Economic policy reform for natural resource conservation

THE WORLD BANK POLICY PLANNING AND RESEARCH STAFF Environment Department Economic Policy Reform for Natural Resource Conservation Robert Repetto May 1988 Environment Department Working Paper No. 4 This paper has been prepared for internal use. The views and interpretations herein are those of the authors and should not be attributed to the World Bank, to its affiliated organizations or to any individual acting on their behalf. * ii - This paper has been prepared by Robert Repetto under a cooperative agreement with the Environment Department of the World Bank. Robert Repetto is Program Director for Economic Policies and Institutions at the World Resources Institute. The author is especially indebted to contributors to the underlying research: Eufresina Boado, John Browder, Kong Fanwen, Malcolm Gillis, Li Jinchang, He Naihui, Lester Ross, Eduardo Bitran, Juan Jose Fernandez, Ahmed Galal, John Horberry, Alison Jones-Webb, Muhammed Chaudry, Ronald Cummings, Quazi Shahabuddin, Wang Yanxiang, and Liu Wen. He acknowledges financial support for this research from the World Bank, the World Commission for Environment and Development, and from USAID. Departmental Working Papers are not formal publications of the World Bank. They present preliminary and unpolished results of country analysis or research that are circulated to encourage discussion and comment; citation and the use of such a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city or area, or of the authorities thereof, concerning the delimitation of boundaries or national affiliation. Because of the informality and to present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. - iii - ABSTRACT After more than a decade of investigation and publicity, the world has awakened to the alarming fact that ecological damage is undermining the development prospects of many of the world's most disadvantaged communities. In semi-arid lands, in remote hill regions, and deep in tropical forests, expanding populations entirely dependent on soils, water, and native vegetation for precarious livelihoods are exploiting deteriorating resources. In parallel, in the Third World's better endowed regions, intensive farming and industrial development have growing environmental implications. Waterlogging, salinization, and sedimentation are seriously affecting the potential productivity of large tracts of irrigated lands. The number of Third World people poisoned by pesticides each year probably ranges in the hundreds of thousands, and pesti.ides residues are widely dispersed in aquifers, surface waters, and body tissues. Serious environmental and resource problems stem not only from the impacts of large capital projects but also from the cumulative effects of many small agricultural and industrial operations. Therefore, remedies must include changes in economic policies, institutions, and incentives to promote more sustainable patterns of resource use by large and small enterprises, including households. The necessary policy framework is one that channels demographic and economic expansion into activities that provide rising incomes while preserving the productivity of the natural resource base. Otherwise, income gains are illusory: current increases in consumption are borrowed by depleting assets vital to sustained production in the future. Sometimes, people borrow against the future because property rights and other basic institutions deny them a secure stake in the future product of the resources they exploit. Sometimes, they do so because their actions benefit them while damaging resources that belong to others. All these problems can be addressed successfully only by changes in the structure of incentives that people respond to. The rationale for correcting incentives to deal with marked failures is well established, but the nature of effective mechanisms applicable to such problems in shifting cultivation, transhumant pastoralism, marginal hill farming, village forestry, and traditional irrigation systems are certainly not. Devising incentive systems that will promote sustainable and more productive resource use in these contexts is a formidable problem. Fortunately, there are important remedies that are much more conventional and straightforward. Problems of resource degradation stem not only from market failure, but also from policy failure. Much of the policy dialogue with and within government agencies responsible for taxes, pricing, tariffs and exchange rates, and other incentive instruments concerns current policies that reduce economic productivity, impede economic growth, exacerbate economic inequities, or increase fiscal burdens on government. Many of these policy reforms have important implications for conservation and better environmental and resource management. - iv - Numerous government policies currently in effect in many countries not only fail to reflect the true opportunity cost of natural resource use, they perversely encourage more rapid and more extensive degradation of soils, water, and biota, than market forces alone would, in the absence of such policy stimuli. Therefore, in certain areas, important opportunities exist for complementary policy reforms: those that raise current economic welfare and reduce long-term environmental degradation. Examples of such complementary policy reforms are removal of pesticide subsidies; an increase in stumpage fees for logging companies; and more generally marginal cost pricing that takes into account external costs. * v - ECONOMIC POLICY REFORM FOR NATURAL RESOURCE CONSERVATION TABLE OF CONTENTS ZAME I. The Need for Incentive Reforms........................1 II. Agricultural Output Prices............................5 III. Agricultural Input Subsidies..........................8 A. Irrigation........................................8 B. Pesticides.......................................16 C. Fertilizers......................................19 D. Other Input Subsidies............................25 1. Mechanization................................25 2. Credit Subsidies.............................27 E. Summary Overview of Incentives for the Use of Agricultural Inputs...........................29 IV. Sectoral Issues......................................30 A. Forests..........................................30 B. Livestock........................................38 References...........................................43 - 1 - ECONOMIC POLICY REFORM FOR NATURAL RESOURCE CONSERVATION I. The Need for Incentive Reforms After more than a decade of investigation and publicity, the world has awakened to the alarming fact that ecological damage is undermining the development prospects of many of the world's most disadvantaged communities. In semi-arid lands, in remote hill regions, and deep in tropical forests, expanding populations entirely dependent on soils, water, and native vegetation for precarious livelihoods are exploiting deteriorating resources. Where growing demands confront diminishing resource stocks, as in semi-arid Africa's search for fuel and forage, damage is accelerating. In parallel, in the Third World's better endowed regions, intensive farming and industrial development have growing environmental implications. Waterlogging, salinization, and sedimentation are seriously affecting the potential productivity of large tracts of irrigated lands. The number of Third World people poisoned by pesticides each year probably ranges in the hundreds of thousands, and pesticide residues are widely dispersed in aquifers, surface waters, and body tissues. The number of pests resistant to major pesticides is now in the hundreds. Increasing reliance on chemical fertilizers, sometimes in place of organic manures, has long-term implications for soil structure and fertility, and run-off from inefficiently fertilized fields contributes to the eutrophication of neighboring waters. Meanwhile, potentially useful organic wastes from agricultural and industrial processing operations constitute growing pollution problems. Serious economic problems such as these stem not only from the impacts of large capital projects but also from the cumulative effects of many small agricultural and industrial operations. Demographic and economic expansion are intensifying these widespread impacts on natural resources, in both well-endowed and poor areas. Environmental assessment and proper planning of large investments can avoid major environmental disruptions, but cannot deflect these growing pressures. Nor can the new environmental regulations that many developing countries have adopted, since governments lack the means to monitor and control such widespread, cumulative damages. Therefore, remedies must include changes in economic policies, institutions, and incentives to promote more sustainable patte,ns of resource use by large and small enterprises, including households. The necessary policy framework is one that channels demographic and economic expansion into activities that provide rising incomes while preserving the productivity of the natural resource base. Otherwise, income gains are illusory: current increases in consumption are borrowed by depleting assets vital to sustained production in the future. - 2 - People often borrow against the future by depleting natural resources because they lack options. They persist in traditional technologies that threaten to overwhelm the ecological base because they do not have the knowledge or resources to adapt. Sometimes, people borrow against the future because property rights and other basic institutions deny them a secure stake in the future product of the resources they exploit. Sometimes, they do so because their actions benefit them while damaging resources that belong to others. All these problems can be addressed successfully only by changes in the structure of incentives that people respond to. The changes implied are those needed to deal with well-known problems of market failure: skewed perceptions of risk or access to capital and information, physical externalities, and "common property" issues. However, while the rationale for correcting incentives to deal with such problems is well-established, the nature of effective mechanisms applicable to such problems in shifting cultivation, transhumant pastoralism, marginal hill farming, village forestry, and traditional irrigation systems are certainly not. Devising incentive systems that will promote sustainable and more productive resource use in these contexts is a formidable problem. Fortunately, there are important remedies that are much more conventional and straightforward. Problems of resource degradation stem not only from market failure, but also from policy failure. Much of the policy dialogue with and within government agencies responsible for taxes, pricing, tariffs and exchange rates, and other incentive instruments concerns current policies that reduce economic productivity, impede economic growth, exacerbate economic inequities, or increase fiscal burdens on government. The dialogue over many policy errors, such as inappropriate pricing policies, has been going on for a very long time, and is by now backed by an enormous body of analysis and experience. Many of these policy reforms have important implications for conservation and better environmental and resource management. Economic waste often also implies resource waste. For example, eliminating subsidies to energy consumers by pricing energy products according to long-run incremental costs promotes energy conservation, higher energy efficiency, and reduces a wide variety of environmental stresses associated with energy conversion. Energy pricing reforms reduce costs by saving energy, and also reduce environmental damages. Numerous government policies currently in effect in many countries not only fail to reflect the true opportunity cost of natural resource use, they perversely encourage more rapid and more extensive degradation of soils, water, and biota, than market forces alone would, in the absence of such policy stimuli. In other words, current policies often do not reflect full costs of natural resource use. Rather, policies are pursued that artificially increase the profitability of activities that result in serious natural resource degradation. Private profits are distorted through a wide range of subsidies, fiscal incentives, and market interventions. - 3 - Therefore, important opportunities exist for complementary policy reforms: those that raise current economic welfare and reduce long-term environmental degradation. This idea of complementary policy reforms is elaborated in Figure 1, using the previous example of energy conservation. The horizontal axis represents the scale of an energy using activity. The vertical axis measures various costs and benefits in monetary terms. The line ED represents marginal private net benefits from this energy using activity, which decline as more and more energy is used. Rational private decisionmakers will use energy up to the scale OP, beyond which the incremental net benefits are negative. The line OC represents marginal net costs of energy use that are external to the private decisionmaker, such as pollution caused by energy conversion. They tend to be ignored, for the most part, in private decisions, in the absence of government intervention. In Figure 1, these marginal environmental costs are portrayed as rising as more energy is used, as is often the case. The scale of energy use that would maximize net benefits throughout the economy is OS: using the additional amount, SP, would provide additional private net benefits ASP, but entail larger external environmental damages, ABP. A common policy prescription is a tax of AS on energy use, so that private net benefits would conform to the social optimum. This is all standard policy analysis. However, in practice, government policies often encourage activities with environmental costs, causing them to expand beyond the scale that would otherwise be privately optimal. Energy price controls or consumer subsidies in the amount QD would induce energy use to expand to OQ. At this scale,-larger environmental damages, PQCB, result. Also, substantial economic losses, PQD, are incurred because the marginal benefits of additional energy use are less than the incremental costs of supply. Removing these policy distortions would lead private decisionmakers to reduce energy use from OQ to OP, with large savings in conventionally measured economic costs and even larger savings in external environmental costs. While still not sufficient, policy changes of this kind are obviously important first steps toward better resource and environmental management. Correcting policies that generate perverse incentives has high priority for two reasons. First, because such policy changes typically promote resource conservation and other economic objectives as well, their net social gains are large. They do not require trade-offs between development and "environmental" goals, and do not create the impression of a false dichotomy between the two. For this reason, they command broad support. Indeed, many of these changes have been on the conventional agenda of policy reform right along, and have been adopted -- to varying degrees -- in many countries. . 4 0 E Net Marginal Private Benefits Marginal External Costs'1 S P Q Scale of Activity D Second, unless underlying perverse incentives are removed, project investments that seek to enhance and protect natural resources will have little chance of overall success. Their remedial effect will be overwhelmed by the general pattern of unsustainable resource exploitation. For example, special projects and programs to promote reafforestation will be overbalanced by widespread deforestation unless the general framework of incentives induces efficient use of forestry products and adequate private investment in new plantings. Many of the opportunities for complementary policy reforms also imply reduced fiscal burdens on government and reduced inequities within the economy. The reason is that persistent distortions in economic policies usually involve the use of the machinery of government to transfer resources from the unorganized majority to an influential minority through manipulation of market forces and capture of the fiscal powers of the state. Consequently, reform often threatens entrenched political interests, but offers large potential rewards in improved economic productivity, equity, fiscal stability, and resource conservation. This paper identifies and discusses a range of important opportunities for policy changes to remove such perverse incentives. The - 5 - opportunities identified in the paper are by no means exhaustive. They are limited only to policies that affect land and water resources; energy policies with significant impacts on air quality and climate are not discussed, for example. Issues are raised that are common to many countries (not only in the Third World, by any means), and that may be exceptionally significant. Often, what this paper adds is merely a new or relatively neglected aspect of a policy issue that has been of concern for some time. The paper is based on a wide array of country case material that has been collected with the support of the World Resources Institute, the World Bank, USAID, and the World Commission on Environment and Development. However, the discussion is at a broad, cross-country level, and the study has revealed a general lack of knowledge about the environmental and resource aspects of many economic policy issues. This lack of knowledge presents an important challenge for development research. Recommendations for policy changes should be based on detailed analysis in individual countries. II. Agricultural Output Prices Governments throughout the world intervene strongly in agricultural markets to change levels of agricultural commodity prices, relative to one another and to prices of non-agricultural goods. Interventions can be direct, through taxes, price controls or supports, and supply restrictions; or indirect, through exchange rate policies or the level of protection afforded manufacturing industries. By whatever means, governments wield enormous influence over the allocation of resources to the farm sector and within it. Most of these indirect and economy-wide influences over the agricultural output prices are beyond the scope of this report.1 Perhaps the most important influence stems from the widespread tendency in developing countries to turn the internal terms of trade against agriculture and to depress agricultural prices relative to international levels by overvaluing their exchange rates, providing high levels of protection to non-agricultural industries, and effectively taxing farm output. Depressing relative agricultural production in this way reduces farming's profitability. The subsidies to agricultural inputs discussed below only partially offset these adverse effects. In general, depressing farm profitability reduces the derived demand for farmland, farm labor, and other inputs not supported by government subsidies. Agricultural land prices tend to be lower than they otherwise would be, since farmland is a factor of production that cannot shift massively into other uses. Consequently, returns on investments in farmland development or conservation are also depressed. Farmers are discouraged from levelling, terracing, draining, irrigating, or otherwise improving their land. The loss of land productivity through erosion, salinization, or nutrient depletion is less costly relative to other values in the economy. Therefore, in a broad sense, depressing agricultural prices depresses farmer incentives for soil conservation.2 - 6 - Depressing the profitability of farming and the derived demand for farmland also tends to slow down agricultural expansion at the external margin. Incentives to open up new areas for cultivation, often at considerable labor and investment cost, are weakened when farming is made less profitable. This might have the opposite environmental effect of slowing the expansion of cultivation into ecologically fragile areas, such as tropical forests, upper watersheds, and semi-arid zones. The relative strength of these contrary forces is totally unknown. However, several qualifications should be mentioned to the idea that depressing farm profitability retards expansion onto fragile soils. First, by no means all land recently brought into cultivation or still available is fragile. In sparsely populated areas, it might just be farther from existing settlements. In temperaie Africa, recently cultivated lands often consist of heavy, hard-to-work bottom soils.3 Second, many governments provide generous subsidies and other incentives for developing new agricultural lands by sponsoring agricultural settlements, by financing infrastructure, and by structuring land tenure laws so that homesteaders can obtain free title to lands they develop. Third, rural poverty ensures a rapidly growing population of underemployed, nearly landless households searching for some means of subsistence, which they often can find only on lands barely suitable for cultivation. In many countries, therefore, the overall structure of agricultural incentives results in large, underutilized areas of good land and a surplus of farm households desperately farming marginal lands for little more than subsistence. Within the agricultural sector, differential rates of implicit taxation among commodities can strongly influence cropping patterns and land uses. Many countries, contrary to widespread popular impressions, severely discriminate against export crops relative to domestic food crops such as cereals. Table 1, reproduced from the World Bank's World Development Report 1986, illustrates this for Sub-Saharan Africa. There are several reasons for this. One is that taxes on domestic food crops have obvious effects on the cost of living, especially for politically powerful urban consumers. Another is that export crops, passing through processing plants, ports, and railheads in large volumes, are administratively easy to tax. Still another is that export crops are often perennials, suggesting that their short-term supply response to taxation might be relatively small. There is considerable irony in this, since many environmental groups complain that developing countries, aided and abetted by international corporations and banks, overemphasize export crop production at the expense of basic food crops, and that these policies accelerate soil degradation and ecological disturbance. This argument is probably twice mistaken: most developing countries underemphasize export commodity production, and export crops tend to be, if anything, less dangerous to soils than basic food crops. Many export crops grow on trees and bushes that provide continuous root structure and canopy cover: coffee, cocoa, rubber, palm oil, bananas, tea, spices and so on. Such crops are quite suitable for the hilly terrain where they are often grown. -7- TABLE I INDEX OL _MINAL AND REAL ROTECTION COEFFICIEMTS.FOR CEREALS AND EORT CROPS IN SALECTED AFRICAN COUNTRIES. 1972-1983 Cereals Export Crops 1972-83 1981-83 1972-83 1981-83 nom. real nom. real nom. real nom. real Country index index index index index index index index Cameroon 129 90 140 108 83 61 95 75 C8te d'1voire 140 98 119 87 92 66 99 71 Ethiopia 73 55 73 49 88 71 101 66 Kenya 115 94 115 98 101 83 98 84 Malawi 85 79 106 100 102 94 106 97 Mali 128 79 177 122 101 83 98 70 Niger 170 119 225 166 82 59 113 84 Nigeria 126 66 160 66 108 60 149 63 Senegal 109 79 104 89 83 60 75 64 Sierra Leone 104 95 184 143 101 93 92 68 Sudan 174 119 229 164 90 63 105 75 Tanzania 127 88 188 95 86 62 103 52 Zambia 107 93 146 125 97 84 93 80 All Sub-Saharan Africa 122 89 151 109 93 71 102 73 Note: The nominal index measures the change in the nominal protection coef- ficient with border prices converted into local currency at official exchange rates. Data for Ghana are not available. Source: World Bank, World Development Report 1986, Washington, D.C., 1986, p. 86. The following table, Table 2, illustrates substantial differences among crops and land uses in susceptibility to erosion under sub-tropical (West African) conditions. The data represent rates of soil erosion of different vegetative covers relative to that of bare ground, under specified slope, rainfall, and other conditions. It is clear that there are substantial differences among crops, and that while some commercial crops -- groundnuts and cotton, for example -- can leave the soil quite susceptible to erosion, others do not. Oil palms, coffee, cacao, with grasses planted underneath result in rates of erosion two or three times less than typical rates for staple root crops such as cassava and yams, or row crops such as maize, sorghum, millets. Moreover, established pasturage also results in relatively low rates of erosion. All in all, there are substantial differences among crops and land uses in underlying soil erosibility, but to the extent that there is any association between erosion and production for exports, it is that most export crops are more protective of soils than subsistence food crops. -8- TABLE 2 VEGETAL COVER FACTORS (C) FOR EROSION IN VEST AFRICAN CONDITIONS C, representative annual value Bare soil 1.0 Dense forest or culture with a thick straw mulch 0.001 Savannah and grassland, ungrazed 0.01 Forage and cover crops: Late planted or with slow development First year 0.3-0.8 Second year 0.1 Cover crops with rapid development 0.1 Maize, sorghum, millet 0.3-0.9 Rice (intensive culture, second cycle) 0.1-0.2 Cotton, tobacco (second cycle) 0.5 Groundnuts 0.4-0.8 Cassava (first year) and yams 0.2-0.8 Palms, coffee, cocoa, with cover crops 0.1-0.3 Source: E. Roose, "Erosion et ruissellement en Afrique de l'Ouest--Vingt ann4es de mesure, en petite parcelles exp&ri- mentales," ORSTOM/IITA., Paris, 1977, p. 51. Differential agricultural taxation can have a substantial impact on cropping patterns and land uses, and thereby on soil productivity. Although many heavily taxed crops are perennials, ample evidence shows that over time farmers respond strongly to differential incentives. In fact, farmers respond more to tax differentials among crops than to overall discrimination against agriculture (because it is easier to shift land and other resources from one crop to another than to withdraw from agriculture altogether). Long-run supply elasticities for most crops are substantial in Africa and other developing countries, and may even be higher for export crops than for basic food crops.4 Evaluation of agricultural price policies therefore should not be divorced from land capability assessments and considerations of soil conservation. III. Agricultural Input Subsidies A. Irrigation5 Huge worldwide investments to expand irrigation capacity have given farmers the water supplies they needed to raise agricultural yields in step with rising demands for foodstuffs over the past three decades. In current prices, the equivalent of $250 billion has already been invested in the Third World alone, and an estimated $100 billion more will be spent between 1985 and 2000 to create more capacity. Since 1950 total irrigated acreage has grown from 94 to 270 million hectares, about 18 percent of all cultivated land, and these irrigated areas produce one-third of the world's harvest. More assured water supplies have enabled farmers to intensify production through shifts in cropping patterns and intensity, and adoption of high-yielding varieties that respond well to heavy fertilization. . - - Despite these achievements, there are serious problems, especially with large and medium-scale public irrigation systems. Costs have generally been considerably higher, and agricultural benefits considerably lower than projected when investments were approved. Operation and maintenance of completed systems are very often deficient. Adverse environmental impacts have been extensive. In India and Pakistan alone, over 20 million hectares have been lost to cultivation through waterlogging, and productivity on at least 30 million additional hectares is seriously affected by salinization. In some countries irrigation systems have provided breeding grounds and habitat for the carriers of malaria, schistosomiasis, and river blindness. River impoundments have had varied and serious impacts. Reservoirs have displaced whole communities, flooded valuable crop and forest lands, threatened critical ecosystems, and wiped out anadromous fish populations. Below the dams, the downstream flow of sediments is interrupted, affecting erosion rates of deltas and riverbanks. Although storage may reduce seasonal variations in river flows, disturbance of upper watersheds and irrigation diversions can also increase flooding and reduce low flows, which concentrates pollutants and allows sea water to move further upstream. Changes in oxygen, nutrient, mineral, and sediment content of impounded rivers all affect fish populations, even in offshore fisheries with deltaic spawning grounds. Many of these environmental effects are complex and exceedingly difficult to predict in advance, and they have generally not been adequately incorporated into project planning or the calculation of expected economic benefits and costs. The environmental impacts and performance problems of irrigation systems are connected. For example, more efficient use of water would reduce excessive seepage into aquifers and risks of waterlogging. More efficient use would also reduce the apparent need for additional large- scale, increasingly costly expansions, and the environmental effects of further river impoundments and diversions. The concept of complementary policy change developed above is thus highly relevant to water resource development for irrigation. Not only does irrigation entail significant environmental impacts on other activities, there are also important physical externalities within the sector: upstream irrigation development affects downstream water users; and, surface and groundwater supplies are interrelated. Such externalities might call for tax/subsidy or other interventions to reflect the true opportunity costs of private decisions regarding water use. However, current policies widely exacerbate misallocation and misuse of water resources. Irrigation, especially in public sector systems, is heavily subsidized and has become an enormous fiscal drain. In most countries revenues from public systems do not even cover their operating and maintenance costs, and fall far short of returning the capital invested in them. In Pakistan, in 1984, gross revenues were about Rs. 1 billion, but O&M costs were twice that, and annualized capital costs were six times as large. Revenues met only 13 percent of total costs. Table 3, based on a recent review by the International Irrigation Management Institute (IIMI), shows that this situation is typical, not exceptional. - 10 - TABLE 3 COST RECOVERY THROUGH DIRECT AND INDIRECT IRRIGATION CHAWES EIATIVE TO RECURRENT AND TOTAL COSTS OF PUBLIC IRRIGATION SYSTEMS (1) (2) (3) (4) Total capital and Actual cost Operation and recurrent costs: recovery maintenance Moderate est. High est. Country (All fiqures in $US/ha; parentheses indicate 4 of column 1 Indonesia* 25.90 (100) 33 (128) 191 (735) 387 (1490) Koreac 192.00 (100) 210 (107) 1057 (550) 1523 (881) Nepale 9.10 (100) 16 (181) 126 (1389) 207 (2270) Philippinese 16.85 (100) 14 (83) 75 (443) 166 (984) Thailande 8.31 (100) 30 (362) 151 (1818) 272 (3276) Bangladesh: Major 3.75 (100) 21 (500) 375 (1000) n. a. surface systems a) converted from local prices at official exchange rates on June, 1985 b) numbers in parentheses are percentages of the costs recovered directly and indirectly from beneficiaries c) based on L. Small et al., wRegional Study on Irrigation Service Fees: Final report," International Irrigation Management Institute, Kandy, Sri Lanka, January 1986, Table 4, p. 35. d) based on Q. Shahabuddin, *Irrigation Water Charges, Subsidies, and Cost Recovery in Bangladeshw- Recoveries represent actual collections, .and costs are average of existing systems. Not only are recoveries small relative to irrigation costs, they are also small relative to the value of irrigation water on the farm, especially in periods of peak water demand. The gap between what water costs farmers and what it's worth to them almost inevitably creates excess demands, so that water must be rationed to users. The difference between the cost of water to the farmer and its value is thus an economic rent; unlike a profit, it accrues to the irrigator not by virtue of superior efficiency but through the water allocation his land receives. Farmers almost always strongly desire additional irrigation supplies, whether or not their costs exceed the likely benefits, since farmers bear few of those costs. Indeed, since most revenue systems do not impose charges based on the volume of water used, farmers' marginal costs are close to zero if they can get more supplies. - 11 - Table 4 measures the economic rents in a number of countries by comparing estimated benefits with current levels of cost recovery. Since charges are relatively low, by far the greater part of project benefits accrue as rents to recipients. Typically, since irrigation water allocations are attached to specific parcels of irrigable land, which are fixed in supply while capital, labor, and other inputs are variable, these rents are quickly capitalized into increased land values and accrue primarily to landowners, rather than to tenants or to hired agricultural workers. TABLE 4 ECOROMIC RENTS IN PUBLIC JRIATION SYSTEMS: IRRIGATION CHARGES AS A PERCENTAGE OF ESTINATED ECONOMIC BENEFITS TO FARMERS Country Percent Indonesiaa high estimate of benefits 8 low estimate of benefits 21 Korea high estimate of benefits 26 low estimate of benefits 33 NepalO 5 Philippinesa 10 Thailanda 9 Pakistanb (Punjab Province, 6 major irrigated crops) sur- face irrigation Mexicoc high estimate of benefits . 11 low estimate of benefits 26 a) based on L. Small et. al., op. cit., Table 5, p. 37 b) based on M.A. Chaudry "Water Charges, Cost Recovery and Irri- gation Subsidies tn Pakistan" c) based on R. Cummings and V. Brajer, "Water Subsidies in Mexico's Irrigated Agriculture" - 12 - While irrigation has made and should continue to make a crucial contribution to agricultural growth, this system of financing irrigation investments contributes to problems of system performance -- and consequently, to problems of water resource and environmental management. The linkages between low irrigation charges and irrigation performance are not limited to their effect on water use on the farm. Divorcing project benefits from responsibility for project financing, minimizing the financial accountability of irrigation agencies for investment decisions and system performance, creating chronic systems of excess demand that must be resolved through administrative allocation, and providing internally generated funds too scanty for adequate operation and maintenance, seriously affect the performance of irrigation systems above the farm-level water outlet as well. The magnitude of potential rents affects investment decisions. Farmers and their political representatives strongly support new irrigation projects, whether or not the overall economics are favorable, so long as they profit privately. Irrigation agencies are not financially responsible for the success of their investments: their capital budgets are typically allocated from the national exchequer, and project revenues (either in total or sometimes in excess of funds for O&M) are returned to the national exchequer. As a result, financial discipline over investment decisions is structurally weak, while -- because rents are large -- the pressures for new investment are strong. Rent-seeking tends to bias investment decisions: those who obtain rents want more; those who don't want their share. Notions of equity are advanced to give priority to new projects to benefit additional areas, over activities to realize maximum returns in areas already served with facilities. Political log-rolling creates coalitions to approve regionally balanced packages of projects. Then, when cost overruns occur and funds get tight, there are too many projects underway and too few resources to complete them on schedule or to maintain them effectively when in operation. The end result can be an inefficient investment program and an unnecessary proliferation of diversions and impoundments. Usually, attempts by national budget authorities and international development agencies to screen out poor investments through benefit-cost analysis yield a frail weapon against rent-seeking pressures from local interests and irrigation bureaucracies. In major projects decades pass before critical assumptions and projections can be tested against actual outcomes. Very often, those assumptions turn out to have been quite optimistic. When there is strong political pressure for approval of a new project, it is easy to make a set of optimistic assumptions that lead to a favorable estimate of the benefit-cost ratio. There are also connections between this pattern of irrigation financing and problems in irrigation design. In many countries, particularly in South Asia, public irrigation systems are typically designed to serve relatively large areas with relatively scanty, unreliable water supplies. This pattern has traditionally been justified in terms of protection against crop failure and famine. However, the economic costs - 13 - are large. Seepage losses from unlined conveyances across long distances reduce effective supplies and contribute to waterlogging. Unreliable and inadequate supplies deter farmers not favorably located within command areas from making the complementary expenditures on field channels, land levelling, and intensive farming systems that would be necessary if the full potential benefits of irrigation were to be attained. When making private irrigation investments, in tubewells for example, farmers typically pay much more per acre-foot than the cost of canal water, in order to have enough water available when they need it. The pattern of irrigation financing described above tends to bias irrigation design toward extensive systems with a relatively low cost per acre commanded. Optimistic assumptions about the area served and likely to be irrigated help to increase projected project benefits. Also, when public investments are highly subsidized, there is a strong equity motive for distributing water as widely as possible, and not concentrating a large subsidy on a relatively small area and few recipients, while others get none. Political support for projects is also broadened by extending the command area, and promising at least some rents to a larger number of beneficiaries. Finally, the low valuation of irrigation water implied by its low effective price to the users, relative to capital and operating costs, makes designers hesitant to make the additional expenditures per acre irrigated needed to permit more precise application of water with less wastage. These distortions tend to generate their own momentum. Because there is chronic excess demand for water, farmers in the head reaches of irrigation systems, which are more favorably located to divert water and are often completed first, often establish water-intensive cropping practices and capture a disproportionate share of irrigation capacity. Because water is then chronically short in the tail reaches and less than promised to those constituencies, strong demands for further investments to increase supply are perpetuated. The operation and maintenance of completed systems are also affected by the excess demands created by prevailing systems of irrigation finance. Serious operating problems have been identified in many public systems, which lower their efficiency and often increase their environmental impacts. Such problems are often ascribed to "management" deficiencies. However, an underlying factor is the discrepancy between the behavior required from irrigators and operators for efficient, equitable operation of the system and the behavior induced by the incentives for private gain imbedded in current cost recovery policies. Operating problems are linked to irrigation finance. Some links are direct and obvious. Where funds for operation and maintenance depend on collections from irrigators, and are low relative to requirements, a vicious circle of declining performance and declining collection of charges can ensue. Where such funds are allocated from central revenues and do not depend on farmers' contributions, irrigation agencies may feel themselves less accountable to users for good performance. Poor operating and maintenance standards not only reduce agricultural benefits, but can increase water losses and damages to soils and aquifers. - 14 - Moreover, the chronic excess demands in many systems, where users will take whatever water they can get, even when the reliability and adequacy of supply are low, lead operators to feel that they are not selling a service but rather allocating a scarce resource. At the least, this tends to shift attention away from farmers' needs and the services they are willing to pay for, toward the means of maintaining and distributing supplies. At the worst, this can make operators relatively indifferent and unresponsive to user satisfaction. System operators who have some power over the allocation of scarce irrigation water are also favorably situated to extract from farmers a part of the rents cheap water conveys, through extortion and corruption. It is not surprising, given the pressures they face, that they do so -- in many countries around the globe. By undermining farmers' trust in the impartial functioning of the system, this makes them less willing to abide by its rules or contribute to its upkeep. Irregularity and partiality in operation also increase uncertainties and often reduce the efficiency of water distribution. The rent-seeking behavior generated by current irrigation financing policies thus affects investment, design, and operating efficiency, not only the efficiency of water use on the farm. Nevertheless, low charges for marginal water use also contribute to the cultivation of relatively low-value or water-intensive crops in irrigated areas, slow adoption of water conserving technologies and practices, and maldistribution of water between head and tail regions. Empirical evidence and analytical studies support the proposition that irrigation water is used with greater economic efficiency when its marginal user cost is higher. Economic considerations and environmental concerns thus combine in support of a reconsideration of the way major irrigation investments are financed. At present, irrigation is regarded quite differently within the World Bank than other public sector production, such as telecommunications, urban water supply, and transportation. Much less attention is given in irrigation development to ensuring financial autonomy and discipline, internal generation of investment funds, cost recovery from beneficiaries able to pay, and rational pricing of output. If the criteria adopted in the irrigation sector were proposed for other investments, they would be rejected out of hand. For example, the idea that natural gas should be priced to the consumer at the cost of operating and maintaining the gas pipeline would be instantly rejected, because it would obviously lead to: (a) excess demand for gas and the need for a cumbersome rationing mechanism, (b) substitution of gas for other energy sources and neglect of energy-saving investment opportunities, (c) a perpetual clamor from consumers for the construction of more pipelines and the development of more gas reserves, and (d) huge fiscal losses among demoralized, dependent gas supply agencies. But, that is uncomfortably like the present situation in public irrigation. Devolving financial responsibility for financing irrigation investments to the beneficiaries will help in ensuring greater - 15 - accountability for the efficiency of irrigation investments and performance. If World Bank irrigation loans are passed through to irrigation supply agencies, they will be forced to give greater heed to cost recovery; hence, to ensure that the benefits to farmers will be sufficiently large that they will be willing to pay the costs. If local governments are forced to meet an appreciable share of the costs of local projects, instead of relying on central government expenditures, they will be induced to consider more carefully the intrinsic worth of the investment. If water user associations are able to contract with irrigation agencies for improvements or additions to service, they will be enlisted in collecting charges from individual farmers, and will provide valuable information on the services beneficiaries will pay for. Careful studies are warranted of the ways to overcome obstacles to more effective irrigation water pricing. Successful steps, such as indexing charges to crop prices, rescinding uniform nationwide or regionwide charge systems, charging for water on the basis of "turns" in rotational systems, and concluding bulk sales to water user associations, can be further developed. The economic and technical feasibility of metering water to individual farmers and farm groups should be carefully studied, including a variety of approximate measurement options. Water markets, based on effective measurement of diversions, have been in existence in traditional irrigation systems for centuries. Among the mechanisms for devolving financial responsibility for irrigation investments to beneficiaries is greater encouragement on private sector irrigation development. While for technical reasons private sector initiatives are not a substitute for public investments, in many countries there is considerable scope for greater development of relatively small- scale ground and surface water irrigation. The performance of private irrigation in many countries has been highly dynamic and, although not without problems, has in general been superior to that of public systems. Because private irrigation is relatively small-scale and decentralized, economic incentives are influential in guiding the allocation of resources. Many countries have used rural electricity pricing, diesel fuel pricing, credit programs, and direct subsidies to encourage private irrigation investments. Until now, however, these instruments have not been widely used as instruments for managing aquifers or conjunctive use of surface and groundwater supplies. Where withdrawals are exceeding recharges, such subsidies may promote a non-optimal rate of aquifer depletion. Where water tables are rising due to seepage from surface irrigation supplies, the same instruments (as well as charges for canal water) can encourage additional withdrawals from aquifers to restore balance. Rehabilitation and modernization projects provide a crucial opportunity to introduce new financing mechanisms while delivering improved services to farmers. Linkage of these investments to acceptance of financial responsibilities by beneficiaries is highly desirable. In order to realize the benefits potentially obtainable from physically rehabilitated and modernized systems, appropriate incentives are needed to induce efficient operation and water use. - 16 - B. Pesticides6 Agricultural pesticide use involves serious health and ecological risks, especially in Third World countries. Most small farmers understand little about the dangers or proper precautions to take in using highly toxic substances. Farmers, farm workers, and their families are often extensively exposed to pesticides that are banned or severely restricted in the U.S. and other industrial countries. For example, a recent study in Thailand carried out by the Agricultural Toxic Substances Division of the Department of Agriculture found that 60 to 80 percent of cotton farmers showed a huge 80 percent drop in their cholinesterase levels in measurements taken before the growing season and after harvest.7 Exposure occurs not only during application, but also through consumption of contaminated foods and use of contaminated containers and implements. Almost nothing is known about the effects of chronic exposure on people who suffer from prevalent Third World health problems, such as anemia, liver abnormalities due to parasitic infections, or reproductive disorders. Because of poor health reporting and misdiagnosis, even acute pesticide poisonings are grossly underreported. Nevertheless, there is evidence of extensive injury. The Economic and Social Commission for Asia and the Pacific recently estimated that there might be as many as 2 million pesticide poisonings per year, of which 40,000 could result in fatalities.8 Detailed local studies confirm the seriousness of the health risks. An epidemiological study in Central Luzon in the Philippines carried out by a consultant to the International Rice Research Institute found that "there has been a massive change in the pattern of mortality since small farmers began to use insecticides intensively in the early 1970s".9 In three rural communities with a combined population of 100,000, the death rate for economically active men rose 23 percent, comparing periods before and after 1972. This rise is striking, in that: (a) men, who work with pesticides, were most affected compared to women and children, (b) there was no rise in male mortality in nearby urban areas, (c) mortality rates rose exclusively for causes of death likely to be confused with pesticide poisoning, such as cardiovascular and respiratory disease, while deaths by other causes declined, and (d) death rates peaked annually in August, the first month after the planting of the wet season crop, and after 1976, when farmers began planting a second crop with the aid of irrigation, a secondary peak in mortality emerged in February. Findings such as these suggest serious undocumented health effects. In addition, intensive use of pesticides creates significant ecological problems, including destruction of non-target species, emergence of new pests as their predators are eliminated, and development of pesticide resistance in target populations. In Indonesia, Malaysia, and Thailand, fish stocks in irrigated rice paddies, irrigation channels, and ponds have been greatly reduced by pesticide poisoning. Indonesia's experience in combating the brown planthopper in rice fields illustrates the ecological risks. Sevin was - 17 - widely used, although it is known to lead to resurgences in brown planthopper populations, because it wipes out insect predators. Heavier applications of Sevin have accelerated the evolution of new planthopper biotypes, and have thus destroyed the resistance of two Indonesian rice varieties to the pest and eroded resistance of IR-36, a popular high- yielding variety developed at IRRI. These ecological consequences have sharply increased the risks of crop losses and raised the costs of plant protection in the affected regions. Ecological problems are not limited to such local dilemmas. By 1980 over 400 insect pests had developed resistance to pesticides, along with weeds, rodents, and microorganisms that cause plant diseases. The number of species exhibiting pesticide resistance is growing exponentially, and many species are resistant to a whole range of chemicals. Resistant pests have brought farmers in some regions close to bankruptcy, and, as the costs of developing new safe and effective pesticides rise, the problems become more serious. Nonetheless, many Third World governments are heavily subsidizing pesticides sales to farmers. In nine developing countries in Asia, Latin America, and Africa, for example, subsidy rates range from 15 to 90 percent of full retail cost, with a median level of 44 percent. In large countries, these subsidies cost government treasuries hundreds of millions of dollars in direct outlays and foregone revenues, as indicated in Table 5. TABLE 5 ESTIMATED AVERAGE RATE AND VALUE OF PESTICIDE SUBSIDIES Per capita Rate: of total percentage of full Value population Country retail costs ($U.S. millions) (SU.S.) Senegal 89 4 0.7 Egypt 83 207 4.7 Ghana 67 20 1.7 Honduras 29 12 3.0 Colombia 44 69 2.5 Ecuador 41 14 1.7 Indonesia 82 128 0.8 Pakistan negl. - negl. China 19 285 0.3 Source: World Resources Institute, Paying the Price: Pesticide Subsidies in Developing Countries (December 1985). - 18 - These incentives were originally put in place during the time of the Green Revolution, mainly to induce small farmers to adopt unfamiliar agricultural technologies. However, even 15 to 20 years later, when both large and small farmers are familiar with modern agricultural inputs, the subsidies remain in effect. In some countries, subsidies are also now rationalized as offsets to producers for agricultural prices that are kept low to benefit urban consumers. Virtually no research or analysis has been undertaken to find out how price subsidies affect farmers' decisions regarding pesticide use, what kinds of farmers receive most of the benefits from subsidy policies, or even the extent to which subsidies are actually passed through the distribution chain and reach the farmers they are supposed to benefit. In fact, since pesticide subsidies are provided through tax and tariff concessions, low-interest farm credits, and incentives for local manufacturers, as well as through direct marketing subsidies, many governments do not even have accurate estimates of the total amounts of subsidy they are providing. It is inconceivable that construction projects costing a half billion dollars or more over a five-year period would be approved without detailed cost estimates, feasibility studies, and benefit- cost analyses, but that is precisely how these large financial commitments to pesticide subsidies are being handled. In several countries covered in the study underlying this report, including Honduras, Ecuador, and Pakistan, it is clear that a substantial part of the subsidies provided by governments is being absorbed by business in high distribution margins, contrary to the purposes of policy. To the extent that subsidies reach farmers at all, their distribution basically conforms to the distribution of landholdings, which in most countries is highly skewed. Yet, most occupational poisonings affect hired farm workers, who are usually landless or very small farmers. Furthermore, in many countries a large fraction of pesticides is used on commercial crops, which are grown disproportionately on larger holdings. In Senegal, for example, 51 percent of agricultural pesticides is used on cotton, which together with peanuts and sugarcane account for over two-thirds of the pesticide market. These are not the staple food crops of the poor; in fact, they are grown mostly for export. Therefore, any favorable effects of pesticide use on crop yields would not benefit low-income Senegalese consumers, but predominantly the owners of large commercial farms. In all likelihood, pesticide subsidies mainly benefit farmers who are better off than the people who suffer the economic and health costs. The opportunity costs of these subsidy polic,.es need to be considered more closely. In most developing countries, resources are grossly inadequate for effective regulation of pesticides, for monitoring the ecological and health effects of pesticide use, for research into integrated pest management strategies, and for extension to farmers of safe and effective methods of pesticide use. In many countries the fiscal burden of subsidies has been increasing rapidly, along with pesticide use. Yet, costly pesticide subsidies continue with little or no consideration whether they represent the best use of the large sums involved to improve pest management practices. . 19 - Rational pest management involves balancing the risks of crop losses against the costs of pest control. Applying chemicals excessively can be as irrational for the farmer as using too little, especially because over the long run excessive use can induce resistance among target species and create new pest problems. Most agricultural development agencies, including the World Bank, advocate integrated pest management (IPM) as the best long-term strategy, both economically and environmentally. IPM relies on a balance of biological and chemical controls, along with modifications in cropping patterns, irrigation timing and other agricultural practices. Under this approach, pesticides are used only at key stages of the life cycles of pests or crops, or when economic damages to crops reach a predefined damage threshoid. However, by lowering pesticide costs to farmers, subsidies artificially depress this threshold and encourage prophylactic applications. Subsidies also artificially lower the costs of chemical use relative to other control methods: planting resistant varieties, finding and destroying infected plants, altering planting dates, and so on. Many of these alternative practices involve more labor time, so subsidizing chemicals tends to diminish rural employment opportunities. In this way subsidies can distort on-farm economic decisions and undermine the very approach development agencies are promoting. In April 1985, the World Bank announced new policy guidelines governing pesticide use in its projects, which stated that "Sound pest management should aim to reduce dependence on chemical pesticides through the establishment of economic control thresholds and through the use, wherever possible, of agronomic and related practices that reduce the severity of pest attacks." More recently, in a memorandum from the director of the Agriculture and Rural Development Department in March 1986, this policy was elaborated with regard to pesticide subsidies: "Where pesticides are subsidized it is essential to understand the economic rationale of the subsidies and the aims of Government in granting them, Lnd whether these aims are likely to be achieved by subsidies within a reasonable time. If subsidies appear likely to encourage excessive or inappropriate pesticide use, the Bank should try to ensure their reduction or removal through dialogue with the government and loan conditionality." Removing pesticide subsidies may often be an important opportunity for complementary policy changes, with health, ecological, economic, and fiscal benefits. C. Fertilizers Similar issues may arise with respect to subsidies on chemical fertilizers, although the environmental effects of fertilizer use are neither so obvious nor so pronounced, and the economic case for subsidies is better established. Although the economic counterarguments against heavy fertilizer subsidies have been taken seriously in recent years, the ecological issues have received less attention. Use of chemical fertilizers worldwide has continued to increase rapidly, from 73 million tons of nutrients in 1971 to 115 million tons in 1983 -- an average annual growth rate of 4 percent. In the developing world, th 'ncrease has been much more dramatic. Per hectare of arable land, ferLilizer consumption in low-income economies has risen almost four- fold since 1970, and has doubled in middle-income countries. Increases have been especially rapid in South Asia and in other densely populated agrarian societies such as China, Egypt, and Indonesia. - 20 - Of course, this increase has been central to the strategy of raising agricultural production in these countries. Over the same period, higher yields have contributed much more to the rise in output than extensions in the area under cultivation, in marked contrast to earlier decades of agricultural growth. The development and diffusion of fertilizer-responsive crop varieties has been the key element in the drive for higher yields, and was facilitated by significant technological improvements in chemical fertilizer production. Since the 1960s, many developing countries have subsidized fertilizer sales to farmers, in a wide variety of ways. The dominant rationale was to overcome farmers' uncertainties and perceptions of risk in adopting a new package of inputs that entailed considerably larger cash expenditures but promised higher returns. In the early 1970s direct subsidy rates ranging from 25 to 50 percent of full retail costs were common, as indicated in Table 6 below. In addition, indirect subsidies were conveyed through favored exchange rate, tariff, and foreign exchange allocations for imported fertilizers; preferential domestic taxation of fertilizers and related materials; preferential pricing of energy, feedstocks, and transport services for domestic production; subsidized credit for fertilizer purchases; and a variety of other means as well. These indirect measures often provided a considerably larger benefit to fertilizer consumers than the figures in Table 6 would suggest. As with pesticides, however, the total subsidies implied by these instruments applied in various combinations were often difficult to estimate, even by the governments themselves. Despite the lack of comprehensive and comparable estimates of total subsidy rates across countries, it is apparent that in the period 1980-85, despite another decade of experience with using chemical fertilizers and increasing consumption levels, subsidy rates in general had not been reduced. In fact, as rising prices for petroleum feedstocks and energy drove up fertilizer production costs and market prices during the decade, some countries raised subsidy rates to cushion farmers and potential impacts on food prices. According to the 1986 World Development Report, "Rates of subsidy for fertilizers in the early 1980s were rarely below 30 percent of delivered cost and were in some countries 80 to 90 percent (in Nigeria, for example). Rates of 50 to 70 percent are common. In Saudi Arabia and Venezuela, farmers pay half the ex-factory or landed cost; urea is sold at 56 percent below cost in Sri Lanka and 60 percent below cost in Gambia."10 According to EAO statistics for 1983/84, direct subsidies for nitrogenous fertilizers were 61 percent in Iran, 60 percent in Togo, 36 percent in Burkina Faso, and 33 percent in Pakistan.11 In Indonesia, the subsidy rate on urea exceeded 50 percent. The current subsidy in India averages about 30 percent of delivered cost. These policies have implied enormous fiscal costs for the governments concerned. At their peak in 1981, fertilizer subsidies in Nigeria cost the state and federal governments $250 million a year, and in Pakistan and Turkey, during the same year, budgetary subsidies peaked at $210 million and $620 million respectively. In India budgetary fertilizer subsidies exceeded a billion dollars per year in 1983/84; in Iran, $340 million, and in Indonesia, the figure for 1982 was $380 million. Under these fiscal pressures many governments have been forced to reexamine the rationale for fertilizer subsidies, and a number, including Senegal, Pakistan, Nigeria, and Indonesia, have substantially reduced them. - 21 - TABLE 6 RATE OF FMRINIZER MSIDY IN =E DEVELOPINO COMITRIES 196869 - 1971/72 (PERCET O M WSHASIDIZED RETAIL MICEI Nitrogenous Phosphate Potash Ammonium Ammonium Single Triple Potassium Muriate Country Sulfate Nitrate *Urea S.P. S.P. Sulfate of Potash Bangladesh 50.0 56.3 55.1 64.5 Botswana 28.7 Cameroon' 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Chile 50.0 50.C 50.0 50.0 50.0 50.0 50.0 Gambia 23.8 Ghana 37.4 38.4 35.6 28.0 India2 Indonesia 36.0 40.0 Ivory Coast3 33.0 33.0 33.0 33.0 33.0 33.0 33.0 Kenya 23.6 Khmer 34.0 34.0 34.0 34.0 Lesotho 11.0 11.8 23.7 Libya 50.0 50.0 .50.0 50.0 50.0 50.0 50.0 Madagascar 0.6 5.6 24.8 Mali 35.7 14.9 20.0 13.9 30.2 Nigeria Pakistan 54.4 23.2 29.5 56.2 31.0 31.0 13.6 Senegal 47.8 47.6 45.6 27.4 Sierra Leone 29.8 . 39.9 Sri Lanka 50.0 50.0 50.0 50.0 50.0 50.0 50.0 Tunisia 18.2 17.9 20.0 Uganda 50.0 50.0 50.0 50.0 50.0 50.0 50.0 Uruguay 19.7 81.4 35.3 Zambia 33.6 33.9 54.6 29.3 28.2 41.1 .51.4 Source: D.G. Dalrymple, Evaluating Fertilizer Subsidies in Developing Countries, Bureau of Pesticides and Pest Control, USAID, Washington, D.C., 1975. 1 10% on all fertilizers used for cotton and coffee. 2 25 to 50% on all fertilizers derending on the region. 1 33% for cocoa, coffee and rice crops. 4 About 50% of the state store price on all fertilizers. - 22 - On close examination, many of the economic arguments for large long-term subsidies for fertilizer consumption appear somewhat flimsy. First, after decades of experience with fertilizer use, farmers should not need large subsidies to induce "learning by doing" or to overcome faulty perceptions of risk associated with use of a "new" agricultural technology. If farmers are slow to adopt chemical fertilizers, there may be causes unrelated to price: problems in distribution, extension, or availability of complementary inputs, which could be more effectively be addressed directly. Water or micronutrients may limit crop yields, depressing the response to conventional chemical fertilizers. Also, in regions where population density is low, fallowing may be a cheaper way to restore soil fertility. Most studies of the cost-effectiveness of fertilizer subsidies have asked whether they produce an increase in agricultural production at less cost than increases in crop prices. But, policy analysts have not asked whether subsidies are more effective than alternative approaches in promoting fertilizer use or maintaining soil fertility. In any case, the use of fertilizer and other input subsidies as a means of offsetting explicit or implicit taxes on agricultural output is a second-best approach that can distort farmers' choices of both cropping patterns and input mix. Second, as in the case of pesticides, fertilizer subsidies may be captured mostly by those who do not need them -- large commercial farmers -- or for whom they were not intended -- producers and distributors. In order to ensure that subsidies reach the farmer, government agencies frequently take over fertilizer marketing, with a pronounced loss in efficiency. Where supplies are not adequate to meet all demands at the subsidized price, informal markets quickly arise, and even farmers who obtain supplies value them at the market price. This can even lead to smuggling of subsidized fertilizers out of the country, as Zambia and other countries have found. Also, even when subsidies do reach the farmer, since chemical fertilizer use is concentrated on irrigated lands and those producing commercial crops, subsidies flow predominantly to better endowed regions that benefit from a variety of other agricultural programs as well. Third, fertilizer subsidies may contribute to the low application efficiencies, probably well under 50 percent for nitrogenous fertilizers, that are prevalent in developing countries. Imprecise timing, placement, use of irrigation and other complementary inputs, and cultural practices such as weeding contribute to low efficiencies. They can be improved substantially, at some increased labor and management cost. Fertilizer subsidies distort these on-farm decisions. The environmental case against fertilizer subsidies includes possible long-term adverse effects on soil structure and productivity, and possible off-farm pollution effects. While on-farm impacts on soil productivity are not true externalities, in that their costs are borne by the landowner, they do involve a hidden sacrifice of future yield potential for present gain. In addition, to the extent that such impacts on soils increase their erosivity, fertilizer subsidies may contribute to external effects of erosion receiving waters. - 23 - The central concern is the likelihood that subsidies artificially lower the cost of maintaining and restoring soil fertility, and so reduce farmers' incentives to practice soil conservation. Loss of fertile topsoil or depletion of desirable properties in the soil can be offset to some extent by adding chemical fertilizers. If they are subsidized, farmers will not realize the true costs of misusing their land. Specifically, subsidies induce a substitution in favor of chemical fertilizers, which are supported, and against organic manures, which are not. While data to document this substitution are scanty, there are reasons to believe that while the use of chemical fertilizers has been rising rapidly in developing countries, the use of organic manures has been falling relatively, and possibly even absolutely. Cropping patterns have become increasingly less diversified and dependent on chemical inputs to maintain fertility. In Asia, for example, the aggregate area planted to leguminous crops and pasturage has declined, while that of cereals and other crops has risen. In Indonesia, before the "green revolution" green manures were widely grown in rotation with rice, with positive effects on yields, but the practice has declined as farmers have adopted chemical fertilizers they can buy at subsidized prices with subsidized credit.13 Using rural wastes as organic manures involves heavy labor costs, because of their bulk and low nutrient content. For example, a study in China found that, due to their low concentrations, the total labor involved in providing the soil with 100 kg of nutrients in organic manures is roughly 35-45 mandays and 20-25 days of draft animal power.14 In addition, some rural wastes, such as straw and cattle dung, can be used for fuel, and their use as manures has a significant opportunity cost. Consequently, one would expect fertilizer subsidies would have a substitution effect, at least on the margin. Studies carried out in India suggest that in many areas chemical fertilizers have largely supplanted the use of organic manures on high-valued crops grown under irrigation. In Taiwan, one of the few countries for which data are available, the use of farm-produced organic manures and crop residues dropped from a peak of 17.3 million metric tons in 1962 to only 7.1 million m.t. in 1981, and the planted area of green manure crops fell from 200,000 hectares in 1948-1953 to only 18,000 hectares in 1981. Meanwhile, the use of chemical fertilizers rose from 82,000 m.t. in 1951 to 416,000 m.t. in 1981. These dramatic trends are attributed not only to the convenience and cheapness of chemical fertilizers, but also to rising rural wages that made the production, transportation, and application of organic manures increasingly costly.15 Thus, it is likely that the substantial long-term price elasticity of demand for chemical fertilizers, which seems to lie between -1.0 and -2.0 in most developing countries, is partially attributable to substitutability between chemical and organic nutrient sources. This has important implications for long-term soil productivity. - 24 - Organic and chemical fertilizers are by no means perfect physical and biological substitutes. While more highly concentrated chemical fertilizers provide convenient sources of specific nutrients, organic manures also serve a variety of other functions. They improve and maintain soil structure. In sandy soils, additional organic matter increases water retention, and, by improving cation exchangeability, prevents nutrients from leaching out and makes them gradually available to plants. Organic matter buffers soils against increases in acidity, alkalinity, and other toxicity. In clay soils, added organic matter makes the soil more open and porous, so that water will infiltrate more readily. This reduces runoff and erosion losses, and prevents soil baking and hardening. Root development is improved. Organic manures provide a variety of micronutrients that may become limiting elements in soils treated only with chemical fertilizers. Finally, organic matter greatly enhances biological activity in the soil, and fosters the growth of soil microorganisms essential to healthy plant growth. For these reasons, numerous studies show not only that yields comparable to those produced by chemical fertilizers can be maintained through organic manuring, but also that organic manures improve crop yields when i,pplied in addition to chemical fertilizers. IRRI's recent research on wetland rice production shows that the soil's organic matter content dominates paddy yield determination: soils deficient in organic matter cannot reach high yields even with heavy applications of nitrogen. This partly explains the sharp reductions in the marginal returns to chemical fertilizer use, in terms of additional rice output, that most major producing countries in South and Southeast Asia have experienced.16 Along with improving the results of chemical fertilization, organic manures protect long-term soil productivity and reduce erosion losses by preserving the desirable physical and biological properties of the soil. Subsidies may induce excessive reliance on chemicals and under-production of organic manures. This could also have secondary off-farm effects. While in many countries, most on-farm biological wastes and residues are being used, there are large amounts of wastes generated by agricultural processing, concentrated livestock production, and human population centers that are not used as manures and become sources of pollution. The main problem is one of cost, since off-farm wastes must be transported, perhaps composted, and spread on agricultural land. In many situations this is uneconomical. However, there is an important margin at which fertilizer subsidies render uncompetitive the potential use of off-farm organic wastes for manures. The environmental impacts are two-fold: off-farm pollution problems and on-farm losses in soil productivity are increased. If chemical fertilizers were not so heavily subsidized, some additional recycling of off-farm organic wastes would become commercially feasible, and the underlying economic advantages would be clearer. In addition, where chemical fertilizers are heavily used, as in parts of China and Egypt, on Java, and elsewhere, runoff in drainage waters contributes to the eutrophication of rivers and lakes. Low application efficiencies, especially of soluble nitrates, mean higher run-off losses. Since higher temperatures and greater exposure to sunlight generally - 25 - enhance biological production in tropical waters, any given addition of nutrients would be expected to deplete available oxygen more severely. The contribution of agricultural runoff in general and chemical fertilizers in particular to water quality problems in the Third World has apparently been little studied. However, it is recognized as an important, and relatively intractable, non-point source of water pollution in developed countries which use fertilizers at per hectare rates that some developing countries are fast approaching. In summary, heavy reliance on inefficiently applied chemical fertilizers has environmental consequences on and off the farm. These effects reinforce the economic arguments against generous subsidies that discriminate against organic manures. Because long-run soil productivity is so vital to the development of many developing countries, these issues deserve more attention than they have received in the past. D. Other Input Subsidies 1. Mechanization For reasons that are not readily comprehensible by economists, developing countries around the world promote agricultural mechanization through a wide variety of direct and indirect subsidies. Almost invariably, agricultural machinery and equipment receive favorable tariff and exchange rate treatment, and are afforded high priority when rationed foreign exchange is allocated. Domestic tax treatment of agricultural equipment is usually extremely lenient. Excise and sales taxes are waived, and liberal depreciation allowances are permitted. In Brazil, for example, the government allows owners to claim up to six times the purchase price of farm machinery in depreciation allowances, creating a significant tax shelter for larger farmers. Moreover, farmers in many countries can obtain highly subsidized credit to buy equipment, and then run it on highly subsidized diesel fuel. A less obvious incentive toward mechanization is found where governments take a large direct role in agricultural development through state and parastatal farms, or through sponsored agricultural settlements. Government agencies are typically able to obtain substantial budgetary and foreign exchange allocations for equipment purchases. Since they are not obliged to operate at a profit, and typically fail to recoup costs by wide margins, they are able to operate this equipment whether it is economical to do so or not. Consequently, government-operated agricultural schemes often evolve into highly mechanized operations. Such direct and indirect equipment subridies, from a development perspective, are at best unnecessary and at worst inefficient and inequitable. Obviously, it is economical to use some forms of machinery in some circumstances in Third World agriculture. However, farmers will tend to adopt equipment in those circumstances without encouragement by subsidies, provided there is a reasonable supply system. Such a system would allow businessmen to import or produce equipment and spare parts - 26 - without undue restriction, would allow private distribution networks to evolve without undue competition from noncommercial state agencies, and would encourage private unsubsidized rural credit flows by removing crippling interest rate restrictions and rationing by government monetary authorities. Generous mechanization subsidies lead to inefficient patterns of agricultural production by inducing farmers to use equipment even when it is uneconomical to do so. Generally, this results in severe problems of labor displacement, reducing rural employment opportunities and exacerbating rural poverty. For example, agricultural settlement projects in forested areas in tropical countries, such as Brazil and Indonesia, have involved large-scale forest clearance. Equipment subsidies have not only promoted forest clearance by lowering the financial costs of land preparation, they have drastically changed the technology of the operation. Traditionally, forests have been cleared by girdling trees and then burning. More recently, chain saws have also been widely used. Relatively labor-intensive methods such as these imply that, in the absence of an adequate labor supply, large areas cannot be cleared. However, with the encouragement of machinery subsidies, heavy equipment has been used to clear extensive areas quickly with little use of labor, often for capital- intensive purposes such as ranching. Obviously, machinery subsidies strongly favor large landowners and farm operators. Indivisibilities and economies of scale, as well as capital constraints and differential access to credit, severely limit the use of machinery on small and fragmented holdings. Smallholders are unlikely to derive much direct benefit from such subsidies, but are put at a competitive disadvantage to larger farmers. Further, since smallholders and marginal farmers typically derive significant amounts of income from agricultural wage labor, they are further injured by the effect induced mechanization has on agricultural real wage rates and employment opportunities. Consequently, there is little to be said for farm equipment subsidies, either on efficiency or equity grounds. The direct government expenditures and foregone revenues that finance these subsidies could almost certainly be better employed in other agricultural development efforts. In addition, incentives for mechanization may result in severe damage to natural resources. In the example given above, forest clearance with heavy equipment has sometimes had devastating effects on the underlying soils. Heavy bulldozers have been used to knock over mature trees, rip out stumps, and push debris into piles. In the process, the nutrients in the biomass have been lost, thin topsoils have been severely disturbed and sometimes scraped off altogether, the ground has been compacted so that water cannot infiltrate into the soil, and erosion rates after land clearance have risen enormously.17 In less vulnerable soils, even heavy agricultural equipment is not necessarily harmful to soils if used appropriately. However, soils compacted by heavy equipment have reduced porosity and greater runoff after - 27 - heavy rains, with increased susceptibility to erosion. If left exposed and plowed against the contour, soils are more susceptible to erosion if cultivated mechanically. In general, therefore, reducing or eliminating subsidies for agricultural mechanization is another good example of a complementary policy change, which would serve the objectives of economic efficiency, equity, fiscal stability, and natural resource conservation. 2. Credit Subsidies Subsidized agricultural credit programs are at least as widespread in developing countries as subsidies to fertilizer and other agricultural inputs, and even more questionable on economic grounds. Their implications for natural resource management are not straightforward, at least in the long run, but may be significant. Special loan funds are often set up in developing countries for: (a) purchasing specific inputs, such as chemical fertilizers, (b) growing specific crops, such as rubber or oil palm, (c) acquiring specific assets, such as cattle or tractors, or (d) developing land, by clearing forests, constructing conservation works, building on-farm irrigation structures, and so on. Interest rates ceilings are imposed by regulation; and loans are often subsidized, usually by allowing the lending agencies to discount their loans with the monetary authorities at favorable rates. In inflationary economies, real rates of interest can be well below zero. Default rates are also often very high, since the lending institutions are largely absolved from risk. These policies are usually counterproductive. They severely undermine financial institutions serving rural areas. Those offering subsidized credit are effectively precluded from offering deposit rates high enough to attract rural savings, and their capabilities for serving rural borrowers' needs economically are also subverted by credit rationing, regulation, their ability to pass along risk to the monetary authorities, and freedom from effective competitior. Moreover, other potential credit institutions are limited by having to compete with government-sponsored highly subsidized lenders. Inevitably, subsidized credit schemes in rural areas, even those specifically created to serve the needs of the small farmers, are quickly captured by larger farmers. Highly advantageous interest rates imply the need for quantitative lending limits and credit rationing. Lending institutions can then minimize transaction costs and risks by dealing with larger farmers, who in turn are usually able to offer better collateral and who can obtain preferential access to the limited credit available. The distribution of subsidized rural credit is typically even more skewed than the distribution of land in developing countries. The allocational and efficiency effects of credit subsidies are less clear-cut. The uncertainty stems from credit's fungibility and the resulting difficulty lenders have in ensuring that, on the margin, directed - 28 - credit will actually increase the flow of resources to the activities they intend to subsidize. For example, if such activities were privately profitable even without subsidies, borrowers probably would have undertaken them with their own resources or unsubsidized credits, and so implicitly use the subsidized loans to expand other, more marginal, activities. If the activities were privately unprofitable without subsidies and lenders, controls over borrowers spending were more insufficiently strict, then borrowers would probably divert credits to other, more profitable uses. Often large farmers are themselves also lenders in informal rural credit markets, and, in effect, simply relend subsidized credits at high market rates. In the process, of course, they implicitly value those funds not at their subsidized cost, but rather at the considerably higher market return they can achieve with them. Thus, subsidies have little effect nn their allocational decisions, but may have substantial effects on their incomes because the implicit transfers can be large. Since the allocational effects of subsidized rural credit is unclear, the impact on natural resources is also often unclear. Only when loans are effectively tied to verifiable activities, such as the acquisition of specific assets, which might otherwise have been marginally attractive, are credit subsidies likely to have a significant impact on the allocation of resources. For example, several Latin American countries, including Brazil, have provided highly subsidized credit for the . acquisition of livestock and the establishment of ranches, often in forested regions. The economic prospects for some of these livestock operations have been risky, at the least. So the availability of credit at negative interest rates has probably increased demand for the assets, pasture land and cattle, that can be used as collateral. In addition, a wide variety of non-credit incentive policies, including tax treatment, price regulation, and the foreign trade regime, have also affected the financial returns to cattle ranching in Latin America. In Brazil, highly subsidized large ranches have already resulted in deforestation of over 6 million hectares, with much of the land yet to be cleared. Much of the pasturage thus established has deteriorated within a few years through loss of soil fertility and invasion by weeds. Economic analyses strongly suggest that without these heavy credit and fiscal subsidies, most of these large ranches would be non-viable and would not have been established.18 In general, the implications of credit subsidies on natural resource management have to be evaluated in each case. Concessional loans offered for potentially benign activities, such as reafforestation, might have significant positive effects. Or, they might be negated by adverse incentives arising from other policies. They might be ineffective, if reafforestation were sufficiently profitable without subsidy, or if lenders were unable to monitor the spending patterns of borrowers closely. The longer credit subsidies are maintained, since borrowers have a wide range of options in the long run for reshuffling their own cash resources and funds borrowed from various sources, the more likely it is that the subsidies will come to resemble general capital transfers, with little effect on resource use. - 29 - However, to the extent that credit and machinery subsidies do effectively promote capital-intensive forms of agriculture with significant economies of scale, such as ranching, they displace farm labor. Since rural populations are still growing in most Third World countries and employment problems are acute, labor displacement puts marginal lands under even greater pressure. In Brazil, for example, large heavily subsidized cattle ranches have evicted tens of thousands of homesteading smallholders in the Amazon, forcing them further into forested regions and extending the area of forest clearance.19 E. Summary Overview of Incentives for the Use of Agricultural Inputs The range of policies discussed above -- government subsidies for the use of irrigation water, agricultural chemicals, and farm machinery -- have been backed up by government programs to promote a particular form of "industrial" farming. Agricultural research, extension systems, and marketing services have all promoted this approach to agriculture. Its distinguishing and (from the environmental perspective) dominating feature is not that it is oriented toward the marketplace, domestic or foreign, nor that it is capitalistic and increasingly capital-intensive. Its distinguishing technological feature is that it is organized linearly, like a factory production line, drawing heavily on natural resources for production and depositing residues and wastes as unwanted by-products. This farming system tends to diminish the productive potentials of soils and the self-regulating capacities of agricultural ecosystems, and to compensate for these losses with external chemical inputs. It imports large amounts of water and at the other end of the production line, industrial farming also "exports" largely in the form of surface and underground runoff, huge quantities of chemicals, minerals and sediments. Similarly, it generates vast quantities of organic residues, most of which are "exported" outside the farm sector as wastes and pollutants. Clearly, from a long-term perspective, with agricultural production doubling approximately every 20 years, this linear technology implies increasing stresses on the environment through both depletion and qualitative impairment of natural resources. Alternative agricultural systems mimic natural ecosystems to a greater extent, in that they rely more heavily on inter-species population balancing, nutrient recycling, and sustainability with a minimum of external inputs.20 Considerable research on alternative agricultural systems in the U.S. and other industrial societies show that even in these countries, where capital and manufactured inputs are relatively cheap, farms using these alternative technologies are at or close to commercial viability. Where the external costs of chemical runoff and soil erosion are internalized into the farm production costs of the dominant agricultural technology, it is possible that alternative agricultural systems would actually be more profitable. In the Third World, studies also suggest that agricultural systems that mimic natural ecosystems more closely through multiple cropping and integration of tree, animal and crop production are capable of sustained high productivity. - 30 - Undoubtedly, there are no universal answers to the question of technological superiority. The point is, however, that the current policy framework discriminates massively in favor of the dominant linear technology, by heavily subsidizing external inputs of chemicals, capital, and water and by failing to charge to users of this technology the substantial external costs that "exported" residues and wastes imply. In those contexts in which an alternative approach to agricultural production would be superior in terms of long-term productivity and stability, it is unlikely to emerge in the face of the overwhelming policy-induced bias in incentives against it. IV. Sectoral Issues A. Forests Forests in the Third World are retreating rapidly. So far in this century, their area has fallen by half. Increasing populations and incomes have raised demands for fuel, fodder, timber, and other products beyond the sustainable yields of shrinking forest inventories, while shifting cultivators and land-hungry peasants continue clearing new lands to farm. Every year more than 11 million hectares are cleared for other uses, and in most developing countries deforestation is accelerating. The environmental consequences are severe. While some forest conversion in the tropics leaves farmers and ranchers with valuable new holdings, much leaves only degraded soils unsuitable for sustained agricultural production. Loss of tree cover in watersheds increases erosion, flooding, and sedimentation. In semi-arid areas, deforestation robs the soil of essential organic matter and shelter from wind and water erosion. Moreover, in the tropics, deforestation also threatens the survival of uncounted species of animals and plants. Tropical rain forests are earth's most biologically diverse ecosystems: a single hectare in the Amazon contains up to 230 different trees, twenty times as many as in a typical temperate forest. These rain forests shelter wild strains of most commercial crops needed for breeding disease- and drought-resistant, high yielding, new varieties. More than 50% of all modern medicines are derived from wild organisms, many of these from tropical plants. The untapped potential of this reservoir of biological diversity is imperilled by destruction of habitat in many parts of the world. These environmental losses rarely enter into the decisions of those who exploit the forest resources. Developing countries are also suffering more direct economic losses through deforestation. While some conversion of forest lands to other uses is to be expected as part of the process of economic development, especially in those countries richly endowed with forest resources, in most such countries conversion has been highly wasteful, yielding far fewer benefits to the local economy than could have been realized, and has probably been pushed too far, too fast. Much of this is the direct result of inappropriate government policies. In most Third - 31 - World countries, governments have taken over responsibility for forest management, and control more than 80 percent of the closed forest area. Rich public forests have been mined as exhaustible resources, and most of the proceeds have needlessly been sacrificed to foreign interests. They have been opened for harvesting more rapidly and extensively than government forest agencies could manage, and on terms that virtually guaranteed shortsighted, wasteful exploitation. According to the recent report of an international task force convened by the World Resources Institute, the World Bank, and the United Nations Development Program, "By the end of the century, the 33 developing countries that are now net exporters of forest products will be reduced to fewer than 10, and total developing country exports of industrial forest products are predicted to drop from their current level of more than US$7 billion to less than US$2 billion.21. As the result of government supported programs, huge forest areas have been sacrificed to ranches, agricultural settlements, river impoundments, and other uses, which have proven to be inferior uses of the land and other resources, or which have failed outright. With forest clearance, the production of many products other than timber is reduced, which has an important, usually underestimated, aggregate valie. The exports of such products as rattan, honey, natural silk, sandalwood, nuts, fruits, and a variety of cosmetic and pharmaceutical products from Indonesia reached $120 million in 1982, an amount almost half as large as the Indonesian government's total revenues from timber production. Domestic consumption was also large. The loss of this production as forests are destroyed cannot be ignored. Country studies undertaken as part of a World Resources Institute research program -- in Indonesia, China, Malaysia, the Philippines, Brazil, Peru, the Ivory Coast, Ghana, and other countries -- amply illustrate opportunities for complementary policy changes that would reduce environmental costs associated with deforestation and promote more efficient use of forest resources. Many countries that entered their development periods still endowed with substantial public forests of mature commercial timber have promoted rapid depletion of those resources by conceding much of their economic value to logging interests on contractual terms that promote shortsighted exploitation. The "stumpage value" of an accessible virin forest of commercial species can be a huge potential economic rent.22 Since rent, by definition, is a value in excess of the total costs of bringing trees to market as logs or wood products, including the cost of attracting the necessary investment, it can be captured by governments as a revenue source -- the economic value of the country's advantageous natural resource assets. Royalties, land rents, license fees, and various harvest and export taxes are all means of converting this rent into government revenues. If not captured, it remains as a source of greater than normal products for the timber contractor, or as a cushion for defraying excess costs. - 32 - Governments typically lease timber lands not through competitive bidding, which would give them a greater share of the rents, but on the basis of standard terms or individually negotiated agreements. Potential irvestors are thus led to rush into agreements before others take the most favorable sites. Most developing countries with large mature forests have failed to adopt forest revenue systems that come close to capturing these rents for the public treasury. Table 7, derived from detailed country case studies, illustrates this fact. In Indonesia, for example, log exports from Sumatra and Kalimantan, the two main concession areas, generated average rents of $61 per cubic meter, the difference between the logs' export value and the total cost of harvest and shipment. Total identifiable government revenues, including royalties, taxes, and fees, averaged only $30, less than half the available rents. Timber exported in the form of sawn logs was treated even more leniently: tax rates were lower to encourage local processing, and the government captured less than one-quarter the available rents. Between 1979 and 1982 the total rent generated by log production for export or local processing exceeded $4.9 billion. The government's share was $1.6 billion, less than one-third. Half a billion dollars were lost because inefficient local processing lowered the profit margin on logs, but the remaining $2.8 billion was left to private parties -- an average of $700 million per year. TABLE 7 GOVERMENT RENT CAPTURE IN TROPICAL TINBER PRODUCTION (IN USS MILLIONS) (1) (2) (3) (4) (5) (6) Potential Actual Official Country rent from rent from government and period loa harvest log harvest rent capture 4*3M%) 4+2(%) Indonesia 4,958 4,409 1,654 37.5% 33.0% 1979-82 Sabah 2,065 2,064 1,703 82.5% 82.5% 1979-82 Ghana - - 29 38.0% - 1971-74 Philippines 1,504 1,001 141 14.0% 9.4% 1979-82 (1) Potential rent assumes that all harvested logs are allocated to uses (direct export, sawmills, plymills) that yield.the largest net economic rent. (2) Actual rent totals rents arising from the actual disposal of harvested logs. (3) Rent capture totals timber royalties, export taxes, and other offi- cial fees and charges. Source: Unpublished research, World*Resources Institute, 1986. - 33 - When governments have failed to collect these huge rents directly, the result has inevitably been a rush by private contractors for (aptly named) "timber concessions", because those contracts for timber leases and harvests offer high potential rates of return on investment. Entrepreneurs are induced to seek timber licenses before others obtain the most lucrative concessions. This rent-seeking behavior has generated the "timber booms" experienced by many developing countries. In Indonesia, largely because of the strong profit incentive, by 1983 the area under concession agreements or being awarded to applicants was 65.4 million hectares, 1.4 million hectares more than the total area of production forests in the country. In the Ivory Coast, where large rents have also been conceded to concessionaires, more than two-thirds of all productive forests were leased to concessionaires within a single seven-year period, from 1965 to 1972. Since then, the rate )f deforestation has been by far the most rapid ir the world, and has accelerated from 3.9 percent of the total forest area annually in the late 1960s, to 5 percent annually in the 1970s, and to an estimated 7 percent annually today. Timber contractors have virtually exhausted the more valuable species, and shifting cultivators have moved in on their heels to clear the depleted forests, which are now less than one- quarter as extensive as they were 30 years earlier. Many governments have reinforced this powerful incentive for timber concessionaires with other provisions that virtually ensure rapid, shortsighted exploitation. Political instability and pressures from local "partners", irregularities in the contracting process, and risks that one- sided agreements will be reexamined and renegotiated, all lead concessionaires to realize their profits as early as possible. Host governments themselves often impose conditions requiring concessionaires to begin harvesting their sites within a stipulated time, and also limit agreements to periods much shorter than a single forest rotation: to 25, 20, 10, 5, and even a single year. In the Malaysian state of Sabah, for example, half the concessions are for the regular 21-year term, but most of the rest are for 10 years, and 5 percent run for just one year. Under these constraints, licensees typically harvest timber on a faster schedule, with less concern for future site productivity, than they would if they owned the land and timber outright and had only to pay ordinary income taxes. Governments affect the pace of deforestation not only by the level of their charges for use of public forests, but also by the form they take. Most charges are based on the volume of timber removed, not the volume of merchantable timber in the tract. This eniourages licensees to harvest selectively, taking only the stems of greatest value. The effects in tropical forests are serious: first, a larger area must be harvested to fulfill timber demand, and thus opened up to other uses; second, more forests are destroyed, because logging operations cause extensive damage to remaining trees. In Sabah and Indonesia, estimates of damage from logging operations range from 45 to 75 percent of the trees not harvested. Inappropriately designed revenue systems often promote excessive "high-grading" of very diverse tropical forests, the practice of harvesting - 34 - only the most valuable trees and leaving others behind -- often severely damaged. Flat charges per cubic meter harvested, unless finely differentiated by species, grade, and site condition, strongly encourage high-grading. The reason is simple: trees with a stumpage value less than the flat charge are worthless to the licensee, and can be left or destroyed with impunity. The Philippine government charges licensees a relatively undifferentiated specific royalty that encourages high-grading. In contrast, the Malaysian state of Sarawak imposes specific charges that vary considerably by species, and suffers only half as much residual damage from logging operations as Sabah or Indonesia. If highly differentiated specific charges are infeasible, ad valorem charges, income taxes, or site rents promote more complete utilization of the available merchantable timber in a concession tract, because even inferior trees are likely to have a positive stumpage value to the licensee. The evidence is clear that improved forest revenue systems and their administration can promote more efficient use of valuable Third World forest resources, reduce wasteful deforestation, and simultaneously increase the economic benefits that accrue to local economies. Similar opportunities are to be found in policies that provide incentives for local wood processing industries. Third World log exporters have struggled to establish local processing industries, even though local processing economizes on shipping costs. Industrial countries typically protect their own processing industries by setting tariffs on imported timber products much higher than those on logs. Log exporting countries have reacted by waiving or reducing export taxes on processed wood, offering generous investment incentives, and banning log exports. These industrialization incentives can contribute to local employment and income, but often do so at a heavy cost. In many countries, such as Ghana, Indonesia, and the Ivory Coast, mills established in response to such inducements have been small and inefficient. For example, Ghanaian plymills require 2.2 cubic meters of logs for each cubic meter of output, compared to 2.1 in Korea and Taiwan, and 1.8 in efficient Japanese mills. If logs are processed in inefficient mills, more must be harvested to meet the demand for finished goods, which implies that more areas are opened up to shifting cultivation and other competing land uses. Moreover, after mills have been set up with official encouragement, governments are most reluctant to reduce their supply of raw materials, whatever economic or ecological reasons there might be to reduce the log harvest. Indonesia's experience illustrates the economic costs and risks to the forests that ambitious industrialization incentives entail. In 1983, the government raised the log export tax rate to 20 percent ad valorem, but exempted most sawn timber and all plywood. Mills were also exempted from income taxes for 5 or 6 years. With these incentives and the impending ban on log exports, the number of operating or planned mills jumped from 16 in 1982 to 182 in 1983. By 1988 plymills will be on stream able to process 20 million cubic meters of logs per year, and sawmills will have capacity for 18 million cubic meters more. This implies an annual harvest 50 percent greater than the peak levels reached in the 1970s and would necessitate logging about 800,000 additional hectares per year, more than 50 hectares per new job. - 35 - Because of low conversion efficiencies (2.3:1 for plymills and 1.75:1 for sawmills), these jobs are bought at a heavy cost. For example, although a cubic meter of plywood could be exported in 1983 for $250, the value in terms of the logs consumed was only $109, whereas the unprocessed logs could themselves be exported for $100 per cubic meter. In other words, plymills added only $9 in domestic value added for each cubic meter of logs processed, for which the government sacrificed $20 in foregone revenues by waiving the export tax. For sawn timber, because the average export price in 1983 was only $155, a cubic meter of logs that could be exported for $100 brought only $89 if sent to local sawmills. The government sacrificed $20 in export taxes in order to lose $11 in value added on every cubic meter of logs sawn domestically. Inefficient processing induced by generous fiscal incentives drastically reduced the rents from Indonesia's forests by absorbing potential profits in higher costs. Although the data for other timber exporting countries is less detailed, essentially the same holds true for other countries studied, such as the Philippines, the Ivory Coast, and Sarawak. More moderate incentives for forest-based industrialization could reduce economic losses and the pace of deforestation. The foregoing discussion refers to policies in forest-rich countries, where substantial reserves of prime commercial forests exist, or did until recent times. Although most Third World forests are found in these countries, most Third World countries are not in this favored situation. Most are forest-poor, and suffer growing scarcities of fuelwood, building materials, and other woodland outputs. In some, especially in semi-arid areas of Africa and densely populated Asian countries such as China, total domestic demands exceed sustainable yields from existing tree stocks by considerable margins. A critical problem in many of these countries revolves around property and tenurial rights to woodlands. Although most woodlands are central, provincial, or local government lands, usage by individuals is rarely regulated effectively. In practice, then, woodlands are open access common property resources. Individuals lack adequate incentives to preserve or invest in tree stocks for future use under these conditions. While this problem is central to community forestry in much of the Third World, it is passed over here because management of common property resources is the subject of a separate World Resources Institute/World Bank cooperative research effort. Related to the open access problem is the fact that in many Third World countries, individuals can obtain title to forest lands by occupying and "improving" them, which means clearing at least part of the holding for agricultural or industrial uses. Especially in Latin American countries, where existing agricultural lands are distributed very unequally, and in African countries where population growth is extremely rapid, these laws and traditions obviously promote rapid deforestation. These issues, however, are also treated in another research effort. A policy issue more directly related to economic incentives stems from the fact that governments in many forest-poor countries, where planting rates would have to be increased many times over to balance sustainable yields with domestic demands, set prices for trees harvested - 36 - from public lands at levels far below their economic replacement cost. In these countries license fees, stumpage fees, and other charges for harvesting wood from government-managed forests amount only to a minor fraction of the costs of planting new stocks and tending them to maturity. In China, for example, where despite extreme scarcities in some regions annual wood consumption exceeds annual growth by at least 30 percent, forest fees and charges cover only one-sixth to one-half the costs of reafforestation -- and a fortiori, smaller fractions of the total costs of replacing the harvested wood. Table 8 presents similar data for a number of forest-poor African countries suffering severe imbalances between tree growth and wood demands. It compares government stumpage prices for fuelwood and other timber products with estimates of replacement costs from World Bank project appraisal reports. Because of wood poaching and non-collection of charges, quoted prices probably substantially overstate average revenues. Replacement costs include costs of reafforestation and maintenance, compounded at about 10 percent interest to the time of harvest, and are based on probably optimistic estimates of seedling survival and growth rates. It is clear that stumpage fees typically represent a very low percentage of replacement costs. These low charges are apparently far less than what the market will bear, in that they represent only a small fraction of retail market prices, as Table 9 shows for the same countries. Investigations of wood marketing in these countries uniformly show large rents or profit margins in bringing wood to market from public woodlands. Higher fees for wood cut on public lands might provide more revenues for forest management (provided, of course, that they are retained within the forestry agency) or at least reduce dependence on large continuing infusions of funds from general government revenues. Since in most forest-poor Third World countries actual achievements in establishing new plantations have fallen short of targets, which in turn have fallen short of levels needed to restore demand and supply balance, additional revenues for investment in plantations are badly needed. Further, low cutting fees on public lands may have the effect of discouraging forestry investments by private farmers on private holdings, by depressing stumpage prices in rural markets and shifting demand toward subsidized sales from government forests. Although empirical evidence on either consequence is scanty, there is no reason in principle why forest products harvested from public lands should be sold at fa%* less than its long-run replacement cost in countries facing severe wood deficits, especially since the implicit subsidy is evidently garnered by middlemen rather than low-income consumers. Although current concerns about deforestation in Third World countries have focussed on population growth, tenurial issues, and investment needs, it is clear that both in countries with and in those without abundant forest resources government policies have been important factors behind resource depletion. Policy improvements can do much to promote conservation and simultaneously raise the economic benefits countries glean from the forest sector. - 37 - TABLE 8 COMPARISON OF STUMPAGE FEES AND REPLACEMENT COSTS PER CUBIC METER FOR SELECTED COUNTRIES Stumpage fees Estimated Replacement as a % of re- Country (Currency) Stumpage fees Costs placement costs Ethiopia (Birr) 4.0 8.3-18.6 22-48 Kenya (KSh) 57.6 33 (deadwood collected 2.0-5.0 by headload) (purchases by 19.2 concessionaires) Malawi (MK) 2.88 16-58 (government 18.0 plantations) (private 5.0 plantations) Niger (CFAF) 85.00 13,610.0 0.6 Rwanda (FR) 160.00 600.0 27.0 Senegal (CFAF) 185.00 9,250.0 2.0 Sudan (ES) 0.67 2-12 (Bushland) 10.2-46.2 (Low rainfall 5.7-27.9 savannah) (High rainfall 1.6- 8.6 savannah) Tanzania (TSh) (Plantation poles) 60-88 66.0 91-133 (Bush poles) 20-30 30.0 67-100 (Fuelwood 12.00 25.0 48.0 plantation) (Fuelwood brush) 6.0 9.0 67.0 Sources: o Ethiopia Forestry SAR, Report 6096-ET, May 29, 1986. o Kenya: Peri-Urban Charcoal/Fuelwood Study Phase I Report (ESMAP) Working Paper 2, World Bank, 1984. o Malawi Forestry Sub-Sector Study (A Review of Selected Issues) World Bank, 1984. o Senegal and Niger: Joseph Baah-Dwomoh, "Estimating Stumpage Value of Wood in the Sahel," mimeo, Washington: World Bank,n.d. o Rwanda Integrated Forestry and Livestock Development Project SAR, 1980. o Sudan Forestry Sector Review, World Bank, 1986. o Tanzania Mwanza/Shinyanga Rural Development Project Forestry Working Paper (Attachment 1, page 2). - 38 - TABLE 9 FUELVOOD WHOLESALE-RETAIL PRICE SPREADS IN SELECTED DEVELOPING COUNTRIES Retail price Wholesale-retail Country Stumpage fee (urban market) price spread () Ethiopia (Birr) 4.00 60-80 94 Kenya (KSh) 19.20 398.75 95 Malawi (MK) 2.88 33.25 91 Niger (CFAF) 85.00 6,646.00 99 Rwanda (FR) 160.00 600 (est) 73 Senegal (CFAF) 185.00 12,308.00 98 Sudan (ES). .67 21.75 97 Tanzania (TSh) 6.00-12.00 45.00 80 Sources: See Table 8. B. Livestock More than a third of the world's land surface is too dry for rainfed farming. These regions provide most of the world's rangelands, about half of which are in the Third World and support 30-40 million pastoral nomads. In the Third World, forage from native pasture and range still provides more than 95 percent of the feed supply for ruminant livestock, and thus supports an essential component of food supplies, agricultural exports, and rural energy supplies in arid and semi-arid regions. Most of the world's rangelands have deteriorated and are losing productivity. Desertification, or drying of the soil, commonly results from overstocking of range with homogenous herds that selectively overgraze preferred grasses, exposing and compacting bare soil, and letting less nutritious and palatable plant species take over. Soil erosion intensifies, water percolation from infrequent rains decreases, water tables decline, and hardy shrubs replace grasses. According to a recent assessment, over 70 percent of rangelands in the Third World are now moderately to severely desertified.23 Large international investments in livestock and range developments in semi-arid areas, especially in Africa, have had a poor record of success. Efforts to transfer ranching techniques from industrialized countries have generally failed, in part because plant, animal, and human communities have not been regarded as an integrated system. A critical set of problems involves management of an intrinsically communal rangeland resource, one aspect of which is effective limitation of stocking rates and overgrazing. This aspect is treated more fully in a companion report on common property resource management. - 39 - Many governments have provided heavy support for livestock development through the provision of infrastructure and livestock services. Where this has taken place without adequate control over herd sizes in climatically unstable regions, stocking rates have typically risen to exceed range carrying capacity in years of low rainfall and forage production. Various proposals have been made to finance infrastructure investments and livestock services through locally administered grazing fees and head taxes, to discourage excessive growth of herd sizes. Such proposals, however, are usually difficult to reconcile with political and cultural traditions. Government support for livestock ranching has not been limited to the provision of services, however. Especially in Latin America, governments have offered generous fiscal and financial support: long-term loans at low or negative real interest rates; tax holidays, credits, and exemptions; accelerated depreciation; and other preferential treatment. Under these inducements, the area devoted to pasturage in South America increased by 350 million square kilometers between 1964-66 and 1981-83, an extent equal to one quarter of the present cropped area. While pasturage is an appropriate land use over vast areas of Latin America, these inducements nonetheless have serious economic and environmental implications. Combined with the skewed distribution of landownership in many countries, they have probably operated to keep many large holdings in livestock, which in Latin America is relatively land and capital intensive, rather than in crop production. This has reduced agricultural employment opportunities, and increased cropping pressure on smallholdings for income and food requirements. On marginal lands, intensive crop production would be expected to increase erosion rates and losses in soil fertility. Moreover, generous fiscal inducements have resulted in the conversion of large forested areas to extensive pasture. In the Amazon region, for example, this process is well documented. Under minimal management without adequate fertilization, many of the soils converted to pasture have deteriorated once tree cover has been removed, through leaching of nutrients and invasion by weed species. At least 20 percent of converted pastures in the Brazilian Amazon are estimated to be in various stages of deterioration.24 A recent analysis by the World Resources Institute demonstrates how fiscal incentives promote unproductive, short-lived, livestock projects that are economically and environmentally unsound, by increasing the rate of return to the private investor far above that of the project itself. Survey data on the structure of costs and revenues from a sample of 24 large-scale, government-supported, cattle ranches in the Brazilian Amazon were merged to derive a typical profile of costs and returns.25 This profile is presented in summary form in Table 10, which shows all cost and revenue streams in terms of their present value per hectare of fully developed ranchland. - 40 - The economic value of such a livestock project was contrasted with its value to a private investor able to take advantage of the fiscal and credit incentives available from the Brazilian government to investors in the Amazon in the late 1970's (and continuing in large part to the present for approved projects). These incentives have included (a) income tax holidays extending up to ten years, (b) provision for offsetting tax losses against taxable income from other enterprises, (c) provision for accelerated write-offs of buildings, equipment, and other depreciating assets, (d) tax credits for investments in approved projects in the Amazon region up to 75 percent of total investment costs, and (e) subsidized credit facilities for remaining capital and operating expenses at real interest rates that were negative, on average, by at least 15 percent during the late 1970s. With these incentives the Brazilian government effectively financed by far the greater share of approved livestock investments through foregone tax receipts granted as credits, and through loan capital that could be repaid in inflated currency. Moreover, the Brazilian government bore a substantial share of operating losses by allowing investors to write them off against other income taxable at a rate up to 40 percent. Private investors could shelter outside income by acquiring cattle ranches in the Amazon with very little equity investment, and hope to take advantage of rising land prices for an ultimate capital gain. Economic analysis of the typical cattle project described above, from a national perspective, demonstrates that even under optimistic assumptions, it is an extremely poor investment. The first panel of Table 11 shows that in the base case, which assumes a 15-year project life after which land, cattle, and equipment are sold, an annual rise in land prices two percent above the rate of general inflation, and a real discount rate of about 5 percent, the net present value of the investment equals a loss amounting to 81 percent of total investment costs. Sensitivity analysis shows that even if cattle prices are assumed double the reported average figure, or even if land prices rise annually at 5 percent above the rate of inflation, the typical sponsored cattle project still loses 62 and 71 percent of investment capital, respectively. In other words, these livestock investments, which converted large areas of tropical forest to pastures, have generally been intrinsically bad investments. The second panel of Table 11 explains why these investments nonetheless went ahead. It presents their returns, not to the national economy, but to the private entrepreneur able to take advantage of the incentives enumerated above. Despite being intrinsically highly uneconomic, the typical project has a positive present value to the private investor that is large relative to his own equity input. The first calculation shows that this present value, at a real discount rate of about 5 percent, amounts to 250 percent of the investor's equity contribution. Sensitivity analysis shows that this present value remains positive if interest rate subsidies are removed, but turns into a loss if provisions for offsetting operating losses against other income are also withdrawn. The implication is that government policy strongly promoted investments that led to the conversion of large areas of tropical forests to pasturage of low productivity and livestock operations of no economic - 41 - value. The responsible agency approved 469 large livestock operations, with an average size of 49,500 hectares. On the basis of a sample estimate of the fraction of project acreage cleared for pasture by 1985, these projects may have led to the deforestation of more than 5 million hectares. TABLE 10 STRUCTURE OF COSTS AND REVENUES FOR TYPICAL- GOVERNMENT-SPONSORED CATTLE RANC-ES IN THE BRAZILIAN AMAZON I. Capital costs US$/hectare 1. Land acquisition 31.70 2. Forest clearanceb 65.95 3. Pasture establishmente 26.36 4. Fencingb 19.38 5. Roadbuilding 6.31 6. Misc. constructionb 1.25 7. Cattle acquisition 90.87 II. Annual operating costs 1. Labor costs 5.23 2. Herd maintenance 4.25 3. Pasture maintenance 9.47 4. Facility maintenance 14.87 5. Administration 0.82 III. Average revenues from 22.50 cattle sales (a) Typical ranch size is, 49,500 ha, although average area of pasturage is 10,500 hectares. (b) Estimates applied to schedule of pasture creation and stock increase. (c) Based on an initial herd of 4000 head. Source: Based on survey data of 24 SUDAM-assisted ranches in John Browder, "Subsidies, Deforestation, and the Forest Sector, ". report submitted to the World Resources Institute, December 1985. - 42 - TABLE 11 ECONOMIC AND FINANCIAL ANALYSIS OF GOVERNMENT-ASSISTED CATTLE ANCHES IN THE BRAILIAN ANAZON Total NWeV Net present investment investment value outlay outlay ($ ml.) (S mu.) I. Economic analysis A. Base case -2,824,000 5,143,700 -.55 B. Sensitivity analysis 1. Cattle prices 511,380 5,143,700 +.10 assumed doubled. 2. Land prices assumed -2,300,370 5,143,700 -.45 rising 5%/year more than general infla- tion rate II. Financial analysis A. Reflecting all inves- 1,875,400 753,650 +2.49 tor incentives: tax credits, decuctions, and subsidized loans B. Sensitivity analysis 1. Interest rate sub- 849,000 753,650 1.13 sidies eliminated 2. Deductibility of -658,500 753,650 -0.87 losses against other taxable in- come eliminated This experience represents an extreme example of the scope for complementary policy reform. In fact, the Brazilian government has modified the policies described above, slowing or halting the approval of new livestock projects and reducing the extent of financial incentives available. Rural interest rates have been indexed and raised above the rate of inflation, and tax incentives have been reduced. However, strong incentives for investment still do exist, which maintain a large wedge between the returns to the national econo&J and returns to the private entrepreneur on investments in the Amazon, many of which have serious ecological implications. Reforming such policies can help to ensure that livestock investments are made in regions and in technologies that offer a reasonable prospect of success, both in economic terms and in use of land and water resources. - 43 - REFERENCES 1. They are discussed in a related paper prepared for the World Bank study on the economics of natural resource management by Douglas Southgate: The Economics of Soil Conservation in the Third World, Dept. of Agricultural Economics, Ohio State University, Columbus, Ohio, June, 1986 2. As Southgate points out, depressing farm prices and land values also reduces incentives to expand production onto the extensive margin, which may consist of land of lesser capability and greater fragility. ibid. This may not always be the case, however. Lands on the margin of cultivation may simply be further away from existing settlements, or composed of heavier, hard-to-work soils. See P. Pingali, Y. Bigot, & H. Binswanger, Agricultural Mechanizatrion and the Evolution of Farming Systems in Sub-Saharan Africa, World Bank, Agricultural Research Unit, May, 1985 3. P. Pingale, Y. Bigot, & H. Binswanger, Agricultural Mechanization and the Evolution of Farming Systems in Subsaharan Africa, Agricultural Research Unit, World Bank, May, 1985 4. See World Bank, World Development Report 1986, Table 4.4, p. 68 5. This section is based on a longer background paper by the author, "The Role of Appropriate Incentives in Improving the Performance of Irrigation Systems" to be published by the World Resources Institute. 6. This paper is based on a longer published report, Robert Repetto, Paying the Price: Pesticide Subsidies in Developing Countries, World Resources Institute, Washington, D.C., December 1985. 7. International Organization of Consumers Unions, The Pesticide Poisoning Report: A Survey of Some Asian Countries, Penang, Malaysia, 1985. ILO recomamends that people who exhibit even a 25 percent fall in cholinesterase level be transferred to other work until it is completely restored to normal. 8. Committee on Industry, Technology, and Human Settlements, Economic Commission for Asia and the Pacific, Development and Environmental Trends in Asia and the Pacific: A regional Overview, Bangkok, 1983 9. Testimony of Michael Loevinsohn before the Subcommittee on International Development Institutions and Finance of the House Banking Committee, U.S. Congress, September 11, 1984 10. World Bank, World Development Report 1986, Washington, D.C., 1986; p. 95. 11. FAO, Fertilizer Yearbook 1984, Rome, 1985, Tables 34 and 39. 12. For discussions of these arguments and counterarguments, see World Bank, World Development Report 1986, p. 95ff. See also H. Shalit and H. Binswanger, "Is There a Theoretical Case for Fertilizer Subsidies?" Agricultural and Rural Development Dept. Research Unit Discussion Paper, World Bank, November 1985; and, T.N. Srinivasan, "Fertilizer . 44 - Pricing Policy in Developing Countries: A Market Based Approach", in E.L. Segura, Y.T. Shetty, and M. Nishimizu, (eds.), Fertilizer Producer Pricing in Developing Countries, World Bank, 1986. 13. 0. Soermarwoto, "Nitrogen in Tropical Agriculture: Indonesia as a Case Study", Ambio, VI (2-3), 1977 pp. 162-166. 14. Bruce Stone, "Fertilizer Marketing and Allocation in China", unpublished paper, International Food Policy Research Institute, Washington, D.C., June 1, 1984. 15. Recycling Organic Matter in Asia for Fertilizer Use, Asian Productivity Organization, Tokyo, 1983, p. 92. 16. W. Kock, "Aspects of Agricultural Research on Rice and Rice Based Farming Systems in Bangladesh" unpublished paper, World Bank resident mission in Bangladesh, March 20, 1985. 17. A good discussion of these issues can be found in Ecological Aspects of Development in the Humid Tropics, National Research Council, National Academy Press, Washington, D.C., 1982; pp. 161-167. 18, R. Norgaard, G. Possio, & S. Hecht, "The Economics of Cattle Ranching in Eastern Amazonia", draft paper, Dept. of Agricultural and Resource Economics, University of California at Berkeley, no date. A more recent analysis is contained in John Browder, Subsidies, Deforestation, and the Forest Sector in the Brazilian Amazon, unpublished paper prepared for the World Resources Institute, Washington, D.C., December 1985. 19. S. Branford & 0. Glock, The Last Frontier: Fighting Over Land in the Amazon, (London: Zed Books, Ltd.,), 1985. 20. The ecological principles of such agricultural systems are set out in M.A. Altieri, Agroecology: The Scientific Basis of Alternative Agriculture, Division of Biological Control, University of California at Berkeley, 1983; and B. Stonehouse, Biological Husbandry, (London: Butterworths), 1981. 21. World Resources Institute, Tropical Forests: A Call to Action, Washington, D.C., 1985; Vol. I, p. 10. 22. A standing tree's stumpage value is its implicit market worth, estimated by subtracting from the market value of the wood products that can be derived from it all the costs of harvesting, transporting to mill, and processing. 23. World Resources Institute and International Institute for Environment and Development, World Resources 1986, Washington, D.C., 1986; Table 6.3, p. 278. 24. National Research Council, Ecological Aspects of Development in the Humid Tropics, (Washington, D.C.: National Academy Press), 1982, p. 167. 25. The data are discussed in John Browder, "Subsidies, Deforestation, and the Forest Sector in the Brazilian Amazon", report prepared for the World Resources Institute, Washington, D.C., December 1985.