K.F.S. KING
K. F. S. KING is on an FAO assignment as Lecturer in Forest Policy and Legislation at the Forest Department, University of Ibadan, Nigeria (United Nations Special Fund project).
Economic factors in their reconciliation
IT IS GENERALLY recognized that a sound land capability classification should form the basis of any land-use plan. Land capability classifications are, however, in some respects basically negative in character. For example, certain categories of land may be classified as unproductive because of adverse climatic conditions, others may be classified as being suitable only for forestry (because of the probability of erosion if put under other crops, or because of the poverty of the soil), but much of the world's land is suitable for forestry and/or cattle-grazing and/or agriculture. It is with land which may be variously used that this article is concerned, and not with that which should be utilized only by forestry for protection or conservation.
What are the factors which should be considered so that a rational decision concerning the utilization of land which is capable of several uses may be made? What criteria should be employed so that the allocation of capital to each land-using sector protects and enhances the nation's welfare? It is suggested that the primary considerations must be economic. The term "economic" is used here not in the sense of mere profitability but in a wider concept which embraces, inter alia, profitability, the number of people which the use is capable of employing, the possible contribution to the balance of payments position, and the possibility of utilizing the products of the land for industrialization.
A great number of foresters seem unable to accept this proposition. Very few are prepared to concede that economic considerations should be paramount where there is competition for land, or where there is competition for the resources to develop the land. There seem to be three reasons for this intransigence. The first is that "naturalistic" view which rebels when nature (rationalized as the forest) is threatened with destruction; the second is the deep-seated fear held by most foresters that forestry cannot compete with agriculture economically; and the third is based on the experience that when comparisons are made between forestry and agriculture an unfair advantage is given to agriculture. It is beyond the scope of this article to convince the holders of the view that nature should be inviolable that this is not always in the interests of the community, even in the long run. An attempt will be made, however, to consider, stage by stage, the economic factors which should be analyzed in deciding to which competing use land should be put, and it is hoped that it will be shown that the use of economic criteria results in a solution for the public good.
First, however, the view of the advocates of the noneconomic approach will be expressed. Eggeling (1949) puts the case forcibly. "Allocation of land cannot be based solely on economics," he writes. "It is not simply a matter of determining which gives the highest return - forestry, agriculture, or grazing; every case will have a different background and must be judged on its merits. Indeed, one can visualize situations where, if there is to be any hope at all of growing trees, forestry may have to be allocated the best soil available, and not... the worst. This position is most likely to arise in treeless grazing areas where it is obviously not just a matter of measuring the value in cash of a tree crop against the value of the stock or the agricultural crop which the same land can carry. What has here to be considered is the fact that without trees there can be neither a permanent supply of fuel nor a permanent supply of building poles. If there are no building poles, it is difficult to anchor a roving population; if there is no wood for cooking, cow dung may have to be used instead - a state of affairs which cannot be tolerated since in any balanced land-use system manure must be returned to the land to restore and maintain fertility."
Are these arguments valid? Do they successfully prove that economic factors are not paramount? Let us consider the hypothetical situation which he poses. A piece of land is suitable for cattle grazing but there are no trees in the area to provide poles for building and wood for fuel. It is assumed that cattle would provide a higher return than a tree crop. Because there is no wood, the forester states categorically that the area should be planted, not only it is true for wood products, but also because, by the combined use of the land, soil fertility would be maintained. It is suggested that the approach should be different. The margin of profitability, which would accrue to the user of the land if cattle grazing instead of tree planting was the land use, should be estimated. The pole and fuel needs of the cattle-grazing population should then be assessed. If the margin of profitability were such that the poles and fuel might be bought from it and still leave a cash surplus, then the correct procedure is to use the land for cattle grazing. The requirements for the maintenance of soil fertility would then be met by the cow manure which would no longer be needed for fuel. It may well be that, although the margin of profits is high enough, no wood is economically available to the graziers; the cost of transportation to the area might be such as to render the transfer of wood uneconomic. In this case, as the values of the different products may be ascertained, the technique of indifference curve analysis may be applied to determine the optimum combination of the joint production of wood and cattle (Gregory, 1955). The approach is at all times rational, and an attempt is made to measure economically different results of particular types of land use.
What then are the factors which should be taken into account in deciding to which of the competing uses land should be allocated? At the outset the difficulty of making economic projections must be emphasized. Because of the numerous and diverse relationships which must be considered, it is almost impossible to construct an entirely quantitative model. Indeed, some of the important variables are not amenable to measurement and human, institutional, and technological skills have to be presumed in the light of a knowledge of the sociological and historical background of the country or region for which the decision is being made.
The factors which influence the decision are:
(a) cost/benefit ratios of the different land uses;
(b) economic location of the crops, supply of and demand for the competing products;
(c) different time pattern scales, labor requirements;
(d) possibility of using the products for industrialization,
(e) comparative advantage in international trade of producing the various products;
(f) their possible contribution to the balance of payments.
If the owners of any resource think that it might be put to better advantage in some other use, this resource would be transferred from the less to the more advantageous use. Here the word "advantage" is used to include both monetary and nonmonetary benefits. The change of allocation of resources occurs almost daily in a free economy because equilibrium in the distribution of economic resources is an ideal which is not often achieved under any but the simplest systems. It is the aim of the land-use planner to ensure, however, that the allocation of land is so made that both nonmonetary and monetary benefits may be attained, and that an approach to the state of equilibrium will occur.
COMPARATIVE PROFITABILITY
The nonmonetary benefits may be partly achieved by a classification of the physical potentialities of the land, the monetary benefits through a stage-by-stage analysis of the economics of competing uses. The first stage, the comparative profitability of these uses, will be considered. The methods used in calculating the profitability of different agricultural crops when these are competing for a particular area of land are straightforward; the methods used by foresters when they wish to compare the profitability of different tree crops are somewhat different but, generally, the well-known Faustmann formula is used. When an attempt is made to compare agricultural with forest crops, the situation becomes, for some obscure reason, complicated.
McFarquhar (1937) in reporting on an investigation into the possible benefits to Western Nigeria in releasing 30,000 acres (12,000 hectares) of forest reserve for the establishment of large-scale oil palm plantations, adopted inter alia the following; procedure:
1. He followed the Faustmann formula in calculating the value of the land under forest at the time of exploitation.2. He assumed a price for a unit quantity of timber in log form, but did not consider the possible returns if the logs were manufactured in any other way.
3. On the other hand, in calculating the returns from oil palms, he took into account the value of the processed articles.4. He capitalized the establishment costs of oil palms at the end of the establishment period and charged simple interest on the basis that these capital costs were incurred in equal instalments over the full establishment period.
Two points require examination here. The first is whether in comparing the profitability of different land uses it is not desirable to base calculations on the ultimate products of the land: on sawn timber or manufactured timber products as compared with processed coffee, oil palm, nuts, etc. The difficulty, of course, is to decide when the calculations should stop. Should we, to cite an extreme example, in considering a timber crop which may be used for housing, calculate the cost of raising the trees, converting the timber into lumber and building the house, and the returns from the sale of the house? Should we estimate the cost of raising cocoa trees, processing the beans, canning the cocoa, and the price of the tinned cocoa? This approach may shock our sense of proportion and may, in practice, prove unduly complicated. But the method used by McFarquhar is also open to serious criticism. A comparison between a semiprocessed and a nonprocessed product is of no validity.
It is suggested that alternative procedures may be employed. First, straightforward comparisons may be made between the profitability of nonprocessed produce. This has the advantage not only of comparing like with like, but also of showing what returns are obtained by a farmer or small woodcutter who uses the land and produces the crop, but who is not concerned with subsequent industrial processes. In the second alternative, the processed product is considered and it is recommended that, in a comparison of profitability between different crops, expenditure and income should be calculated from the time of the first operation down to and including the completion of the operation which would make the product usable for the object intended. Thus, if the object of the plantation is fuelwood, the calculation should start at the time of establishment and end when the felled trees are converted into usable firewood sizes; if the object is saw timber, the calculations should end when the timber is milled; if the object is to produce paper, the calculations should end when the wood is converted into woodpulp. In the same way, if the agricultural crop is rice, the calculations should continue until the paddy is milled into rice. It must be emphasized that the stage at which the calculations stop will depend upon the object of growing the crop. This, though easily ascertainable for agricultural crops, is often difficult for timber crops.
The reasons for this flexibility in the objects of forest management are its long-term nature and the multiplicity of uses to which wood can be put. Where the forest is natural, the object is generally to improve the productivity of the economic species, but the definite use to which these economic species will be assigned is hardly ever stated. Where the forest is artificial, objects may be less vaguely defined, but are still often far from specific. The planner must bear in mind the possible uses; he may find it necessary to assume different end products and to estimate the profitability of each of these, but it is wrong to use the value of the recently felled nonconverted tree as its potential return in all cases, because the value is often enhanced considerably by the most insignificant process of conversion.
The second point in profitability calculations which requires examination is of a dual nature. The first aspect is the interest rate which should be charged. Although a range of interest rates should be used in all such calculations so that as wide a picture as possible may be seen, some particular rate must finally be chosen if only for purposes of comparison. Grayson (1962) has stated that the Forestry Commission of Great Britain has adopted 3.5 percent, based partly on the notional rates charged on funds advanced, but Duerr (1960) has shown that the rate may be determined not only by debt charges but also by investment or spending alternatives. Debt charges seem to suggest the minimum rate to be used, for few business men would wish to receive a return which is only equal to the cost of the borrowed money. Grant et al. (1960) have advocated the use of a minimum attractive rate of return for public works which may well be applied to all land-using undertakings. This would normally be greater than the borrowing rate, for the following reasons.
1. Although there may be good opportunities for the productive investment of funds in government activities, the amount of funds available may be limited; in such a case the discount rate should be the marginal opportunity rate (the prospective return from alternative investments), and this will be higher than the borrowing rate.2. Investment opportunities foregone by the taxpayers should be considered in setting a minimum attractive rate of return. Hirshleifer et al. (1963) have supported Grant's arguments.
The other aspect concerns comparisons between agricultural and forest crops. As mentioned, McFarquhar (1957) used the Faustmann formula in his forest calculations, but appears to have capitalized the establishment costs at the end of the establishment period of the oil palm and charged simple interest rates on the basis that these capital costs were incurred in equal installments over the full establishment period. If the competition between forestry and agriculture for land is between timber crops and agricultural crops which require an establishment period during which no returns are forthcoming, then, no matter how short the gestation period, if it is longer than one year the investment should be compounded or discounted in both cases.
TIME PATTERN SCALES
It sometimes happens that, in spite of the apparent profitability of a particular form of land use, planners advise that capital be invested in projects which, though yielding a lower return, will give it much more quickly. A consideration of the time pattern scale is therefore important in land-use planning. It is evident that an investment which begins to yield earlier is superior in an objective sense to one, otherwise equal, which has a longer gestation period. The proceeds of the quick-yielding investment can in turn be invested and a larger flow of output produced by the time that the slow-yielding one is ripe, with no loss of consumption meanwhile. This may be also true even if the slower yielding investment gives a higher return.
The period of waiting is, of course, greater for timber than for agricultural crops, and has led to the rejection of apparently quite promosing land-use proposals. Thus, in the Annual Report of the Forest Department of British Honduras for the year 1959, the following quotations from a visiting economist, Mr. J. Downie, are made: "I accept... that the ultimate return in forestry is very large. But there is a strong prima facie presumption against a poor country investing a big proportion of its capital in a project which yields a return only after so long a period... I do not believe that (British Honduras) can afford to wait anything from 40 to 100 years to get a return on its money. Since forestry is competing for capital with other urgent needs - many of which can offer a much quicker return - the percent rate at which a limited amount can be borrowed is not relevant;1 and by this standard, forestry does not pay. This conclusion is all the more true of hardwoods, where the period of investment is much longer and the true financial return is correspondingly lower."
1 It was shown that money could be borrowed at 6 percent. If this money was invested in pine plantations, the return would be 8 percent.
Despite Downie's arguments, it is suggested that, if the yield from the project is high enough to compensate for the long wait, it should be followed; that is, if the return from a lower yielding project, even if reinvested, will not cumulatively give the return which will result from the higher yielding project, the correct decision is to make the higher yielding investment. The rate which is "large enough" may be weighted to allow for the greater uncertainty of the market for the long deferred return in relation to the short delayed return. The calculation may be made by employing a well-known procedure. A rate of interest, or a series of rates, is assumed, and the periods of gestation for the projects are ascertained. These rates of interest are, in economic terms, the rate of marginal efficiency which is expected to rule throughout the rotation of the tree crop, for example. This marginal efficiency of investment can be used as a measure of the cost of waiting, and expressed as a discount to be applied to all future costs and future returns. On this basis, the discounted present value of the competing land uses can be calculated and compared.
Another suggestion is to phase investments, that is to say, that the available capital should be distributed in such a way that the high-yielding, slow-maturing use should be carried out in stages, and the capital released because of this phased development of the high-yielding project can therefore be invested in the low-yielding, fast-maturing project.
ECONOMIC LOCATION OF CROP
The economic location of the crop will also affect profitability. There is no need to labor this point. The factors which should be taken into account are: the rent per unit of land, the yield per unit of land, the market price per unit of product, the distance from the market, the transport rate per unit of distance, and the infrastructural development of the country or region. Economic location cannot be treated in isolation, however. It is part and parcel of the calculation of profitability, and it is the sum total of the factors mentioned above which will decide the location of a particular form of land use.
SUPPLY AND DEMAND
Production forestry, like agriculture and cattle grazing, is, of course, a business. The relative supply and demand of the products to be grown must therefore be considered. It does not seem necessary for the purposes of this paper to devote much space to the principles underlying these concepts. However, certain patterns in the consumption of wood and wood products in the developing countries, some of which do not appear to have been greatly discussed, will be treated.
It seems to be generally assumed that, with a rise in population and a rise in per caput income, the per caput consumption of wood would also rise. Hummel and Grayson (1962) have pointed out, with reference to the United Kingdom, that "any forecast of future demand is incomplete unless it takes into account the effect of price," but few demand forecasts for the tropics in particular have actually taken this aspect into account. Apart from the difficulty of forecasting price trends, this failure to consider possible price changes may be due to the apparent lack of correlation between the demand for wood and price fluctuations in the developing countries. When changes in demand are observed, they seem to be related to changes in income level and are independent of price.
Although this is still a fertile field for research, certain trends have already been observed. It is fairly well established that with a rise in per caput incomes (even at comparatively low levels of income) the demand for fuelwood drops (King, 1963). Evidence from the United States and Australia, for example, suggests that a further rise in income (but at much higher levels than obtains in most developing countries) may cause the demand for lumber to drop. On the other hand, (a) a rise in the consumption of paper, fibreboard, plywood and particle board seems strongly correlated with a rise in per caput income, and (b) the rise in the consumption of these sophisticated products outstrips the fall in demand for the more traditional products. The demand for fuelwood and lumber, at certain incomes, is often indirectly proportional to the demand for fuelwood substitutes (such as, kerosene) and lumber substitution (such as, cement). The demand forecaster must therefore always consider alternative products, and relate the possibility of their substitution to any trends he may discern. This is important.
It must not be assumed that a rise in per caput income automatically means a rise in demand for all sorts of timber. With high incomes the consumer becomes more selective. The consumer also becomes more selective as he becomes more aware. It is therefore quite possible that the demand for the more sophisticated products may occur in the developing countries at lower levels of income than they have hitherto done in the developing world. These aspects of demand forecasting apply also to agricultural crops. The obvious difference is that demand forecasting in forestry necessarily covers longer periods and is therefore all the more important, even if more hazardous.
LABOR REQUIREMENTS
The problem of the reconciliation of conflicting uses is complicated by the rapid rise in underemployment and unemployment which prevails in most developing countries. It is desirable, if competing uses are more or less equally profitable, that an assessment be made of the people required to operate the use. It is obvious that, if there is no monetary gain to be had by any particular form of land use, that which absorbs the most labor should be the one recommended. Unfortunately, the choice is not usually so simple, and some sort of weighting system might have to be evolved to meet those cases in which profitability is relatively great but employment absorption is relatively low.
It has, of course, been argued that one of the crucial hurdles obstructing the development of developing countries is the lack of an adequate "economic surplus" (see Baran 1952) and that money should be channeled into those undertakings which yield the necessary surplus. On the other hand, the welfare economists (see Pigou 1962) might accept the desirability of giving some weight to employment. It would perhaps not be begging the question to say that this is one of those matters of policy which will ultimately be decided by the philosophy or ideology of the decision makers.
In this connection, Zivnuska (1952) has stated that current economic and political thinking shows clearly that a widely accepted ultimate objective of domestic policy in the United States is the development of a stable economy with full employment and a high level of production. The statements of politicians all over the world echo this sentiment.
INDUSTRIAL POSSIBILITIES OF CROP
This raises the point of planning the use of the land in a vacuum. A land-use plan should be part of a larger, all-embracing development plan; i.e., the overall development of the area being planned for should be kept in mind.
A basic assumption in economic planning in developing countries is that a major structural transformation, requiring some degree of industrial development, is essential. The industrial sector in national development plans is therefore of special interest. Yet very little attention has been given, in the formulation of land-use plans, to the potentialities for industrialization which the forested areas of the tropics possess.
The emphasis in most of the plans investigated has been on the agricultural sector. In the few cases in which economic comparisons were attempted, the calculations stopped at the production of the raw materials and considered neither the returns which already accrued to existing processing factories nor the possibility of developing an industrial economy from the fruits of the land. Yet not only is the potentiality of the world's tropical forests great, but the need for industrial products already exists and appears to be increasing rapidly. Westoby (1963) has shown this clearly. It is therefore urged that, in considering the demands of competing land uses, the possibilities of industrialization which might arise from a particular land use, and the multiplier effects of the use, should be estimated.
CONTRIBUTION TO BALANCE OF PAYMENTS
Other factors which have to be considered in planning the use of the land are what comparative advantages are possessed by a country for a particular form of land use, and what contribution to the balance of payments can be made by the crops which may utilize the land. These considerations involve an assessment of the availability of international supplies of the products which may be rejected because it is more profitable to grow some other crop at home and an estimation of the price which will have to be paid in order to import them from abroad; they involve the relative profits which would be made if the planting of certain crops is rejected and others are grown, and, perhaps most important, they are affected by possible contributions to the balance of payment. The developing countries rely heavily for their infrastructural development (and must do for a long time) on the importation of equipment and material which they cannot produce at home. Production of goods which reduce the drain of local funds and earn foreign money is therefore to be encouraged.
The reconciliation of conflicting demands for resources is one of the important problems now facing developing countries. Land hitherto reserved for forestry is frequently being transferred to agriculture, government capital is being denied to one section of the landusing economy and given to another, and decisions are made on inadequate data and on inadequate advice. Foresters are sometimes so reluctant to use the tools of the economists that the case for forestry is lost by default. The main object of this article is therefore to persuade foresters that a more detailed study of the economics of wood production and other land uses would lead to more rational resource allocation.
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