0263-C1

Economic theory of emerging forest property rights

Shashi Kant 1


Abstract

The dominant economic theory argues that bundles of private property rights will increase as the value of property increases. However, in recent decades, forest property rights have shown a different trend, the emergence or re-emergence of different forms of community-based and co-management forest property rights with increase in value of forest resources. The economic rationale behind these trends is examined. Multiplicity of forest attributes and non-pricing of many forest attributes, user-group-specific values of different forest attributes, production or management-process-specific market values of some forest attributes, high transaction costs associated with delineation of attribute-specific property boundaries to different stakeholders, exclusion of non-right holders, and specialization of different stakeholders in required factors, are identified as the main determinants of forest property rights. The evolution of forest property rights in India and Canada is examined. Based on the economic rationale and field experiences, a new theory of forest property rights is proposed.


Introduction

Property rights of individuals or groups over an asset consist of the rights to draw benefits, to exclude others from benefits, to transfer the asset to others, to manage the asset, and to involve in productive activities associated with the asset. Management rights include rights for providing or sharing inputs, rights to decide the management or production process, rights to organize the management or production process, and rights to intermediate and final outputs. The dominant economic theory of property rights is the theory developed by Demsetz (1967), and supported by historical evidence provided by North and Thomas (1973), and De Alessi (1980). This theory argues that the bundles of private property rights will increase with the economic scarcity of the property, and has suggested private property rights for economic efficiency. Many forest economists, such as Barbier et al. 1991, have also argued for private forest property rights specifically to control deforestation. Some economists have justified the public property rights for natural resources due to multiple functions that conflict with the single product objective that provide profits to private owners (Luckert 1992). However, the recent developments in forest property rights - specifically the emergence or re-emergence of different forms of community-based and co-management (or joint management) forest property rights in developing (India, Nepal, China, and Mexico to name a few) as well as developed countries (Canada) - seem counter-intuitive to the dominant economic theory of property rights. Some economists may argue that these new property rights may not be economically efficient, but such outright rejection may not be socially desirable. Hence, it seems necessary to examine economic rational behind these forest property rights, and propose an economic theory which can explain this phenomenon2.

The arguments of dominant economic theory are based on the Walrasian model, in which market adjustments are frictionless, and market prices alone always suffice for all allocation problems. In this model, scarcity of a resource will be immediately reflected into market prices, and the society will adjust its property rights arrangement to private property rights to capture the economic gains from scarce resources. Indeed, the Walrasian model may explain many problems in capitalist economies, where prices play a vital role. But, this ideal and frictionless situation is not universal, specifically for non-market economies, where prices are eschewed, suppressed, or non-existent (Barzel 1989, p.99). Many attributes of forest resources are not priced by the market, transactions are costly; and, hence, transactions require non-price allocation methods, corresponding institutions and organizations. New forest property rights - community-based rights and co-management rights - are non-price allocation methods, an institutional arrangement, aimed at social welfare maximization, specifically through minimization of transaction costs. Hence, an in-depth analysis of specific features of forest resources with respect to property right arrangements is required to propose an economic theory of forest property rights.

Demsetz's theory assumes the property to be as a single attribute object, and the scarcity of a resource or attribute is reflected through market prices only. But, forest resources are a complex of multiple attributes, some of which are separable but others are non-separable. Similarly market prices can provide scarcity signals only for private goods and not for the public or common pool goods. Second, some times market prices of a product may also attach a value to the process of production or management in addition to the features of the product. Third, the economic optimality of a property right arrangement depends upon the minimization of transaction costs, and the transactions costs of meeting certain owners' objectives, where that owner is the state acting in the public interest, are very different under different allocations of rights or management structures. The transaction costs depend upon the physical and economic features of the forest attributes as well as on the socio-economic features of the user groups. Hence, keeping attributes and values of different attributes constant, optimal forest property rights may vary across countries or communities in the same country. Keeping these features in view, first we examine all these three aspects in detail. Second, we provide some background of evolution of forest property rights in India and Canada. Finally, we propose an economic theory of forest property rights that can explain emergence of new forest property rights and discuss some policy implications.

2.0 Forest Attributes: Multiplicity, Non-pricing, and User Group-specific Values

Forest resources have multiplicity of attributes. Some attributes have characteristics of a private good, such as timber and some non-timber physical products; some of a public good such as environmental and ecological services; and some are common-pool goods such as fruits, berries and leaves. Normally, forest attributes of private good nature are traded in the market and priced, but attributes with features of public goods and common pools goods are normally not market priced. However, the absence of market prices does not mean the attributes are not valuable. In fact, values of these attributes are called non-market values. The different attributes of forest may have different economic values for different user groups such as forest industries, Aboriginal people, local forest-dependent groups, environmental groups, and other members of society. Hence, any pattern of property rights inclined towards the single right-holder or ownership to all forest attributes will increase externalities, and may not yield the maximization of social welfare. Since, the different attributes have different economic values for different groups, one group may not have all the physical factors necessary for forest management, and the single right-holder may have to acquire these inputs from outside sources. But, the different groups, who have the joint property rights on different attributes, may be able to contribute to social welfare by pooling their factors together. In the case of single right holder, the management focus will be only on the attributes valuable to him, and other attributes will be in the public domain resulting into open access problem. Hence, an economically efficient structure of rights should be designed to allocate property rights of all attributes among parties in such a way that the parties who have a comparative advantage in managing the attributes that are susceptible to the open-access problem will obtain rights over them. Similarly, joint allocation of property rights will also help in capturing the gains due to specialization of different groups in the management of different attributes. New forest property rights seem an attempt in that direction. Whether a new property right arrangement is Pareto-improvement or not will depend upon actual property right structure used in the specific arrangements and the pre-existing property rights.

An individual's or group's rights over an asset or some attributes of an asset are not static, and are function of their own, community's, and government's protection efforts and attempts of other people or group to capture them, and these efforts will depend upon the value of the attributes to those people. The value of attributes to a group/individual may also vary with socio-economic, market, political, and environmental factors. For example, about thirty years back, environmental and ecological services of forests were not treated as valuable, but now these attributes have become highly valuable. Similarly, in the past society at large did not recognize Aboriginal values, but now it has. Hence, the efforts of non-right holder groups to capture rights to the asset or at least some attributes of the asset will evolve with time. The main reason of emergence of new forest property rights is the increasing values of many attributes of forest which were not valuable before, and the attempts of these groups, such as environmental and Aboriginal, to capture the rights of the groups, such as forest industries and states, who previously hold the rights over some other forest attributes such as timber.

However, property rights are never absolute irrespective of the number of agents or groups to whom rights are assigned. The nominal right holder has the right to the gross income or return from the asset. The net return will depend upon the cost of associated transactions, and the maximization of the net value of an asset, then, involves that property right arrangement that minimizes the transaction costs. Four important aspects of transactions, in forest resources, are the delineation of property rights, exclusion of non property-right holders, sharing of factor inputs and outputs, and these are discussed in Section 4.

3.0 Production or Management Process-specific Market Values of Forest Attributes

Generally, the market value of a good is based on inherent features of the good, and the same good with the same features, irrespective of the source of the good or management and production process of the good, would have the same market value. The argument is based on the assumption that the utility derived by a consumer is the function of the inherent features of the good, and is independent of the context of the consumer or of the production process. However, experimental economics has demonstrated that the context of a consumer and of the production process are critical for utility and hence for the market value of the good. In the last decade, consumer preferences for certified forest products have given enough evidences for this phenomenon. Researchers have identified green premium, improvements in corporate image, and increased market share as some of the outcomes of forest certification. Each adopter may capture a larger market share and become more competitive. Many giant lumber companies such as the Home Depot, IKEA, have committed for the exclusion of lumber from non-certified forests. Forest certification means sustainable forest management which includes wider range of values such as timber, non-timber, biodiversity, global ecological cycles, Aboriginal Values and Rights, and incorporation of inputs from local people (CCFM 1995). Hence, new forest property rights are an attempt to capture increased values from certified production/management process.

4.0 Transaction Costs Associated with Forest Property Rights

Transaction costs associated with four aspects, identified in Section 2, are discussed next.

4.1 Transaction Cost of delineating property rights

The delineation of the boundary of the forest property rights is too difficult. Forest resources are not a mix of few separable commodities but it is a system that is also valuable for its functional contributions such as regulation, production, carrier, and information. These functional contributions are derived by keeping its different components working in their existing functional relationship as a fully functionalized system. For some user groups, only some physical products are valuable, but for other user groups, the functional attributes are also valuable. The functional attributes have features of public goods, and cannot be demarcated like private goods. These functional attributes are also subject to variability and lack of full information which further enhances the difficulty to delineate separable property rights (Barzel, 1989). New forest property rights are essentially a compromised solution that reflects the problem of delineation, and minimizes transaction cost of delineation.

4.2 Transaction Cost of Enforcement of Property Rights

In the situations where multiple attributes of forests are valuable to different user groups, allocation of the rights to all attributes to one group will result in very high costs of control of access and exclusion of other groups. In the case of highly-dependent forest communities, de-jure state or private rights become de-facto open-access. Similarly, it is almost impossible to exclude Aboriginal people from their traditional use of forest resources. Consequently, compliance with property rights held or allocated by the government to private industries units is very low and implementation cost will be very high. This is why the conventional approach of allocation of property rights over the forest resources through legislation to one user group is not successful in many cases. The allocation of rights of different attributes to different user groups will lead to high-scale shirking in management efforts, conflicts in the management objectives and practices, and externalities in outcomes, but these costs can be minimized by effective cooperation among different user groups. New forest property rights are an attempt to minimize ex-post transaction costs.

4.3 Transaction Costs and Use of Factors in Forest Management

In the case of single property-right holder, factors not available with the right holder are bought through transactions in the market. In the case of multiple right holders, factors are pooled and not transacted through the market. Since, different forest attributes have different values for different user-groups, these groups may acquire specialization in the factors with respect to management of user-group specific attributes. For example, Aboriginal people have specialization with respect to management of Aboriginal Values while industrial groups have specialization in industrial products. In the respective groups, the specialized factors will be available at low cost, and if these factors can be exchanged through the market at low transaction costs, one group will buy the factors from other group, and depending upon the prices of these factors, either industrial or Aboriginal rights will emerge. But, in many situations, such as specialization of Aboriginal or tribal people, either there are no markets or transaction costs are very high. In such cases, pooling of factors will minimize the cost of factors as well as the cost of transactions of the factors. But, in the case of pooling of factors, coordinating efforts are not costless. One of the major costs is mutual monitoring. However, if such costs are less than the transaction cost of input factors through market, then pooling is more efficient.

4.4 Transaction Costs and Sharing of the Outputs

Normally, different user-groups have different and some time even conflicting preferences on the same resource. For instance, aboriginal people may value wildlife relatively more as hunting resources, while the non-aboriginal people or government may value wildlife more for option value or existing value. So the preference or trade-off between two products is different for the two user groups. According to the Coase theorem, it does not matter because both groups can trade the outputs among themselves, and will attain the socially optimal allocation of outputs. However, this outcome is subject to zero transaction cost, and these costs are never zero, and in such a case a transaction between timber and non-timber may not lead to the socially optimal point. In the case of joint arrangements, transaction costs are saved with such sharing of outputs. However, sharing the outputs is also not costless. However, if the costs of sharing outputs are low compared to transaction costs of outputs, sharing, and hence co-management, will be economically optimal outcome. Specifically, when the demand and value of environmental services, ecological services, and Aboriginal Values from forests increases, trading of these services through market is either impossible or transactions costs are too high, so co-management of forests that reduces the trading by sharing outputs, will be an economically optimal forest management system.

5.0 Evolution of Forest Property Rights in India and Canada

In the pre-British India, forests were owned by the rulers but use of forest was managed by local community institutions. The British regime realized economic value of timber and introduced state property rights. Harvesting rights were given to private contractors on area basis. Independent India continued the same property rights at least for twenty years. In 1980, Indian Government passed the Forest Conservation Act which recognized increased values of environmental and ecological attributes. In 1988, the second National Forest Policy recognized the rights and concessions of the local communities, importance of their participation in forest management, and this has resulted into community-based forest property rights, commonly known as joint forest management (JFM).

In Canada, during the pre-European era, the concepts of property rights and ownership were absent. In the beginning, European settlers valued forests only for military purposes, but later they valued forests for generating public revenue and introduced annual harvesting rights. By the end of 19th century, the value of timber was recognized for industrial development, and multi-year harvesting rights were introduced. Heavy exploitation of timber resulted in the introduction allowable annual cut (AAC) in 1940s. In the 1960s and 1970s, large share of forest areas was reserved as wilderness areas, and a new system of property rights, which included partial transfer of management responsibility to harvesting right holders, was introduced. In 1980s, emergence of wood processing technology resulted in the extension of property right arrangements from softwood species to hardwood species. In the 1990s, the Canadian courts, through Sparrow (1990) and Delgamuukw (1997), directed the governments to recognize and protect Aboriginal rights and values. The recognition of increasing values of many forest attributes led to many types of forest co-management agreements.

In Canada, the Crown opted to keep forest resources in public ownership, and allocate rather only partial rights to private companies over the private good attributes. This process has been gradual, and the new private good attributes were included in the process as they became valuable either due to new technology or scarcity. The Crown opted for co-management regimes only when some attributes with public and common good characteristics, such as environmental and Aboriginal values, became valuable. Similarly, in India, the Britishers and the Government of Independent India maintained the state ownership and private harvesting rights for long time, and introduced joint forest management in late eighties due to similar reasons.

6.0 Economic Theory of Forest Property Rights and Policy Implications

Forests are a complex of multiple attributes with private, public, and common pool good characteristics. Some of those are traded in the market and others are not. Change in relative values of different attributes will mean the change in relative importance assigned to different attributes by the concerned groups, and not necessarily change in market prices. The changes may be due to market forces as well as environmental and social awareness, court decisions, and international conventions or agreements. An increase in value of a given attribute will not always mean increase in private property rights, but it will mean increase in specification and clarification of property rights for that attribute. Generally, increase in the value of a private good attribute will lead to increase in private rights, while increase in the value of public or common pool good attributes will lead to an increase in public or communal rights, respectively. However, simultaneous increase in the values of the private, public, and common pool good attributes may lead to co-management rights. Hence, with increased scarcity, dynamics of property regimes may be in any direction i.e., from state to private property or from private to state or co-management rights. Any property regime, including private or co-management, will not be efficient in all situations. The efficiency of a property regime will depend upon transformation costs as well as transaction costs. The optimality of a property regime is also not a static outcome, and optimal property regime will evolve along the changes in relative values of different attributes of a resource, changes in relative preferences of different stakeholders for different attributes, as well as changes in population, local economy, and some other factors (Kant, 2000; Zhang 2001).

Literature Cited

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Barzel, Y. 1989. Economic Analysis of Property Rights. Cambridge. New York: Cambridge University Press.

Canadian Council of Forest Ministers (CCFM). 1995. Defining Sustainable Forest Management: A Canadian Approach to Criteria and Indicators. Canadian Forest Service, Ottawa.

De Alessi, L. 1980. The economics of property rights: a review of evidence. Research Law and Economics 2: 1-42.

Demsetz, H. 1967. Toward a theory of property rights. American Economic Review57: 777-795.

Kant, S. 2000. A dynamic approach to forest regimes in developing economies. Ecological Economics 32: 287-300.

Luckert, M. K. 1992. Changing resource values and the evolution of property rights: the case of wildness. pp 85-99. In Ross, M. and Saunders J. O. (eds): Growing demands on a shrinking heritage: Managing resource-use conflicts. Calgary: Canadian Institute of Resource Law.

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Zhang, Y. 2001. Economics of Transaction Costs Saving Forestry. Ecological Economics 36 (2): 197-204.


1 Associate Professor, Forest Resource Economics and Management, Faculty of Forestry, University of Toronto, 33 Willcocks Street, Toronto, Ontario, Canada. M5S3B3. shashi.kant@utoronto.ca

2 The main purpose of this paper is to explain the emergence of co-management forest property rights on the state-owned forest lands, and hence the proposed arguments are not suitable for privately owned forests.