2. DEFINING THE DECISION CONTEXT

As mentioned, value information is needed by decision makers as a basis for deciding among alternatives. Thus, the decision context in which it is going to be used determines to some extent what information is needed. At least three closely related contextual issues need to be addressed in deciding how value measures of interested groups are going to be derived. They are as follows:

• the policy context. The nature of the policy constraints on the choices that have to be made should influence the type of value information that will be generated and how it will be derived and used.

• the administrative context. Choice among technically acceptable valuation approaches should be tempered directly by the administrator's view of the credibility of the value information generated and the ability of analysts to generate information that meets the decision makers' time and budget constraints.

• the social/interest group context and tradeoff criteria.

The reader is reminded at this point that the following discussion relates to public policy makers and managers. In the private sector, the context for decisions is based on market prices and on considerations of risk, uncertainty, profits, and losses. As mentioned earlier, the valuation task for the private sector is much simpler, since we only deal with market prices in private financial decisions. Here, proposed changes are appraised by private groups based on the market priced costs (including opportunity costs) and returns to the private groups involved.

The Policy Context

The policy context defines the nature of the decisions to be made, and thus the value information needed. For the sake of discussion, we can identify three contexts with different requirements for information. In the first category are all those cases where the policy decision regarding a particular change in forest or land use has already been made by higher level authority (legislature, minister, etc.). In such cases, the task of the manager is to implement the decision. The manager is only concerned with values on the cost side of the picture. In the second category are all those cases where the decision has not been made, but there are no particularly strong conflicting demands on the forest, and whatever decision is made can be reversed or changed in the future. In the third category one finds eases where there are conflicting demands on the forest from different interested groups, one or more of the alternate decisions to be made is (are) not reversible in the future, and the decision on which use to choose is left up to the manager.

Decisions that already have been made

Assume that a policy decision has been made to implement a particular alternative, despite the competing demands that exist. The decision may have been made by the legislature, a minister, or some other higher authority acting strictly based on political criteria. In a sense, the decision maker has implicitly or explicitly decided that the benefits to be derived will be greater than any reasonably expected costs. The problem for the land manager is to decide how to carry out the decision in the most cost efficient and effective manner. The question becomes: which of the acceptable means of accomplishing the chosen output objective has the lowest cost attached to it, other things being equal. The manager focuses on how best to value costs.

An example of this type of situation is where a legislative body has decided, for the sake of national pride and heritage or because of international political pressures or agreements (noneconomic reasons), to set aside a specific 50,000 ha forest area as a national park. The political decision has been made. The problem for the administrator carrying out the decision is to find the most cost effective, acceptable ways to set up, manage, and protect the park. Valuing inputs becomes the main task in an economic analysis.

No competition exists and changes are reversible in the future

This category includes those policy situations where proposed changes in use of a specific forest involve decisions that can be reversed in the future. For example, assume a case where environmentalists recommend that an area of tropical forest be reserved by administrative decision. (Note that, in contrast with the previous case, the decision to set aside the area is to be made within the existing administrative structure and has not been made by higher level policy decision.)

The area is some distance from the nearest settlement, and presently there are no defined demands on the area for other uses. The administrative decision maker obtains an estimate of the legal and administrative costs involved in protecting the reserve. Then a judgement is made on whether those costs can be justified in terms of the department's perception of the benefits involved. In some cases with high visibility, there may be an attempt to develop some approximate values for the benefits or positive impacts associated with protecting the area, so they can be used to justify the estimated costs of establishing the reserve.

In this type of situation, the decision maker does not worry about the changes, in demands on the area in the future, i.e., the opportunity costs of setting the area aside. This is because the administrative reserve status of the land can be changed, if society deems it desirable to use the area for other purposes in the future.

Competition exists and/or some changes are not reversible in the future

Many of the remaining natural forest areas in the world fit in this category. Few of them are not faced with strong competing demands. Many proposed changes associated with these forests involve changes that are irreversible in the future. Once humans have intervened in the natural forest, its original form and composition, and thus its natural evolution, are modified. In the absence of conservation measures, long-term sustainability of the resource may be threatened.

The key policy question is how to reconcile the various interests and values in making a decision on change in forest use. The typical approach of economists (traditional national level cost-benefit analysis) avoids part of the problem of competing interests and differing value frameworks by taking a national accounting stance: it compares benefits and costs to the nation as a whole, regardless of who gains and who pays.

In reality, all groups that have legitimate claims on the forest, as well as the various parties who will be affected by change, do not have similar value perspectives nor interests in the forest. If the existing policy context recognizes these various parties as having legitimate claims, then their different interests and value perspectives should be of concern to the decision maker and thus should enter the decision-making process.

Ultimately, the choice among competing value systems and claims becomes a judgement call by decision maker(s) based on many considerations, one of which is economic value tradeoffs. The economic input into the decision includes both cost and benefit values. The valuation processes discussed in later sections become directly relevant.

The Administrative Context

There tends to be a difference between economic value measures that are considered best by academic economists and those that are politically acceptable to public policymakers and managers. In choosing a value assessment approach and a set of value measures, one needs to keep in mind both the technical considerations and the decision maker considerations (decision context) as illustrated in figure 2.1. In the ideal world the two sets of measures should coincide. In the real world, due to various reasons, often related to measurement and credibility problems, decision makers accept value measures that are less theoretically and conceptually sophisticated than others, but more logical and defensible to use in a practical administrative context as proxy measures of value. Various constraints facing the administrator/manager need to be considered, as well as problems involved in applying the more sophisticated measures. Two examples illustrate this point:

1. Due to time constraints and disagreement over existing nonmarket measures of value, decisions often are based only on market prices, even though they are known to be distorted by various factors (see Gregersen and Contreras 1992).

2. One often finds that conceptually valid measures of nonmarket values are ignored by decision makers because the persons suggesting them have strong vested interests in the decision being made. Thus the values are considered suspect.

3. A manager chooses among alternate forest uses based on the aggregate values of the forest area's timber, wildlife, fruits, nuts, and other noneconomic criteria. From a technical economic point of view, the wrong decision may have been made, since all the relevant values would not be included, e.g., still missing in the calculations would be at least the value of the standing forest in terms of protection of biodiversity, watersheds, and aesthetics. However, the administrative decision could not wait until those values have been developed by researchers.

Social and Interest Group Decision Contexts and Tradeoff Criteria

Groups assess the level of forest benefits they want to obtain by comparing benefits to the amount of scarce resources (land, labor, and capital) they have to give up to obtain the benefits. However, different resources are scarce to different groups, so comparison of points of view becomes difficult at best for the decision maker. Different groups are looking at costs of obtaining benefits from the forest in terms of different scarce resources available to them to combine with the forest. We can illustrate this point with two examples, using the economic reasoning of slash and burn farmers in the forest vs. the economic reasoning of concerned environmentalists living in the city.

Figure 2.1. Factors affecting the choice of approach in assessing value of impacts of forestry projects (adapted from Gregersen et al. 1987).

Box 2.1 illustrates conflicts due to different perceptions of the two groups concerning the relative scarcity (to them) of forest vs. food. Box 2.2 illustrates apparent anomalies due to different perceptions of the two groups concerning the scarcity of inputs - land and labor in this case. In both examples (which are simplified to make clear the points discussed), if the slash and burn farmer is de facto decision maker - i.e., is not being effectively stopped from clearing the forest - then the relevant context, or economic value tradeoff that drives decisions, is the one that the farmer defines.

More generally, we can define three common sets of scarce resources that different interested groups use as a point of reference for setting their tradeoff criteria (i.e., criteria against which they judge alternate uses of the scarce resource). These are capital (returns per unit of investment); labor (returns per unit of labor); and land (returns per unit of land). The common forestry view of the past was associated with the latter criterion - growth or returns per acre or per hectare. As mentioned, subsistence land users in land abundant situations tend to look at returns per unit of labor, while those in land scarce situations may look at either or both returns per unit of land and returns per unit of labor. Commercial ventures tend to use the criterion of returns per unit of capital invested. Many public policy studies use the criterion of returns per unit of national income expended, using that as a proxy for the narrower concept of investment capital.

The problems involved in considering different bases for tradeoff criteria are obvious: If we are not dealing with the same criterion for all decisions, then how do we weight the different criteria? How do we compare in a value sense different returns per unit of labor with different returns per unit of capital or different returns per unit of land? The straightforward answer is: We cannot compare them directly. Most decision makers in the public sector have to resort to using arbitrary tradeoff criteria defined by higher authority - ministries of planning, ministries of finance, or other policy makers. Traditional cost-benefit analysis provides an example of a common value framework used by the public sector. (See the companion volume by Gregersen and Contreras 1992 for an introduction to the subject and the nature of the tradeoff criterion involved).

Regardless of what tradeoff criteria are used in making decisions, tradeoffs imply that some interested groups may win and others lose. Satisfying some people may result in not satisfying others. Or worse, some decisions, in trying to strike an equitable balance, may not satisfy any of the key interested groups with strongly held values. As a result, human conflict emerges.