Thursday, February 19, 2015

10 Applying Economics to Forestry-I: Strategic decisions in Indian forestry sector

Scientific forestry, as developed in Europe during the 19th century and applied and expanded in India by European foresters like Brandis (1897) under the colonial government, focused on the maximization of physical mean annual increment, rather than on financial returns. However, economists have trenchantly criticised this and advocated alternative financial methods, starting with the discounted cash flow principle advanced by Faustmann (1849), which has been revisited by Gane (1968). During the later decades of the 20th century, a number of mainstream economists have advocated economic efficiency principles for management decisions such as the cutting of old tree stands, choice of species and product mix, age at harvest, level of investment and costs, and so on (e.g., Bentley and Teeguarden, 1965; Pearse, 1967; Hyde 1980; Johansson and Loefgren, 1985; and a host of others).

Over time, the domination of economic criteria in forestry led to a backlash from ecologists and social environmentalists, who argued that such a strong orientation to industrial interests was leading to both ecological destruction and the erosion of people’s livelihoods and cultural base (see, for example, Gadgil & Guha, 1992). Attempts were made to reconcile financial objectives the interests of equity by various artifices within he framework of economic theory, such as social cost benefit analysis, SCBA (Little and Mirrlees, 1974), or including non-monetised products and services through “unpriced values” (Sinden & Worrell, 1979). The current fashion is to advocate the other extreme of completely handing over the forest to local communities (for a recent, comprehensive statement, see Lele & Menon, 2014).

Rather than be blown around by such changing currents from the social sciences, the forest establishment may well be justified in sticking to what it sees as a safe middle path, and to be somewhat slow in adopting every latest fashion in the social sciences.

Economic critique of traditional forestry

The ‘neo-classical’ economists criticised the ‘sustained yield, no drop-off, and never-declining yield’ principles of the classical European foresters and their colonial followers on the grounds that they ignored the costs of time, which imposes costs on financial investment, and of land, which has alternative uses and hence an opportunity cost that is seldom considered in public forestry, since the forest department does not have to pay for the land or its annual rent (Thompson, 1966; Smith, 1969; Waggener, 1969; Ledyard and Moses, 1974; Roberts, 1974). The economists consequently charged that the vast resources of publicly owned timber were being inadequately harvested (Hirshleifer, 1989, p.52). According to Smith (1969), “(a)n economic view suggests that sustained yield should have gone out with the cross-cut saw” (see Davis and Johnson, 1987, Chapter 16 for an analysis of harvest decision criteria).

Prominent economists like Paul Samuelson and Hirshleifer pressed home such criticisms at a symposium on “The Economics of Sustained Yield Forestry” at the College of Forest Resources, University of Washington, Seattle, Washington in November 1974, the proceedings of which were not published as originally planned because “the implication that more logging should take place on public lands was unpalatable to many in the industry” (Hirshleifer, op. cit., p.52-53). However, seeing that the ‘big guns’, like Hirshleifer himself and Samuelson, in any case managed to get their contributions published in mainstream journals, one wonders whether the disadvantage was not the other way round!

Hirshleifer suggests that this “shibboleth” of sustained yield “does seem to be irrationally worshipped in at least part of the forestry literature”, like the holy cow of India, “with seriously harmful consequences for the well-being of our nation” as “…a large part of the nation’s capital is locked up in an untouchable and unremunerative form” despite a miniscule annual increment (just 0.88% per year) (Hirshleifer, op. cit.). This amounts to working in the range of “first order absurdity” where annual yield is falling with further increments in capital stock, or even the region of “second order absurdity”, where the annual sustainable yield is deemed negative (and falling). All this calls for a decumulation of excess capital stock, and for the locked up capital to be realized so that the funds could be invested elsewhere in the economy (Hirshleifer, op. cit.). To allay fears of future shortages, technological advance over time “will allow us to get more yield from any given level of future capital stock” (ibid., p.58), which means that “less current saving and investment are needed in the case of relatively scarce capital”, and draw-down of excessive capital types can be faster (p.59).  To counter charges of  “money-grubbing”, Hirshleifer declaims that it is verily the moral duty of the foresters, as “stewards” of the public resource, to work them for maximum return, failing which “we would actually be better off giving the forests away” (op. cit., p.61).

One such “pathological” effect of sustained yield (SY) according to Hirshleifer was the so-called “allowable cut effect” (ACE), according to which adding additional areas of young growth, or even “otherwise worthless” cut-over lands (ibid., p.63), to an existing estate of mature or old growth, implies a bigger annual average increment for the entire forest, thereby justifying a faster rate of liquidation (conversion) of the old growth. Interestingly, what he finds objectionable in the ACE is, not so much that it appears to be an unethical way of justifying quicker draw-down of old growth (which economic efficiency anyway demands even without the ACE being dragged in), but that it is irrational: “Rationally, of course, if a cut of over-mature timber is justified, it remains so whether or not a separate stand of young timber is included in the same working circle” (ibid., p.62). This demolishes one of the fundamental principles of traditional SY forestry, i.e. that one has to guarantee regeneration before thinking of cutting, by separating the two decisions. Management decisions are asked to stand on their own economic feet, rather than being dependent on one another. In this spirit, Hirshleifer finds objectionable such “slogans” of the conservative forester as “evenflow”, “sustained yield”, “no-drop-off”, etc. Such ideals, which stem from the forest service’s misplaced (in the economists’ view) aim for stability, are deserving of censure as “truly pernicious” (ibid., p.61), “ridiculous” (ibid., p.64), and so on. There is even a somewhat sly suggestion that maintaining low current harvest in the public forests might be construed as a device to prop up private timber returns, even though he finds it “difficult to believe that the agency might be a tool of large-scale capitalism” (ibid., p.66).

The great Samuelson’s contribution in the same conference also got published in the mainstream (Samuelson, 1974). For him, the debate has to be decided on the basis of “sound economic analysis” (op. cit., p.466). He does not apparently recognize any intrinsic claim of the redwoods or other old growth to be preserved in lieu of some other crop that may well provide better external or other benefits. Long-rotation, sustained physical yield forestry (“jam tomorrow and never jam today”) could be conceivably justified only if some extra-ordinary positive externalities could be proved, in which case he believes that “all economists would be found on the side of the angels, sitting thigh next to thigh with the foresters” (ibid.). Like Hirshleifer, Samuelson also declares that the market forces will apply the desired corrective if the rate of exploitation is felt to be too high or when scarcity of wood looms (op. cit., p.485). Keeping old forest stands intact is, in his analysis, contingent on society making an informed choice to sacrifice current returns for this purpose, which it will when a certain level of prosperity has been attained (op. cit., p.486):

"The proper way of looking at publicly-owned land is to view it as any public asset. It’s something which is convertible into something else. Too often we’re canny as all hell in running private business and we’re reckless as all hell in running public business. Well, you can be reckless by having things grow too long as well as by not having them grow long enough. We would be better off today if we had adopted a more rational timber harvesting policy in the past." (Samuelson, in discussion reproduced in Dowdle, 1974).

Impact of economic theory on forestry strategy in India

Faced with such a formidable campaign, the traditional forester, unschooled in the art of academic polemics, was unable to put up even a weak fight, if any. From the traditional forester’s viewpoint, the ACE is a corollary of that fundamental bugbear of forestry, namely that the product (annual increment of timber) is physically indistinguishable from the factory (the standing, growing tree). The forest management systems generally require that regeneration be established on an equivalent area before taking the harvest (see Shyam Sunder and Parameswarappa, 2014, for a recent description of these practices in Indian forestry). There is a danger that if even newly regenerated or even vacant lands are added to the pool to calculate annual increment on an area basis, this may result in the more objectionable excesses of theACE, and would generally not be acceptable to the sustained yield forester, for whom the harvest decision is contingent on the state of the forest as a whole and whether or not a full or 'normal' series of young crops is being built up commensurately. If regeneration is not successfully established, fellings in the mature or old-growth crops would need to be delayed or postponed, which would again attract criticism from the economic efficiency viewpoint. Forestry, which was accused as acting as a ‘dog-in-the-manger’ by occupying large stretches of land, water and mineral resources while yielding very low direct financial returns, was less and less able to attract any support, either from policy planners or from the mainstream academics, who mostly followed the eminent economists in castigating sustained yield as too conservative and unreasonably demanding.

One of the ‘pernicious’ effects (to borrow the economist’s favourite term of endearment) of putting economics on top, was that aspiring foresters could not advance their professional careers except by endorsing those principles. For the persons entering the Indian Forest Service in the 1970s, forest economics happened to be the main avenue for higher specialization, as most of them were not from the biology stream (a good example is afforded by Nautiyal, an Indian forester who made good in the University of Toronto, and wrote a much admired textbook on forest economics (1988)). But the economic critique was crippling, because it held up the forest department to ridicule as an outdated, unresponsive, blundering and unprofessional bureaucracy which was sitting on a quarter of the country’s land and natural resources without offering a commensurate return. The forest department was seen as a drag on the economy, and there were intense pressures to divert the forest areas for all sorts of other uses.

One of the direct consequences was the devaluing of natural forests, expressed unambiguously in the Report of the National Commission on Agriculture (NCA, 1976) which called for a major change "from the present conservation oriented forestry to a more dynamic programme of production forestry", heavily slanted toward conversion of the low-productivity mixed forests into monoculture of fast-growing species (like eucalypts) in a bid to raise the low average annual productivity of the forest estate in terms of industrial wood (e.g. pulpwood). Ironically, many Indian foresters, although by training votaries of sustained yield, were also in the vanguard of this transformation. Indeed, it would not be far off the mark to say that the forestry chapters in the NCA report were drafted by foresters who had become forest economists.

As already mentioned, this inordinate endorsement of commercial forestry led to a backlash from ecologists and social environmentalists, who mounted a successful campaign to bring back the values of ecological sustainability and social (equity) concerns. The story of the campaigns, against this type of intensive and invasive forestry involving large scale conversion of mixed native forests to monoculture and the heavy dependence on a few exotic species like eucalyptus, has been has been told and retold in the literature, and will not be repeated here. Suffice it to say that India as a polity has resoundingly rejected the neo-classical economic efficiency model in forestry, until today there are no ‘green’ fellings in most state forests (apart from clearance for development projects), no clear-felling of natural forest, exotics like eucalypts are discouraged or banned in reforestation, and the revised forest policy of 1988 clearly puts environmental and ecological interests above industrial products, and the livelihoods of local communities above commercial returns.

As for the forest departments, they were made to appear as the villains twice over: they were fated to lose in the economists’ view if they stuck to their conservative, low-input low-output ways of sustained yield, and they were fated not to win if they took to fast-growing, intensive forestry based mostly on exotic species.


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