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The economics of mountain resource flows

D.J. Pratt and L. Preston

Jane Pratt is President and Chief Executive Officer of the The Mountain Institute, an international non-governmental organization which has its headquarters in Franklin, West Virginia, USA.

Lynelle Preston is a programme officer at the Asian Regional Office of The Mountain Institute in Kathmandu, Nepal.

Considering mountain economics based on the results of an electronic conference, Investing in Mountains.

For centuries mountain ecosystems and communities have played a critical role in maintaining a sustainable flow of mountain resources to the plains below. With the advent of new technologies, population increase and development pressures, the magnitude of these resource outflows has increased dramatically. However, downstream beneficiaries have contributed little to reinvestment in their management or renewal, or compensation to the traditional stewards of these resources. As a result, natural assets are flowing downhill at unsustainable rates and mountain communities are becoming increasingly marginalized. Moreover, traditional downstream beneficiaries are also adversely affected, and no longer receive the benefits of indirect environmental services they previously enjoyed.

Innovative mechanisms are needed to protect mountain ecosystems, to provide incentives for communities to continue in their stewardship roles and, ultimately, to maintain the very resources on which national and global populations depend. These measures should aim to generate, capture and redirect revenue from the use of mountain resources in ways which ensure that the flow of environmental goods and services will be sustained.

During recent years, political and institutional momentum has been building up to develop policies and mechanisms to mobilize more financial assistance for the conservation and sustainable development of the world's mountainous regions. The endorsement of Chapter 13 of Agenda 21, entitled Managing fragile ecosystems: sustainable mountain development, at the 1992 United Nations Conference on Environment and Development (UNCED), acknowledged that mountains are often net exporters of globally significant natural resources to the lowlands below. As stated in the United Nations Commission on Sustainable Development (CSD) report of the third session:

There is a need to take a new look at the overall flow and full-cost pricing of resources and services to and from mountain areas.... The Commission further recognizes the need for a fair share of the benefits derived from the use of mountain resources to remain with the local people and their communities.

UN Commission on Sustainable Development
Report, 1995


A major factor contributing to the downward flow of the net benefits from resources is the marginalization of many mountain communities and the lack of a voice of support for mountain ecosystems. Highland people typically suffer from insecure rights to ownership, access and use, and have little control over the very resources they essentially manage. Throughout history they have been isolated from mainstream economic and political life, and they feel disempowered in shaping the decisions that affect their lives. Their isolation allows them little access to information or to the decision-making powers of their national governments; typically, participation in external markets is based on unequal and unfavourable terms of trade (Byers, 1995).

Unless mountain communities are empowered as critical stewards of irreplaceable natural assets and are given secure ownership and usage rights, access to information and decision-makers, and improved economic standards of living, they may be forced to exploit short-term extractive opportunities and thereby deplete globally significant resources. Even more important, without adequate empowerment and control, they may be unable to prevent overexploitation by others.


Denniston (1996), in writing about the Annapurna Conservation Area Project, states that,

Reflecting only the present costs of extraction and distribution, today's prices for natural resources do not even come close to telling the ecological truth: they ignore the full costs of denuded forests, eroded hillsides, and dammed or polluted rivers - not to mention the incalculable social costs of uprooting people living atop the resource. Recognizing full costs provides direct incentive to minimize environmental impacts, which then yield higher returns.

As identified by the global NGO Consultation on the Mountain Agenda,

Mountain peoples, in their sloping islands of human and natural variety, have become the guardians of irreplaceable global assets. Their homelands serve as storehouses of timber, minerals, and hydroelectric power for the surging populations below them. At least half of humanity depends on mountain watersheds for their supplies of fresh water.

For more than one billion people, mountains are sacred places. Mountains are also becoming recreational refuges from crowded cities for the tourist elite.

Mountain Forum, report to
UNCED, 1995

Some of the goods and services provided by mountain environments, such as timber, hydropower and minerals, have a measurable economic value. Historically this value represented only the extraction costs and profits and did not include the environmental benefits and values. In part, this is because many of the associated benefits are non-market resources which economists consider as "public goods". In economic terms, public goods are defined as those from which other users cannot be excluded and whose consumption by one individual or group does not diminish the amount available for others (Tietenberg, 1996). However, exploitation of the conditions that produce the goods can greatly diminish its availability to all. Clean air and biodiversity are classic examples. Traditional economic tools are often inadequate in measuring these non-market goods. Furthermore, the market is not the universal determinant of values; lack of a monetary value does not mean lack of utility or aesthetic value.

Another major difficulty in valuation is that mountain resources are themselves inherently complex and interrelated so that they constitute a joint product rather than an single one. For example, forested watersheds not only provide clean water and forest products, but they also provide habitat for wildlife and erosion control, recreational opportunities, clean air and, in many places, sacred significance for surrounding populations. Another example is that the right to use timber has traditionally given de facto rights to use (or degrade) other connected resources such as clean air or water. Therefore, ownership of one resource essentially establishes ownership of all rights, even those that were not factored into the original grant of the resource right.

However, with this "ownership" should come a set of responsibilities to the interconnected resources, even those that have not been clearly defined. While in the short term clear-cutting timber adversely affects mountain communities who are dependent on forest products, in the long term it is the global populations who ultimately pay a high price for the adverse impacts on air and water quality, recreational opportunities and soil erosion. The unsustainable use of one resource in one location (upstream) affects the entire system, including downstream environments.

As a result of the complexity of mountain resources and the limitations of traditional pricing approaches, the resource value is typically not reflected in the product price. Consequently, mountain communities, as suppliers, do not derive appropriate benefits. The first challenge, therefore, is to identify and value resources as accurately as possible. This may lead to a conclusion that conservation is the most efficient resource "use"; or alternatively, it may reveal the benefits of balancing resource extraction with the maintenance of existing environmental assets. In either case, once the full resource value is established, mechanisms can often be employed to acquire this value and redirect it from downstream users to mountain communities.

Despite the inherent difficulties, there are case studies demonstrating that economic valuation is feasible, and that redressing the imbalance in mountain resource investment requires identifying and, where possible, quantifying these values. As Narpat Jodha (1996) points out,

More than anything else, the examples provide evidence that market-linked approaches to enhance and transfer resources for conservation and sustainable development of mountain areas fall within the realm of possibility. This will help in invalidating the conventional view that "conservation does not take place because it does not pay".

Some of the goods and services provided by mountain environments, e.g. limber (Finland)...

... and tourism (Nepal), have measurable economic value


In an effort to examine the complex issue of flow and pricing of resources and services to and from mountain areas, The Mountain Institute, at the request of the Food and Agriculture Organization of the United Nations (FAO) organized an electronic conference, entitled Investing in Mountains, to gather examples of innovative financing mechanisms used to reverse the downward flow of benefits. The electronic conference, held in 1996, was hosted by the Mountain Forum, a global electronic network of individuals and organizations involved in mountain conservation and development. The goal was to identify financing mechanisms that are currently being employed in mountain areas to pay for maintaining sustainable flows of mountain resources. Over 200 people from 23 different countries participated in the discussion. Contributions included more than 60 examples of conservation and development efforts which have been effective in balancing the downward flow of resources from mountainous regions around the world. The ultimate goal is to increase investment in resources and people, thereby contributing to more economically sustainable use of globally significant mountain resources.

The conference focused particularly on mechanisms that have the potential for widespread adoption in mountain areas. Those identified were: property rights, transferable development rights, conservation easements, tradable water rights, user fees, royalties, entrance fees, tour operator fees, hunting and fishing fees, environmental taxes, regional trademarks, "green" marketing tools, microenterprise development, cooperatives, microfinance, foreign aid, trust funds, debt-for-nature swaps and the mobilization of private sector funds. Table 1 describes each of the mechanisms and the associated case studies.

These proposed options illustrate that communities in both upstream and downstream areas increasingly recognize the unintended negative consequences from unsustainable mountain resource use, and that they are creating and implementing innovative responses aimed to reverse and mitigate adverse effects. At the same time, many stakeholders who are now recognizing the problem are searching for models which have proved to be successful elsewhere, and which they can adapt to their own situation.

A more detailed description of each of these mechanisms and case studies is provided in the conference report edited by Lynelle Preston (1997), Investing in mountains: innovative mechanisms and promising examples for financing conservation and sustainable development.


The conference and the report highlight a number of enabling conditions and characteristics relating to the social and economic policy which has contributed to the successful implementation of mechanisms. Further analysis identified three factors that appear to be essential to the success of each of these case studies: more complete valuation of mountain resources to capture the costs of multiple resources; increased ownership, rights and responsibility for mountain resources; and introduction of incentive structures to foster multiple stakeholder-driven processes in the design and implementation of solutions.

Valuation of mountain resources

A critical step in balancing the outflow of benefits with investment in mountain environments and people is to identify and measure the full economic value of various resources. For example, the cost of cutting a forest must include the full economic value of the trees, plus the relinquished benefits of clean air, pure water, wildlife habitat and other non-tangible values derived from that forest ecosystem. The examples cited at the conference indicate that when social and environmental costs of resource use are a part of the cost-benefit calculation, users begin to understand the interrelationships of ecosystem well-being and to devise reinvestment schemes.

Of her mountain values, e.g. biodiversity (United States), are more difficult to quantify

An environmental valuation study conducted by the Sierra Nevada Ecosystem Project (SNEP) in northern California, United States demonstrates that it is possible to measure and place economic value on mountain resource flows which traditionally have not been assessed. This study concluded that water resources are by far the most valuable economic resource, despite the popular perception that timber and grazing are the two most highly valued resources within the Sierra Nevada ecosystem. It was shown that conservation, which ensures protection of the watershed, constitutes the "highest and best use" of the area. Studies such as this help to quantify the value of mountain resources and to turn attention to the social and environmental costs of their use (SNEP, 1996).

TABLE 1. Innovative mechanisms and promising examples


How it works

Promising examples


Property rights

Legal rights to manage, use or own a particular piece of property or resource

Community forest user groups in Makalu-Barun Conservation Area, Nepal

Ejidos, Mexico

Transferable development rights

Legal rights to develop a piece of property which can be traded on the market

Mountain Protection Plan, Virginia, United States

Conservation easements

Legal agreement which entails the sale or donation of a property owner's right to develop a piece of property

Conservation easements in Vermont, United States

Tradable water rights

Legal rights to use water resources which can be traded on the market. Certain restrictions apply to the use of water

Tradable water rights in Chile


Royalty fees

Fees charged by a government for use of a national resource

Mountaineering royalty fees in Sagarmatha National Park, Nepal

Entrance fees

Fees charged on entry into a protected area

Annapurna Conservation Area, Nepal

Buffer Zone Regulation. Nepal

Fees for viewing gorillas, Rwanda

Tour operator fees

Fees charged to the tour operator rather than the tourists

Tour operator contribution to conservation, Nepal.

Pippen system of generating revenue from tour operators, India

Hunting and fishing fees

Fees charged for the right to hunt and fish

Akagera Domaine de Chasse, Rwanda

Control of species, New Zealand

Environmental taxes

Fees attached to the price of a good or a service

Lodge taxes in Langtang National Park, Nepal

Redirection of user fees

Fees channelled back to protect the resource being used

New York City Watershed Agricultural Program. United States


Regional trademarks

Exclusive legal rights to the production and sale of high-quality, locally produced foodstuffs: also called appellation of origin

Cheese production in the Beaufort Valley, France

Green marketing tools

Tools which capitalize on value addition from environmentally benign products

Hindelang Nature and Culture Programme, Bavaria Ecotourism marketing in Sikkim, India

Microenterprise development

Training and support for developing new small businesses

Hydel Programme, northern Pakistan

Microenterprise development, Nepal


Entrepreneurial systems of associations with roots in the local region and run by self-management

Cooperative Movement in Trentino Region, Italy


Credit and savings programmes for low-income people

Aga Khan Rural Support Programme, Pakistan

Village banking model

Capturing revenue from genetic resources

Strategies which enable communities to derive appropriate economic value for their biological diversity

Bioresources Development and Conservation Programme, Cameroon


Foreign aid

Bilateral and multilateral assistance given to countries in need of financial support

Global environment facility

National trust funds

Money invested at the national level to provide a long-term source of funding

Mgahinga and Bwindi Impenetrable Forest Conservation Trust, Uganda

Bhutan Trust Fund for Environmental Conservation, Bhutan

Debt-for-nature swaps

Hard-currency debt of one country exchanged for conservation, or preservation, of globally significant natural resources

National Trust Fund for Protected Areas, Peru

Local trust funds

Money invested by local community or organization to provide a long-term source of funding

Warm Springs Indian Reservation Trust, Oregon, United States

Wolf Compensation Fund, Rocky Mountains, United States

Snow Leopard Trust. Mongolia and Tibet


Mobilization of private sector funds

Use of private sector funds for conservation

Shore Trust Bank, Washington, United States

Recreational Equipment, Inc., United States

A fuller understanding of land-use and ownership patterns is fundamental for mountain conservation and development. A Rai woman carrying bamboo collected in the Makalu-Barun Conservation Area, Nepal

Increased ownership, rights and responsibility for mountain resources

An accurate valuation of mountain resources, however, is not sufficient. A second factor, which is central in most of the case studies, is better definition of ownership, rights and responsibilities. In mountainous areas, ownership of land I and natural resources spans the whole spectrum from private to common to state, with an overlay of traditional usage rights and responsibilities that is not linked to ownership.

Therefore, a critical step in motivating conservation and sustainable use is to understand existing patterns of ownership in order to define more clearly the relationship between stakeholders and mountain resources. Thus, the stakeholders can better comprehend and accept their rights and responsibilities as, for example, the owner of a timber licence appreciates the economic value of the right to resource extraction conveyed by the licence.

In some cases, more effective resource management can be achieved through privatization or secure tenurial rights. However, not all resources can be privatized and individual ownership can lead to destructive and unsustainable uses. Cash in hand may be more useful to some individuals than its equivalent value as a standing forest so that private ownership of a forest, for example, may lead to short-term gains and degradation. Furthermore, while secure property rights may provide incentives for sustainable management, there may be no incentives to prevent downstream effects such as water polluted by runoff.

Contributors to the Mountain Forum report that individual private ownership is rarely the solution chosen. Rather, stakeholders are often given an opportunity to participate in decisions regarding the resource use which instills a sense of responsibility. There are examples, such as the Mexican ejidos case, where communities have increased ownership and management responsibility for forests without privatizing the land; Nepalese people feel a new sense of ownership and responsibility in nationally managed protected areas owing to the new buffer zone legislation in Nepal; and Recreational Equipment Incorporated, a well-known outdoor equipment retailer in the United States, has assumed responsibility for contributing to the conservation of wilderness areas on which their business depends. In none of these examples has the resource been privatized, but in each clarity of ownership, rights and responsibilities has been established.

Incentive structures that foster multiple stakeholder-driven processes

The third key element of successful mechanisms to protect mountain environments is the design of incentive structures that foster stakeholder-driven processes. In each case study, a full set of stakeholders are involved in designing and implementing solutions over an extended period. In a mountainous environment characterized by a complex patchwork of stakeholder groups and interests, this is a significant achievement. Furthermore, many types of stakeholders participate, mostly on a voluntary basis with little need for external control or enforcement. This is possible precisely because incentive structures have been implemented in each of the examples so that it is in the individual and collective best interest for stakeholders to continue working together. Often the incentive structures are maintained by social inducements and "soft sanctions" that depend on peer pressure for compliance.

These partnerships - whether between upstream and downstream dwellers, governments and private organizations, producers and consumers or global communities and local institutions -are often initiated by the stakeholders themselves. The incentives for individuals to act collectively rather than independently encourage stakeholders to return to the table whenever necessary to renegotiate fragile and tenuous partnerships and alliances.

The New York City Watershed case study is a classic example of economic incentives that led to stakeholder-driven partnerships between downstream users and upstream stewards. Despite the fact that mountain and highland forests play a key role in watershed protection, the majority of benefits from a protected watershed accrue to downstream users, not to the local communities who maintain the forests. Downstream users do not pay a charge to have their water protected, but rather they pay to use the water. Consequently, they have no incentive to invest in watershed and forest conservation. However, if sustainable quantity and quality are to be assured, downstream users must begin to assume a larger share of the true costs of water by paying for the maintenance of watersheds.

New York City Watershed Agricultural Program, United States

The problem for New York City has been a concern about a potential decrease in the quality of its water owing to runoff from barnyards (paddocks) and faulty sewage treatment systems upstream. The City was facing the possibility of being forced by the federal Environmental Protection Agency to install a water filtration system at a cost of US$6 billion. New York City put up US$35.2 million for farmers to purchase or build pollution abatement devices. Under the agreement, the participating farmers must entice at least 85 percent of the 400 farmers in the watershed to join the programme. The average farm receives about US$75 000 for improvements such as cement manure pipes, fencing to improve cattle feeding, and riverside tree planting. The programme is voluntary and run entirely by the farmers themselves. They meet as a 21-member Watershed Agricultural Council to disburse the city hinds for pollution prevention projects.

Sources: Beckhardt (1996); Morrow (1996).

In the New York City Watershed Agricultural Program, with no increase in the price of water, the revenue generated from water use is reinvested in upstream farmers to protect the watershed. Thus, the redirection of these funds provides incentives for upstream farmers to conserve the watershed which ultimately reduces the costs to the end user. With this incentive-based mechanism in place, actual value has been attached to watersheds, not only to the water resources, and unique partnerships have been formed.


The electronic conference and report, Investing in Mountains, began with the premise that mountain resources are flowing downhill at unsustainable rates with little or no reinvestment in the resources or the mountain communities. It was therefore assumed that sustainability would be achieved through strategies which reverse the flow of benefits and provide an equitable share to mountain people as an incentive for continued stewardship.

However, as the case studies repeatedly illustrate, the victims of unsustainable mountain development are not limited to the marginalized mountain communities. In fact, the real losses over time extend to global populations. For example, deforestation destroys habitat, increases erosion and exacerbates global warming; overgrazing causes landslides; mining destroys sacred pilgrimage sites; and hydroelectric construction leads to serious siltation. Ultimately everyone pays, and everyone loses. Mountains are an integrated part of a much larger system. Therefore, unsustainable practices upstream necessarily affect those living below. It is only through examining the dynamics of the whole system - resources and people - that innovative solutions can be devised that address the underlying causes of the problem.

The physical features of mountain environments are complex and so also are political and social associations. Mountain systems are defined by pluralism - by the complex assortment of stakeholders who share a common interest in sustainable mountain development. Solutions, therefore, must include all stakeholders, for, when they recognize that it is in their personal and collective best interests, they themselves will begin to drive the process. It is interesting to note, as an aside, that in many cases the interests of the non-human stakeholders in mountain ecosystems are represented by members of NGOs or scientific projects, whose role is to provide objective assessment of environmental development.

The analysis of contributions to the electronic conference, Investing in Mountains, has shown that effective and lasting mechanisms are being devised to maintain environmental services and sustainable resource flows from mountains to the areas below. The mechanisms share three critical features: they estimate and capture full cost values for a range of mountain resources; they identify clear ownership, rights and responsibilities; and they introduce economic incentives so that solutions are introduced and implemented by stakeholders and are sustainable over the long term. These factors should be incorporated into the design of mechanisms to ensure sustainable resource use in mountain areas.


Beckhardt, L. 1996. New York City Watershed Agricultural Program. E-mail sent to the Mountain Forum electronic conference. E-mail address: [email protected]

Byers, E. 1995. Mountain Agenda: environmentally sustainable and equitable development opportunities. Background paper in support of the global NGO Consultation on the Mountain Agenda. Lima, Peru.

Denniston, D. 1996. Annapurna Conservation Area Project. E-mail sent to the Mountain Forum electronic conference. E-mail address: [email protected]

Jodha, N.S. 1996. Reviewer comments. E-mail address: [email protected]

Morrow, C. 1996. New York City Watershed Program. E-mail correspondence. E-mail address: [email protected]

Preston, L., ed. 1997. Investing in mountains: innovative mechanisms and promising examples for financing conservation and sustainable development. Synthesis of a Mountain Forum electronic conference in support of the Mountain Agenda. Franklin, West Virginia, USA, The Mountain Institute and FAO.

SNEP. 1996. Final Report to Congress, Vol. I - Assessment summaries and management strategies. Davis, California, USA, University of California, Centers for Water and Wildland Resources, Sierra Nevada Ecosystem Project.

Tietenberg, T. 1996. Environmental and natural resource economics. 4th ed. New York, USA, Harper and Collins.

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