The Economics of Forestry: Modern Theory and Practice PDF
Preview The Economics of Forestry: Modern Theory and Practice
THE ECONOMICS OF FORESTRY Modern Theory and Practice THE ECONOMICS OF FORESTRY Modern Theory and Practice Erhun Kula Department of Economics, University of Ulster Northern Ireland, UK CROOM HELM London & Sydney TIMBER PRESS Portland, Oregon First published in 1988 by Croom Helm 11 New Fetter Lane, London EC4P 4EE Croom Helm Australia, 44-50 Waterloo Road, North Ryde, 2113, New South Wales © 1988 Erhun Kula Softcover reprint of the hardcover I st edition 1988 St Edmundsbury Press Limited Bury St Edmunds, Suffolk. All rights reserved. No part of this book may be reprinted, or reproduced or utilized in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without permission in writing from the publisher. British Library Cataloguing in Publication Data Kula, Erhun The economics of forestry: modern theory and practice. 1. Forests and forestry-Economic aspects I. Title 338.1 '749 SD393 First Published in the USA 1988 by Timber Press 9999 S.W. Wilshire Portland, OR 97225 USA ISBN-13: 978-94-011-6080-3 e-ISBN-13: 978-94-011-6078-0 DOl: 10.1007/978-94-011-6078-0 Library of Congress Cataloging in Publication Data Kula, Erhun. The economics of forestry: modern theory and practice / Erhun Kula. p. cm. Bibliography: p. Includes index. I. Forests and forestry-Economic aspects. I. Title. SD393.K82 1988 338.1'349-dc 19 Contents Preface ix 1 Forestry policy: an historic overview 1 2 Forestry in some selected Western countries and the European Economic Community 18 3 A cost-benefit analysis of public sector forestry in the United Kingdom by using ordinary discounting 45 4 Modified discounting and its application to forestry 73 5 Private sector forestry 102 6 The optimum rotation problem in forestry 135 Discounted cash flows/discount factors 158 II Discount factors for the UK on the basis of MDM 160 III Derivation of social interest rates for the UK, the US and Canada 163 IV Recent developments in forestry policy in the United Kingdom 170 Bibliography 175 Author index 181 Subject index 182 v To my son About the author Erhun Kula is a Turkish-born economist who did his first degree in Istanbul. After completing his M.Sc. at the University of Wales and his Ph.D. at the University of Leicester, he taught for a couple of years at the Centre for Development Studies, University College, Swansea. Currently he is a Senior Lecturer in Economics at the University of Ulster, Northern Ireland. He has published in many learned journals of economics and environmental science in the fields of cost-benefit analysis, forestry, fishing, agriculture and famine anticipation. Preface The economics of forestry has always fascinated me as one of the most brain-taxing cases in economics. As an investment forestry is different from many other projects as it has unusually long gestation periods. For example, in the United Kingdom it takes over 40 years to grow coniferous and over 100 years for deciduous timber. These long gestation periods make it very clear how import ant are the magnitude of the discount rate and the method of discounting in the evaluation of investment projects. Any errors in these will misguide investors in forestry one way or the other. In addition, forestry redistributes income between gener ations. Its long gestation periods make it obvious that more than one generation will be involved in any venture. When we plant trees we know that the bulk of the benefits will be captured by future generations. Conversely, when we fell trees we reap the benefit of projects which were established in the past, mostly by generations who are long gone. So far most economists have devoted their time and energy to analysing income distribution in an intragenerational context, and this is a very sensitive and controversial issue. After all, most revolutions have taken place because of the uneven income distribution which was oppressive for the majority. Forestry helps us to study the case from the viewpoint of different generations. Forestry necessitates estimating timber prices a long time ahead. No other investment project makes such burdensome demands on economists. In this book I have a great deal to say about the first two aspects of forestry. As regards the third case, i.e. price projection for the distant future, I have declined to enter into deep discussion on this matter in view of the time IX PREFACE scale involved: could anybody be expected to make an accurate guess as to the price of, say, veneer oak 120 years from now? The bulk of the ideas which are presented in this book stem from my work and resulting publications in journals such as En vironment and Planning A, Journal of Agricultural Economics, Journal of Development Studies, Quarterly Journal of Econom ics, Forestry, Resources Policy and Project Appraisal. I am grateful to these journals for granting me permission to repro duce some parts of my material, i.e. tables, figures, etc. I have also used my teaching notes for the course 'Economics of Exhaustible Resources', which I have been teaching at the University of Ulster during the last five years. I am well aware of the fact that some of my ideas, particularly on discounting, will not be easily digested by some economists. I have spent the last ten years of my life studying the case of discounting, especially in public sector economics. I started out on this mission when I was an enthusiastic and idealistic research student. Many of my fellow economists tried to dismiss this work simply because I was trying to say something radically new and hoping to correct past errors which were affecting not only our own lives, but also those of future generations. The book should be of interest to economists, foresters, geographers and environmental scientists as the material presented is useful in all these subject areas. Chapter 1 explains, first, how in the British Isles forests were almost completely destroyed in the course of history, a destruction which was repeated to varying degrees, in many other Western countries. When the British government decided to reverse the trend, it came up against a fundamental economic difficulty, discounting. The emphasis is placed upon a number of events by which the principles of discounting were badly and fatally twisted to justify afforestation projects. The chapter brings it home to economists that the general economic principles designed to analyse public sector projects did not work out for forestry. Something was wrong somewhere. It also reminds foresters that their projects cannot escape economic scrutiny by just becoming a special case. Chapter 2 explains, briefly, the history and the current struc ture of forestry in a number of Western countries and the EEe. It is written for economists. Highly informed foresters are likely to be knowledgeable about these subjects and therefore may skip this chapter. x PREFACE Chapter 3 carries out a cost-benefit analysis of forestry as practised in Britain and Ireland. It uses the widely practised ordinary discounting principle, which is inaccurate. Chapter 4 explains what is wrong with the ordinary discount ing method and provides an alternative, modified discounting, not only for forestry but for all public sector investments. The new method is used in the economic evaluation of public sector forestry with dramatic results. It is also emphasised that the modified discounting method would change the project mix in the public sector portfolio towards the inclusion of more long term projects. Chapter 5 is a study of private sector afforestation projects which, thanks to a number of government incentives, is a booming sector in Britain. The planting grants and tax conces sions given to private investors have made forestry an attractive proposition in recent years. In this chapter financial rates of return are calculated for investors in two different locations, poor and moderate. Chapter 5 also reports on a recent case study in which the responsiveness of private foresters to changes in a number of variables, such as government grants, timber prices, agricultural subsidies and land prices, are measured. Here readers are warned that in calculations modern economet ric technology is used and those who are not familiar with it should avoid the mechanics of the models used and concentrate on the final results and their implications for private sector forestry. The last chapter deals with the old and rather difficult problem of finding the optimal rotation period for felling a tree or a stand of trees. Here every effort has been made to avoid unnecessary complications, and a number of worked-out examples are provided. Chapter 6 ends with the conclusion that in public sector forestry the modified discounting method will make a substantial impact on finding the optimum rotation. I should like to express my thanks to a number of individuals who helped me along the way. David W. Pearce was one of the economists who had sympathy with my ideas, which helped at a time when I needed it most. Roger Cooper made many helpful comments on the early manuscript of this book. Colin Price was helpful on occasion in explaining to me details of forestry in the United Kingdom. Of course, his major contribution is in the launching of a lively debate which is still continuing in the litera ture. My work with Donal McKillop, presented in Chapter 5, xi PREFACE was also a great help in providing further insights into forestry economics. I am also grateful to him for reading parts of the manuscript. Many staff members of the Forest Service, Depart ment of Agriculture, Northern Ireland, and in particular Dr R. McKenzie, helped me in compiling research material. Last but not least I am immensely grateful to my wife on two counts: for typing most of the manuscript, and for giving support when the pressure of work was great. Erhun Kula Coleraine, Northern Ireland, 1987 xii
The list of books you might like
