This does not include the intangible costs of the loss of biodiversity and water services. Nor the future social cost of natural disasters and loss of jobs from forest destruction.

"Demand for timber is far exceeding the amounts that can be produced sustainably," Prasetyo said. According to the CIFOR study, East Kalimantan's timber industry has the capacity to produce about 9.1 million cubic meters of wood a year. For all of Indonesia the capacity exceeds 60 million cubic meters. This is in stark contrast to the Ministry of Forestry's allowable cut of 5.7 million cubic meters in 2004.

"If we make the fairly standard estimate that the industry in East Kalimantan is working at only 60 percent of its potential capacity, then the need for timber in the region would be around 5.5 million cubic meters," Prasetyo said.

"But figures for the past five years show that the official quantity of log production from natural forest has been around 2.1 million cubic meters per year. Subtract this official figure of 2.1 million cubic meters from the 60 percent estimated output, and you have a deficit of 3.3 million cubic meter of logs. This 3.3 million cubic meters of timber is being processed without any taxes being paid to the provincial government.

"As if that's not bad enough, there's also the lost revenue incurred through illegal timber smuggling to neighboring countries. This was over two million cubic meters in 2000," Prasetyo said.

Prasetyo said that in total, undocumented timber processing and illegal logging amount to a loss of Rp 856 billion a year - about $US107 million a year - half the annual revenue of the region.

"This is money that could be spent on poverty reduction programs, job creation schemes, new schools and health centers."

These days the price of timber is decreasing despite a rise in demand for wood and a decline in the legal production of timber.

"Given falling supply and increasing demand, economics dictates that prices should be rising," said Obidzinski. "That prices are not going up means there is an oversupply of timber on the market. And the supply appears to be from illegal or at least undocumented sources. This timber costs less because the suppliers do not have to pay tax or meet the other financial obligations associated with legally producing timber."

Prasetyo thinks the days of East Kalimantan being the main source of timber to Indonesia are over.

"In 1974, official government statistics listed the region as producing 6.6 million cubic meters of timber. The estimate of the Ministry of Forestry for 2004 is only 1.6 million cubic meters," Prasetyo said.

The decline in output is due to a number of causes. These range from the 1997/98 forest fires and recent land use changes, through to unsustainable and illegal logging, which is also contributing to the steady deforestation of East Kalimantan.

Obidzinski says there are many issues underpinning illegal logging. One of them is the lack of law enforcement, although Obidzinski is quick to add it is not the main reason. "The most significant underlying cause of illegal logging is the client-patron relationship. Illegal logging is difficult to eliminate because both suppliers and purchasers benefit from the profitability of the trade, especially by evading tax," Obidzinski said.

Current timber prices are reaching as low as US$45-50 per cubic meters. These levels are bound to make legal timber production unprofitable. Another reason for the low prices is that workers involved in illegal logging earn much less than legal workers because of their poor bargaining position.

Prasetyo and Obidzinski suggest a number of solutions to the illegal logging problem. Restructuring the timber industries, increasing the supply of timber from plantations and improving the management of natural forest would reduce illegal logging and slow down deforestation. Other solutions include making timber industry regulations more transparent and improving law enforcement practices.

Prasetyo says the Ministry of Forestry seems committed to overcoming illegal logging, but faces an extremely difficult challenge.

"We've recently seen the Minister for Forestry, Pak Muhamad Prakosa, trying to engage Malaysia and Singapore's help in preventing the import of illegal timber from Indonesia. And the Ministry has identified the fight against illegal logging and the restructuring of the timber industry as two of its five priority areas.

"But illegal logging is a complex issue involving many players. To succeed, the Ministry of Forestry also needs the help of other government agencies, industry, local governments and the military," Prasetyo said.

Forestry is the main source of livelihood in East Kalimantan. If illegal logging is not properly addressed, Prasetyo and Obidzinski predict unemployment in the region will increase due to the short-term benefits and unequal distribution of profits from the business of illegal logging.

"Without a whole-of-government approach and greater public and industry awareness and responsibility, illegal activities will be impossible to control. This will harm not only the environment but also the economic future of the region," Prasetyo said.