Growth Patterns, Institutions and Environmental Demand

Over the past few years, most distortionary policies associated with direct and indirect subsidies for agriculture, water use, and forest conversion, including those that heavily subsidized credit and provided tax incentives for deforestation, have been eliminated or greatly reduced in Latin America (Heath and Binswanger, 1996).

Given the nature of the comparative advantages of the region, the economic revival and the increasing openness of the economies become significant sources of serious pressures on the “green environment,” and the tropical forests in particular. Additionally, rising income levels may have a positive impact on environmental consumer goods, roughly corresponding to the so-called “brown environment” (Dourojeanni, 1996). The Latin American experience suggests that once economic distortions are eliminated and per capita income increases, a wide range of projects to improve the “brown environment” (potable water, sewage, air pollution, etc.) become profitable. This pattern is consistent with results from empirical analyses that have found that most, but not all, of the brown resources start improving once per capita income reaches US$4,000 to US$5,000 per capita (see, for example, Grossman and Krueger, 1993). Something very different, however, happens with the “green environment” and, in particular, with natural forests. Few investments in the protection or in the truly sustainable exploitation of natural forests, aquatic natural habitats, and other rural resources are currently profitable from the individual country perspective and many fewer are privately profitable.² Moreover, the main source of pressures on the green environment is increasingly becoming economic growth itself, particularly in the context of an export-oriented strategy.

Although the lack of well-defined property rights on part of the land aggravates the tendencies toward mining the green resources, there are many examples to show that even by eliminating this distortion, optimal economic private decision would still involve eliminating or greatly reducing the area under natural forests (López, 1998). The case of the native forests in southern Chile is illustrative. There are clear signs of large recent native forest clearing on privately owned lands with no problems of property-rights enforcement whatsoever. In fact, the opening up of the economy generated significant opportunities for exporting native forests in the form of chips, mainly to the Japanese market. It appears that deforestation is a consequence, not only of a lack of property rights but, more importantly, of the low market value that standing forests have. Market values do not reflect the full social value of the forest.

Economic Growth and Deforestation

It has been argued that green environmental sustainability is good for long-run growth in the countries that implement it and hence, far from reducing growth, promotes it. This argument may have some validity when environmental degradation is due to distortions but not when it is a by-product of growth itself, as is, in large part, the new reality in the region. Of course, there is some room for controlling natural-resource degradation when it induces negative externalities of local or national consequence. But the scope of these limitations is likely to be restricted to a relatively small part of the resource degradation induced by growth.

Many environmental projects have been implemented under the assumption that the environmentally benign exploitation of the natural resources may reconcile the objectives of economic growth and environmental sustainability. Ecotourism, genetic prospecting, non-timber forest extraction, and other environmentally sound exploitations have been singled out as activities that satisfy these two goals simultaneously. Unfortunately, as several studies have shown, they pass the profitability test only in highly unique sites from the point of view of tourist attraction, biological specificity, or particularly rich non-timber products (Southgate, 1996; Southgate and Clark, 1993; Simpson et al., 1996). Ironically, the main reason why there are no large revenues or rents to be raised out of these environmentally friendly activities is the relative abundance of green resources in Latin America. Scarcity rents that would make these uses more competitive may appear once the green resources become much less abundant.

Given the large endowments of natural resources in most countries in the region, particularly in South America, it is unlikely that green environmental sustainability is in the interest of the individual countries. Growth at the cost of part of the natural resources is probably profitable from the point of view of the individual Latin American countries, as it was for the currently developed countries.³ Even if the discount rate were very small (and there is evidence that this is not the case), implying great concerns for future generations, environmental sustainability would not necessarily be strictly desirable from an individual country perspective, although total asset sustainability could be. That is, a low discount rate would suggest that the current generation would like to maximize current growth subject to maintaining or even enhancing the total value of the asset stocks, including man-made and natural assets. As long as there is some substitution between natural and man-made capital, there is no reason why it is not in the interest of individual countries that have a large endowment of natural resources, like most of the South American countries, to mine part of their natural resources, particularly if this facilitates increasing their man-made capital.

The “mining” of certain tropical areas for lumber, agriculture, minerals, or oil can, however, provide positive net returns to the countries to the extent that the loss of trees does not cause serious domestic negative externalities. Thus, if public policy is devised exclusively from the perspective of the individual countries, it would have to promote forest conversion to agriculture and other activities in areas that allow for positive rates of return after considering all local externalities. There is an optimal degree of deforestation from the point of view of individual countries that, given the current high levels of the forest stock in most tropical South America, is probably far from being reached.

The Global Externalities

If the global externalities of the Latin American tropical forests are also considered (carbon sequestration and biodiversity reserve), it is clear that the optimal level of tropical forests is much greater than if only intra-country effects are considered. In fact, the global value of a typical standing rain forest in the Amazon accounts for more than 50% of its total value, while the private value is less than 31% (even assuming an unrealistically low discount rate for private entrepreneurs) and the local public value is less than 20% (Table 2). It is possible that global welfare maximization would require a forest area larger than current levels. On the other hand, maximizing the welfare of the individual Latin American countries may call for natural forest areas perhaps only modestly larger, relatively speaking, than those in North America or other countries in the North, where less than 10% of the original natural forests remain.⁴ This could mean providing public incentives for the protection of ecosystems that clearly generate domestic positive externalities, including the preservation of river basins, watersheds, other water sources, recreation areas and forest areas, important to prevent soil losses.

TABLE 2
PROPORTIONS OF LOCAL PRIVATE, LOCAL PUBLIC, AND GLOBAL VALUE IN THE TOTAL ECONOMIC VALUE
OF A STANDING RAIN FOREST

a. Estimates obtained using a 2% intertemporal discount rate for all three benefit streams.

b. Estimates obtained using an intertemporal discount rate of 6% for local private and public
benefit streams and a 1% for global benefit streams.

Source: Based on estimates by Andersen, et al. 1996.

The main reason why the rate of deforestation in many heavily forested countries in South America is not even greater is that most of the remaining natural forests are in remote areas where the necessary public infrastructure (mostly roads and other services) takes time and large financial resources to build. It is a problem of capital rationing or, ironically, insufficient financing, rather than a lack of potential profitability, that is delaying much greater forest destruction in many South American countries. It is only when the global forest externalities (e.g., carbon sequestration, biodiversity reserve) are taken into account that deforestation in most natural forests in South America becomes “bad business” (López, 1996). One possible way of achieving this is through international trade of carbon emission rights.