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Social benefit stream and forest economics
A consideration that may come to the rescue of the long rotations
and slow conversion rates of existing crops may be the indirect services that
are expected to flow from such natural crops, but this is likely
to support longer rotations
only if the stream of such benefits is
shown to increase with age of the crop. If not, as in the case of
carbon sequestration, it may also come about that a series of fast-growing crops
may capture more carbon in a given time period, than keeping the already
locked-in carbon in standing trees. Samuelson feels that such decisions should
be left to “the electorate, by that same pluralistic process” which determines
other fiscal decisions and allocation of budgets (Samuelson, 1974, p.486).
Distribution considerations and economic criteria
We may however argue that there is an
alternative to this laissez-faire
approach: that is if the polity decided
(through a democratic -- or maybe a revolutionary-- process!) to actively
favour certain classes, usually the poor or otherwise disadvantaged, bringing
us to social cost-benefit analysis (SCBA),
in which a positive weight
is attached to income or consumption increments accruing to the
poor, which of course is not allowed in neo-classical economics
where inter-personal utility comparisons are not admitted (see Squire & van
der Tak, 1975, for a primer on SCBA; Price, 1989 for forestry applications).
Then products which flow differentially to these favoured classes will be
ascribed a social value that may be higher than signalled by market prices
alone. In our case study, this possibility is explored by ascribing such social
weighting to non-teak smallwood (and a small portion of the non-teak timber as
well), which local poor are assumed to consume directly. That is, we explore
the possibility of making the consumption increments of the poor our ally in
defending sustained yield against the ‘heartless’ application of financial
criteria.
Rather than having to undertake a special
exercise to compensate the ‘losers’ in each project, SCBA seeks to do this on a
societal and economy-wide basis. In a departure from this neutral stance of
neo-classical utility theory, we posit that just as the marginal utility of
consumption of an individual is assumed to diminish with level of consumption
of a commodity, from the point of view of society as a whole, “an extra rupee
is better given to a poor man than to a rich man” (Little & Mirrlees,
1974). One function required for this is the social elasticity of the
marginal utility of consumption, denoted by the Greek symbol η (eta), which denotes the (proportional)
change in marginal social utility for a corresponding (proportional) change in
consumption at different income levels. Then the relative weight di
attached to an incremental rupee of consumption at a consumption level ci,
is related to the average consumption level ĉ (or any other consumption level,
for that matter), by the formula
di = ( ci ∕ ĉ ) η
(η being negative usually)
Of course, in order not to make the
assigning of relative weights completely arbitrary, some or other reasoning is
advanced. Fellner (1967) suggested that the value of η could be approximated by
the ratio of the income elasticity of consumption of ‘Food’ (usually positive),
to its pure price elasticity (usually negative). The higher the income
elasticity, the more pervasive is poverty assumed to be (denoting that there is
a greater slack to be made up), and the higher will be the number for η (of
course with a negative sign). As an
example of this type of estimation of the parameter, using estimates of income
and prie elasticity of food grains consumption by Raj (1966), η works out to -0.6 or -0.7, which portrays
only a mildly progressive distributive orientation. If we separate out the
elasticities for the rural and urban sectors, we get the numbers for η as -1.12
for the rural sector, and -0.15 (amounting to almost neutrality to
distributional interests) for urban. For a really strong pro-poor bias, η would have to be closer to, say, -2, which
would denote that as consumption level doubles,
the value of an incremental rupee becomes a quarter.
This detour was only to give an idea of the
computational results for η, the social elasticity of the marginal utility of
consumption. But the real interest lies in the implications for the economic
analysis of sustained yield forestry decisions as laid out in our case study of
the teak forests in Karnataka. In doing our social cost benefit analysis
(SCBA), let us assume that a value for η of -2 represents this strong
distributional bias. By itself, using SCBA on the lines outlined here does not
materially alter the optimal rotation decisions for maximum NPV (details in
Dilip Kumar, 1988). For a SQ III
hectare, for example, using -2 for η, and ascribing full cost of labour (shadow
wage rate SWR = 1), the optimal rotation of a single rotation remains at or
above 75 years up to a discount rate (STPR) of 4%, but falls to 55 years at 5%,
35 years at 6%, and 10 years at 10%. For an infinite series of rotations (soil
expectation value, SE) the optimal rotation falls away from 75 years to 30
years at 5%, i.e. a little faster than the single rotation case. If we take the
rather extreme case of SWR =0.25 (since wages are presumably going to very poor
persons), the optimal rotation for one rotation still follows the same pattern
with rising discount rate, while the rotation for maximum SE falls a little
sooner, from 75 years at 3% to 30 years already at 4% rather than at 5%
(because the cost of postponing future returns looms larger as initial
afforestation costs become lower). All this does not give much succour for long
rotations per se.
The main impact of social criteria will be
through the computation of the social discount rate (SDR). One of the effects
of considering the marginal utility of consumption through a parameter like η
is on the consumption rate of interest CRI or social time preference rate STPR
(see Kula, 1984). Considering that per capita income is expected to grow quite
slowly, however, future increments of income are not very highly discounted due
to η, and it was calculated that the CRI would be only around 3.6% with η= -2,
allowing for mortality (the probability of surviving to enjoy the future
consumption stream being around 98.5%, which imposes a time preference rate of
1.5% by itself). A simple assumption of zero mortality (survival probability =
1) would bring the discount rate (CRI) to 2% (η being -2), or essentially 0%
for η = 0. Any lower figure for η like -0.5 would likewise devalue future
increments less strongly, yielding an even lower discount rate like 2%. Such
results are a support for maintaining longer rotations, but as the transition
to shorter rotations occurs between 3% and 5%, the optimal rotation is
extremely sensitive to the precise discount rate chosen, but merely using social
prices rather than market, does not render long rotations any more viable.
Conversion of natural forest and social criteria
So far we have considered the optimal
rotations for a fresh plantation. As we saw before, under strictly economic
analysis, there is no mitigating circumstance to come to the aid of a slow pace
of conversion, and even under social CBA, the social value of the firewood and
small timber coming out to augment consumption of the poor would only add to
the pressures to convert the standing forest. But there may be one special
circumstance in which social considerations may so support a longer conversion
period. This is, if only a limited portion of the production is utilisable by
the poor, each year, and any excess production over this limit would go to
socially neutral uses, it may make some sense from the social angle to slow
down the rate of conversion of the old growth, especially if consumption by the
poor is highly valued (say η= -2).
Such an exercise was actually done in the
case study of Yellapur-Mundgod (Dilip Kumar, 1988, chapter 10). The working
plan estimated an annual production of 6,548 cum of teak logs and 28,293 cum of
non-teak logs annually on a 30-years conversion period of the remnant existing
forest. If we assume that 1.5 times this comes out as firewood, this would
amount to respectively 9822 cum of teak firewood and 42,439 cum of non-teak
firewood annually; the latter would just be sufficient to meet the demand based
on the state-wide per-capita assessment of fuelwood consumption in the
Karnataka State of Environment Report in 1977-78 (Subramanian, 1984),. A
similar exercise for timber demand and potential output as per the working plan
indicated that just some 10% of non-teak timber would be sufficient to satisfy
local needs. If now we ascribe high social value to the non-teak timber and
fuelwood that is assumed to be consumed by the poor, obviously any acceleration
of conversion that is not required for the years’s local consumption would have
less social value (as the local poor would not have a use for it and it would
go to the general market).
On these assumptions, relative weights (di)
can be calculated for the firewood and timber produced every year under the
normal (sustained yield) prescriptions and under (hypothetical)
accelerated conversion rates of natural
forest, based on available information on income class distributions in the
area. While not describing the detailed calculations, a few sample results are
presented. With a high distributive bias (η = -2), consumption increments
distributed equally over the entire population would have a aggregate relative
social weight (D) of around 6.1; if restricted to the classes below the poverty
line it would have a higher weight of over 8.8; or if restricted to the class
of workers alone, 13; and if restricted to the poorest class, it would be as
high as 491.5 (Dilip Kumar, 1988, chapter 10).
In the Little-Mirrlees scheme of SCBA,
these d values are not used directly to amplify the value of incremental
consumption or products; one more step is involved, that of expressing values
in terms of a standard measure or ‘numeraire’, v, which is defined as the value
of incremental public income (in ‘border rupees’, i.e. after correcting for
distortions due to local tariffs and duties). This numeraire depends on the use
to which the incremental public income is assumed to be put in the economy. A
simple assumption, for example, may be that it is all applied to consumption,
and further that it is equal to consumption at the reference level ĉ (the
average level of consumption in the economy). Then the value of a rupee of
public income income would be essentially 1.0, except that it would have to be
converted to border values by multiplying by some average accounting ratio or
standard conversion factor (SCF) to account for duties (we used a SCF of 0.86).
An alternative formulation, however, could be that the (incremental) public
income is devoted partly to investment, which may yield further incomes and
even further re-investments, and partly to consumption. One could even posit
that public income is put to socially very high-valued uses (for instance,
income supplements to the poorest classes, say below the critical or minimum
level of consumption, which would inflate its social value). These different
scenarios give us different estimations of v, which is then used in the
formulation D/v to convert the consumption benefits from market rupees to the
corresponding social value at border prices. As can be imagined, if we assume a
high value for v (public income is highly valuable), then the value of
consumption benefits accruing to individuals will go down even though they may
be poor, with high social weightage or D values). If we assume that public
income is fairly neutral in distributive effects, then the D/v value of
consumption benefits will be allowed to remain at high levels.
We cite a few variants from our constructed
example of conversion of old forests in the Yellapur-Mundgod division. A simple
assumption could be that all the non-teak firewood and 10% of non-teak timber
that are going to local basic needs, are consumed equally by all sections of
the population. Our calculations show that this component would then have a
social weight in aggregate (D value) of around 6.1 (assuming the parameter η=
-2); because most people have low incomes, if the product is consumed by all
the classes equally, the aggregate social weight is high. In contrast, if the
product were distributed in proportion to existing incomes, the aggregate
social weight D would be only 1.4; while if it were restricted to the really
poor, say to the workers class and below, the relative weight D would be
higher, around 13.1 (Dilip Kumar, 1988).
There is one more step: the relative weight has to be converted to the
numeraire by dividing it by the social value of public income v, as outlined
above. If we assume that there is no reinvestment, that all is consumed at the
average level of consumption, and a consumption rate of interest (CRI) of 3.56%
(with expectation of mortality and η
--2), the simplest case, then v comes to around 3.3. If we assume that
15% of public income is reinvested at marginal product of 10%, and the rest
consumed at the average level of consumption, then v comes out to around 4.8
(ibid., Table 8.10). The more valuable that public income is assumed to be, the
lower would be the social value of consumption benefits indicated by the D/v
ratios of firewood or other basic needs products (ibid.).
If we accept the scenario where incremental
consumption benefit accrues to the entire population (D=6.1), and value of public income is related to the
average level of consumption (v=4.8), the accounting ratio D/v of the added
consumption comes to 1.27. If we change the assumptions, the D/v ratio will
also change: thus, if incremental consumption is assumed to accrue to workers
only, D will be higher, 13.1, and D/v 2.7. Many more variants in assumptions
regarding D or v values could be imagined, which we need not spell out
here.
Now we can try accelerating the conversion
process from 30 years to say 20, 10 or even shorter periods, and see how the
social value changes as diminishing proportions of the non-teak output qualify
for the higher social values. For the non-teak firewood, the conversion factor
(to convert value at market prices into social value in terms of the numeraire)
at 30 years conversion rate (100% socially valuable) would be 1.5 using a D/v
of 1.5, or 2.5 using D/v of 2.5. Under a 20-year conversion period, part of the
extra firewood would go to general consumption (not 100% socially valuable), so
that falls to 1.3 (D/v = 1.5) or 1.95
(D/v = 2.5). For a 10-year conversion period, it is only 1.1 (D/v of 1.5) or
1.4 (D/v of 2.5). Non-teak timber, of which only 10% of prescribed output is
socially advantageous under the 30-year period, has accounting ratios (ARs)
respectively of 1.02, 0.97, 0.92 and 0.88 under conversion periods of
respectively 30, 20, 10, and 3 years and D/v of 2.5 (Dilip Kumar, 1988, Table
10.5). If the consumption is assumed to accrue at lower levels, D/v may be
higher, and the social accounting ratios also higher.
These accounting ratios or shadow prices
are then plugged into the SCBA, under various assumptions of social discount or
time preference rate (STPR) and shadow wage rate (SWR). Under our assumptions,
the longer conversion period is favoured at low social discount rates and high
D/v values of the non-teak component. At 3% discount rate and D/v 2.5, it is
the 1-year conversion period (immediate liquidation!) that has maximum value;
to favour the 30-year period, we would have to use a D/v of around 5.0. At 5%
discount rate, D/v of 2.5 or even 5.0 favours still the 1-year conversion
period; only if D/v were to be 7.5, does the 30-year period become favourable.
In these cases, a loss in social value of the non-teak products is countered by
the higher early returns from the high-price teak component. Of course, it has
to be remembered that any conclusion favourable to the longer conversion
periods comes about only if the afore-mentioned limits on the capacity to
absorb the basic needs products is operative. If no such limit is posited, then
the more that is extracted, the higher will the net social value be, and there
will be no succour for the sustained yield option.
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