10.6 PARTICIPATION CATALYST

126 Sustainability Assessment

devaluation, and the level of debt servicing ratio may have an impact on the resource trade and deforestation (Barbier et al., 1992), and thus may invite catalysts of global level for policy inducement. On the other hand, microeconomic policies like micro credit and price control may influence the local catalyst to operate in the policy system. The following sections describe the influence of economic measures, specifically adhered to forest land use.

10.7.1 Influence of Macroeconomic Factors

Macroeconomic measures taken by a government are usually targeted to adjust all the policies. However, a few measures of macroeconomic policy, e.g., an overvalued exchange rate, acts as a subsidy to urban consumers on imported goods while implicitly taxing resource exports produced domestically. Real currency devaluation as frequently required by structural adjustment programs for indebted developing countries, remove existing distortions and provide incentives for greater domestic production of exportable items including primary resources. This is due to increased international price competitiveness and increased domestic demand for home-produced goods, as imported substitute goods become more expensive. Both impacts can directly encourage resource degradation through the expansion of primary production for international or domestic markets unless adjustment is made in the policy.

Generally, macroeconomic policies (i.e., fiscal and monetary policies) can affect underlying demand and supply conditions, with knock-on effects in the resource-based industry (e.g., unnecessary project aid or grant or loan is taken in a resource sector to meet the deficit of foreign reserves in the total policy). Such impacts of macroeconomic policies on the resource sector are complex to evaluate. For example, Capistrano and Kiker (1990) found a negative correlation between debt service ratio and deforestation. In contrast, Kahn and McDonald (1990) discovered a positive relationship between tropical deforestation and public external debt. Their study also indicates a high correlation between exchange rate, devaluation, and deforestation.

However, economic policies specifically aimed at the measures to resource sector, including domestic and trade instruments (e.g., tax credits or subsidies for forest conversion, afforestation, or for wood product exports) produce a direct effect on resource degradation (Devaranjan

and Lewis, 1991). Forestry is indirectly affected by economic policies which alter incentives and returns in downstream industries or related sectors, such as wood processing, construction, and agriculture (Barbier et al., 1992). Short-term concessions and poor regulatory frameworks coupled with inappropriate pricing policies often contribute excessive rent-seeking behavior in resource production (Gillis, 1990). For example, in the Philippines, if the government had been able to collect the full value of actual rent, its timber revenues would have exceeded a yearly average of US$ 250 million, nearly six times the US$ 39 million actually collected during the years 1979 1982 (Barbier et al., 1992). Instead, excess profit of US$ 4500 per hectare officially went to timber concessionaires, mill owners, and timber traders (Repetto, 1990). Similar difficulties of capturing less rent have been reported from elsewhere in other developing countries, e.g., Malawi (Hyde et al., 1991). Many of the problems may have to do with the complexity of fees and concession arrangements decided by the policy which makes enforcement and supervision of revenue collection difficult (Grut et al., 1991).

10.7.2 Influence of Microeconomic Factors

Microeconomic policies, as outlined in Hyde et al. (1991), may influence the environmental factors of primary resource management through their impacts on:

•the level of mechanical efficiency of harvests,

•the level of social efficiency of harvests (environmental externalities),

•alternative arrangements of royalty, contract, and concession and their implication for trespass, grading, and other environmental losses, and

•the level of rent distribution.

The implications of domestic microeconomic policies are also illustrated in Barbier et al. (1992) in terms of a cost curve. Lohmann (1996) reported that the optimal level of the forest operation conducted by the private concessionaires is guided by mechanical efficiency attained from the competitive price of the delivered logs, harvest volume, and short-run marginal cost. The level of such a short-run return is not optimal from a social point of view because it excludes:

•The “user costs” of short-run harvesting, that is the discounted future returns from leaving the residual stand undamaged and

128 Sustainability Assessment

growing or through the avoiding of high grading and other practices that degrade the stand.

•External environmental cost of extraction (e.g., watershed degradation, downstream sedimentation, disruption to nutrient cycling, loss of natural habitats, loss of nontimber products).

The discussion on economic influence shows that economic influences create a field to guide private investments or corporations in a path desired by the policy. But investment may be public as well. If it is a public investment, the prime target of a policy may be to guide the investment to social benefit which might need to use some strategy of economic influence differently from guiding the private investment. Thus, it may be important to characterize private or public investment for policy evaluation. The following sections describe some characteristics of investments.

10.7.3 Influence of Private Investment

Privatization may not always work for environmental reasons in developing countries. Often misconception and wrong use of privatization concept appear harmful to the economy of developing countries. There are also debates that privatization supports the interest of multinationals (UNDP, 1993). Privatization should be seen as one element of a total package of stimulating private enterprises but many developing countries have taken it differently. Privatization in developing countries like Bangladesh has been politically motivated and pursued for vested interest of different interest groups or individuals rather than as coherent part of encouraging private investment. The sustainability attempt through privatization has received a mixed result in developing countries for the following reasons:

•For the wrong reason (for increasing short-term revenue rather than building competitive markets, e.g., privatization of jute and cotton mills in Bangladesh).

•In the wrong environment (privatization may bring some good result if initiated in a competitive environment rather than protective environment).

•By wrong procedure (privatization without proper circulation of information accompanied by corruption).

•For the wrong purpose (often state properties including forests are sold to cover the budget deficit or to meet the current liabilities).