M. K. Muthoo
Maharaj K. Muthoo is Director of Forestry Operations of FAO.
Costs and benefits should be equitably shared among all users of environmental assets. Policies and incentives must therefore be devised to ensure sustainable and environmentally sound development, and economic tools sharpened for the purpose. This article examines some of the issues underlying economic decision-making concerning renewable natural resources and presents a holistic planning approach aimed at optimally harmonizing the economic, ecological and institutional factors related to development.
Poverty and environmental degradation are mutually reinforcing. Yet decision-makers in developing countries cannot easily be persuaded to allocate scarce resources for environmental management. Their priority concerns of feeding, clothing and housing increasing populations have a greater immediacy.
Likewise, the global environmental impact of economic activity in the industrialized countries is not matched by requisite resource and technology transfers. Even their own national needs for maintaining environmental quality remain unmet to a sizeable extent.
No doubt awareness is spreading about the problems of environmental degradation and renewable resource depletion. However, these problems generally receive limited financial consideration in practice.
This is largely because apparently "abstract" ecological concepts have less compelling appeal in decision-making than short-term economics. Environmental and ecological concerns and the deteriorating renewable resource situation must, therefore, be depicted in ''concrete" economic terms.
Work has been started to this end but much more needs to be done if those responsible for policy planning are to be convinced that it is economically worthwhile to make adequate budgetary provisions, and to institute appropriate fiscal, legislative and other policy measures that ensure environmental conservation.
The priority concern of the developing countries id satisfying the needs of Increasing populations
Income accounts
Sustainable income is the amount that can be consumed in a given period without reducing the future consumption potential. Income accounting is an important and widely used tool in economic planning and decision-making but in most cases national accounts do not incorporate changes in renewable resource stocks. Nor do they reflect impact on future flows and related income potential, let alone the concomitant environmental effects. Income represented by gross domestic product (GDP) should not inaptly treat the environment protection costs as generating income.
The shortcomings of the current measures of income need to be recognized and work intensified toward integrating environmental and resource management concerns more effectively in the economic decision-making process. Work is now under way to improve the current United Nations System of National Accounts (SNA) (El Serafy and Lutz, 1989). The measurement of environmental outlays has been pioneered in France by the development of "natural patrimony accounts" (Theys, 1989), which are designed to relate economic growth to quantities of natural resources required to make growth possible. Moreover, operating costs are distinguished from investment and other capital formation expenditure (Bartalmus, 1987).
Environmental satellite accounts in the SNA framework would aim at adjusting conventional income and product measures to reflect environmental degradation and natural resource depletion. These accounts should, inter alia, help to optimize the economic value of available natural resources and their use as factors of production, and to determine the portion of GDP to be set aside for environmental protection. The ultimate objective should be to incorporate the dynamics of renewable resources and related environmental assets in SNA, thereby making it a pertinent planning tool for holistic economic management.
Environmental Impact Assessment
Environmental Impact Assessment (EIA) is now a recognized method for comparing the costs, benefits, welfare and risks of projects, programmes and policies on the environment (FAO, 1990). As opposed to cost-benefit analysis (CBA), EIA is aimed at reversing the tendency of decision-makers to put more emphasis on economic data and profitability than on environmental data and long-term development. However, there need be no conflict between the two. A well-conceived EIA can reveal the environmental limits to economic growth, just as there are economic limits to the improvement of environmental quality (Alhéritière, 1982). What is needed, therefore, is holistic systems design for renewable resource management, where social profitability criteria of CBA and sustainability indicators of EIA are appropriately intertwined and continually reviewed.
Scarcity and sustainability
In the conventional approach to resource scarcity, market forces are expected to regulate the optimal rate of utilization. Short-term profit maximization criteria might justify depletion of natural resources. But the cost to society of the expected losses from decline in other functions, such as ecological stability, should be evaluated from the standpoint of more comprehensive criteria that incorporate interaction between environmental and economic aspects. Ecosystems assimilate the waste byproducts of the economic process and provide other services which are essential for supporting the economy, including health, genetic diversity, and climatic functions (Barbier, 1990).
Sustainability requires that renewable resources, in the long run, are utilized in line with their regeneration rates and that waste emissions do not exceed the assimilative capacity of the ecosystem. Regenerative and assimilative capacities need to be treated as natural capital. Failure to maintain these capacities is tantamount to capital consumption, and therefore not sustainable (Daly, 1990). Sustainability should thus be analysed in terms of tradeoff between environmental quality on the one hand and resource depletion and waste generation on the other.
Irreversibly depleting a renewable resource amounts to taking a bet that its future value would not have exceeded the present benefits of liquidation. In the case of environmental policies, with the degree of current uncertainty, the risks of this type of wager are high indeed. The benefits obtained by waiting for further information must, however, be weighed against the costs associated with delaying the decision. Maintaining flexibility in order to better capitalize on future information may be referred to as "quasi-option value" (Freixas and Laffont, 1989), which a social cost-benefit analysis should take into account. It can be demonstrated that the irreversibility of resource liquidation and the possibility of new information arriving about the value of the resource can provide a justification for lowering the break-even rate of return used in cost-benefit calculations (Jewitt, 1990).
An approach to economic assessment is warranted which would evaluate the total economic worth of all the functions of an environmental asset, current and expected, and weigh benefits of environmental conservation that may be forgone against net economic benefits. The aim of such cost-benefit appraisal would be to optimize resource allocation and choice between various technological packages, taking into account the risk and uncertainty associated with various renewable resource management options.
Commons and concessions
Environmental externalities may arise either from common access to natural resources or from downstream spill-over effects of an economic activity. The breakdown of traditional controls on individual access to common-property resources such as grazing lands, forests and fisheries due to demographic pressures, encroachments or inappropriate technology, is instrumental in environmental degradation. The result is often an open access situation that constrains individual users only in their ability to exploit the resource, without requiring them to pay the cost of any resulting degradation or depletion (Barbier, 1989). Only when the resource nears exhaustion or is severely degraded does increasing scarcity begin to bind on all users, often disproportionately on small-scale users.
Lack of perfect market mechanisms, among other things, has uncompensated effects, such as upstream denudation resulting in downstream flash floods. Distortions are a common feature of large-scale renewable resource concession agreements, and in many countries agricultural policies encourage the conversion of tropical forests to other uses which "would be uneconomic without inducements" (Repetto, 1990). Cattle ranching concessions in certain tropical countries have led to land clearing and livestock rearing which was found to be unsustainable and unprofitable, even by the rancher, once subsidies and other indiscriminate incentives were withdrawn. On the other hand, a sliding tax levied on livestock production might reduce overgrazing and land clearance. Ideally, the tax should be such that, among other things, it would compensate for in situ soil erosion and impact on land productivity elsewhere.
Commercial logging concessions are often noted as having encouraged inefficient forest utilization and capturing a very low share of the revenue for the resource owners. Examples exist to show that governments may have captured hardly one-third of the potential timber resource value (Gray and Hadi, 1990). The low rent capture could be a disincentive to resource owners for investing in sustainable management. This is compounded by the terms of concession agreements, which run for 20 years or less, while much longer intervals are required between successive harvests. Concessionaires, as well, thus often have little incentive to maintain productivity for future harvests.
Awarding longer-term contracts by open market auctioning to the highest bidder could enhance revenue capture. But the security of tenure of long-term concessions cannot always be guaranteed. Moreover, the high costs of management through the growth cycle and the inability to prevent encroachments in the interim are disincentives for longer-term concessions. Conferring property rights, enabling equitable ownership and promoting people's participation in renewable resource management could create incentives toward redressing the situation.
Tropical forests - resource capital for the future
Incentives and internalization
The social costs of private enterprise can lead to suboptimal outcomes from the viewpoint of welfare economics. Likewise, where individuals enjoy free access to a common property resource, privately rational behaviour can cause overexploitation to the detriment of wider and long-term interests. Spill-over effects of shifting cultivation on steep slopes and offshore overfishing are classical examples.
To reduce the misuse of renewable resources due to external costs which are not borne by the users, Costanza and Perrings(1990) propose an environmental assurance bonding system requiring users to post a refundable bond to cover potential environmental damage. The purpose is to bring the private and social costs into concordance by confronting individual users with the marginal social cost of their activities. Such a concept would call for an in-depth review and revamping of the existing system of incentives and more reliable information and methodology about the costing of damages and technological forecasting. Policies for inducing sustainable management of communal resources may therefore include introduction of property rights, land tenure and leasing arrangements. Nevertheless, these measures must be developed in the light of costs and benefits, so that the focus is on incentives designed to improve management by internalizing uncompensated influences.
Cost-benefit analysis will need to consider costs of regulatory measures at the practical level. For example, the cost of measuring water consumption and collecting fees from users will need to be compared with estimated savings. Moreover, preferences of the polluters and cost-bearers have to be considered for both the rates of increase and the extent of an externality in order to ensure adequate compensation. Practical cost problems could be reduced by treating the renewable resource system holistically and designing resource management strategies which take into consideration various resource options for an entire resource system, e.g. a watershed. Thus, the diseconomies, or economies, of one area or of one activity enter as costs or benefits elsewhere in the system.
Conceptually, therefore, all relevant effects could be captured within the renewable resource system and the spill-overs are internalized fully. Such an integrated decision framework averts under- or overcounting of external consequences, and offsets divergence between private and social marginal net product.
Renewable natural resource planning for sustained development should be based on biotechnical, economic and institutional analyses in an iterative process, which ensures optimal environmental-ecological interaction. Biotechnical analysis permits the identification of what is possible, including ecological considerations, contingent upon the feasibility of manipulating a given area's renewable resource-use pattern. Economic analysis shows what is profitable and ranks the various investment options socio-economically. Institutional analysis indicates which opportunities are adoptable and which are not, depending upon society's developmental stage. These analyses can be collated to produce coherent management plans consistent with overall sustainable development objectives.
Within this framework, the options for renewable resource management should be evaluated by a social cost-benefit analysis designed to objectively appraise ecological and economic consequences. However, this analysis alone would not be sufficient to permit optimal selection, because of potential incompatibility and interdependence of management options.
To determine an optimum resource management strategy for a given situation, a systems analysis approach is advocated, which would be based on the application of a programming technique with the underlying principle of marginal analysis in resource allocation. It identifies the best adoptable combination of options, "best" implying a design which contributes the most to the objective function of sustainable socio-economic resource-use efficiency, within the bounds of land, labour and capital availability and suitability. The system analysis should also consider subsidiary objectives and institutional considerations, including employment generation, people's preferences, income distribution and social impact.
Population pressure can lead to overexploitation of common property resources
This iterative procedure explores the effects of incremental changes in the levels of production processes on the outputs, resource uses and the system's efficiency. The dynamic scheduling of the optimal resource-use adjustments is also considered by incorporating emerging substitutability, sequential effects on the efficiency and the " loosening" of the constraints, notably of budget and labour.
A sensitivity analysis of the process combinations may be done by a parametric analysis. This would show the effect on the total system of varying the assumptions about discount rates, resource situations and constraints. An optimal solution, under current constraints, which is stable over a wide range of scenarios as well as conforms to the most likely resource-demand pattern can be chosen as the most suitable plan. It would be easily amenable to adjustments in response to economic and technological developments and retain the flexibility of rolling planning.
Trade, aid, debt and development
The developing countries require nearly US$ 200000 million a year in foreign debt servicing alone. Deteriorating terms of trade aggravate the situation. Primary commodity prices have reached their lowest level since the Great Depression of the 1930s. The positive net resource transfer: of around US$ 40000 million has been reversed during the past ten years to a net outflow of resources of a similar magnitude.
Despite growing concerns about the environment, the debt-ridden developing countries are often left with few options other than drawing down their natural resources and expanding their commodity output. This may appear to be a relatively rational way of achieving development goals in the short run. However, such a strategy may be less effective for stimulating long-term agricultural development under more diverse and less favourable agroecological conditions (Barbier, 1989). The benefits of such a strategy and concomitant economic incentives must be measured against their costs. These may include long-term resource degradation, damage to the sustainability of agricultural systems and creation of a bias against the interests of the rural poor. For example, the sustainability of many small-scale farming, agroforestry and pastoralist systems may be undermined by pricing policies that favour imported food at the expense of local crops, and by incentives that favour the adoption of inappropriate technologies.
Pricing policies and other economic incentives, as well as the overall agricultural strategy behind them, are rarely analysed in terms of the impact on the renewable resource base and the needs of the rural poor who depend on it. For instance, some ecological interest groups are pressuring consumers in developed countries to boycott tropical hardwoods altogether in the absence of an eco-labelling scheme. But if trade declines because of consumer boycotts, the rain forests will have even less value to the producer nations and could be even more prone to clearance, and employment and income accruing to local people and their participation in management and sustainable use of natural resources could be affected adversely. Proposals which would limit trade, such as embargoes, are in conflict with the current discussions under the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), which seek the fullest liberalization of trade in natural resource-based products.
Any serious programme aimed at the resolution of debt and trade problems will require new international initiatives and mechanisms for raising funds which can be used either for direct aid and investment or to buy out debt and subsidize commodity prices. One much-discussed possibility is the use of debt-for-nature exchanges to finance resource management. These swaps involve buying discounted debt and exchanging it for its face value. For example, Costa Rica received US$ 12.2 million with which titles were acquired to US$93.3 million of debt of nominal value for protecting forest areas, institutional strengthening and reforestation. Debt swapping is also taking place in other countries, including Bolivia, Ecuador, Madagascar, and the Philippines (Perez and Quiros, 1990).
The need for debt reduction can lead countries to issue non-sustainable timber concessions
Overexploitation of human resources is closely linked to environmental degradation
In considering the debt-for-nature swap mechanism, however, due consideration must be given to potential disadvantages to the debtor countries; for example, these swaps may generate inflationary pressures because their main advantage generally is not of debt reduction per se, but rather conversion of a foreign currency debt into a local currency obligation. Furthermore, sovereign nations cannot be expected to accept external control of their environmental and monetary policy priorities. Nevertheless, scope exists to tailor debt-for-nature swaps so a foreign commercial debt could be exchanged for a local investment or additional resources deployed for developing sound ecological management and nature reserves.
Poverty and environment
Rural poverty is the main cause of tropical deforestation. Mounting population pressure, increasing unemployment and inequities in land tenure lead to clearing forest land for spontaneous settlements, shifting cultivation and open grazing. Denudation is also due to excessive fuelwood extraction for bona fide needs. Further destitution and mass movement of the rural poor are inevitable accompaniments. Social restiveness is said to be increasingly intermixed with these processes (Thompson et al., 1986).
Interdependence between ecological and social systems is intense and delicate in developing economies. The poorest of the poor have increased from around 600 million in 1980 to 1000 million in 1990. Those facing fuelwood scarcity have reached 1500 million. This ever-rising tide of poor is eroding the capability of the renewable resource system to yield enough food and fresh water for sustained human activity. Understandably, the rural masses are most concerned about meeting their daily bread and other basic needs. Considerations of conservation and environment do not have the same immediacy for them.
Nonetheless, low agricultural productivity, soil salinization, tropical deforestation, wildlife destruction, overgrazing, depletion of inland and coastal fisheries, despoliation of watersheds, floods, droughts and desertification are the mutually reinforcing cause and effect of rural poverty. Closely linked is the problem of underemployed and overexploited human resources. In this context, the rural women are a key target group because of their strategic potential in moving their families out of poverty and promoting sustainable agriculture. NGOs can help strengthen people's motivation for the stabilization of population, removal of discrimination against the disadvantaged and environmental conservation.
Solutions to environmental degradation clearly must look beyond the renewable resource sector. Optimization of land and water utilization and ecosystems conservation need to be concerted with reducing rural poverty, developing human resources and promoting local community development. This requires institutional innovations and international aid for the reduction of economic pressures and creation of adequate incentives, which could enable developing countries to move into a sustainable development path without levying undue penalties on the weakest sections of society.
Macro-economic and global choices
Macro-economic impact of two environmental policy scenarios in the Netherlands shows a slightly depressed growth of 95 percent over the period 1985-2010 compared with 98 percent of the unchanged policy scenario (Opschoor et al., 1990). The equivalent figure is 100 percent for the sustained growth scenario, provided foreign countries pursue similar policies. Therefore, environmental policies, if undertaken by all concerned, could eventually stimulate the economy.
However, the short-run costs to the national exchequer can be substantial, considering the scale of economic and social intervention required. Therefore, each country may wish "to take stock of its own domestic situation and to assess the possible costs and economic effects, as well as the environmental benefits, of measures to limit greenhouse gas emission or adapt to climate change" (Reilly, 1989).
The President's Council of Economic Advisers in the United States recently concluded that carbon dioxide stabilization could cost 1 percent of GNP per year. The guesstimates so far about the measurable damage that could be prevented if the so-called global warming were stopped range from 0.25 to 2 percent of GNP. This uncertainty apart, and without counting the costs of biodiversity losses or of assistance to developing countries in containing their emissions, the decision-makers need to develop policies in reply to such macroeconomic indicators.
Society must optimally allocate output between consumption and services to improve the environment and choose between increased capital accumulation and environmental degradation (Barbier, 1990). Even though global warming is beset with uncertainty, some macroeconomic policy stand has to be taken. As the price of being wrong, the price of doing nothing could be irreversible ecological impact.
An anticipatory "no-regrets" approach could be adopted by beginning with low-cost measures, such as energy conservation. In the wake of the petroleum price increases in the 1970s, energy efficiency increased and many cost-effective conservation measures were developed. Self-paying energy conservation could be combined with reforestation; this could be the most cost-effective method of providing concentrated and sustainable sources of raw material. Beneficial side-effects would include control of air pollution and acidification and the positive impact on agriculture and allied renewable resources systems.
Uniform reduction of acidifying transboundary air pollution and other, similar environmental effects in the various countries cannot be cost-efficient; instead, an international cost-sharing system could lead to large savings (Almoco et al., 1988). Global conventions are required, but they will be effective only in so far as there are corresponding international funding mechanisms.
There are several alternative means of providing funding for the maintenance of the global environment (World Bank, 1990). These are not mutually exclusive, but they should be designed to tap the experience and installed capacity of development banks and the United Nations system, especially its specialized agencies, as well as the resources of bilateral donors, private organization and NGOs.
The anticipated "peace dividend" unfolds new opportunities. Four days of global military spending could finance the amount that was indicated in the Call for Action to protect the world's remaining tropical forests. Two days of spending could finance a full year's expenditure to halt desertification. Commitment of large-scale economic resources for environment requires recognition of international interdependence and political will for reconciling economic development with a global environment capable of sustaining growth.
The present structure of the international economic system and the unequal distribution of the world's wealth widen the gap between developed and developing countries and create pressures for development that may be ecologically unsound. Not only institutional and financial support but also technical assistance must be provided. This should include the transfer of the latest results of research and development regarding most appropriate and environmentally benign technologies, especially for agro-industries, weather watch, climate control, alternative energy systems, saline agriculture and biotechnology.
The industrialized countries should undertake clean-up operations in their economies, for they "are still the biggest menace to global environment and climate" (Colombo, 1989). Longer-term sustainable global development policies should not be allowed to hamper shorter-term economic growth in developing countries. Some "ballpark" estimates put the annual cost of a 2.5 °C global warming at 3 percent of the gross global product (Ettinger et al., 1989). But this could amount to an unaffordable 4 percent for the GNP developing countries because of their proportionately larger and more vulnerable agriculture sector. No doubt they need to take endogenous initiatives and self-reliant measures to promote development without destruction to the extent possible.
Developing countries cannot make sizeable investments for combating global environmental degradation without hampering their economic growth. They can only share the burden of global environmental policies to the extent that the industrialized countries give them access to additional capital and appropriate technology.
The trade-off between improved environmental quality in the medium-to-long term and reduced economic growth in the short term implies intra- and intergenerational adjustments and willingness to pay for cleanup operations. This calls for economic justification of resource allocation decisions which stand the scrutiny of pragmatic political rationale.
The economics of sustainable and environmentally sound development calls for the computation of costs and benefits associated with alternative environmental policies. Such evaluation criteria bring into focus the opportunity cost of continued environmental degradation through the uninhibited pursuit of economic growth.
Resources at society's command are scarce. Renewable resources have an important place in catalysing development. National income accounts need to be adjusted to reflect the extent to which economies are drawing down the renewable resource capital, thereby affecting the future growth potential. Systems analysis is a suitable approach to harmonizing the economic, ecological and institutional aspects of renewable resource management.
Poverty is one of the greatest threats to the environment. Many choices that degrade the environment are made in the developing countries because of the imperative of immediate survival, not because of a lack of concern for the future. Any plans of action for environmental improvement must therefore include programmes to reduce rural poverty.
Alhéheritière, D. 1982. Environmental impact assessment and agricultural development. Rome, FAO.
Almoco, J. et al. 1988. Acidification in Europe: a simulation model for evaluating control strategies. Laxenburg, Austria, IIASA.
Barbier, E.B. 1989. Sustaining agriculture on marginal land: a policy framework. Environment, 31(9): 12-18.
Barbier, E. B. 1990. Alternative approaches to economic-environmental interactions. Ecological Econ., 2(1): 7-26.
Bartalmus, P. 1987. Accounting for sustainable development. DIESA Working Paper No. 8. New York, United Nations Dept of International Economic and Social Affairs.
Colombo, V. 1989. The role of science and technology in the solution of the problems of development. In Advanced technologies for developing countries. Florence, Italy, Hypothesis Editore.
Costanza, R. & Perrings, C. 1990. Flexible assurance bonding. Ecological Econ., 2(1): 57-75.
Daly, H. E. 1990 Towards some operational principles of sustained development. Ecological Econ., 2(1): 1-6.
El Serafy, S. & Lutz, E. 1989. Environmental and resource accounting: an overview. In Ahmad, Y.J., El Serafy, S. & Lutz, E. eds. Environmental accounting for sustainable development. Washington, D.C., World Bank.
Ettinger, J. Van, Jansen, T. H. & Jepma, C. J. 1989. Climate, environment and development. Noordwijk Conference Report, vol. 1.
FAO. 1990 Socio-economic aspects of environmental policies in European agriculture. Seventeenth FAO Regional Conference for Europe. ERC/90/3. Rome.
Freixas, X. & Laffont, J. J. 1989. The irreversibility effect. In Boyer, M. &. Kihlstrom, R. eds. Bayesian models in economic theory. Amsterdam, North-Holland Press.
Gray, J. A. & Hadi, S. 1990. Fiscal policies and pricing in Indonesian forestry. FAO.
Jewitt, I.D. 1990. Economics of natural renewable resource management. (Unpublished manuscript)
Opschoor, J. B., Kuik, O. J. & Blok, K. 1990. Economic aspects of carbon dioxide reduction: a view from the Netherlands. Amsterdam, Free University.
Perez M., C. l. & Quiros, J. R. 1990. Estudio sobre la reducción de la deuda externa para promover la conservación de los recursos forestales. Rome, FAO. (Unpublished draft)
Reilly, W. K. 1989. Statement at the ministerial conference on atmospheric pollution and climate control. Noordwijk Conference Report, vol. 2.
Repetto, R. 1990. Government policies and deforestation in the tropics. (Mimeo)
Theys, J. 1989. Environmental accounting in development policy: the French experience. In Ahmad, Y.J., El Serafy, S. & Lutz, E. eds. Environmental accounting for sustainable development. Washington, D.C., World Bank.
Thompson, M., Warburton, M. & Hatley, T. 1986. Uncertainty on a Himalayan scale. London, Milton Ash.
World Bank. 1990. Funding for the global environment. Discussion paper. (Mimeo)
