09An Economic Perspective on Land Degradation Issues

Executive Summary

The objective of this report has been to review the perspectives from economics on the debate about sustainability in general and land degradation in particular. Land degradation is a concern because of the potential costs it imposes on present and future generations in terms of lost production, poor water quality, reduced biodiversity and other poor environmental outcomes. It is one component of a broader debate about the sustainability of natural and environmental resource use by the present generation.

The focus of much economics research related to sustainability in agriculture has concerned questions of efficiency in resource use. The two main areas of contribution are first, in providing a framework within which the benefits and costs of alternative land management strategies can be evaluated and second, in providing an understanding of the incentives for efficient resource use that confront individual farmers and the community, particularly in the presence of externalities. Sections of the Report review techniques for assessing efficiency in resource use; studies of the cost of land degradation; and reasons for the slow adoption of landcare technology.

In common with similar reviews, the conclusion here is that with its focus on valuing land degradation in terms of foregone production, most empirical work from the past provides little insight into how land degradation is best managed from the viewpoint of either farmers or the community. The main deficiency of this approach of valuing the potential benefit from ameliorating degradation as the value of foregone production is that this estimate of benefit is not related to any feasible management strategy to achieve it. Hence this approach provides little guidance as to where resources are best used to combat degradation. Other difficulties with the approach are discussed in the Report.

An important source of market failure or inefficiency is the set of externalities associated with land degradation that arise through attenuated property rights. An important contribution of this Report has been to make clear the analogies between spatial and temporal externalities and, following Quiggin, to identify how the significance of externalities might be measured as the difference between wealth under a regime of open access to a resource as against a regime where the resource is treated as common property. The non-point nature of the externalities associated with many forms of land degradation means that precise farm level control mechanisms, whether they be of a market or regulatory nature, are not available under present technologies. Even if property rights could be made more secure, it is most likely that efficient resource use from society’s viewpoint would result in some level of degradation, partly because the benefits and costs of changes in land use express themselves over very long investment periods.

The methodological approach of economists that is the basis of benefit/cost analysis is to identify the resource use strategy that maximises a measure of income or wealth. Resources are used to the point where marginal benefits equal marginal user cost where marginal user cost can be defined to include opportunity cost in terms of either using resources now rather than later (the temporal dimension) or in terms of off-site costs in a spatial dimension. When costs and benefits flow over several years, discounting techniques are used to reflect the opportunity costs (or time preference) of not being able to use future income now. Techniques to identify efficient resource use are reviewed in the Report. The advent of powerful computers has enabled the solution of dynamic resource use problems over long time horizons but there is still great uncertainty about the biophysical relationships especially those associated with the hydrology of catchments.

However there is strong opposition to the use of benefit/cost analysis as the final, or even as an important, arbitrator in decisions about the use of natural resources. The most significant objections seem to be the focus of benefit/cost analysis on efficiency to the neglect of equity and related to this is its basis in a utilitarian philosophy which accords few rights to other species or to future generations.

The concern for sustainability seems as much a question of equity as efficiency and from social welfare theory (Bator 1968) we know that efficiency is a necessary but not sufficient condition to optimise social welfare. There is no unique way of using resources efficiently because there is an efficient solution to each of the many (infinite) ways in which resources could be distributed between generations. There are situations in which social welfare can be improved by moving to a less efficient solution but one which results in a more equitable distribution of resources. Hence efficient resource use by the present generation may not be sufficient to protect the rights of future generations, uncertain though they may be.

Much attention is presently being paid to the removal of externalities associated with land use and the choice of a discount rate as means of protecting the interests of future generations. It would seem that neither approach is sufficient. The removal of externalities has both efficiency implications, in that the wealth of an economy increases when resources are used in a way that accounts for all costs, and equity implications, in that property rights are less attenuated. However the concern is largely with present generations and it is likely that the interests of these generations are best served by a significant, though perhaps lower, level of resource degradation. Similarly any positive discount rate at some point discounts future benefits to zero. While much empirical work remains to be done, experience to date suggests that it is likely that even at low discount rates, the benefits from strategies (based on current technologies) to ameliorate land degradation, such as salinity, will be modest relative to costs. Both these issues are discussed in more detail later in this Report.

Concern about equity is often expressed as ‘fairness’ which is achieved if future generations have no cause to envy the resource endowments of the present generation. It seems highly unlikely that the present generation would be envious of any previous generations. If future generations are successively more wealthy, as has generally been the case to date, then the question arises as to whether they are likely to envy the present generation. To make this discussion less abstract, a pertinent question to consider with respect to Australian agriculture, is whether the present (or a future) generation placed in the position of the previous generation but with knowledge of the consequences for salinity of agricultural technologies then in use and also with knowledge of the benefits that have flowed from these technologies, would have preferred a different pattern of development (in the spirit of Rawls’ ‘veil of ignorance’).

As noted later in the Report, the rights of future generations are problematical as are the rights of other species. The individuals of these future generations are only ‘possible’ persons and which of them become actual persons depends on decisions made by preceding generations - about resource use among other things. On this basis some argue that the present generation is only weakly obligated to consider future generations. However others argue that there is a chain of obligation to future generations because of our obligation to our children, actual people, and their obligation to their children with this obligation continuing from generation to generation. Some writers have pointed out that this concern for future generations contrasts starkly with treatment of the poor of the present generation.

Despite this uncertainty about the obligations of the present to future generations, there appears to be a growing acceptance in the community, at least in rich countries, that government takes action to preserve the access of future generations to natural and environmental resources. If present generations are concerned about diminished access of future generations to natural resources in general or to specific natural resources then, in addition to using resources efficiently now, some form of saving must be entered into that preserves resources. The level and form of saving is largely dependant on beliefs about the substitutability between natural and manmade resources, and the rates of technical change, economic growth and world population, issues discussed later in the Report. This concern about sustainability raises a number of questions which are discussed but not resolved later in the Report:

• Are resources being used at an unsustainable rate?;
• How should we treat future generations?;
• What type of resources should be protected?;
• How should resources be protected?;
• What conservation measures are presently being taken?.

These issues are often discussed in the context of weak versus strong notions of sustainability. At the weak end of the spectrum, writers such as Solow (1993) suggest while each generation should save/invest at least enough to compensate for the natural and environmental resources it has used up, the form of this savings is not necessarily in maintaining stocks of particular resources but in maintaining ‘a generalised capacity to produce economic well-being (p.168)’, so that every generation is at least as well off as its predecessors. While no attempt is made in this Report to review particular policy instruments, it can be said that in general, policy prescriptions at this end of the spectrum largely relate to more efficient resource use through better information about the long term consequences of alternative technologies and the amelioration of externalities. In general, policy instruments of this nature impose few restrictions on the use of resources by the present generation as a whole even though there may be some distributional impacts as property rights associated with externalities are changed. Those who argue for weak sustainability are optimistic about the degree of substitution possible between natural and man-made capital and the continuing possibilities for technical change to be saving of scarce resources.

Stronger versions of sustainability require the conservation of specific resources such as stocks of fossil fuels and old growth forest and the maintenance of air and water quality and biodiversity. In an agricultural context it may extend to maintaining dimensions of soil health such as soil depth, carbon levels, pH, and efficient use of rainfall by maintaining perennials (in a salinity context).

At the weak end of strong sustainability is the concept of a safe minimum standard – the stock of a resource that is just high enough to prevent irreversible losses. The safe minimum standard is imposed as a constraint in the traditional economic model seeking to maximising wealth by using resources efficiently. The change in wealth (shadow value) from relaxing this constraint provides an estimate of its cost to the present generation.

Setting a safe minimum standard is an explicit act of saving for future generations but the risk is that future generations may not value the resource that is conserved as much as poor sections of the present generation. Hence many advocates of safe minimum standards apply a caveat that the costs of the standard are not ‘too high’. While ecologists and economists might provide some insight into the consequences of imposing a safe minimum standard, other unknown considerations will influence how future generations value these resources. Hence there is great uncertainty about which resources should be conserved. Those favouring conservation appeal to the ‘precautionary’ principle.

While there is a vocal section of the present generation who appear committed to strong measures to conserve resources for the future, governments have generally been slow to follow. For both individuals and governments, sustainability has the characteristics of a public good. Just, Hueth, and Schmitz (1982) pointed out that while many in the present generation may have concerns for future generations, the alleviation of these concerns by the sacrifices of a few are non-rival and non-exclusive and can be enjoyed by many who make no provision. Hence the real willingness of the present generation to save for future generations is difficult to ascertain.

One indicator of this willingness to save for the future is provided by the actions of governments. It seems to me that few policies have been adopted which require significant savings by present generations. Some writers have argued that practical concern for the future could be demonstrated by a redistribution of resources from rich economies well endowed with built capital to capital poor economies where the opportunity costs of conserving resources by the present generation is likely to be high (Toman, Pezzey and Krautkraemer (1995)).

In Australia resource conservation issues that may impose significant costs on the present generation include greenhouse gas abatement, land use change to control the rate of salinisation of land and water resources, and the protection of native vegetation including old growth forests. Some are disappointed at the lack of action by governments to protect these resources. However while we have some idea of the costs to the present generation of conserving these resources, there is a great deal of uncertainty as to whether some future generation would be envious of us were we not to conserve these resources in the same way as we are not envious in general, of the resource use decisions and endowments of our predecessors.

In an agricultural context, the concern of government until recently has been to increase productivity by more efficient resource use by farmers through the provision of research and extension services. In the Report it is noted that research and extension solutions are inadequate in dealing with resource use issues related to externalities and sustainability because generally they expect farmers to act against their own interests. While the amelioration of externalities may lead to more efficient resource use and address some inequities, it is not a sufficient condition for sustainability. The dimension of sustainability concerning the endowment of resources across generations requires explicit saving and the community has to judge whether it is equitable to impose the cost on a section of the community, such as farmers who have remnant native vegetation for example, or whether the cost should be borne more widely by the community.