The limitations of economic criteria in forestry decisions
In the previous sections, we looked at the impact of neo-classical economic analysis on approaches to forest sector strategy, on management decisions like optimal rotations and product mixes, and on the interaction of social (equity) considerations with economic efficiency criteria in the context of conversion of natural forest to teak plantations in Karnataka state of
Owing to the numerous parameters that play a role and the large number of
assumptions (many heroic!) that are necessary, any such analysis will probably
have only an indicative significance rather than a prescriptive role. The aim
of recounting some of the above analytical scenarios is not so much to pass
judgment on what the optimal decisions in the case study forests should be, but
to illustrate some broad principles regarding the application of economic
analysis in forestry situations. India
Firstly, if we do accept the need and justification for economic criteria in forest management, it is apparent that the results are going to be highly sensitive to the assumptions, especially the choice of discount rates. Economists, as we saw, are critical of any adoption of low rates of discount specially for forestry projects just because everybody likes standing trees or green habitats. Economists have been especially virulent in their criticism of the retention or slow conversion of old growth under the foresters’ criteria of maximum mean annual (physical) increment, contending that this keeps too much capital locked up on the ground, sacrifices other opportunities for investment, and so on. Foresters, on the other hand, have been wary of these arguments, because they realize that forestry is highly vulnerable to hasty and irreversible decisions (as the factory and the product are physically the same, and it takes little time to liquidate the capital stock, unlike the plant and machinery of a normal factory). Foresters realize that, pitted against the competing uses for land and capital, forestry (especially of long-rotation timber species) has little chance of surviving the analytical tests if purely economic criteria are imposed.
Because social environmentalists equate a concern for social justice with the rejection of the classical (colonial) forestry, it may be thought that adding social concerns, through social cost benefit analysis (SCBA), would possibly come to the rescue of long-term, long-rotation forestry options, assuming that society approves of it even if market economists do not. As we saw above, SCBA also has a myriad assumptions on various parameters like the social discount rate, wage rate, distributional bias (η), etc., all contributing to the relative values of shadow prices used for the analysis. Once again, at very low interest rates, there is a certain advantage for longer rotations. There is also a possibility of some support to longer conversion periods (i.e. keeping old growth longer on the ground in reserve hectares) if it can be shown that there is a differential flow of products (or services) over successive time periods from such locked-up resources to the poorer sections of the population. However, this advantage exists only at quite low discount rates, say 3 to 4%, depending on other parameters. Paradoxically, if all of the product could be absorbed by the target populations, then the earlier liquidation of the standing growth would be favoured even under SCBA under the maximum net present value (NPV) criterion. Further, the potential gain from early exploitation of commercial products is likely to overwhelm what little advantage the slower options may have had by supporting consumption by the poor.
How then do we reconcile the criticisms of mainstream economists with the universal popular consensus that old growth has to be retained even if not highly remunerative? Indeed, how do we justify the notion that natural habitats have to be protected, and the excesses of the era of commercial forestry reversed, if we are not to abandon the basic assumption of rational behaviour that underlies all economic theory?
Perhaps the hard truth is that there may be areas of human activity that are so important for reasons other than financial gains, that the narrow criterion of individual economic gain cannot be the basis of decisions. In other words, the decision rules of neo-classical utility theory may be operative mainly in a narrow range of choices at the margin, between a few units of resources or commodities this way or that, but this cannot be extrapolated in a grand way to the society-wide policy choices in a manner that may spell doom in the long run. Forests are a sensitive resource with such considerations of the ‘precautionary’ criterion, where economic efficiency in the narrow sense may have to be sacrificed (Dilip Kumar, 1988, p.289). The “safe minimum standards of conservation” suggested by Ciriacy-Wantrup (1952) may be of greater relevance than the maximum net present value criterion.
It is highly instructive that Hirshleifer himself, in a disarming aside, acknowledges that he was “afraid” to bring his wife with him to the conference venue “because I thought if she saw all these trees up here, she would never let me say we should cut more of them down” (Hirshleifer, op. cit., p.67). In other words, even a common person knows that there is something very wrong in the so-called expert’s recommendations when it goes so blatantly against all the instincts of common sense. Unfortunately, mainstream economists have an irrefutable answer to common sense, following the lead of the great Keynes: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist”. Hirshleifer himself uses this formula: “Men of affairs often claim to be free of concern about issues of theory. Usually this means they are acting on the basis of some theory whose validity they choose not to question” (Hirshleifer, op. cit., p.53). Ignoring the cost of interest, Hirshleifer says, is one such instance, for it implicitly assumes, not an absence of interest as a factor, but actually a zero rate of interest, the hidden theory that is belied by the state of affairs in the real, practical world.
Despite the iron frame of neo-classical theory, a majority of citizens may well choose to go along with Mrs. Hirshleifer’s homespun wisdom rather than her husband’s learned pronouncements. This anecdote may afford an explanation of why foresters in general tend to be fairly conservative in their approach, and slow to adopt the theoretical formulations and exhortations of social experts of various hues. All over the world, foresters tend not to go down one path too far, and like to keep open the option of recovering the status quo if things do not work out. However, under the sustained demonization of traditional forestry by mainstream economists, they have in the past abandoned the old values of sustained yield, and gone so far in the other direction – clearing valuable mixed forest for eucalyptus, for instance – that they have invited equally scathing attacks and virulent criticism from another interest group, the social environmentalists who seek to combine ecology with distributional justice, and are now demonizing the forest service with equal virulence (e.g., Lele and Menon, 2014, p.403 and throughout the book).
There is, moreover, a fundamental difference between an applied science (or art) like forestry and the social sciences, which is that it is very easy in the social sciences to make major changes in ideas by merely changing a few words here and there, whereas it takes decades to change physical reality in the ‘field’. If one looks at the policy guidelines of international donors, for instance, there is clearly a shift every few years: at one time the donors were all pushing for forestry as a business, then they shifted to forestry in support of (industrial) development; then to social forestry, which they abandoned as a failure in equity terms; then participatory management (e.g. joint forest management), which was also condemned on various grounds like human rights; leading to empowerment of communities, withdrawal of the forest departments to a purely advisory role, and transfer of ownership to the community or individual. Of late, there has been another concept gaining popularity among academics and international fora, that of payment for(PES). This has its own logical deficiencies and administrative weaknesses, which require another article to explore. But international funding, research support, journal publications, travel grants, are all linked to the aspirant faithfully following the latest academic trends set by the social scientists. The forests, however, can neither be transformed so fast nor can they be preserved in the face of such changing policy environments.
This unedifying experience with the involvement of mainstream economists recounted above, also gives cause for caution in fully accepting contemporary criticisms of public forestry, and going to the other extreme of giving up state control of the forests completely. As against the proponents of decentralization and village control of all forests, the professional forester once again advocates a middle path, which has been expressed by the author in the following words at the United Nations Forum on Forests on 2nd Feb 2011:
"As the non-forest value of forest acres in the expanding economy rises, it has been our experience that all the different strands of the polity are important in ensuring the long-term survival and sustainable management of this precious resource: well thought out legislation, a strong and independent judiciary, strong community and civil society participation, and a professional state forester cadre and other administrative personnel and apparatus."
It would be a pity, and short-sighted in the long run, if the voice of the forester on the ground were once again ignored, and the forester vilified as if he (and increasingly she, see Marwah and Thakkar, Sanctuary Asia magazine, October 2014) were an undesirable alien in the set up.
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