Published on March 6, 2014
Bringing the economics of land degradation back to the farm level: a conceptual framework for addressing the costs andbenefits of sustainable land management This paper was commissioned by CIAT to contribute to the knowledge base on the economics of land degradation and feed into the development of a conceptual framework for incorporating economic approaches into sustainable land management projects.It synthesises and reviews information on the costs and benefits of sustainable land management, and discusses how recent developments in the economics of land degradation offer a set of tools and insights that can assist in the planning of more equitable, effective and sustainable land management interventions. To these ends, a stepwise approach is proposed for assessing farm-level actions to tackle the social and economic drivers of land degradation, capture and redistribute the costs and benefits associated with sustainable land management, and enhance the monetary and non-monetary payoffs to farmers from the application of such techniques, technologies and practices. Posing the challenge: towards more joined-up economic thinking The recognition that land degradation is not solely a technical or technological problem, but is fundamentally economic in its causes, effects and potential solutions, is hardly a novel insight (Barbier 1997). An extensive (and often rather bewildering) body of literature now exists on the economics of land degradation. This encompasses many different models, methodologies and case studies.For the most part these different approaches however remain somewhat fragmented and disconnected from each other. While each addresses a key part of the land degradation equation, it is sometimes difficult to discern exactly how the various pieces fit together into a coherent whole. As a result, conservation and development decision-makers are often left struggling to understand how economicscan be best used to assist in tackling the problems associated with land degradation, or what it adds in terms of improving the effectiveness of the actions that are undertaken in support of sustainable land management. It is perhaps hardly surprising that economic concerns have tended to be only weakly reflected inthe planning of sustainable land management projects – or that the resulting interventions have often failed to adequately address the wider economic factors underlying land degradation (Bojö 1991)or result in solutions that are economically viable, equitable and sustainable for land managers (Giordano 2003; Pretty and Shah 1997).A key challenge remains: to foster more practical, policy-relevant and “joined-up” economic thinking which brings together these different− and often rather disparate – approaches into anintegrated framework that can be used to inform sustainable land management planning and implementation. This paper addresses these issues. It unpacks the core elements in the economic analysis of sustainable land management interventions, and proposes a stepwise approach for integrating economic approaches into project planning.Reflecting CIAT’s focus on developing technologies, methods and knowledge that “better enable farmers, mainly smallholders, to enhance eco-efficiency in agriculture”, the paper is concerned primarily with farm-level sustainable land management interventions in agricultural landscapes. Understanding the monetary payoffs to the farmer It is perhaps self-evident that sustainable land management interventions should be profitable for thefarmer who is expected to adopt them: as a standalone activity and relative to alternative (unsustainable) land uses, technologies and management practices (Mazvimavi 2011). A first step in the economic analysis of sustainable land management interventions is therefore usually to identify, quantify and compare these farm-level costs and benefits. While this might seem so obvious and basic a step as to be unnecessary to mention, it is, nonetheless, acritical one. The issue of ensuring that interventions are feasible and attractive in financial terms from the perspective of their intended beneficiaries is one that has alltoo often been underplayed, or omitted altogether, in sustainable land management planning(Tisdell 1996) There is ample evidence of a long history of unsuccessful interventions 1
Bringing the economics of land degradation back to the farm level: a conceptual framework for addressing the costs and benefits of SLM designed to encourage (or even demand) the adoption of sustainable land management practices by farm households, mainly based on coercive regulatory approaches (Jones 2009). Many of these actions failed either to improve farmer livelihoods or to reverse land degradation problemsbecause theirdesign and selection did not take account of the need to be financially viable at the farm level (Barungi and Maonga 2011;Lovo 2013; Mangisoni 2009; Nakhumwa and Hassan 2012), or consider that the costs to farmers of undertaking sustainable land management might outweigh the benefits generated (Iiyama et al 2010). Although both the different components of farmers’ earnings and expendituresand the key determinants of financial viability will, of course, vary in different contexts, some common factors emerge. The idea of the economic viability of sustainable land management practices and technologies as being shaped by higher yieldsand/or improved income possibilities is mentioned repeatedly in the literature (see, for example, Orr and Ritchie 2004; Sauer and Tchale 2006). Effective cost is also singled out as being a decisive factor, with market access and input prices exerting a powerful influence on whether a particular technology or technique is taken up (Chinangwa 2006; Tchale and Wobst 2004). Careful analysis of the various elements that enter into the cost and benefit equations that affect farmers’ land management decisions is essential. Going beyond cash income and expenditures Analysis of economic viability (and, by implication, likelihood of adoption)does not stop at comparing the cash income and expenditures associated with different land management options. While a positive monetary return is almost always a necessary condition for a farmer to be willing − and able – to take up a particular practice or technology, by itself it is rarely sufficient.Economic viability depends upon a wide variety of factors which include, but are not limited to, cash returns(Tisdell 1996): for example the stability and certainty of earnings, the input requirements of the farming system, the alternative earnings and opportunities that are diminished or foregone by a shift in land management regime, the type of product or output that is generated,and the farmers’ own tastes, aspirations and preferences.It is not just the quantity of costs and benefits that are important, but their quality, nature and form. Identifying and understanding non-monetary elements of the profit-loss equation Is an important step in the economic analysis of sustainable land management interventions. Although, as is the case with cash costs and benefits, these obviously vary greatly in different places and under different circumstances, there are certain recurrent themes. Opportunity costs, for example, are frequently cited as being a particularly important determinant of uptake. This particularly concerns the ability of resource-poor farmers to reallocate inputs and assets away from other productive uses and towards sustainable land management (FAO 2001; Iiyama et al2010).Additional labour requirements are often identified as being an especially critical factor in the choice to adopt or reject a particular sustainable land management technology or practice (Barungi and Maonga 2011; Chinangwa 2006).Cashflow and liquidity constraints are other importantconcerns (Chirwa 2008; Marenya et al 2012). In other words, it is not just the overall increase in output or income that is of interest, but the balance and timing of production that can be readily transformed into earnings to offset household expenditure needs: there is often a premium attached to cash earnings as compared to non-marketed output. Linked to this, time preference is highlighted as a key factor by many authors, both with respect to the immediate costs of shifting to sustainable land management practices and the rate at which its benefits accrue, as well as in relation to how far into the future the costs associated with land degradation are perceived to lie. Thus, smallholder farmers may in some cases be overexploiting soil quality stock or failing to invest in soil conservation technologies because they have a high time preference: that is, they value current consumption more than their future consumption and wellbeing (Nakhumwa and Hassan 2012; Yirga and Hassan 2010). Particularly for poorer households, land conservation strategies with low initial costs and short pay-off periods are more likely to be adopted (Giordano 2003).Farmers’ perceptions of risk is also mentioned as a major factor influencing the uptake of sustainable land management practices. Smallholder farmers are typically characterised as risk averse in terms 2
Bringing the economics of land degradation back to the farm level: a conceptual framework for addressing the costs and benefits of SLM of their preferences for sustainable land management technologies (Marenya et al 2012;Ngwira et al 2013) and as regards their response to the expected returns from the adoption of new technologies and land management practices (Kassie et al 2008;Simtowe 2006; Zeller et al 1997). Tracing the economic drivers of land management decisions The preceding paragraphs have underlined the importance of factoring farm-level costs and benefits into the planning of sustainable land management interventions. However, there has often been scant attention paid to understanding the broader physical, human, policy and institutional landscape within which farming takes place, or to addressing the underlying structural conditions and factors that determine land management decisions in the first place (Gebremedhin 2004;Giordano 2003). Farmers do not produce, consume and invest in a vacuum: they respond (usually very logically)to the economic opportunities and constraints that they face as they go about their day to day business. A wide range of economic (and other) stimuli variously enable, encourage or even force people to produce, consume and invest in particular ways or at particular levels (Barbier 1997). Understanding the signals that markets, prices, policies, institutions and social norms send to farmers about the most “profitable”, “desirable” or “feasible” land management options is a key step in the economic analysis of sustainable land management actions(World Bank 1996). Of primary concern is to understand the underlying economic causes or drivers of land degradation, and identify the broader economic conditions that can help to foster and encourage sustainable land management. Various examples can be found in the literature which serve to illustrate the kinds of economic driversthat influence farmers’ land management decisions. Local institutions and property rights typically have a major effect because they regulate land use and land management decisions, facilitate or inhibit collective action, and affect households’ incentive and ability to invest in land management practices (Pender et al 2006). Lack of secure land tenure and well-defined property rights among smallholder farmers, and particularly the unequal distribution of land, is often identified as a binding constraint to farmers investing in land improvements (Alamirew 2011;Barungi and Maonga 2011; Chirwa 2008;Morey 1986;Southgate 1988; Stocking and Murnaghan 2001; Yirga and Hassan 2010). Widespread poverty is also frequentlycited as one of the most pervasive underlying economic causes of land degradation, incorporating a host of factors in addition to cash income, such as asset endowment, livelihood breadth and resilience, food security, social capital and “voice” in decision-making. It is argued that any effort to persuade farmers to engage in sustainable land management, without finding concrete solutions to the problems they face in terms of poverty, is futile (Mangisoni 2009).In particular, there is repeated reference in the literature to the “vicious economic cycle” of low agricultural productivity, poverty and land degradation. A host of underlying economic conditions have been identified which bring about and sustain these vicious cycles (or, conversely, enable farmers to break out of them or to enter into so-called “virtuous cycles” or “upward spirals” (Pender et al 2006)). One factor that is commonly mentioned is the weak, exploitative andunfavourable agricultural input, output, creditand labour markets that are argued to perpetuatethe low farm returns and chronic shortages of food and cash that force farmers into unsustainable land management practices(Munthali and Murayama 2013; Sauer and Tchale 2006).A great deal of attention has been devoted to understanding the ways in which poorly-performing markets and distorted prices serve to both undermine farmers’ livelihoods, and make sustainable land management options unprofitable (Nakhumwa and Hassan 2012;Tchale and Wobst 2004). Ironically, these distortions are often the resultof public policies which – although originallygeared towards improving agricultural production and income, or stimulating growth in other sectors of the economy – serve as “perverse incentives”by encouraging farming practices that lead directly to land degradation (Barbier 1996; Boardman et al 2003; Giordano 2003). Erratic pricing policies, agricultural subsidies and an overvalued exchange rate have for example all been argued to have distorted the incentives of poor smallholders away from adopting sustainable farming 3
Bringing the economics of land degradation back to the farm level: a conceptual framework for addressing the costs and benefits of SLM systems (Barbier 2000). There is also evidence that the effects of price reforms and trade liberalisation have served to exacerbate land degradation byundermining farm profits and crowding farmers out of the agricultural input market(Chinsinga 2008;Smale and Jayne 2004; Sauer and Tchale 2006). Articulating economic impacts for other sites, sectors and groups A major critique of these essentially microeconomic models is that they stop at the farm level. Focusing only on the direct, biophysical or on-site effects of land degradation fails to acknowledge that a large part of the costs of land degradation (and the benefits of sustainable land management) typically accrues outside the farm(Boardman et al 2003; Nkonya et al 2011a).In fact,it is the presence of such externalitiesthat providesthe basic economic rationale for intervening in land management in the first place: one of the most fundamental reasons for externally-led or outside-funded actions to address land degradation is the wish to secure broader social benefits or, conversely, to mitigate or avoid costs and losses to other sites, groups and sectors (Baumol and Oates 1988; Kirby and Blyth 1987; Pagiola 1999a,b). Until relatively recently, these wider economic values were largelytaken as given, and were rarely included in the cost-benefit calculations used to inform sustainable land management projects.Over the last two decades there has however been a steady broadening in perspective.Considerable efforts have been made to quantify off-site costs and benefits, and especially to expand the scope of valuation beyond the direct physical products and marketed commodities to which economists have conventionally limited their analysis.During the 1980s and 1990s, parallel to the entry of environmental economics into mainstream conservation and development thinking, a suite of methods were developed and came into common usage for valuing the off-site impacts of land degradation (see for example Barbier 1996, 1997;Clark 1996;Dreschel andGyiele 1999;James and Sherman 1990;Magrath 1990;Morey 1986; Mullen 2001;Seckler 1987). A substantial evidence base has accumulated which provides monetary estimates of its local, national and even global economic costs (see, for example Barbier and Bishop 1995; Coxhead 1996;Pagiola 1999a;Pimentel et al 1995;Scherr and Yadav 1996;Upstill and Yapp 1987;World Bank 1996). This includes a large number of studies carried out in sub-Saharan African countries (see, for example, Abegunde et al 2008;Bishop 1995; Bojö 1991; Bojö and Cassells 1995;Chabalaet al 2012;Convery and Tutu 1990;Eaton 1996;Hein et al 2008; Holmberg 1990; Iiyama et al 2010; Kaggwa et al 2009. Majuleet al 2012;Mangisoni 2009;Mazvimavi 2011;Nakhumwa and Hassan 2012;Norse and Saigal 1992;Sauer and Tchale 2006;Selassie and Belay 2013; Sutcliffe 1993; Xinshen Diao and Sarpong 2007; Yaron et al 2011). The past few years have seensomething of a resurgence of interest in environmental valuation, especially as concepts such as “green economy”, “natural capital” and “economics of ecosystems and biodiversity” have taken hold and gained influence among the international research and development community (see, for example, TEEB 2008, 2010, Turner and Daily 2008, UNEP 2011). Major advances have been made in incorporating these approaches into the discourse surrounding land degradation (see, for example, Chabala et al 2012; ELD Initiative 2013;Hein 2006; Jones 2009;Low 2013; Majule et al 2012; Nkonya et al 2011a,b, 2013;Poulsen 2013; SCBD et al 2013; von Braun et al 2012). Whereas earlier valuation studies tended to consider only a relatively limited range of costs and losses (mainly those incurred by the agricultural and water sectors from soil erosion and nutrient loss), the “new” economics of land degradation is based on a far more comprehensive framework that articulates the value of ecosystem services for human wellbeing (Millennium Ecosystem Assessment 2005a). This allows for a much broader range of land management benefits and impacts to be incorporated into economic analysis (and, typically, results in much higher economic value estimates):for example pollination and pest control, water flow and quality regulation, mitigation of natural hazards and disasters, climate adaptation, carbon sequestration, recreational values, nutrient cycling, protection of wild species and habitats, aesthetic and landscape values, and so on (Low 2013; Millennium Ecosystem Assessment 2005b). Renewed efforts are also being made to use the economic valuation of off-site or economy-side impacts to “make the case” for actions to address land degradation. This responds to a series of very practical concerns, namely the 4
Bringing the economics of land degradation back to the farm level: a conceptual framework for addressing the costs and benefits of SLM critical shortage of funding, continuing policy inaction and apparently lowpolitical will to address land degradation. The assumption is that this state of affairs results from limited knowledge of the costs related to land degradation and weak appreciation of the potential benefits to be gained from more sustainable land management on the part of decision-makers (Low 2013; Poulsen 2013; Nkonya et al 2011a, 2013).Valuing the economic costs and losses associated with land degradationis seen as a way of providing a powerful (and often much-needed) argument in support of increasing the level of public and private investment in sustainable land management (Jones 2009). The logic is that, far from being a problem that only affects crop yields and farm profits, land degradation should be seen as something that gives rise to economic impacts which stretch across local, national, regional and even global boundaries (Low 2013; Nkonya et al 2011a). Furthermore, it is argued that the investments required to prevent or reverse land degradation will in most cases be far lower than the benefits that can be obtained(von Braun et al 2012)– or, indeed, the costs that society and the economy will ultimately incur if land degradation is permitted to continue unchecked. The key message is that the neither the onus for financing sustainable land management actions nor the gains arising from these investments lie only with the farmers on whose lands degradation occurs. It is demonstrably to the advantage of governments and other agencies that are concerned with public or global interests, as well as off-site actors that feel the impacts of land degradation, to ensure that such measures are implemented (Ibrahim et al 2012). Weighing upthe gainers and losers, gaps and imbalances It is clear that there has been a progressive widening of focus in economic approaches to land degradation– from more conventional farm-level models of production, consumption and resource allocation, through analysis of the underlying economic forces and conditions that drive farmers’ land management decisions, to the current preoccupation with valuing changes in the supply of ecosystem services to other sites, sectors and groups. These variouslevels of analysis however usually remain quite separate from each other. There is a tendency for economic studies to focus either on the micro-level of the farm or the macro-level of the wider economy. Yet some of the most useful insightscome only when these different perspectives and interests are compared and considered together. This is because the primary economic challenge associated with reaching sustainable land management outcomes is one of overcoming the uneven spatial, temporal and socio-economic distribution of land management costs and benefits, and reaching effective trade-offs which balance the gapsbetween private and social interests, short and long-term goals, and on and off-site impacts (Morey 1986; Mullen 2001;Tanui et al 2013). While the costs of controlling land degradationtend to be immediate and are incurred almost exclusively on-site, the benefits of sustainable land management typically build up more slowly, and accrue to a wide range of other groups in addition to farmers (Giordano 2003). Not only is this asymmetry of benefits and costs inequitable, but it is rarelyeconomically efficientor sustainable(Hein et al 2008). There is no reason why farmers (who are often among the poorest and most marginal groups) should subsidise the provision of economically valuable ecosystem services to others (especially when thebeneficiariesare relatively affluent, or are gaining considerable valueadded and costs avoided from their consumption or use of these services).In mostcases farmers will be unwilling – and often also economically unable – to do so (Pagiola 1999b; Shiferaw and Holden 2000). Being able to shed light on where, for whom and in what form such imbalances are manifested provides important information for planning sustainable land management actions. It indicates where there are needs, niches and opportunities to use economic and financial instruments to fill these gaps, align private and social costs and benefits and, ultimately, provide incentives and financing for sustainable land management(TEEB 2008, 2010). On the one hand, this type of analysis shows where farmers face a net loss from shifting to sustainable land management practices, even when the economic impact of these actions is positive in terms of the overall effects on society(or, of course, the opposite: where farmers’ actions, even though privately profitable, are leading to broader social costs and losses). In such instances, efforts to fill the economic gap that results from 5
Bringing the economics of land degradation back to the farm level: a conceptual framework for addressing the costs and benefits of SLM these unrewarded actions, uncompensated costsor unpenalised damages is both warranted and required. Even where sustainable land management actions are clearly and unambiguously in the private interest of the farmer, the fact that offsite benefits are simultaneously being generated may also be grounds to argue that some form of redistributive mechanism is justified in order to remunerate or otherwise reward these actions.By the same token, if valuable services are being gained at low or zero cost by off-site beneficiaries or are generating large economic surpluses for them, this may indicate that there is a niche or opportunity to tap into this uncaptured value so as to provide some kind of cash or in-kind payment, transfer or funding back to the farmer,in support of sustainable land management. Leveraging incentives and finance for sustainable land management It cannot be emphasised too strongly that the ultimate aim of economic analysis is to contribute towards more informed decision-making, which will in turn result in more equitable, effective and sustainable land management interventions. The intention is to help to change the economic conditions and circumstances that cause farmers to degrade land, and instead set in place the opportunities and rewards which will make sustainable land management a more economically viable, desirable and profitable option. Experiences from a large number of projects suggest that the main problem to be overcome in sustainable land management projects is not the lack of technologies per se, but the absence of economic incentives to adopt (Jones 2009; Kaggwa et al 2009; Pandey 2006) and the critical shortage of investment and funding for actions to address land degradation (Nkonya 2011a,b; von Braun et al 2012). Bringing together on-site, off-site and distributional aspects of economic analysis points to the kinds of concrete instruments that can generate finance and incentives for sustainable land management. It also allows for their feasibility, appropriateness and “fit” to a particular set of economic conditions, constraints and opportunities to be assessed. Unfortunately, most economic analyses stop short of doing this. As a result, policies aimed at promoting sustainable land management have generally not been based on a diagnosis of the causes of divergence between private incentives and social returns (Jones 2009), nor have they explicitly attempted to better realign them (Pagiola 1999a). Yet, however great the economic costs of land degradation or benefits of sustainable land management actions are demonstrated to be in theory, this has little meaning unless it translates into real changes in the economic conditions and opportunities that farmers face as they go about their day-to-day business. Along similar lines, however convinced decision-makers are that it is in the public interest to take action against land degradation, this will have only a minor impact unless the groups that are directly involved in managing land have adequate incentive and perceive there to be sufficient gains from doing so. Traditionally, interventions to address land degradation were heavily biased towards command-and-control approaches, often backed up by some kind of subsidy or public payment scheme funded by donor projects and transfers from central government (Jones 2009). These arrangements frequently proved to be ineffective or unsustainable over the long-term due to weak enforcement capacity, uncertain availability of public funds, and their failure to provide positive incentives for farmers to effect long-term changes in land management practices (Gebremedhin 2004; Kirby and Blyth 1987; Shiferaw and Holden 2000). Today, price and market-based instruments have gained in popularity, particularly those which encourage private investment and application of the user-pays principle and which are based on developing the markets and economic opportunities which allow farmers to add value to or achieve price premiums from sustainable land management practices and products (Ibrahim et al 2012). Examples include payments for ecosystem services such as carbon sequestration or watershed protection, eco-labelling and certification of sustainable products and services, conservation and development easements and offsets, the provision of targeted or preferential credit and investment capital, and fiscal incentives such as tax breaks and exemptions or relief on export and import duties. Although it is beyond the scope of the current paper to provide a detailed description of these instruments, a large number of documents are available which offer further guidance and examples of how economic and financial instruments 6
Bringing the economics of land degradation back to the farm level: a conceptual framework for addressing the costs and benefits of SLM can be applied to support land management interventions (see, for example, ELD Initiative 2013; Ibrahim et al 2012; Jones 2009; TEEB 2008, 2010). Aframework for incorporating economic approaches into sustainable land managementprojects This paper has described the various economic approaches that are used to describe, explain and analyse land degradation. Integrating these perspectives and insights provides the kind of “joined-up” economic thinking that can assist in planning for more equitable, effective and sustainable projects. Incrementally and in combination, they allow for a picture to be built up of the complex array of economic factors that drive land management decisions, and for decision-support information to be generated on the types of economic and financial instruments that are required to enable, encourage and empower sustainable land management at the farm-level. An initial step is to assess the monetary and non-monetary returns to the farmerfrom different land managementoptions. It is clearly necessary to establish whether or not sustainable land management is likely to be an economically viable and attractive choice, as a standalone activity and in comparison to alternative, environmentally-degrading, practices. Following on from this, it is necessary to understand the economic conditions that drive land management decisions and shape how farmers produce, consume and invest. This provides essential information to assist in tackling the factors that encourage or force land degradation, oract as barriers and constraints to more sustainable land management. Building on micro-level farmanalysis, valuation of the costs of land degradation and benefits of sustainable land management for other sectors, sites and groups helps to identify where there is an economic rationale for intervening in land management. It can provide a convincing, and much-needed, argument to public and private decision-makers as to why it is in their interests to should invest in sustainable land management. Analysis of the distribution of costs and benefits over space and time, and between different groups, allows for the economicimbalances that arise from a shift to sustainable land management to be weighed up, and for gainers and losers to be identified. This shows where there are needs, niches and opportunities to use economic and financial instruments to address the asymmetries and fill the gaps left by the unrewarded actions, uncompensated costs, unpenalised damages or uncaptured values associated with sustainable land management. Last but not least is to use the findings of the economic analysis to identify concrete instruments and mechanisms which can be used to provide incentives and financing for sustainable land management, and to assess their feasibility, appropriateness and “fit” to a particular set of economic conditions, constraints and opportunities. The ultimate intention is to set in place the conditions under which sustainable land management becomes a more economically viable, desirable and profitable option for farmers. 7
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