tropical forests are beingmanaged sustainably. Despite their great economic value,forests are one of developing countries’ most mismanagedresources. Many countries with substantial forest resourceshave been subject to corruption and serious inadequacies inforest allocation, administration, and monitoring. Illegallogging and associated trade and corruption at high levelsflourish because timber rights can be extremely valuable.

Besides channeling potential timber revenue away fromnational development efforts—particularly from the peopleliving in and near the forests—the low prices at which theseconcessions are often granted encourage waste, unsustain-able management, plundering for short-term gain, andreplacement by less valuable and less sustainable activities.Strengthening of governance usually touches upon sensitivelocal and national interests, which are benefiting from thestatus quo.

Furthermore, growing populations lead to an increase inthe conversion of forests for other land uses (for example,clearing of forests for agriculture; see figure 1). The Foodand Agriculture Organization (FAO) estimates that eachyear 13 million hectares of forest are permanently convertedto agriculture, mostly in the tropics. Spillovers from poorpolicies in other sectors can also contribute to rapid rates ofdeforestation. This has been particularly evident in recentdecades, for example, in the conversion of forest areas to oilpalm plantations in Indonesia.

Although some forest products, primarily lumber andfuelwood, are delivered through markets, the economicvalue of many of the other forests goods and services (forexample, environmental services, biodiversity, and carbonsequestration) go unrecognized by the market. Creative newmechanisms are needed to compensate those preservingenvironmental services and to provide incentives through

market-based methods to reduce loss of forests’ environ-mental services.

Safeguarding global public goods is not a national prior-ity in countries struggling with problems of poverty reduc-tion. As a result, forests’ potential is unexploited in develop-ing countries because the forest sector has to compete fordevelopment investment and governments have limitedinterest in investing in the sector through loans when thebenefits are often global rather than national or local. Theseinvestments must compete for resources against such highpriority sectors as health, education, and infrastructure.Weak governance in the forest sector is pervasive and leadsto ineffective use of funds. Forest authorities often lack thecapacity to implement policy reforms and programs effec-tively and have limited capacity to access, and make use of,extra-budgetary financing. Furthermore, incentives for theprivate sector to implement sustainable forest managementare either absent or limited.

The forest sector represents one of the most challengingareas in the development of community and global publicpolicy. Despite significant resource flows, international con-cern, and political pressure, a combination of market andinstitutional failures has led to forests failing to realize theirpotential to reduce poverty, promote economic growth, andbe valued for their contributions to the local and globalenvironment.

UNLOCKING FORESTS’ POTENTIAL

The problem of sustainable forest management (SFM) ishighly complex and can only be addressed by a range ofactions targeted at (i) the policy framework, (ii) strength-ening of governance, (iii) removal of market distortionsand engaging market actors, (iv) full valuation and sharingof forest benefits through market and other mechanisms,(v) capacity building, and (vi) mobilization of adequatefinancial resources.

Countering the drivers of deforestation and forest degra-dation to enable sustainable forest management will require,among other factors, greater innovation and better coordina-tion in global forestry dialogue, national sectoral planning,and technical analysis that addresses these forces and factors.Capturing the potential of forests to advance poverty reduc-tion, support economic growth, and deliver local and globalenvironmental services will require donors to work in closecoordination with governments, the private sector, and otherkey stakeholders in the forest sector, and to link forest sectoractivities with national strategies. This can involve workingwith emerging external constraints and opportunities.

2 INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR

10,000

20,000

30,000

40,000

50,000

60,000

Africa LatinAmerica

Asia Pan-Tropical

Conversion of forest area to small-scaleshifting agricultureConversion of forest area to small-scalepermanent agriculture and other land usesConversion of forest area to large-scalepermanent agriculture or other land usesConversion to agricultural and forestplantations

Figure 1 Main Causes of Deforestation, by World Region, 1990–2000

Forest law enforcement and governance. Loss anddegradation resulting from weak forest law enforcement andgovernance have occurred at the expense not only ofnational economies, but also of the rural people who dependon forest resources for their livelihoods. Thismismanagement translates into enormous national costs.For example, failure to collect appropriate royalties and taxesfrom legal forest operations has a global cost to governmentsof about US$5 billion annually. Illegal logging results inadditional losses of forest resources from public lands of atleast US$10 billion to US$15 billion a year. Improvements inforest law enforcement and governance are critical tocapturing the full economic potential of forests in asustainable manner. In response, a stronger global focus hasbeen placed on forest sector governance, accountability, andtransparency (see chapter 5, Improving Forest Governance).

Private sector engagement. Because of forests’ significantcommercial value, the private sector is the principal source offinance in forest production in most countries. Indeed, thelevel of activity and influence of the private sector in forestsdwarfs that of the international community—andsometimes of the national government. Private investmentin the forestry sector in developing countries and countriesin transition is close to US$15 billion per year, or up to ninetimes more than the current official development assistanceflows.1 Official development assistance accounted for only afraction of the funds available for forestry in the mid-1990s,and has declined sharply since then.

Private sector investment—from both domestic and for-eign sources—has been on the upswing. Given this trend ofincreased private engagement in forest production and pro-cessing, legal and regulatory frameworks that support sus-tainable forest practices must be developed to promoteresponsible private sector investment and corporate socialresponsibility as well as to eliminate corruption. To enhancethe role of private sector investment in poverty alleviation,effective and efficient community-company partnershipsand greater support to small and medium forest enterpriseswill be critical.

Increased community engagement in forestmanagement. Local communities, including indigenousand traditional groups, play an increasingly important rolein forest management. Studies of the ownership andadministration of forests anticipate that forest areas underrecognized community ownership and reserved forcommunity administration will nearly double between 2001and 2015 (figure 2). Community participation in decision

making and implementation is considered essential forgood governance, equitable distribution of benefits, andsustainable resource management. Additionally, it isimportant for creating accountability and transparency.

Using forests for poverty reduction requires a stronginstitutional framework and an effective legal and regula-tory environment, in which the rights of specific groupsamong the poor are recognized and protected (see note 1.3,Indigenous Peoples and Forests, and note 1.4, Property andAccess Rights). Additionally, opportunities to develop sus-tainable forest businesses must be provided to the forest-dependent poor and other groups (see note 2.2, Small andMedium Enterprises). Therefore, development organiza-tions, in collaboration with government and other relevantstakeholders, need an approach that focuses on participa-tion and conflict resolution, and not just on the technicaland economic aspects of forestry.

Coexistence of conservation and production.Conservation and production must coexist for the fullpotential of forests for poverty reduction to be realized.Although large areas of the world’s forests must be preservedintact for their ecological and cultural values, much of whatremains will inevitably be used for productive purposes.Consequently, a dual approach covering both protection andproductive use is needed.

Greater investment in the development of plantationscontributes to economic growth and poverty reductionwhile reducing pressure on natural forests and protectingsome ecosystem services. Integration of forest conservationinto productive landscapes can help achieve conservationobjectives, enhance the benefits of conservation, andbroaden the ownership of conservation initiatives (see note

INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR 3

0

100

200

300

400

500

600

1985 2001

Community owned Community administered

2015 201520011985

Mill

ion

hect

ares

Figure 2 Community Ownership and Administration of Forests

Source: White and Martin 2002.

3.1, Mainstreaming Conservation Considerations into Pro-ductive Landscapes). Plantations, when coupled with pro-motion of environmentally and socially responsible trade intimber and forest products, have the potential to meet therapidly growing demand of countries like China and Indiawithout sacrificing protected forest areas.

Improved forest management practices. Althoughbiodiversity and key environmental services havetraditionally been sustained through the establishment ofprotected areas, the wide range of competing uses for forestsby diverse groups imposes constraints on how much can beachieved by protection alone. Improving forest managementpractices in production forests (forests where productive useis permitted) is an essential component of any strategy toprotect vital local environmental services, in addition toefforts aimed at bolstering the effectiveness of managementwithin protected areas.

Innovative financing. It is highly unlikely that governmentswill be able to significantly scale down lumber extraction topreserve forests for their environmental services unless thecosts of forgone revenue can be offset in some way. Moreover,very few countries would be prepared to borrow funds—fromthe World Bank or other sources—to finance forest protectionas a substitute for forest production. Innovative financingoptions and markets for forests’ environmental services, suchas ecotourism, carbon offsets, reduced emissions fromdeforestation and degradation (REDD), and watershedmanagement, will all have important roles to play. As carboncredits grow in value under emerging global carbon tradingsystems, incentives to invest in the establishment of newforested areas for their carbon benefits, and in reduceddeforestation for reduced carbon emissions, will increase.

Avoided deforestation. Though the Kyoto Protocol hasno mechanism for providing compensation for reduceddeforestation, the Stern Review highlights “avoideddeforestation” as a cost-effective mechanism to limitgreenhouse gas emissions (Stern 2007). Present concernsabout climate change have opened a window of opportunityfor the framework of avoided deforestation. The ForestCarbon Partnership Facility of the World Bank is developinga financing mechanism for avoided deforestation andpreparing countries to participate in this scheme.Preparations include, among other things, developingtechnical tools for monitoring and measuring avoideddeforestation, assessing opportunity costs, and making thenecessary financial transfers. Beyond the technical aspects of

operationalizing this concept, an enabling environmentmust be created to facilitate this approach.

Cross-sectoral impact. Deforestation is a complexphenomenon: While there is general agreement that it isstrongly influenced by economic change arising fromoutside the forest sector itself, its specific causes (and,equally important, its economic and social effects) varywidely between—and even within—countries. Large-scaleeconomic change in any country, whether induced inspecific reform programs or inflicted through exogenousforces beyond the control of that country, has the potentialto bring about major changes in the condition of naturalresources and the environment, especially in developingcountries, where natural capital plays a significant role ineconomic growth and development and is crucial to thesustainability of these processes.

Pressures on forests from poorly aligned strategies inagriculture, transportation, energy, and industry, as well asfrom unsound macroeconomic policies, are major causes offorest loss and degradation. Cross-sectoral cooperation tocoordinate policies is essential to avoid forest degradation,to ensure that forests are managed in a sustainable manner,and to harness opportunities created by ever-rising fossilfuel prices and improved biofuel technologies.

THE WORLD BANK’S APPROACH TO THE FOREST SECTOR

Forests are important to the World Bank’s mission becauseof their contribution to the livelihoods of the poor, thepotential they offer for sustainable economic development,and the essential global environmental services they provide.

The World Bank’s 2002 Forests Strategy andOperational Policy

In 2002 the World Bank adopted a revised Forests Strategy(World Bank 2004) and Operational Policy on Forests (OP4.36) that allow the World Bank to engage more proactivelyin the forest sector to help attain the goal of poverty reduc-tion without jeopardizing forests environmental and eco-nomic values intrinsic to sustainability. The strategy wasfounded on three equally important and interrelated pillars:

■ Harnessing the potential of forests to reduce poverty in asustainable manner

■ Integrating forests more effectively into sustainabledevelopment

4 INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR

■ Protecting vital local and global environmental servicesand values

Addressing these three pillars together makes the ForestsStrategy complex and multifaceted. It not only concernsgrowing or protecting trees but also involves a complexinteraction of policy, institutions, and incentives. The strat-egy embodies a multisectoral approach that addresses cross-sectoral issues and takes into account the impacts of activi-ties, policies, and practices outside the sector on forests andpeople who depend on forests for their livelihoods.

The 2002 Forests Strategy and operational policy markeda shift from outright prohibition of World Bank financingof commercial logging operations in primary tropical moistforests to an approach of improved forest management withtargeted conservation of critical natural habitats in all typesof forests. The new approach embodies explicit safeguardsthat require World Bank–financed investment operations tocomply with independent certification standards acceptableto the World Bank.

Harnessing the potential of forests to reducepoverty. Forest outcomes are crucial for poverty reductionin many of the World Bank’s client countries. For bothcountries with large forest endowments, and for others withlimited forests, if forest issues are not fully incorporated intobroad national government and assistance strategies, theoverarching goals of poverty reduction will not be met.

To harness the potential of forests to reduce poverty, con-ditions must be created to ensure that the rural poor areable to manage their natural resources, especially the forests,for their own benefit. Capacity must be built to support andregulate community use of forests and plantations. Forestassets under various forms of community management,possibly supported by the private sector, could becomemajor sources for global environmental services, such asbiodiversity and carbon sequestration.

Integrating forests into sustainable economicdevelopment. Forests are one of the most mismanagedresources in many countries. Forests are seriouslyundervalued, many of their environmental benefits do notenter markets, and poor governance has fueled illegalactivities. The rapid rates of deforestation in the last decadesare largely a result of the spillover from poor policies in othersectors and lack of governance in the forest sector itself.

A main task, therefore, is to help governments improvepolicy, economic management, and governance in the forestsector, including forest concessions policies and allocations.

Efforts to bring about credible systems for socially, ecologi-cally, and economically sound management of productionforests should, however, also be coupled with systems forindependent certification and monitoring. Identificationand promotion of local, regional, and global markets forforest products is a matching priority.

Protecting global forest values. More than 600million hectares of protected areas have been established indeveloping countries. While many of these areas areeconomically inaccessible, other areas are under increasingpressure from development and illegal activities, includinglogging and poaching. Many governments do not have theresources to effectively administer and protect these areas.In addition, other forests, ecologically sensitive and rich inbiodiversity but outside protected areas, are underincreasing threat.

Invasive pressures are likely to worsen unless significantadditional funds can be made available from multiplesources, at highly concessional or grant terms, for protection,or unless effective markets for the ecosystem values of forestscan be developed. The creation of new markets for the envi-ronmental services of forests, such as biodiversity, carbonsequestration, and watershed protection, are essential.

The Forests Strategy course for implementation

The World Bank’s Forests Strategy charts a course for imple-mentation based on engaging in key countries, creatingpartnerships, increasing analytical work, and improvingcoordination across the World Bank Group.2 In line withthis, the World Bank is pursuing the following:

■ Selectively engaging with forest priority countries.■ Developing partnerships, such as the Global Forest Part-

nership, that bring together existing and emerging part-nership arrangements—such as the World Bank-WorldWildlife Fund (WWF) Alliance, the Program on Forests(PROFOR), and Forest Law Enforcement and Gover-nance (FLEG) initiatives—and that enhance coordinationamong client countries, donors, international nongovern-mental organizations, research institutions, and civil soci-ety to achieve the goals of the Forests Strategy. In thefuture, the strategy will continue to rely on successfulefforts and enter into new partnerships as dictated by thestrategy and the changing development context.

■ Focusing on emerging opportunities for innovativefinancing of forest sector activities and continuing tofacilitate concessional financing by blending Interna-

INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR 5

tional Bank for Reconstruction and Development(IBRD) and International Development Association(IDA) loans with grants.

■ Building a solid analytical foundation to support andfacilitate engagement in the forest sector.

■ Coordinating across the World Bank Group, with a par-ticular emphasis on the International Finance Corpora-tion (IFC), whose operations in the sector are significantin many forest-important countries.

Operational policies for World Bank–supportedinvestment projects

The World Bank’s suite of operational policies ensures thatBank operations with potential impact on forests take forestoutcomes into consideration. In line with the current ForestsStrategy, OP 4.36 is proactive both in identifying and pro-tecting critical forest conservation areas and in supportingimproved forest management in production forests outsidethese areas. OP 4.36 applies to all World Bank investmentoperations that potentially affect forests, regardless ofwhether they are specific forest sector investments. It alsoencourages the incorporation of forest issues in CountryAssistance Strategies (CAS) and addresses cross-sectoralimpacts on forests. OP 4.36 provides for conservation of crit-ical natural habitats and prohibits World Bank financing ofany commercial harvesting or plantation development incritical natural habitats. It also allows for proactive invest-ment support to improve forest management outside criticalforest areas, with explicit safeguards to ensure that suchWorld Bank–financed operations comply with independentcertification standards acceptable to the World Bank, oroperations with an agreed upon, time-bound action plan toestablish compliance with these standards.

Beyond OP 4.36, relevant operational policies comprisethe provisions for environmental assessment embodied in OP4.01, which require that impacts of any proposed activity onthe natural environment, human health and safety, and socialaspects be taken into account under OPs 4.10 (IndigenousPeoples), 4.11 (Physical Cultural Resources), 4.12 (Involun-tary Resettlement), and 4.04 (Natural Habitats). OP 4.04 inparticular requires that the World Bank not support projectsthat, in its opinion, involve the significant conversion ordegradation of critical natural habitats, and OP 4.10 requiresthat the World Bank only support projects in which affectedIndigenous Peoples provide broad community support to theproject based on prior, free, and informed consultations.

Broadly based development policy lending, by its nature,is not dealt with under safeguard policies of the type the

6 INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR

World Bank applies to its investment lending. Developmentpolicy loans (DPLs) were originally designed to provide sup-port for macroeconomic policy reforms, such as in trade pol-icy and agriculture. Over time, DPLs have evolved to focusmore on structural, financial sector, and social policyreforms, and on improving public sector resource manage-ment. Development policy operations now generally aim topromote competitive market structures, correct distortionsin incentive regimes, establish appropriate financial moni-toring and safeguards, create an environment conducive toprivate sector investment, encourage private sector activity,promote good governance, and mitigate short-term adverseeffects of development policy. While the sorts of activities,institutional changes, and policy developments that resultcan certainly have impacts on forests, it is no simple task toassess what these effects will be in any given situation, as theconnections with outcomes at the field level are diffuse andindirect—and thus quite inaccessible to the precise and spe-cific requirements of the safeguard policies that apply toinvestment lending. The World Bank recognized this diffi-culty, and until recently did not subject its structural adjust-ment lending to compliance with the safeguard policies. Anoperational directive (OD 8.60) provided some guidance onenvironmental issues for this form of lending until it wasreplaced by a more detailed operational policy on DPLs (OP8.60).3 This policy makes explicit mention of forests and ishighly relevant to the forest sector because it guides the duediligence needed to ensure that the potential for this form oflending to cause damage to natural resources, forests, and theenvironment is minimized in the design and approach used.Such operations are of special concern where large numbersof poor people rely on forests to some extent for their liveli-hoods. Where rapid economic change is occurring, perverseincentives and misallocation of resources leading to forestremoval or changes in the status of use and ownership offorests will be risk factors to poverty alleviation.

THE WORLD BANK’S LENDING TO THE SECTOR

The portfolio of the World Bank’s investments in forestsindicates an upward trend, after having fallen in the early2000s to historically low levels.4 The total commitment in2001 was US$141 million, reflecting lending from the WorldBank, the Global Environment Facility (GEF), and the IFC(figure 3). Lending has remained relatively steady in fiscal2007 (July 1, 2006 to June 30, 2007).5 Between October 2002and June 2007, the World Bank approved 12 stand-aloneforestry projects, as well as 39 others that include forestrycomponents. There are 13 more forestry-related projects in

the pipeline, four of which are stand-alone forestry projects.A more proactive approach to World Bank engagement inforests, which is embodied in the Forests Strategy, andstrong support for this approach from the Board of Execu-tive Directors and senior management have been significantfactors in creating the increase in activities.

Overall lending profile

The volume of lending for the five years preceding theForests Strategy is nearly equivalent to the five years afterintroduction of the Forests Strategy: US$568 millionbetween fiscal 1997 and fiscal 2001, compared with US$517million from fiscal 2002 through fiscal 2006. After adoptionof the Forests Strategy, lending slowed and has only recentlyregained the levels preceding the adoption. When forestryinvestments in projects associated with other sectors areincluded (that is, World Bank projects that do not have aforest sector coding), aggregate IBRD and IDA investmentin the forest sector is much larger (figure 4). By this mea-sure, total investment in forests by the World Bank wasUS$770 million after adoption (fiscal 2002 to fiscal 2006).Though lending in the forestry sector has not expandedsince approval of the Forests Strategy in 2002, forest lendinghas been integrated into natural resource management,agriculture, environment, and rural development projects.Furthermore, World Bank lending has expanded to include

all types of forests, not just tropical forests: Nearly 40 per-cent of lending between fiscal 02 and fiscal 06 (US$204 mil-lion) has been in nontropical countries, predominantly inEastern Europe and the Mediterranean.

Regional lending profile

The regional profile of lending has changed since 2001 (figure5). The inclusion of temperate forests in the Forests Strategyhas increased lending in the Europe and Central Asia region.In the region, the World Bank has been concentrating on anincreasing demand for policy dialogue and advisory technicalassistance. Projects in Armenia, Bosnia and Herzegovina,Georgia, Kazakhstan, Romania, and the Russian Federationare working to strengthen fire management, reforestation,and development of protected areas. Focus within the proj-ects has been on training, institutional reforms, forest infor-mation, the role of the private sector, and devolution of man-agement to local and subnational levels.

In the Sub-Saharan Africa region (AFR) since the newstrategy there have been three active projects with a focus ongovernance in the Congo Basin (Cameroon, DemocraticRepublic of Congo, and Gabon). It is anticipated that overthe next few years, forest activities will focus on governance-related issues, sector reform, and institution strengthening.

In general, the World Bank has had limited forestryengagement in the Middle East and North Africa region

INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR 7

2001 2002 2003 2004Fiscal year

2005

1125

45

82

128

35

111

274

166

6

45

217

2917

162

208

63

12

443

518

131

28

143

302

134

2

300

436

2006 2007

600

500

400

300

200

100

0

World BankGlobal Environment FacilityInternational Finance CorporationTotal

US$

mill

ion

Figure 3 Commitment from the World Bank, GEF, and the IFC for Forests, FY01 to FY07

(MENA) because of its low forest cover. In Morocco, anation with relatively extensive forests, the World Bank isinvolved in preparing an Integrated Forest DevelopmentProject. In the Islamic Republic of Iran, a land and watermanagement project has a community-based forest man-agement component.

In the East Asia and the Pacific region (EAP), the WorldBank’s lending has focused on plantation development incountries, such as China, that are major consumers of forestraw materials.6 Additional focus has been on policy dialoguefor development of certification schemes. Also, successfulprojects in Vietnam and the Lao People’s Democratic

Republic are working to address governance and policyreforms.

In the South Asia region (SAR), India accounts for the bulkof lending. Lending commitments have been declining since2003 as one generation of projects has ended (figure 5). Sincethen, lending awaits the results of an Analytical and AdvisoryServices (AAA) initiative designed to guide future lending andto reengage dialogue with the government about policy.7

In the Latin America and the Caribbean region (LAC),projects have concentrated on community forestry, refor-estation, forest land restoration, forest certification, forestconcessions, policy, and legal reforms.8 Additional projects

8 INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR

Figure 4 IBRD/IDA and GEF Forestry-Related Lending, Including Forest Components in Nonforest Projects, 1997–2006

Figure 5 Amount of IBRD/IDA Forestry Lending by Region, FY01–FY05

US$

mill

ion

1997

61

286

422

56

110

21

130

3420

84

165

67

249

54

105

19

128

45

148

32

1998 1999 2000

IBRD/IDAGEF

2001 2002

Year

2003 2004 2005 2006

450

400

350

300

250

200

150

100

50

0

Region and years

SSA EAP ECA LAC MENA SAR

0

20

40

60

80

100

120

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

US$

mill

ions

in Belize, Brazil, Colombia, Costa Rica, Ecuador, El Sal-vador, Honduras, Nicaragua, and Peru concern the creationand management of protected areas with an emphasis onindigenous and local community participation and forestmanagement.

See figure 6 for a regional breakdown of lending over2001–05.

PROGRESS TO DATE

In 2006 the World Bank commissioned an independentmidterm review of the Forests Strategy implementation(Contreras-Hermosilla and Simula 2007). The review foundthat the World Bank has made substantial progress on allfronts outlined in the strategy. Yet the strategy has been onlypartially implemented in the four years since its adoption.Some of its main achievements follow.

Mainstreaming of the strategy. The World Bank hassought to manage the effects of macroeconomic policy andsector programs on forest resources. Some countries haveincorporated forest sector reforms into their PovertyReduction Strategy Papers (PRSP). The Bank has supportedthese within the framework of CAS in countries likeCameroon, and through forest investment projects in suchcountries as Albania, Croatia, Romania, and Russia. TheWorld Bank has also supported policy changes through DPLs,again for example, in Cameroon. In many other countries,however, forests have not been properly considered in theCAS or DPL, even in cases where doing so was clearlywarranted by the size of the sector or its potential to alleviate

poverty, contribute to economic development, and preserveenvironmental values. Governments do not always makeforestry a policy priority or seek Bank support, and in someinstances analytical work that might have provided aframework for integrating forest issues into planning andpolicy making has been lacking or insufficient. The relatedanalytical work has been highly variable and offersopportunity for improvement.

Successful extension to nontropical forests hasextended its engagement to nontropical forests, includingthose in China, Georgia, Romania, the Russian Federation,and Turkey. It has also supported timber productionactivities in tropical moist forests in countries such asCambodia, Cameroon, and Mexico. The integration offorest components into natural-resource and ruraldevelopment programs has intensified in countries likeAlbania, Gabon, and Guatemala. The World Bank has alsobroadened its focus on forestry with new instruments, suchas independent certification. It has also expanded the scopeof its interventions to account for the impacts on forests ofpolicies in other sectors, such as trade.

Despite these accomplishments, the World Bank’s overalllevel of engagement has thus far remained insufficient forachieving the targets set in the Forests Strategy. IBRD andIDA lending volumes increased only slowly, regaining andthen stabilizing at levels comparable to volumes before theadoption of the strategy. Overall World Bank involvementin natural tropical forests operations remains modest and isoften surrounded by intense controversy. In many cases therelative dearth of self-standing forest projects reflects thelack of priority that clients assign to investing in forests orto introducing forest sector reforms.

Poverty reduction. Poverty reduction objectives, a pillar ofthe strategy as well as fundamental to the World Bank’soverall mission, have been appropriately included in forestinvestments in a number of countries, including Albania,Gabon, and Nicaragua. In many other countries, however,poverty and the effects of forest interventions on forest-dependent people have not received adequate attention,either in the World Bank’s analytical work or in its lendingprogram.

Other key achievements include the following:

■ Strengthening forest sector governance and transparency.World Bank activities have created a political climate forhigh-level regional discussions on improvement in gov-

INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR 9

SSA19%

EAP26%

ECA11%

LAC15%

MENA9%

SAR20%

Figure 6 Regional Distribution of IBRD/IDA Lending,2001–05

ernance and increased transparency and accountabilityin the sector. They have also made improving forest sec-tor governance and institutional reform a central focusin many countries, including Cambodia, Cameroon,Democratic Republic of Congo, Gabon, Honduras,Indonesia, and Russia, and initiated the process of sectorreform in some of these countries (Democratic Republicof Congo, Gabon, and Tanzania).

■ Conserving local and global ecosystem services. The WorldBank has supported and spearheaded the developmentof conservation through payments for environmentalservices schemes and improved management of pro-tected areas through Bank projects. The World Bank alsorecently launched the Forest Carbon Partnership Facility(FCPF) to enable payments for REDD.

■ Facilitating responsible private investment. Most WorldBank client country governments are working to attractresponsible domestic and foreign private sector invest-ments to achieve effective conservation and sustainablemanagement of forest resources.

■ Building strategic partnerships. Through strategic part-nerships and programs, such as the World Bank–WWFAlliance, PROFOR, and FLEG initiatives, the WorldBank has been leveraging resources, aligning stakeholderinterests, enabling innovation, improving outreach, andscaling up impacts. The World Bank has been activelysupporting strategic partnerships at regional (for exam-ple, Congo Basin Forest Partnership) and national lev-els. The World Bank is currently facilitating the develop-ment of a Global Forest Partnership to galvanizesynergies among forest partnerships and programs andto scale up the availability of grants for the developmentof the sector.

THE CHALLENGE AHEAD

The 2002 Forests Strategy emphasized a path of “cautiousreengagement.” Since fiscal 2002, this has included theWorld Bank selectively reengaging in key countries, buildinga solid analytical foundation for World Bank lending andgrants, using partnerships to initiate and implementnational and international processes for strengthening gov-ernance, enhancing poverty considerations in forest activi-ties, and advancing forest conservation and sustainable for-est management. Progress made in these areas since the startof the new strategy is described above. Still, significant gapsand challenges remain, not only across countries andregions, but also in implementation of the World Bank’spriority areas. These challenges are as follows.

Key global challenges

Address poverty and forest governance by promotingforest ownership and access rights. Promote greaterrecognition of the rights of local and indigenous groups andgive greater attention to land tenure, ownership, and rights-to-resource and access issues. Emphasize and enablestakeholder participation in the formulation andimplementation of policies, strategies, and programs to fosterownership and long-term sustainability of the resource.

Enhance the role of forests as an engine ofeconomic growth and development. Increaseinvestments in plantations (especially in tropical countries),expand forest certification and overall forest management,and encourage responsible private sector investments,including for community-company partnerships for on-siteforest enterprise development, and for market access.

Protect vital local and global environmentalservices and values. Create markets for local ecosystemservices, such as water and soil erosion. Seize the potentiallyenormous financing opportunities emerging in the contextof global climate change to increase investments for carbonsequestration and avoided deforestation to reduceemissions from deforestation and forest degradation.

Assist countries to integrate the global forest agendainto their own national strategies and policies and toharness the development opportunities available. Usethe World Bank’s leadership position in the global forestdialogue and take advantage of emerging economic andenvironmental opportunities (such as the attractiveness ofbiofuels, for example) to foster sustainable forest management.Integrate forest interdependencies into the design ofagriculture, rural development, and natural resourcemanagement projects to ensure sustainable economic growthand rural poverty alleviation.

Key regional challenges

Sub-Saharan Africa. Continue promoting fundamentalsector reforms and capacity building around the challenges ofgovernance, environmental protection, and forest livelihoods.Expand market mechanisms to secure environmentalservices, and improve dry forests management.

East Asia and the Pacific. Invest in plantation areaexpansion, expand instruments for natural forest

10 INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR

management and biodiversity conservation, providesupport to forest law enforcement and governanceinitiatives, and maintain well-managed environmental andsocial safeguard reviews.

Europe and Central Asia. Support transformation offorest management organizations into efficient servicedelivery institutions capable of meeting the challenges ofmultifunctional, landscape-level forest management;support decentralization of management to subnationalentities through adequate public financing mechanisms andincreased responsibilities for the private sector and localcommunities.

Latin America and the Caribbean. Support improvedforest governance and institutions, sustainable harvestingand forest management, forest landscape restoration, anddevelopment of industrial plantations.

Middle East and North Africa. Enhance policy andinstitutional reforms to position forests in a wider contextof sustainable natural resource management.

South Asia. Support the rural poor through greater accessto forest resources and stronger property rights, and fostergreater participation of the private sector in productiveenterprises in rural areas, for local value addition andemployment.

Key challenges for the World Bank

Mainstream forests. Strengthen forests’ role in the WorldBank’s agenda through greater inclusion of forest sectorissues in PRSPs and CASs and better alignment of PovertyReduction Support Credits and GEF and IFC resources withthe overall lending program to address poverty andlivelihood issues.

Implement safeguards and due diligence. Ensureefficacious application of the World Bank’s safeguardspolicies (especially on the social side) in traditional forestlending projects, and strengthening due diligence for forestconcerns in DPL, through increased participation, betterknowledge management and communication, and focusedstaff training.

Strengthen forest governance. Integrate forestgovernance into World Bank policy dialogue and projects toachieve concrete outcomes in client countries.

PURPOSE OF THE FORESTS SOURCEBOOK

The purpose of the Forests Sourcebook is to be a resource forWorld Bank clients, task managers, and other stakeholdersin the design and implementation of projects in line withthe Forests Strategy as they tackle the challenges ahead. Thesourcebook draws on experiences from within and outsidethe World Bank in implementing innovative approaches forintegrating the three pillars of the strategy. The sourcebookdistills key points from frontier guidance material sup-ported or published in specific subject areas, either by theWorld Bank or other partner organizations.

The sourcebook offers guidance to program and projectmanagers by (i) highlighting the key issues in each chapter,(ii) suggesting approaches for implementing projects andanalytical work in line with the strategy, (iii) providing linksto more in-depth sources of information, and, where possibleand relevant, (iv) describing tools for addressing these issues.

NOTES

1. In 2002, the World Bank estimated that total forest sectorprivate investment in developing countries and countries intransition was in the range of US$8 billion to US$10 billionper year. In the opinion of the review team for the WorldBank’s independent midterm review of the Forests Strategyimplementation, the 2007 figure is substantially higher(Contreras-Hermosilla and Simula (2007)). According to theFAO (2006), the plantation area in developing countries isincreasing at about 1.8 million hectares per year. This repre-sents investments of US$3 billion to US$4 billion per year.Improvements in existing forest management should beadded to this, but reliable estimates do not exist. In planta-tion-based projects, industrial investments represent 80–90percent of the total. Applying this coefficient—with planta-tion investments being 20 percent of the total—total forestinvestment in developing countries should be at least US$15billion.

2. Successful implementation requires (i) being selective inWorld Bank activities in forests with country ownership andcommitment, as broad criteria for engagement; (ii) devel-oping partnerships (with other donors, nongovernmentalorganizations, and the private sector) to enable the WorldBank to address forest issues through a broad spectrum ofpolicies and in collaboration with national governments;(iii) financing the strategy by encouraging blended financ-ing arrangements through multiple sources, including thedevelopment of markets and financial payments for envi-ronmental services from forests; (iv) increasing economicand sector work to initiate the process of building analysis,awareness, and then demand for forest investments (and forincorporation of forestry issues) into CASs and PRSPs; and

INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR 11

(v) coordinating across the Bank, including with Interna-tional Finance Corporation (IFC), Multilateral InvestmentGuarantee Agency (MIGA), and World Bank Institute(WBI) for better implementation of a unified strategy.

3. This policy was approved by the World Bank’s Board ofExecutive Directors in 2003.

4. The World Bank Group includes the InternationalDevelopment Association (IDA), International Bank forReconstruction and Development (IBRD), InternationalCentre for Settlement of Investment Disputes (ICSID), IFC,and MIGA. Aggregate investment in the forest sector tendsto fluctuate from year to year because it can be heavilyskewed by one or two large projects. Such fluctuationswould be less if aggregate disbursements were tracked.

5. This sourcebook does not go into details, but the GlobalEnvironment Facility (GEF) is an important partner in theimplementation of the Forests Strategy. In 2003–05, theGEF provided US$186.1 million for 38 forest-related proj-ects implemented by the World Bank. The total value ofthese projects was US$951.8 million. The number of WorldBank–implemented GEF projects has averaged 13 per yearsince 2000. The average size of these projects has doubledduring the same period, from US$16.1 million to US$34.4million.

6. For more details, please see the regional strategy (WorldBank 2007).

7. See Unlocking Opportunities for Forest-Dependent People(World Bank 2006). It includes a policy report, policy dia-logue, and comprehensive dissemination that will guide

future World Bank lending in forestry. It is the basis for dis-cussions with the government of India on possible reformsat the national and state levels. Important outcomes havebeen the formation of a forestry donor’s forum, and high-level policy meetings with the Prime Minister’s Office andthe National Planning Commission.

8. These subjects have been the focus of Bank projects inBolivia, Colombia, Guatemala, Honduras, Mexico,Nicaragua, Paraguay, and Peru.

REFERENCES CITED

Contreras-Hermosilla, A., and M. Simula. 2007. “The WorldBank Forest Strategy: Review of Implementation.” WorldBank, Washington, DC.

FAO. 2006. Global Forest Resources Assessment 2005. Rome:FAO.

Stern, N. 2007. The Economics of Climate Change: The SternReview. Cambridge: Cambridge University Press.

White, A., and A. Martin. 2002. Who Owns the World’sForests? Forest Tenure and Public Forests in Transition.Washington, DC: Forest Trends.

World Bank. 2004. Sustaining Forests: A Development Strat-egy. Washington, DC: World Bank.

———. 2006. Unlocking Opportunities for Forest-DependentPeople—India. Delhi, India: Oxford University Press.

———. 2007. East Asia Region Forestry Strategy. EASRD(Rural Development and Natural Resources. East Asia &Pacific Region), World Bank, Washington, DC.

12 INTRODUCTION: OPPORTUNITIES AND CHALLENGES IN THE FOREST SECTOR