Domestic policies and forest management§

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An important step towards understanding how overall policy choices affect forest resources was taken in the 1980s, as development strategies shifted from project-based assistance to policy-oriented programmes. During this period, policy analysts turned their attention to the impacts of intersectoral policy linkages on the forestry sector. They recognized the inability of traditional forestry strategies to slow the accelerating pace of deforestation and forest degradation and realized that the roots of forest degradation and depletion often lay outside the forestry sector. In the industrial countries, the effects of pollution (acid rain) on temperate forests highlighted this problem. In the developing countries, population growth, land tenure systems and agricultural sector policies were seen as underlying causes of deforestation.

Repetto suggested that one useful way of conceptualizing how these intersectoral policy linkages affect forests is to visualize a set of concentric circles moving outwards from the forest.

It is important to note that the macro scale could just as easily be placed at the hub or in one of the intermediate circles, depending on a country's particular circumstances and where the primary interest resides. Repetto's example reflects primary interest in the forest unit. On the other hand, the evidence suggests it often belongs in circles above those in which Repetto placed it: specialized direct policies have proved to be remarkably ineffective without a macro or sectoral policy context allowing them to work properly. How these policy linkages are defined and interpreted depends on whether forest issues are: viewed from a national (macro) or a forest unit (micro) perspective; evaluated using development-oriented or resource-oriented concepts of capital, space and location; and analysed with macroeconomic or microeconomic methods (therefore establishing macro or micro sets of policy priorities).

The ongoing research on the efficiency and sustainability implications of these linkages may be consolidated in four key areas: i) market failures and incentive structures; ii) policy failures; iii) forest sector policies; and iv) impacts of timber trade policies on forest use and the environment. Following is an examination of the first three groups for the forestry sector; the fourth group is covered in Section IV, which deals specifically with trade issues.

Market failures and incentive structures. Market failure occurs when incentives offered to individuals, households and firms encourage behaviour that does not meet efficiency criteria, i.e. private and social prices (costs and returns) diverge. When public goods, including public environmental goods and externalities are present, incentive structures may lead to market failure. The market does not confront users with the full social costs of their actions. For example, markets that fail to reflect environmental values fully can lead to excessive environmental degradation. Some form of public or collective action involving regulation (command and control), market-based incentives or institutional measures is required if market failures are to be corrected.

Forests may be affected in several ways. For example, the market prices of widely traded timber products typically do not reflect the environmental costs of their production. Market prices fail to account for indirect use values (e.g. watershed protection or nutrient cycling) as well as future use and non-use values (e.g. option value or existence value), which may be lost or degraded by the production or consumption of forest products. Many environmental benefits are public goods and thus have no market price.

If all goods and services, including environmental services, provided by forests could be bought and sold in efficient markets, the trade-offs among forest functions and between forest and non-forest uses of land would be determined by the public's willingness to buy different services. If the public preferred the services of an intact forest over timber, the private landowner would be paid more to preserve the forest than to harvest it. Since it is not possible to restrict environmental benefits to those who pay for them, no market for these services exists and most landowners undervalue and thus underinvest in environmental forest functions.

In these cases, private and social costs and benefits diverge. Logging companies, for example, may disregard the impact of their activities on wildlife and landscape. The resulting loss of value for hunting or tourism falls outside the private cost and benefit calculations of the timber firm. When external costs are consistently ignored throughout an industry, prevailing market prices will tend to fall below the socially optimal level. ideal policies would induce landowners to weigh the social costs and benefits of their land-use decisions equally with the private costs and benefits. Policies that attempt to induce this behaviour include taxing landowners to cover the social costs they impose on society or subsidizing landowners to prevent them from imposing the damages.

Property rights also shape the system of incentives and disincentives for forest use. The structure of property rights defines the rules, rights and duties within which users of the forest operate. Economic policy-makers place great importance on property rights systems because they govern the efficiency of resource use throughout the economy as well as the distribution of income.

Forest tenure systems range from exclusive rights to open access. Public forests in many developing countries are often open access resources from which no one can be excluded. In countries with extensive tropical forests, the public sector's claims on tree-covered land far outstrip its ability to manage or control forest resources .41 In an open access situation, one individual may want to conserve the forest or set it aside for future use, while another may decide to extract timber for personal gain. The risk and uncertainty associated with abstaining from current use creates an incentive to maximize short-term returns by harvesting forest products immediately. Thus, the opportunity costs of resource use (at long-term social prices) are not taken into account.

This type of economic behaviour is not limited to open access situations. If the owner of a forest parcel is so poor that the revenue from selling trees is needed immediately, the discount rate applied to tomorrow's benefit is infinite and the parcel would therefore be logged today.

Institutional and legal arrangements governing land tenure and transactions can also have significant effects on forest land use. in the past, property laws and land reform legislation in many countries required settlers to clear land in order to secure title to forested areas. Large areas that could have been exploited for commercial timber and non-wood products on a sustainable basis were lost in this way.

With the exception of remote frontier areas of tropical forests, very little forested land exploited for timber is subject to pure open access conditions. However (as discussed below), the failure to design appropriate concession arrangements for public forest lands and insecure tenure rights to plantations can create conditions similar to an open access situation, That is, private individuals and businesses make harvesting decisions based on short-term profit-maximizing objectives and have little regard for the potential for greater returns from timber stands in the future.

Government policies and forest use. Macroeconomic policies and public investment decisions may distort market prices of traded forest products and services. It is often difficult to discern how the linkages between macroeconomic, trade and sectoral policies affect forestry. Economic policy interventions at various levels can alter the profitability of forest-based activities vis-à-vis other domestic sectors and their competitiveness relative to foreign producers.

Macroeconomic policies, such as exchange rate devaluations and the level of debt-service ratios, influence forest resource use in a variety of ways (see Box 19). For instance, an overvalued exchange rate lowers the price of tradable goods relative to nontradable goods. in this case, a real devaluation would remove economic distortions and provide enhanced incentives to domestic production of tradable goods (including forest products) relative to non-tradable goods. This may encourage forest harvesting and increase deforestation rates through the expansion of wood production for international markets.

More generally, macroeconomic policies can affect underlying demand and supply conditions, having an inevitable impact on the forest industry and forest resources. Habito describes how the Philippines encouraged capital displacement of labour through macroeconomic policies that subsidized exports of manufactured goods and that taxed labour relative to capital at a rate five times higher than in developed countries. Many of the displaced labourers and their families migrated to upland public forests where they cleared parcels to grow crops. Without secure tenure, the squatters lacked incentives to invest their labour or capital in conservation practices or to plant tree crops. In many of these upland areas, the resulting soil erosion caused downstream sedimentation of reservoirs, harmed offshore coral reefs and fisheries and depleted soil fertility thereby forcing further forest conversion.

The impacts of macroeconomic performance and policies on the forest sector are difficult to assess; few studies have attempted to examine the macroeconomic linkages to temperate deforestation, and studies of tropical deforestation often produce conflicting conclusions. One study found a significant negative correlation between debt-service ratios and deforestation .44 in contrast, another study found a positive relationship between tropical deforestation, public external debt and the levels and changes in debt .

One study concludes that the high availability of external funds in the early 1970s may have reduced the pressure to use domestic forest resources in tropical forest countries. However, the results also indicate a negative correlation between exchange rate devaluation and tropical deforestation. Thus, some policy responses to correct or service the debt problem may indirectly lead to forest use and deforestation.

Public investment often has direct effects on forest-based activities, particularly where transport infrastructure and public services are extended to previously inaccessible forested areas. This type of investment may be an important subsidy for the logging and wood processing industry, because it reduces the costs of gaining access to forest resources. Likewise, it represents a subsidy for consumers, as it brings forest products to market less expensively. Public investment in remote forested areas also acts as an impetus to human migration and agricultural expansion, which is the major cause of forest clearing in many countries.


MACRO FISCAL GOVERNMENT EXPENDITURE Publicly funded agencies can protect biologically unique areas; public infrastructure (roads and dams) may encourage logging in new areas.
TAXES/SUBSIDIES Multisector instruments can alter general demand conditions and thus the use of resources; for example income tax breaks may encourage investments in forest industries, processing and plantations; resource taxes, "polluter pays" taxes and user fees can also affect forest industry costs.
MONETARY Tied credit analogous to subsidies, credit rationing and interest rate hikes may reduce demand for forest products but may also discourage forest management and conservation investments.
INTERNATIONAL EXCHANGE RATE Devaluation increases prices of imported inputs (petroleum, logging equipment), while increasing the profitability of timber product exports; environmental impacts will depend on the timber products and management regimes affected.
TRADE Import and export taxes and quotas have effects similar to devaluation but on selected timber products and forest industry inputs only; they may alter relative returns to "sustainably managed" forest practices and products.
CAPITAL CONTROLS When used to prop up an overvalued currency, capital controls are similar to a revaluation of the exchange rate.
SECTORAL PRICE CONTROLS Sectoral price controls may stimulate or retard environmentally damaging forest management practices, depending on the nature of timber practices and products affected.
TAXES/SUBSIDIES Reforestation taxes, stumpage fees, concession fees, plantation subsidies, processing subsidies and other taxes or subsidies in the forestry sector will directly affect timber management and production; tax subsidies in other sectors may have indirect effects, for example subsidies on livestock production may promote deforestation in timber areas.

Forest sector policies. Examples of policies that aim directly at forest management include tax credits or subsidies for forest conversion, afforestation and wood production. Forestry is also affected by policies that alter incentives and impede competition in downstream industries or related sectors, such as wood processing and construction.

In the past several years, a great deal of applied research has focused on the economic linkages between forest policies and deforestation. Many studies conclude that forest pricing and management policies often distort costs in two ways. First, the prices for tropical timber products or the products derived from converted forest land do not incorporate the lost economic values, such as foregone timber rentals, foregone non-wood forest products, forest protection and ecological functions or the loss of biodiversity. Second, the direct costs of harvesting and converting tropical forests are often subsidized (or distorted in other ways), thus encouraging overuse and waste.

An important role of policy analysis is to determine whether the benefits of incorporating these foregone values into decisions affecting forest use balance the costs of reduced timber production, trade, jobs and income (as well as the costs of implementing such policies). The next step is to correct the distortional domestic government policies and market failures that drive a wedge between private and social rates of forest use. Economically efficient policies internalize the ecological costs of forest use in production decisions.

Policies that permit imperfect competition in the forest industry can have important effects. Barriers to entry can prevent the most efficient firms from operating, thus leading the industry as a whole to extract more timber than necessary to provide a given supply of products. Inefficiencies in the processing sector are particularly damaging in this respect, as they tend to increase the raw material requirements and, consequently, timber exploitation through poor log conversion rates and overexpanded capacity. Imperfect competition may also lead to the failure to adopt technologies and management practices designed to improve forest harvesting activities that minimize environmental degradation.

Finally, public management is often a source of inefficiency. A study of United States national forests, for example, estimates that charging recreational visitors as little as $3 per day would generate more revenue than selling timber does now. The study suggests that if the United States Forest Service's budget depended solely on user fees from all activities ranging from camping to logging, the agency would allow fewer high-impact activities such as clear-felling and grazing.

Forestry policies and management practices Forestry policies may lead to management inefficiencies in a number of ways. Hyde, Newman and Sedjo characterize forestry policies according to how they affect: i) the level of privately efficient harvests; ii) the level of socially efficient harvests when accounting for environmental externalities; iii) alternative royalty, contract and concession arrangements and their implications for trespass, high-grading and other environmental losses; and iv) the level of rent distribution. Box 20 illustrates the example of a concessionaire who contracts with a forestry ministry to extract timber from public forest land. The example could easily be extended to describe a forest operation on private land.

Designing forestry policies to reduce the inefficiencies of existing management practices and to control excessive degradation through logging activities is a complex process requiring careful attention to harvesting incentives. More often than not, policies actually create the conditions for short-term harvesting by concessionaires and, in some instances, even subsidize commercial harvesting at inefficient levels.

Unless specifically regulated, short concession periods for logging operations on public lands reduce incentives for sustainable management, while low stumpage fees and licences fail to reflect the scarcity value of standing timber. Moreover, many governments are unable to control harvesting and management on public forests effectively, which results in illegal encroachment or logging. All of these factors reduce incentives for the sustainable management of forest resources by private firms.

Throughout Southeast Asia, the allocation of timber concession rights and leasing agreements for short periods, coupled with the lack of incentives for reforestation, has contributed to excessive depletion of forests managed for timber production. In the Philippines, the net gain from logging old-growth forest was found to be negative (around $130 to -$1 175 per hectare), once the costs of timber stand replanting, depletion and off-site damages were included.

Short-term concessions encourage rent seeking; that is, concessionaires open up additional stands for harvesting in order to mine timber for high short-term profits. In addition, inappropriate pricing and revenue policies allow timber operators to obtain excessive rents. By charging insufficient stumpage fees and taxes or by selling harvesting rights too cheaply, governments have allowed the resource rents to flow as excess profits to timber concessionaires and speculators.

Social and private harvesting decisions

Table 13, indicates government rent capture from tropical timber in five countries. Rent is the value in excess of the total costs of bringing trees to market as logs or wood products. Timber rent includes the actual rents that accrue to governments and timber businesses (timber concessionaires, mill owners and traders) as well as potential rents, i.e. rents destroyed by logging damage, inefficient processing and high grading. The potential rent column in Table 13 accounts for rent that would have accrued if all harvested logs were allocated to uses (direct export, sawmills, plywood) that yield the largest net economic rent.

Boado estimates potential rents from the Philippines' forest sector to have been more than $1.5 billion during 19791982, while actual rents were slightly more than $1 billion. The difference represents inefficient processing at plywood mills. A log exported as saw timber or in raw form brought higher net returns than the same log used for plywood. During this period, the government's total revenue from forest charges and export taxes represented around 11 percent of potential rents. Boado concludes that the government's inability to capture a larger share of the available rent promoted rapid deforestation by encouraging timber booms throughout the country.


Hyde, Newman and Sedjo (1991) suggest that concession pricing and licensing arrangements are key incentive mechanisms which determine whether timber harvesting levels are both privately and socially efficient. if a timber concessionaire is committed to a forest management plan that maximizes the future value of timber production from the concession, the concessionaire is attaining a privately efficient harvest level. If, in addition, the concessionaire is paying for any external environmental costs arising from timber harvesting, such as the loss of any potential non-timber forest values and ecological services (e.g. watershed protection), then the concessionaire is also extracting timber at a socially efficient harvest level.

The Figure illustrates these conditions. if p is the competitive price for delivered logs, V is the harvest volume and MC, is the short-term private marginal cost curve of the concessionaire for delivered logs, then V, is the optimal short-term and private harvest level. That is, the private concessionaire is concerned only with short-term financial returns from harvesting and not with the potential long-term returns from the stand or with any of the external environmental effects of logging. However, this level of extraction, V, is not privately efficient over the long term because it excludes the user costs of short-term harvesting, i.e. the discounted future returns from leaving the residual stand undamaged and growing or from avoiding high-grading and other practices that degrade the stand. This level of harvesting is not socially efficient either because it ignores external environmental costs of timber extraction (e.g. watershed degradation, downstream sedimentation, disruptions to nutrient cycling, loss of natural habitats, loss of non-timber products).

Improved contractual arrangements between the forestry ministry and the concessionaire could ensure that the latter "internalizes" any additional user costs and thus attains a privately efficient level of harvest. Long-term contracts that coincide with optimal harvesting/regrowth rotations could ensure that the concessionaire has an incentive to take account of these user costs, denoted by MC, in the Figure. Other arrangements, such as imposing provisions for the continuation of short-term contracts conditional to the use of "sustainable" practices or even to the outright sale of the land, could also be applied. if successful, such contractual arrangements would ensure that the concessionaire would attain the optimal long-term harvest level, V, and deplete less timber. Finally, if MC 3 represents the additional offsite environmental costs of timber harvesting, then these costs can also be "internalized" by imposing a tax equal to bd on the concessionaire.

It is possible that the national forestry ministry might want to impose a single tax to cover both user and environmental costs, in which case the optimal tax would be bc in the Figure. Hyde, Newman and Sedjo argue that such a tax does nothing to extend the horizon of an operator after short-term gains and would actually encourage high-grading, trespassing and tax avoidance, especially for inframarginal stems and stands. The result is that the concessionaire now harvests at the socially optimal level, V3, which is lower than the private short- or long-term level.

As indicated in the Figure, the concessionaire is making an economic rent equal to pap,, or pbp if all social costs are accounted for. The forestry ministry can capture all or part of this rent through harvest taxes. An ad valorem (flat rate) tax or royalty that is a percentage charge on net revenues will not affect the harvest level (i.e. it will not move the concessionaire from V1, to V3 ) but will increase the incentive to high-grade, trespass and ignore off-site environmental costs.

A uniform fixed royalty, which is a flat fee per unit of harvest, does alter the marginal harvest decision, but it also increases the incentive to high-grade, trespass and ignore off-site environmental costs on the inframarginal land.

Moreover, increasing this royalty may actually decrease tax revenues if the elasticity of the marginal cost curve is greater than 1, and could reduce harvests below the socially optimal level, V3. internalizing user and environmental costs while also capturing a greater share of rents requires a more sophisticated combination of policies: first, sorting out long-term contractual arrangements and an environmental tax equal to bd as outlined above; second, charging a competitively bid lump sum fee for the right to harvest the stand, equal to pbp1, so as to capture the economic rent generated at V3.

Table 13: Tropical timber rent capture

Country Potential rent from log harvest Actual rent from log harvest Official government
rent capture
Official government share in:
Potential rent capture Actual rent capture



Indonesia (1979-82) 4 954 4 409 1 644 37.3 33.2
Sabah, Malaysia (1979-82) 2 198 2 094 1 703 81.3 77.5
Philippines (1979-82) 1 505 1 033 171 16.5 11.4
Côte d'Ivoire 204 188 59 31.5 28.9
Ghana ... 80 30 38.0 .....

Source: Reppeto and Gillis, eds, op. cit., footnote 46, p. 304.

Although the total area of production forest in the Philippines is 4.4 million ha, the total area under timber concessions is actually nearly 5.7 million ha - almost 90 percent of the entire country's forest area. Concessions are awarded for a period of five to 25 years, even though the minimum realistic felling cycle is 30 years, and the rotation cycle 60 years. In general, decision-makers other than forestry officials ultimately determine concession policy and allocation.

Forestry departments, particularly in developing countries, often find it difficult to administer and collect timber fees and taxes. For example, in Malawi, the Forestry Ministry collects less than 50 percent of the receipts due from timber harvests. Much of the problem may stem from the complexity of fee structures and concession arrangements, which make the enforcement and supervision of revenue collection difficult.

In a review of forest pricing in West and Central Africa, Grut, Gray and Egli conclude that appropriate concession policies can encourage and support sustainable management and conservation, reflect the values of the forest resources and finance forest management."' They found that: forest revenues are generally low compared with what they could be, owing to low fees and low collection rates; "valueless" forests are the first to go; and a lack of concession fees encourages acquisition rather than management of concessions. The authors suggest establishing an annual concession rent, set by competitive bidding, and replacing logging concessions with forest management concessions that would be regularly inspected.

Timber fees and taxes also have an important influence on the pattern of forest-based industrialization and its implications for long-term economic development and deforestation. For instance, stumpage prices (the prices of harvested logs at the stand) play a crucial role in timber reserve depletion and processing expansion, particularly in facilitating the transition of the forest sector from dependence on old-growth to second-growth forests, and in coordinating processing capacity with timber stocks. In most developing countries, however, stumpage prices tend to be determined administratively and not by the market, in which case stumpage values are understated and fail to reflect increasing scarcity in old-growth forests. As a result:

Industrial countries face similar revenue policy questions related to logging fees and royalties for timber harvested from public lands. The standard calculation for determining royalties is to take the lumber price at the mill minus harvest, extraction and (log to lumber) conversion costs.

Such pricing methods are not related to long-term user costs or environmental values and, in many instances, do not even approximate market and economic scarcity values for timber.

For example, Australian state forest agencies generally use administrative means to set timber harvesting royalties, which are then negotiated with individual buyers as part of a package that includes processing commitments. The royalties are usually adjusted in the short term in line with changes in inflation, and in the long term in line with changing market conditions. A recent study compared the resulting administrative royalty pricing in the 1980s with market-derived prices. This study indicated that processors were prepared to pay 49 to 74 percent above royalty levels for low-grade logs, 34 to 48 percent extra for medium-grade logs and 27 to 40 percent extra for higher-quality logs." Old-growth hardwood sawlogs and softwood sawlogs were generally priced below market value; pulp log royalties were found to be both above and below market price.

In another study, Wibe highlighted problems associated with ensuring that private investors and concessionaires in industrial countries produce timber at a long-term privately efficient level." First, market imperfections prevent any investment in forestry from being fully capitalized by selling the standing timber or planted stand. For example, restrictive market regulations apply to forest lands in France, Germany and the Nordic countries. In addition, regulations on the purchase and sale of forest land usually imply large transaction costs, especially when holdings are small, which is normally the case. The result is that private forest owners tend to invest too little in regeneration and/or reforestation.

Second, the major problem concerning publicly owned forest lands in industrial countries is securing efficient contracts with private forestry activities. For example, in Canada, where 11 percent of forest land is owned by the federal government and 80 percent by the provinces, provincial governments sell licences to private concessionaires for 20 to 50-year periods. The concessionaires usually have the right to harvest the area once, with some restrictions on maximum annual cuts. They can also obtain volume licences which allow them to harvest a certain volume of timber in an area. However, such contracts often do not regulate long-term damage and degradation of the stand or any environmental impacts (see Box 21, Clearfelling practices). Nor is the loss of these values reflected in the licence fee, which is usually set very low and, in some areas, close to zero.

Several recent case-studies demonstrate that subsidies in OECD countries, particularly for plantation establishment, have direct environmental impacts .62 In Sweden, the subsidization of land drainage to increase timber production has led to the loss of more than 30 000 ha of wetlands annually. In the 1980s, the United Kingdom increased tax concessions for afforestation but not for land purchases. This encouraged investors to minimize land purchases and increase their tax shelters by locating plantations on land of poor or negligible agricultural value, such as wetlands, heath, moorland and other areas with a high environmental and amenity value. The tax concessions were repealed in 1990, although they have been replaced by direct afforestation grants to farmers.


Clear-felling is a widely practised harvesting system in temperate forests. Its advantages are its simplicity, adaptability and efficiency. However, it is blamed for soil loss, for upsetting the hydrological balance and for the rapid alteration of ecological conditions to the detriment of forest-dwelling taxa. it is perceived to be aesthetically unpleasant. Moreover, it creates physically and ecologically unstable conditions around forest edges and affects and fragments the habitats of species that require extensive undisturbed habitats, such as the Northern spotted owl.

The environmental effects of clear-felling in the boreal zone are compounded because: i) the forests affected are often undisturbed primary forests; ii) soils are fragile and felling disrupts the water cycle; iii) the scale of the felling coupes is large; and iv) regrowth contains less diversity of tree species and tree ages.

Boreal forests are renewed through extensive fires; some argue that clearcuts replace the role of this natural force. However, a forest inventory undertaken by Forestry Canada in 1991 shows a higher proportion of poplar and birch in. harvested forests than in undisturbed boreal forest, and a fall in the area of spruce and pine. in pine forests swept by fire, pine regrows. On the other hand, the inventory shows little difference in the age composition between regenerated and undisturbed forests.

Research in Canada and Finland shows marked differences between the bird communities of mature forests following logging and those of unlogged forests. Some of the nine-fold increase recorded in bird densities in virgin forests as opposed to the young spruce plantations may be explained by the stage of growth of the respective forests.

Research demonstrates that many of the detrimental effects of clearfelling can be reduced by: retaining seed trees and old trees to provide seed sources and nesting sites for birds; providing wildlife corridors to allow movement of mammals; keeping rivers free of logging brash; building logging roads and trails as far apart as possible to minimize fragmentation; and reducing the size of felling areas.

The long-term economic effects of subsidizing forest plantations may also have indirect environmental impacts. When subsidies lead to more afforestation on agricultural land or wetlands, the expansion in supply could reduce prices and profitability. In Italy, this has caused skilled managers of established plantations to be replaced by new (subsidized) and less skilled owners, with negative implications for productive efficiency and timber stand management over the long term.

In Germany and the United States, state intervention has facilitated below-cost sales of public forest timber, reducing profitability for the whole sector and discouraging private investment. The result has been inefficient forest management and suboptimal levels of exploitation. In Spain, the fact that the environmental benefits of holm and cork oak woodlands in the Dehesa regions are not priced has led to underinvestment in private holdings; government intervention led to the planting of conifers, poplars and eucalyptus, which have altered the characteristics of plantations in these regions and actually increased local environmental degradation.

All these domestic market and policy failures have important implications for sustainable forest management. if public policies are to be redirected to achieve efficient and sustainable management of forest resources, then changes are required.

The economic valuation of current policies plays an important role in determining the appropriate policy responses. Often, however, insufficient economic data and information exist to allow a precise estimation of the economic costs arising from domestic market and policy failures. Although in most cases cost estimates as orders of magnitude and indicators of the direction of change are sufficient for policy analysis, in many cases we are not even at this stage of "optimal ignorance".

Domestic market and policy failures also have a major influence on the conversion of forest land to agriculture and other uses. As this is the single largest cause of deforestation in the world, addressing only market and policy failures that directly affect the forestry sector will by no means be sufficient to halt deforestation and forest degradation in most countries.

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