3. SYNTHESIS, DISCUSSION AND PROPOSAL FOR A BASE SCENARIO

3.1 Synthesis and discussion

It should be recalled that what we are looking at here are significant potential changes in policy direction. Policies already in place are having impacts on the FFI sector which can be observed and, to a certain extent, measured and internalised in the projection models for supply and demand for wood and its products. In nautical terms, this would be a “steady-as-she-goes” scenario. This, incidentally, is not the same thing as a “laissez-faire” scenario, which implies a certain benign neglect in policy making with no particular direction being provided. The extent to which changes in policy may have an impact on the FFI sector varies considerably, as indicated in the “scale and direction of impact” column of tables 8 A…J.

Table 8-A: POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION

¹ On a scale of* (= little impact) to *****(=very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-B: POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION POLICY-AREA B: ECONOMY

¹ On a scale of * (=little impact) to ***** (very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed form its present direction
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-C POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION - POLICY AREA C: ENERGY

¹ On a scale of * (= little impact) to ***** (= very significant impact). This is intended to show the possible extent of impact on supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-D POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION-POLICY AREA D: ENVIRONMENT

¹ On a scale of * (= little impact) to *****(= very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-E: POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION - POLICY AREA E: LAND USE, RURAL AND REGIONAL DEVELOPMENT

¹ On a scale of ^* (= little impact) to ^***** (= very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-F: POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION - POLICY AREA F: AGRICULTURE

¹ On a scale of ^* (= little impact) to ^***** (= very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-G: POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION - POLICY AREA G: INDUSTRY

¹ On a scale of ^* (= little impact) to ^***** (= very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-H: POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION - POLICY AREA H: TRADE

¹ On a scale of * (= little impact) to ***** (= very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.
³ Since this table was prepared, the GATT Uruguay Round negotiations were completed and, subject to ratification by the contracting parties, will become effective. Therefore, this alternative could be deleted.

Table 8-I: POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION - POLICY AREA I: CONSTRUCTION

¹ On a scale ^* (= little impact) to ^***** (= very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

Table 8-J POSSIBLE IMPACTS ON THE FFI SECTOR OF CHANGES IN POLICY DIRECTION - POLICY AREA J: THE ROLE OF THE PUBLIC SECTOR

¹ On a scale of ^* (= little impact) to ^***** (= very significant impact). This is intended to show the possible extent of impact on wood supply and demand should policy be changed from its present direction.
² This column is intended to show how soon after a policy change has been initiated an impact might begin to take effect: S = Within 5 years; M = Within 15 years; L = Not before 15 years.

3.1.1 Policy areas with potentially major impacts on the FFI sector

The impacts on the FFI sector which rated four or five pluses or minuses in tables 8 A…J are the following:

3.1.2 Identification of the potentially most important policy changes for the FFI sector

Thus, there were found to be 22 policy areas where changes in direction are having or may have a significant impact, whether positive or negative, on the FFI sector. On closer inspection, however, there is a degree of overlapping, and these 22 areas can be consolidated into seven groups of policies, as follows:

1. Stimuli to economic growth, including trade liberalisation, construction
   (points a), t), v) above);
2. Stimuli to reform and restructuring in the countries with economies in transition
   (points b), p), r));
3. Energy alternatives and conservation
   (points d), e), f), g));
4. Stimuli to environmental protection, including waste management
   (points g), h), i), k), o), u));
5. Application of sustainable development principles
   (points c), l), s));
6. Stimuli to rural and regional development
   (points j), n));
7. Changes in agricultural policies
   (points m), n), p), q)).

Further streamlining may be achieved by combining (1) with (2); (4) with (5); and (6) with (7). This would leave four major policy areas, as follows:

1. Policies to stimulate economic expansion.
2. Policies relating to energy alternatives and conservation.
3. Policies relating to the protection of the environment and sustainability.
4. Policies relating to rural development and agriculture.

In all cases, it should be recalled that what are being considered are the actual or conceivable changes in emphasis or direction of policies from the existing ones. For instance, it can be assumed that all countries will, whatever happens, continue to pursue policies for the protection of the environment, and these will affect the FFI sector to a greater or lesser extent. What has been attempted here, however, is a preliminary assessment of which policy changes, if countries were to make them, could have impacts on the FFI sector beyond those that are likely to result from present policies. As this assessment is the subjective and personal one of the authors, it is open for further criticism, discussion and possible alteration.

The above listings are based on the cases where the impact on the FFI sector was rated at four pluses or minuses or more in the “scale and direction” column in tables 8 A…J. In addition to the high to very high impact cases listed above, there are a further forty-five cases with three pluses or minuses (moderate impact), which should not be overlooked in the analysis. The impacts of the majority of these forty-five cases fell within the four main policy areas listed above but there were enough cases that warrant adding three further headings:

5. Policies aimed at improving the quality of life;
6. Policies relating to industry and trade matters, but not necessarily aimed at stimulating economic activity, which is covered by 1) above);
7. Policies to change the role of the public sector.

3.1.3 The scale and direction of the impact of policy changes

Since this study is concerned primarily, although not exclusively, with the impact of policies on the supply and demand of wood and its products, the “scale an direction of impact” column in tables 8 A…J distinguishes between the impact on supply and on demand of wood and its products. In some cases they may have an impact on both, but for the most part it is fairly clear where the impact will fall. Out of 78 cases (counting those with both positive and negative impacts twice), where impacts were related at three pluses or minuses or more, 52, or two-thirds, affect the supply of wood and its products; and 26, or one-third, the demand side. There are five policy areas where the impact would be very largely on supply: D-Environment; E-Land use, rural and regional development; F-Agriculture; G-Industry; and J-The role of the public sector. For four others, the impact would be equally on supply and demand or slightly more on demand: A-Demography and social affairs; B-Economy; C-Energy; and H-Trade. The only policy area where the impact would be mostly on demand is, not surprisingly, I-Construction. The general conclusion to be drawn from this is that a majority of the policy changes considered in this study would, if they were introduced, have impacts on the supply side of the supply/demand balance.

The direction of the impact that policy changes would make, that is, whether it would be likely to result in increases or decreases in supply or in demand of wood and its products, is shown by the pluses and minuses in the “scale and direction of impact” column in tables 8 A…J.

For supply: 33 of the impacts, or nearly two thirds, out of the 52 cases of three or more pluses or minuses would result in an increase; and 19, rather more than one third, in a decrease. Some of the impacts would be both positive and negative. An example of this is where a change in policy would result in increased supply of one category of product, for example recycled waste paper, at the expense of another, for example small-sized roundwood and thinnings. Another example would be where a policy that would favour domestic industry might result in reduced imports, or vice versa.

Policy areas where the impact of changes in policy would be in most cases to increase supply are: B-Economy; C-Energy; F-Agriculture; and G-Industry. The impact in policy area D-Environment would be mainly to decrease supply.

For demand, in 21 cases out of 26, or more than four-fifths, changes in policy would be likely to provide a stimulus, and only 5 to restrain it. The policy areas with the strongest positive impact are: B-Economy; C-Energy; and I-Construction.

3.1.4 The timescale of the impact of policy changes

An attempt was also made in tables 8 A…J to indicate the timescale of the impacts of policy changes, that is to say, how long after the changes were initiated they would begin to have an effect. Three time periods were chosen: Short - within the following 5 years; Medium - within 5 to 15 years; and Long - not within the following 15 years. Thus, if decisions were taken within the next 2 to 3 years, the periods within which impacts could begin to be felt correspond roughly to the short, medium and long-term forecasting horizons in ETTS V: the years 1995–2000, 2000–2010, and, for such aspects as roundwood removals, 2010–2040, respectively. Judgement as to the timescale of impacts is, like other assessments made in the study, subjective and the proposals for S, M or L in the righthand column of the tables are presented for discussion and possible change.

Taking the same 78 cases of medium, high and very high impact of policy changes as for the scale and direction of impact, as discussed in the previous paragraphs, the breakdown into short, medium and long timescales for the impact on supply is 10 : 26 : 16. That is to say, over 80 percent of the impacts would be felt in the medium to long term, and less than 20 percent in the short term. The long-term impact is especially noticeable for policy area F-Agriculture, and this is understandable when such measures as the afforestation of abandoned agricultural land, and the time before plantations come into production, are considered. Some important short-term impacts on supply are possible in policy area D-Environment, for example the immediate reduction in wood availability that would result from the transfer of productive forest land to other use categories (nature reserves, etc.).

With regard to the timescale of impacts on the demand side, the breakdown of cases into short, medium and long is 9 : 15 : 2. All but a fairly small fraction (8 percent) could begin to have an impact within 15 years or so. In some cases, a short timescale corresponds with the lead time between the policy change and the start-up of new mills or power generating plants; in others, a change in trade policy, for example concerning trade in environmentally sensitive species, could have an almost immediate impact.

3.1.5 Summary of the discussion

To summarise the foregoing, this analysis has identified four main areas where changes taken in policy directions would have major impacts on the FFI sector in the decade or two following their introduction. They are: policies to stimulate economic expansion; policies to stimulate efforts to find alternative sources of energy and to conserve it; policies to intensify environmental protection and promote sustainable development; and policies relating to rural and regional development, including adjustments in agriculture. To these may be added a further three: policies to improve the quality of life; policies relating to industry and trade matters other than policies primarily aimed at stimulating expansion; and policies to change the role of the public sector.

There is a degree of over-lapping between these seven policy areas, and each one could have a number of different impacts on the FFI sector, sometimes working in opposite directions. All of them include, to a greater or lesser extent, one area of general concern, namely the transition of the economies of the countries of central and eastern Europe from planned systems to forms of market economy, and in further analysis it may be convenient to treat this as a separate policy area, which in fact affects not only the countries themselves but all countries in Europe and many in other regions as well.

It is difficult to summarise in a few lines the possible major impacts on the FFI sector from the eight policy areas highlighted above. The following is therefore intended to be indicative, rather than comprehensive:

1. Economic expansion. A distinction has to be made between short-term policies, e.g. to pull economies out of recession, and the longer-term ones which are of primary concern in this study. The latter would have the effect of stimulating a continuing growth in demand for forest products, notably in the construction sector, and thereby growth in production, including investment in new capacity, and trade. The impact would take effect in the short-to-medium term after the introduction of new policies.

2. Energy. Wood as a fuel would stand to gain considerably from policies to seek alternative energy sources (to fossil fuels) and to reduce the harmful impact on the environment (including climate change) of burning fossil fuels, provided the environmentally benign nature of wood (including waste paper) for fuel was satisfactorily demonstrated, which should not be difficult. This would open up major markets for assortments of wood and residues that may otherwise be difficult to use, notably small-sized wood. The impact of policy changes would be felt in the short-to-medium term, as well as in the longer term as a result of the establishment of energy plantations. If appropriate policies were adopted, afforestation for fixing CO₂ could become an important role for forestry, with implications also for increased wood availability in the long term.

3. Environmental protection and sustainable development. Policies in this area would mainly work towards reducing the volume of wood supply. Some would have an impact in the short term, such as the transfer of productive forest land to other categories, e.g. nature reserves, or the reduction in supply and export availability from old growth forests. Changes in silviculture to put forests on a sustainably managed basis would reduce availability in volume terms, but might raise the quality of output in the longer term. Waste management would reduce demand for certain forest products (packaging), but might stimulate the recycling of waste paper and wood residues. This would augment the supply of these assortments, but partly at the expense of primary wood raw material, with consequent problems for silviculture (see 2. above).

4. Rural and regional development, including agriculture. Various inter-related policies in this area would generally offer considerable opportunities for the FFI sector, including scope for the expansion of wood supply in the medium to long term. Forestry, notably with non-wood benefits as objectives (landscape, amenities, recreation and tourism, nature conservation, etc.), could be called upon to play an increasingly important role in maintaining the social and economic viability of rural areas, and would become a more significant component in the integrated land use planning and management of these areas.

5. Quality of life. Greater emphasis on values other than, or at least additional to, material gain could have the effect of reducing growth over the long term in consumption of goods, including forest products; of giving more weight to durability and aesthetic values; and of putting greater emphasis on environmental standards. In other words the emphasis would be on sustainable development in the economic, social and environmental meanings of the term (see 3. above). Forestry for purposes other than wood production would be an important beneficiary. Given that wood, when produced in a sustainably managed way, is an environmentally benign and renewable material, opportunities would also exist for it to replace other materials in certain end-uses.

6. Industry and trade matters. The globalisation of industries and markets and increasing international competition, and the reaction of governments to these trends, will have a significant impact on the FFI sector, as on all others over the medium to long term. Because of their relatively large scale, the pulp and paper industries are part of the globalisation process, the other wood-processing industries (sawmilling, wood-based panels, etc.) much less so. However, the latter may even gain some benefit to the extent that they can develop product and market niches and improve the quality of their products and services. Much will depend on their being willing and able to amount effective co-operative promotion and marketing efforts, backed by more intensive R&D.

7. The role of the public sector. There are contrasting trends: one is towards disengagement and decentralisation of the public sector, leading to less State involvement in the ownership and management of resources, the means of production and services - in other words, privatisation; the other is towards more policies that direct activities towards national objectives, notably in such fields as environmental protection and sustainability. Forestry stands to gain, especially from the second trend, provided its benefits to society in those respects can be clearly demonstrated. Public support for forestry will, however, be more for its role in providing non-wood benefits than wood.

8. Countries with economies in transition (CITs). Policies to effect the transition to pluralistic societies and forms of market economy are already in place. The question is whether there will be further marked changes in the direction of those policies that would affect the FFI sector. As it is, aspects of all the seven preceding points are relevant to the CITs. A key issue is how long it will take to establish the political, institutional and economic infrastructure in these countries needed to attract the massive amount of foreign investment required for the mobilisation of their resources and industries. There is considerable potential for the development of the FFI sectors in the CITs, and strong latent demand for forest products waiting to be fed when conditions are right. The impact would be felt in various ways by the FFI sector throughout Europe.

Michael Porter, Professor at Harvard Business School and specialist in industrial strategies, has shown from observation of developments during the 1980s (The Competitive Advantage, published in 1985) that to understand the development of a sector in the medium to long term (and to reduce the economic impact on its probable profitability) it is necessary to analyse not only the competitive interactions that exist between the actors directly involved in the sector (the industries), but also the relations and the forces which are or may be exercised on the direct actors in the sector by the following partners and contexts:

• the customers:enterprises, traders, end-users, etc.;

• the suppliers: of raw materials, intermediate products and services, etc.;

• the new enterprises which are able or which wish to enter the sector; this requires the barriers to entry, whether economic or regulatory, to the sector to be identified;

• the new technologies, products and processes which could replace those currently in use by enterprises;

• the institutional context, the legislation, and policies that could modify the rules governing the functioning of the market. (Initially, this aspect was barely taken into account by Professor Porter who felt that, in an open market context, regulations would have little influence).

This analytical method, the Porter model, rapidly became one of the main reference methods for carrying out strategic analyses of enterprises. It was widely used in numerous fields, also by Professor Porter himself in 1992 to analyse the competitive situation of certain States and Countries (Strategic Choices and Competition: Technical Analysis of Sectors and Competition in Industry, Economia, Paris).

It should be stressed that the Porter model is not a scientific instrument for precise forecasting, but rather an analytical tool and an aid to decision making. It is, in effect, for the decision makers to assess the relative weight to be given to the various elements identified in the analysis and to draw their own conclusion.

This methodology will be used in a more modest way in the present study to present the forest and forest industries sector in a highly condensed manner. Charts B and C present the industrial processors of wood and the wood raw material producers, respectively, and place them in the context of their relations with their economic and institutional partners and the pressures which the latter exert on them.

Thus, to summarise the elements for a strategy for 10 to 15 years ahead for wood-processing industries at the centre of the exercise, Chart B shows in particular that:

• the wood-processing industries are in a situation of strong competition which is leading to a restructuring of the sector around major regional or international groups;

• the customers and consumers are going to play an increasingly important role and exert strong pressure on the industries: globalisation of markets, standardisation of requirements, strengthening of trading positions and distribution systems. At the same time, specific demand for certain higher quality wood products, the appearance of newly emerging economies as important consumers of processed products (for example, China), may offer opportunities to industries;

• suppliers of raw materials are adapting their trading relations with industries which will need to adapt to new constraints: waste paper recycling, reduced availability from forests transferred to protection functions, export of low-priced wood from certain countries, in the longer term perhaps a reduction (or increase) in availabilities as a result of global warming;

• new materials (notably plastics and aluminium) are replacing wood in construction, “new” uses of the forest (recreation, protection, etc.) are taking over from its traditional function of producing wood;

• the access of new actors to the wood-processing sector is on the one hand being helped by the liberalisation of world trade but on the other hand being braked by the new import regulations intended to protect the environment;

• lastly, institutional and political developments in the FFI sector (the principal purpose of the present study) are going to play a determining role on the evolution of relations between the various actors.

To conclude the commentary on Chart B, it may be said that:

• the wood-processing industries, faced by numerous pressures on their activities, are certainly going to face even greater difficulties to obtain a reasonable return on their investments, because they will not be in a position of strength vis-à-vis their competitors or their partners or in the economic and policy context;

• the future of the sector is going to depend principally on the external institutional and policy choices rather than on the socio-economic factors which the industries themselves can control or influence.

Chart C, in which the producers of wood raw material are placed at the centre, does not need as much commentary as Chart B. The principal lesson that can be drawn from it may be summarised as follows:

• wood producers are more and more dominated by and subjected to forces that are stronger than themselves: industries that are becoming increasingly concentrated, local populations that are cutting down the forest (in developing countries), green movements that are seeking to have protective legislation imposed, urban populations which give preference to the “other”, i.e. non-wood, functions of the forest (landscape, recreation, protection).

Only in the case of higher quality wood, a relative shortage, which may be provoked by the growing demand from emerging economy countries, and the development of the use of biomass for energy, may offer favourable opportunities for producers.

The question remains, however, whether they would be able to benefit economically, even in these cases, given their weakened capacity to take advantage of their potential?

Thus for wood producers, even more than for the wood-processing industries, it will be the institutional and policy decisions that will condition their future situation.

In short, the study does give credence to the supposition on which it is based, namely that it is the policy choices outside the FFI sector, notably as regards energy, the environment, stimuli to the economy, and international economic relations, that will condition the forces affecting the FFI sector. On the other hand, the directly involved actors in the sector, such as the owners of forests and forest industries, will have rather limited margins of manoeuvre and their policy choices will not be decisive for the sector.

These have been indications of areas where major developments could occur if certain policy directions were taken. Whether those directions will be followed is altogether another question. Even though there is increasing convergence of policy-making within Europe, particularly within the framework of the European Communities (European Union), national policies will continue to differ to a greater or lesser extent according to the particular situation of each country. Nevertheless, policies in one country are being increasingly influenced and guided by what is going on elsewhere, and a certain degree of convergence in policy-making can be assumed. Whether the critical mass of political will exists that is needed to inaugurate some or all of the policy changes discussed in this study is, however, an open question. This should be borne in mind when considering the proposal for a base scenario below, which is not, repeat not, offered as a forecast, but merely as a basis for discussion and something with which to compare alternative scenarios, whether national or European, which readers may put forward.

Chart B: Development of relations with the wood-processing industries part of the FFI sector

Chart C: Development of relations with the wood-producers part of the FFI sector