4 FAILURES OF MARKETS, POLICIES AND INSTITUTIONS
As the above analysis has shown, the technical knowledge to develop sustainable forest management practices is available and global forest products markets are not a major constraint, indeed they offer a range of opportunities to pursue sustainable forest management goals. However, sustainable forest management is not widely implemented, particularly in tropical forests. This occurs because markets fail to support sustainable forest management practices. Furthermore, market failures are often compounded by policy and institutional failures that make it even more unattractive to manage forests sustainably. New initiatives such as "model forests", forest product certification and the development of criteria and indicators for sustainable forest management are currently working to address some of these failures, but there is still a considerable way to go.
Markets may fail to yield economically efficient investment in natural resource management when:
· there are non-market impacts from production that are not taken into account in private production and consumption decisions (i.e. externalities and public goods);
· property rights are poorly defined or enforced and investment is discouraged while consumption is often higher than the optimal level (the common property problem); or
· there is imperfect competition and producers or consumers, acting out of self-interest, fail to arrive at levels of production that maximise welfare.
Examples of some of the major externalities of forests
1. Carbon storage;
2. biodiversity and habitat;
3. forest recreation;
4. visual amenity;
5. water quality and quantity;
6. soil stability;
7. social and cultural significance; and
8. existence values.
Perhaps the most noticeable way in which markets fail in the forestry sector is in their failure to take account of the significant externalities associated with forest management. Forests produce a range of locally consumed goods that are difficult to measure such as food, fuelwood, and construction materials. Forests also produce a variety of services that are hard to market. Some of these are fairly localised: e.g. soil protection, water quality protection, wildlife, recreation, and views. Other services can be demanded both locally and even internationally: e.g. biodiversity conservation and carbon sequestration. These externalities are difficult to manage because they vary physically across ecosystems and because they have different values in alternative economic settings and cultures. Consequently, the best forest management regime for each type of forest can only be determined on the basis of local conditions.
Sustainable forest management requires forest managers to invest in the production of some of these outputs. Some of these investments could be financially viable (e.g. low impact harvesting techniques), but do not occur because of policy failures elsewhere (e.g. where governments set artificially low stumpage prices). Others will result in little or no financial gain to the forest manager (e.g. curtailment of harvesting activities on sensitive forest sites). A number of studies have predicted that the cost of implementing sustainable forest management will be large. However, it should be noted that most of the cost of implementing sustainable forest management is not a financial expenditure, but rather a limitation on revenues through the restriction of some harvesting activities. In other words, sustainable forest management is not unprofitable, but rather less profitable than unregulated harvesting.
The third way in which markets often fail in the forestry sector is where common property problems arise in the management of the forest resource, when multiple parties share the resource. Shared ownership of forests has often led to the resource being degraded (the tragedy of the commons) because people have little incentive to invest in the forest. Typically, this results in over-harvesting and under-management of the resource. One response to this problem is to allocate property rights for all, one or a specific bundle of forest outputs (e.g. water, timber and forage). However, issues of equity complicate these assignments of rights.
The typical response to market failure is to design and implement government policies to attempt to either regulate production or create markets for some of the externalities. Thus, for example, many countries have a large body of forest legislation identifying areas of forest that can be used for different purposes and describing how they should be managed. Others have subsidies to support desirable interventions and fines or penalties to discourage bad practices. However, other policies within and outside the forestry sector often counteract or diminish the effect of these policies.
One of the major problems in many countries is the incorrect pricing of forest outputs. Such policies, often implemented with the aim of stimulating development of the forestry sector, typically price standing roundwood at a level that is much lower than would be obtained in a competitive market. Pricing policies are often also poorly designed in terms of their structure as well as the level of charges imposed and may not be strictly enforced.
There is considerable evidence of under-pricing and low levels of fee collection around the world. Such policies discourage efficiency in harvesting and processing, discourage the development of alternative wood and fibre sources and lead to inefficient allocation of scarce development resources (land, labour and capital) towards the forestry sector. In other words, they act against the improvement of forest management. An associated problem is bans on the export of raw or semi-processed forest products that depress local prices for felled roundwood and forest products. These have similar impacts to under-pricing of the standing trees.
Most of the subsidy given to the forestry sector (in the form of artificially low prices for forest resources) is captured by forest concessionaires and processors, although some of the benefits from activities such as illegal logging (where no fees are paid) are passed on to consumers. This subsidy supports very inefficient operators at the margin, while the others earn high levels of profit. The forest industry often claims that they can not afford to pay higher stumpage rates or invest in sustainable forest management, but there is plenty of independent evidence to suggest that this is not the case. Consequently, it seems likely that large parts of the forestry sector could afford to invest in better forest practices, even though they are unlikely to be able to pass the cost onto consumers, if only they were compelled to do so.
There are also a number of examples of policies outside the forestry sector having a detrimental impact on the management of the forest estate. Policies that encourage the development of other land-uses such as: mining; agriculture; roads; and urban development, are typical examples. These can often be justified on the grounds of economic efficiency (i.e. they represent a higher value land-use), but sometimes they can not. Broader structural adjustment programmes have also been shown to sometimes have a negative impact on forest management. To some extent, the current debate about sustainable forest management is futile in this respect. Countries will continue to convert forestland to other uses where it is more profitable to do so. Forestry policymakers are largely powerless to stop this. A more constructive approach may be to seek improvement in overall land-use planning and compensation when such changes occur, to support improved forest management in remaining areas.
The other major area of policy failure in the forestry sector is in the legal framework governing land tenure and titling. National laws and regulations sometimes conflict with each other or with local legislation and such laws often fail to take into account traditional or customary laws, which often have more impact on the way in which forest land is managed in remote areas. The uncertainty that this creates further exacerbates the common property problems referred to above. In some cases, laws governing land tenure and titling even encourage deforestation. This occurs in situations where the first steps towards legal property rights over public land forest can be obtained if individuals demonstrate that they have improved or invested in the land in some way. Legal precedence in many countries has shown that one common way to do this is to clear the forest cover and replace it with another crop.
Institutional failure occurs where countries have adequate existing forestry policy and legislation in place to support the implementation of various aspects of sustainable forest management, but still nothing occurs on the ground because these policies are not implemented. Indeed, the lack of implementation of existing government forestry policies is often seen as a more important cause of the continuation of poor forestry practices than the quality of the policies and legislation already in place.
In many respects, institutional failure can be seen as an extension of market failure. Governments, often fail to adequately fund forestry administrations to carry out the tasks they are expected to perform and sufficiently train their staff. The common property problems associated with forestry apply to government institutions as much as they do to private individuals. Thus, it is not uncommon to see different government agencies offering rights to perform incompatible activities (e.g. mining, peat extraction, oil palm estate development and forest harvesting) on the same piece of land. The distribution of benefits (i.e. income, employment and tax revenues) amongst local and national authorities also often varies between different sectors. Institutions that try to control operations from the centre and where a large proportion of revenues go to the national government, often fail to successfully implement policies over widely dispersed areas and, unfortunately, forestry administrations often fall into this group.
Another institutional failure often arises because of the imbalance in money, skills and power between the different stakeholders. Forest managers and the processing industry typically have substantially more of all of these assets than government officials and local communities. This sometimes leads to corruption of government officials and local leaders and it often makes it difficult for other forest users to negotiate outcomes that take into consideration their concerns.
