Thursday, March 10, 2011

Environment and Property Rights

Posted in BusinessWorld on March 6, 2011

            When one thinks about being  friendly to the environment, one usually counterposes it to private property rights.  Along this line of thinking, the government is for the environment and the private sector with its “greed” is anti-environment. 
            Nothing could be more wrong. 
            The unthinking prescription to denudation, for example, is for the government to do a total log ban on the assumption that greedy loggers are responsible for the denudation.
            However, think about it:  why would logging and wood companies destroy their source of raw materials?  If their aim is to destroy the forest, how can logging and wood companies sustain their business?  On the contrary, it’s in the self-interest of logging and wood companies to sustain the forests because that is the source of their livelihood.
            How can we then explain the massive denudation of the country?  Well, government was and is the culprit.
            The macro-explanation is that the government’s protectionist import-dependent import-substitution economic policy in the fifties encouraged deforestration.  This policy, buttressed by an overvalued exchange rate, ensured a persistent trade deficit.  To finance the trade deficit, the government encouraged extractive industries – logging and mining – in the sixties and seventies to generate foreign exchange.  In effect, our natural resources were used to pay for the inefficiency of our protected import-substituting industries. 
However, government exacerbated the situation by two wrong-headed policies.
 One is that it imposed a “reforestation fee” on logging companies, telling the logging companies that the government will assume the responsibility of replanting and sustaining the forests.   Of course, the government never did replant and used the reforestation fee wisely.  The fee got lost in graft, the government didn’t have the resources and interest to police the forest and keep out the kaingeros (slash and burn farmers), and because of population pressures, people started moving uplands and cutting trees.
The other is that the government did not give logging companies secure, long-term property rights.  Logging permits were usually short-term (five years or less) and highly political because  keeping them was dependent on one’s padrinos and political connections.  Because of the long period it takes to plant and grow a tree and recoup one’s investment, the government should have given secure property rights of twenty five years or more. 
Property rights analysis, therefore, should be at the core of any plan to preserve and sustain the environment. 
Secure private property rights can be pro-environment while its absence can lead to the environmental destruction.  In his famous economics textbook, N. Gregory Mankiw, Chairman of the Council of Economic Advisers under former President George Bush, cites the example of whales, which are “commonly owned”, and in danger of being hunted to extinction, compared to cows, which are privately owned, and is in no danger of becoming extinct.  In fact, cows are being regularly reproduced because there’s a private incentive to do so. 
Quoting a World Development Report, journalist Tom Bethel makes the case for the use of property rights to protect the environment:  “When people have open access to forests, pastureland, or fishing grounds they tend to overuse them.  Providing land titles in Thailand has helped reduce damage to forests.  The assignment of property titles to slum-dwellers in Bandung and security of tenure to hill farmers in Kenya has reduced soil erosion.  Formalizing community rights to land in Burkina Faso is sharply improving land management.  And allocating transferable fishery resources has checked the tendency to overfish in New Zealand.”
Another example of how insecure property rights can be very damaging to the environment is land reform.  Because land reform makes possession of agricultural land insecure, the incentive of landowners is either to convert their agricultural land to residential or industrial land (and therefore exempt from land reform) or not plant at all.  Large swaths of idle agricultural land may be traced to the unintended consequence of unsecure property rights caused by land reform. 
I’m not saying that privatization is the only solution to our environmental woes nor that the government has no role to play in sustaining the environment, but that good environmental policy requires property rights analysis.  Even Olin Ostrom, who received the Nobel Prize for Economics this year, determined that a feature of property rights – exclusion – was necessary for successful community management of common resources (water, forests, etc.).  The “tragedy of the commons” or the depletion of commonly owned resources is not inevitable but that exclusion, accountability, and a system of incentives and disincentives must be in place.
It’s time to do away with mere rhetoric. Let property rights analysis take its rightful place in sound environmental policy.

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