- /Y9 7Internal Dor oments

INDUSTRY AND ENERGY DEPARTMENT WORKING PAI UnltENERGY SERIES PAPER No. 49 _.-

Accounting for Traditional FuelProduction: The Household EnergySector and its Implicationsfor the Development Process F

March 1992

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The World Bank Industry and Energy Department. PRE

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Accounting for Traditional Fuel Production:

The Household Energy Sector andIts implications for the Development Process

prepared by

Henry M. Peskin, Willem Floor, and Douglas F. Barnes

Industry and Energy DepartmentOperations Division

The World Bank

March 1992

Copyright (c) 1992The World Bank1818 H. Street, N.W.Washington, D.C. 20433U.S.A.

This paper is one of a seiles issued by the Industry and Energy Department forthe information and guidance of World Bank staff. The paper may not bepublished or quoted as representing the views of the World Bank Group, nordoes the Bank Group accept responsibility for its accuracy and coit.pleteness.

Abstract

A fundamental proposition of modem economics is that to the extent thatthe prices of goods and services are establistied through exchanges in well-functioningmarkets, efficient allocations are likely. Conversely, if there are no markets for certaingoods and services, allocations may be inefficient for not only the nonmarketed goodsbut also for marketed goods that m y be substitutes for these goods. l'o the extentthat economic development takes place with inefficient allocations, then the fullpotential for growth in societal well being will not be realized. The notion that GNPdoes not accurately reflect production in poor developing countries has widespreadacceptance. The problem of under-measuring national production has been well knownfor decades. Instead of trying to account for the many areas of informal trade andproduction, we have taken the approach in this paper to focus on fuelwood production,In developing countries, the large portion of fuelwood consumed in households and thehousehold labor that is used to collest this fuelwood meet the definition of nonmarketedgoods and services. As expected from economic theory, there is evidence of inefficientallocations. Policy makers in certain instances can be misled by the notions that largeinfrastructure projects are superior to moie mundane projects that may deal with informalhousehold production. One of the most important contributions of including householdproduction in the national accounts is not only that the value of household productionis more accurately reflected in economic accounts, but the fit. .nat the effect ofdevelopment can be more fully measured. Such a framework is essential for evaluatingthe benefits of energy projects, especially in poor developing countries where informalproduction is a large component of economic activity.

Table of Contents

L Introduction 1II. The Economic Importance of the Fuelwood Sector 3m. A Model of Household Fuelwood Production and Economic Interaction 7IV. Household Production in the Context of an Expanded

National Accounting System 9V. Implementation Strategies and Data Needs 15

Sectoring and aggregation 16Developing input-output information 16Developing household information 16

VI Applications of the Accounting Scheme to Tanzania 17VIL Summary and Conclusions 22

References 24Appendix A: The Fuelwood Production Model 27

r'ABLESTable 1: Energy Balance, Income and Traditional Fuel Use in Selected Developing

Countries 4Table 2: Energy Loans by Energy Sector for the World Bank 6

FIGURESFigure 1: Modified National Income and Product Accounts 11Figure 2: Conventional GDP Accounts for Tanzania, 1980 18Figure 3: Modified GDP Accounts for Tanzania, 1980 21

ACCOUNTING FOR TRADITIONAL FUEL PRODUCTION:THE HOUSEHOLD ENERGY SECTOR AND ITS IMPLICATIONS FOR THE

DEVELOPMENT PROCESS

Henry M. Peskin, Willem Floor, and Douglas F. Barnes

I. Introduction

1.1 A fundamental proposition of modern economics is that to the extent thatthe prices of goods and services are established through exchanges in well-functioningmarkets, efficient allocations are likely. Conversely, if there are no markets for certaingoods and services, allocations may be inefficient for not only the non marketed goodsbut also for marketed goods that may be substitutes for these goods. To the extentthat economic development takes place with inefficient allocations, then the fullpotential for growth in societal well being will not be realized.

1.2 In developing countries, the large portion of fuelwood consumed inhouseholds and the household labor that is used to collect this fuelwood meet thedefinition of non marketed goods and services. As expected from economic theory,there is evidence of inefficient allocations. Under certain conditions, the lack of a marketprice for fuelwood has led to excessive depletion of an apparent "free" good, fuelwoodshortages, ecological damage, diversion of labor from valuable agricultural activities, andan inefficient mix of fuels and energy sources to satisfy the energy needs of a growingeconomy. This is especially the case in regions that are undergoing a transition fromabundant biomass supplies from local woodlands to conditions of greater scarcity.During this transition, the depletion value of these scarce resources rise, but because thewood resources are used directly by households and are not marketed, their value doesnot show up in most national accounts.

1.3 The shortcomirgs of traditional accounting methods for including informalproduction in the measurement of Gross National Product (GNP) are fairly well known.When a woman enters the workforce, not only is her production added to the outputside of the accounts, but so is the value of her children's daycare. On the debit side ofthe accounts, nothing is subtracted since the child care was previously uncounted,informal household production. For developing countries, the movement fromtraditional fuels to modem fuels is plagued by similar accounting difficulties. When afamily moves from traditional fuels to modem fuels, the use of modern fuels appears asadded consumption in the accounts, but nothing is entered on the debit side since theformer production of traditional fuel frequently involved informal labor.

1.4 The consequence of not having adequate figures on the informalproduction is that the effects of misallocations and inefficiencies caused by the lack of amarket price for fuelwood may be obscured from the eyes of policy makers. The onlymanifestations of misallocations that may be visible are weaknesses in growth rates,unexplained labor shortages, or unexpected changes in prices for marketed energysubstitutes. For instance, in a situation in which fuelwood has become very scarce, a

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policy to encourage substitution by other fuels may fail because the price of these fuelsmay exce' d the unobserved time cost of alternatives fuels, such as straw or dung.Likewise, a policy to promote the growing of trees for fuelwood around homesteads in aregion with abundant wood resources is not likely to succeed if the perceived value oflabor spent collecting fuel is far below the value of the trees grown. Finally, for acountry in which many people were originally dependent on fuelwood collection forobtaining fuel for cooking, the level of economic growth may be overstated as peopleswitch to marketed fuels. As a result, policy makers may be unable to appreciate the fullconsequences of both sector-specific projects and macro-economic policy initiatives.1

1.5 The purpose of this paper is to develop a methodology for includingproduction of fuelwood in the national accounts. The reason why this is important isnot just for making the national accounts more accurate, but more importantly, toimprove the ability of policy makers to make better management decisions concerningthe economy. We realize that fuelwood production is not distinct from other informalproductive activities, which should also be incorporated into national accountingschemes. However, in this paper we focus on fuelwood production only because it isone of the important informal, productive activities that does not appear in the nationalaccounts.

1.6 This report discusses the problems that may arise for,: -veloping countriesif the economic importance of the fuelwood sector is ignored. A m'c& is developed thatwill help in the analysis of how this sector interacts with other marketed activities (seeAppendix A for details), such as agricultural production, and how the sector may beaffected by general economic policies. The report indicates how these interactions canbe reflected in the euviomic accounts with suitable modifications. Next, the paperspecifies the data needed to support both the empirical modeling of the interactions andthe modified accounts. One brief case study is presented with the objective ofillustrating the modified accounting structure and modeling specilfc interactions of thefuelwood sector with other economic sectors. Finally, the report will highlight thepractical policy implications for planners and project designers that can be drawn fromthe above analyses and case studies.

I The relatve benefits and costs of development projects may be misspecified as well. For example, the trueeconomic or opportunity costs of a labor-dependent project may be understated to the extent that the requiredlabor is diverted from nonmarket fuelwood producdon and other nonmarket household activities. Conversely,if the project under analysis is labor saving, the benefits of the project may be understated to the extent thatthis labor has a positive but non-observable (nonmarket) opportunity cost. For a discussion of the role oflabor oppormuity cost in the evaluadon of the benefits of labor-saving projects, see Schramm (1988).

IL The Economic Importance of the Fuelwood Sector

2.1 The fuelwood sector, as is other conventional, marketed economic sectors,can affect general and specific economic activity in two principal ways. In the firstplace, outputs of this sector can compete with or compliment other economic sectors.There is, for example, obvious product competition between non marketed fuelwoodand marketed energy sources such as kerosene or charcoal that fulfill household needs.Presumably, if fuelwood really had the zero price one observes, it would out-competeany other alternative source of fuel and would probably account for even a much largerpercentage of household energy consumption than the current 80 percent for poordeveloping countries, limited only by the technical inability of fuelwood to meet certain Jneeds such as lighting. The fact that fuelwood does not out-compete all potentialsubstitutes indicates that the true or "shadow" price of fuelwood is certainly greaterthan zero.

2.2 The examination of certain unique features underlying the fuelwoodproblem in developing countries is essential to the understanding of its scope andnature. First, the level of energy demand by developing countries is low, which reflectstheir low level of per capita national incomes (see Table 1 and OTA, 1991). Secondly, ahigh level of total energy use goes to meet household energy needs, especially in lowincome countries. For such low income countries between 70-90% of total final demandis attributable to household use. In middle income countries the comparable percentageis between 40-60%. Most households use energy primarily to meet cooking needs, withless used for space heating and lighting. Energy use for other purposes increases onlywhen household income levels rise so that kerosene, LPG and electricity become viablealternatives. Poor urban households that purchase their energy supplies sometimes useas much as one fifth of their income for this purpose (Barnes and Qian, 1991). Whenfuelwood becomes scarce in rural areas, straw and stalk often are substituted forfuelwood rather than modern alternatives, mainly because there is no cash outlay forthese substitutes. Even in oil-exnorting LDCs, biomass use for energy plays animportant role, for the household sector.

2.3 A portion of the value of biomass energy is reflected formally in thecommercial wood trade, which is monetized and thus reflected in some country'snational accounts. But typically, the economic value of even commercial biemass fuelsis ignored or undervalued by national governments (see UNDP/World Bank reports).For example, the annual value of the wood fuel trade in many countries is significant,and sometimes higher than that of the power sector or tropical timber exports for a givencountry. For instance, in the six countries constituting Central America, where 86% ofthe urban population consumes firewood, the firewood trade has an annual value ofUS$150 million, which was half the value of the entire power sector in that region i:1985 (CEPAL, 1987). In Mali, where the annual value of the wood fuel trade is 10billion FCFA ($30 million), the use of household petroleum products accounted for only3-4 billion FCFA/year, and the value of electricity consumed in households was 4-5billion FCFA in 1988. In the Central African Republic, the annual value of the woodtrade amounts to FCFA 7 billion, as compared with FCFA 5 billion for tropicalhardwoods. The value of trade in petroleum and electricity is FCFA 1 billion and 3

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billion respectively, highlighting the economic i.mportance of the fuelwood trade(UNDP/World Bank, 1991d, p. 30).

Table 1: Energy Balance, Income: r d Traditional Fuel Use In Selkcted Developing Countries

Low Income GNP per Capite Urban Popula- Consumption Consumption of Tota Energy Share of Tradi-Countries 1987 (S) tion as Share of of Tradisional Commercial Consumption per sional Fuels in

Total 1987 (%) Fuels per capits Fuels per capita Capita 1986 (GJ) Total 1986 (%)1986 (GJ) 1986 (CJ)

Zaire 150 38 8.68 3.01 11.69 74Madagascar 210 23 5.87 1.19 7.06 83Rwanda 300 7 8.59 1.25 9.84 87Haiti 360 29 9.51 1.80 11.31 84Indonesia 450 27 7.70 8.47 16.17 48. - n% 290 38 7.69 25.35 33.04 23

300 27 3.01 8.34 11.36 27;ia 580 59 2.39 10.90 13.28 18

c J !voire 740 44 7.57 6.76 14.32 53Camieroon 970 46 8.53 9.91 18.44 46Peru 1,470 69 4.16 19.21 23.37 18Brazil 2,020 75 17.82 32.76 50.58 35Venezuela 3,230 83 1.26 106.17 107.43 1Germany, Fed. Rep. X,400 86 0.60 185.39 186.00 0United States '4,530 74 4.88 305.11 310.00 1

Source: OTA, 1991Note: GJ stands for Gigajoule; ihina figures from Wang, 1988.

2.4 In many situations, the continued use of non market biomass fuels may bevery much in the national interest, saving desperately needed foreign exchange. A fewhypothetical examples illustrate this point. Converting all households to modem fuelswould increase the oil import bill to levels which many devieloping countries could notafford. Fuelwood consumption in the developing countries is about 1.070 million TOE,of which 80% is used for cooking. The amount of kerosene or charcoal required toreplace this consumption of fuelwood would be about 245 million TOE. If kerosenewere the preferred substitute, this would increase world demand for oil by 9% anddevloping countries demand by 31 percent. Taking only urban demand (about 1/3 oftotal demand), then 80 million TOE would be required, a 10% increase in oil demand bydeveloping countries. Of course this is a hypothetical exampic and the actual situationis much more complex than this, but at least it illustrates the problems that might becaused by the under valuation of traditional fuels in the national accounts.

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2.5 Employment in sectors that closely compete with fuelwood provides rnuchneeded income for the urban and sometimes even the rural poor. Some examplesillustrate the importance of the employment generated by these substitutes for selectedcountries. The charcoal trade offers emp!oyment to 67,000 people in Haiti alone(UNDP/World Bank, 1991g, p. 37). In Niger, the firewood trade employs 5,000 persons(UNDP/World Bank, 1988, p. 6), and in Cameroon 3),000 persons (UNDP/World Bank,1991c, p. 16), while the commercial wood fuel trade offers full-time employment to some50,000 persons in Zambia (UNDP/World Bank, 1990h, p. 35). Also, the wages in thecommercial biomass sector can be more remunerative than an urban job for an unskilledlaborer, thus acting as an incentive to stay in the rural areas rather than to migrate. Forexample, wood cutters in Burkina Faso can earn about FCFA500,000 per year(UNDP/World Bank, 1991a, Annex X), while an unskilled laborer in Ouagadougou onlygets FCFA100,000.

2.6 Another major influence of the traditional fuels sector on general economicactivity results from factor competition. Household fuelwood production is a time-consuming and tiring activity that competes for labor services that could be applied toother activities, both marketed and non marketed. It should be kept in mind that thepotential diversion from other labor uses may be greater than is reflected by the numberof hours per week devoted to fuelwood gathering. If a person is engaged in fuelwoodgathering for one or two hours every other day, that person is not available for jobsthat require a week's continual presence at a specific location. The economic effect ofthis factor competition is to increase opportunity cost, of activities that compete for thelabor. Treating fuelwood-gathering labor as under employed or "free" means that thetrue costs of competing activities will be underestimated (see Rosenzweig, 1984). Ifthese competing activities are, for example, development projects, the undervaluing offuelwood gathering labor implies an over-valuation of these projects.

2.7 Despite these important effects on production, foreign exchange,employment, and factor substitution, the commercial biomass sector is often timesoverlooked when one lists a country's productive assets. For example, in Mali andBurundi, the power sector absorbs 10% of public funds to serve only 1% of finaldemand. By contrast, the biomass sector gets 0.01% of public funds, but serves 95% offinal energy demand (UNDP/World Bank, 1991b, 1991f). This is not to say that thecapital intensive power sector does not deserve to get a significant amount of publicfunds, but rather it is to emphasize that the biomass sector is really not even consideredas appropriate for financing, perhaps because it does not appear in the nationalaccounts.

2.8 Although the economic size of just the commercial wood product sector israther significant, the non-traded, non-monetized part of the biomass sector is evenlarger than the commercial one. Because the value of non marketed energy production isnot normally shown in the national accounts, there is an imbalance in political interestshown by governments and donors between the modem energy sector (power, oil, gas)and the traditional biofuels energy sector, as is clearly evident in any examination oflending by the multilateral banks. The technical support to the household energy sectoris very small. This imbalance can translate itself into a neglect of the sector to thedetriment of the national economy in general, and of the rural and urban poorpopulations, in particular. The time of women and children are particularly affected by

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the fuelwood trade and production, because they are the ones who collect and use thefuels. Women's time is important because, vaomen constitute 40% cf agricultural labourin Asia and sub-Saharan Africa. As can be seen from Table 2, the opportunity cost ofwomen's time can be quite higb. Fuel collection and food preparation can take up asmany as 5 hours per day. The more time that has to be spent on fuel collection the lesstime will be available for other vital economic tasks. Because children share in thesetasks, their school attendance may be negatively effected as well as their generaldevelopment.

Table 2. Rural Women and the End-use of Their Time(Hours per day)

Country Agriciltural Non-Agricultural Fotel Collection Cooking OtherWork Work

IndonesiaIrrigated villages 29 0.2 1.5 6.9 11.5Upland villages 3.1 0.5 2.4 6 12

India(Average 5 villages) 3.9 4 4.8 0.9 13.6

OhmnaSavannah villages 13 2.7 5 5 14Fishing villages 2 63 3.6 2.1 14Forest villages 3.8 03 4.1 5.8 14

Mozambique(Average 4 villages) 3.1 0.1 1.8 9 14

PeruCoastal desert 1A 2 2.2 5.6 11.2'ierra 4 1 3.8 2.4 11.2High Sierra 4 2 2.9 2.8 11.7

S urce: Cecelski, 1987

2.9 The crucial point , made here is not only that fuelwood production isundervalued, but that it goes L._koticed by government policy makers even though itmay play a significant role within the larger economy. As can be discerned from Table 1,with economic growth traditional fuel use plays less of a formal role in the economy asall kinds of other activities grow. Also, the value of fuelwood depends on the supplyand demand for fuelwood and other wood products. For rational policy-making, thetradeoffs between using traditional and modem fuels by households needs to be placedin a more conventional economic framework. To atcomplish this end, we next present amodel of household fuelwood production.

III. Household Fuelwood Production and Economic Interaction

3.1 The household fuelwood production model presented in Appendix Aserves to illustrate the basic point that househc'd fuelwood production is inherentlylinked to all other economic activity. The linkage is not simply in one direction: generaleconomic activity affects household fuelwood production (through the effects on pricesand wages) and household fuelwood production affects general economic activity. Thelatter influence is due to the effect that household fuelwood production is likely to haveon the general demand for goods and services and on the supply of labor available fornon-household production.2 For example, to the extent tht labor is devoted tohousehold fuelwood production, it may not be availat 'or market agriculturalproduction. Thus, increased dependence on fuelwood ;ol'1 imply increasedagricultural prices or decreased agricultural production for both domestic purposes andfor export. This model is a so-called partial equilibrium model since it focuses only onthe equilibrium behavior of the household. Prices and wages are taken a. given eventhough in reality, they are determined by the equilibrium behavior of other sectors of theeconomy. Nevertheless, the formulation does indicate that the marginal rate ofsubstitution between fuelwood labor and purchased energy is equal to the real energywage-that is, the money wage deflated by the price of purchased energy. This is basedon the reasonable assumption that the alternative employment opportunities for woodcollectors exist at the assumed rural wage rate.

3.2 Most of the relevant policy implications of the model are as follows. If theunderlying behavioral equations have their expected mathematical properties (e.g., thatindifference curves are convex to the origin), as real energy wages rise, either because ofincreases in the nominal wage or because of a fall in the market price of energy,household fuelwood production will be expected to fall. Conversely, if policies existthat either serve to raise purchased energy prices or to lower nominal wages, fuelwoodproduction would be expected to increase because of the substitution between non-marketed fuelwood gathering compared to purchased alternative energy supplies.3 Ofcourse, complex policies could lead to both increases and decreases in householdfuelwood production but at different times. Thus, structural adjustment programs couldin the short term increase fuelwood production if such programs required currencydevaluation and, thus, an increase in the domestic price of imported fuels. However, ifsuch programs were successful in the longer term, a decrease in fuelwood productioncould eventually occur as '1usehold incomes increase.

2 There is an extensive literature on rural labor markets in developing countries, partic: 'ly for Asia. Thenotion that the opportunity cost of time in rural areas is very low or zero is now out of favor. A basicassumption in the model is that the opportunity cost of time in rural areas can be measured by the rural wage.This assumption is now fairly well accepted in the development literature on rural wage markets (seeRosenzweig, 1984 as an example).

3 By explicitly specifying utility and production functions-that is, the explicit forms of (1), (2) and (4)-household production of fuelwood can be related to the other parameters and variables in the model. Inparticular, Cobb-Douglas-type functions will lead to relationships that are linear in logarithms and could,thus, be estimated with linear regressions.

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3.3 The model in its simplified form does not have the power to analyze indetail such general equilibrium interactions. In particuiar, it is unable to address spelificeconomic development policies that may influence fuelwood production through effectson energy prices gnd wages. Of course, the likely effects of certain policies are fairlyobvious. For example, direct price subsidies that lowered the price of marketed energywouiid have the expected effect of increasing purchased energy at the expense ofhousehold fuelwood production. For instance, significant kerosene subsidies inIndonesia have successfully encouraged three-quarters of urban households to usekerosene for cooking (see Fitzgerald and co-authors, 1990). Logging prohibitions inThailand in 1987 caused a rapid and significant increase in the prices of wood fuels,including charcoal which is used to cook traditional meals. As a consequence, in thelargest cities peoplc rapidly switched to alternative fuels. Hoviever, analyzing otherpolicy instruments may be more difficult since their effects on prices and wages may bemore indirect. For example, the effects of devaluation can be expected in the short runto raise imported energy prices and thus increase household fuelwood production.However, in the longer run the devaluation could improve the outlook for exports andthus may lead to increases in wages of those employed in the export sectors. Analysisof this policy requires information on the market wage opportunities of those producingfuelwood-esperially with regard to whether these opportunities are in the exportsectors.

3.4 Other policies, such as general macroeconomics fiscal or monetary policies,can also have indirect but substantial influences on fuelwood production. Analysis ofthese policies can be quite difficult since their ultimate effect on the individual fuelwoodproducer may result from the cumulative effects on many other sectors and forms ofeconomic activity. Partial equilibrium models-such as the one described above-are oflimited use for this purpose. Some form of general equilibrium analysis would benecessary. Such a general, inter-sector analysis can involve the use of formal modelssuch as input-output or other activity analysis models. Or it could simply consist of moreinformal, qualitative, even judgmental assessments of likely inter-industry effects.

3.5 Regardless of whether formal or informal methods are used, the analysisshould be supported by a data system that covers all the relevant inter-sectorrelationships. Fortunately, the basis for such a comprehensive data system alreadyexists: the national economic accounts.

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IV. Household Production in the Context of An ExpandedNational Accounting System

4.1 Besides generating the summary statistics used to measure a nation'seconomic performance (e.g., the GNP), the national economic accounts records allsignificant economic transactions among the nation's industrial, governmental, andhousehold sectors. The data gathered for this purpose have become the raw material formany formal and informal economic policy models. However, as useful as theseaccounts are, they have been criticized for a number of deficiencies. Two are worthmentioning since they affect the ability of the existing accounts to support analyses ofhousehold energy production.

4.2 First, while the accounts in most nations provide detailed information onindustrial activity, household activity is normally aggregated into a single sector. As aresult, no information is provided on income and consumption by income class, makingthe accounts inadequate for the analysis of policies affecting income distribution. Ofperhaps more importance for the analysis of household energy production, there is nodetailed inlormation in the accounts on household income and consumption by sourceof employment. This lack of detail makes it difficult to analyze the effects on householdbehavior of policies directed towards specific sectors such as agriculture.

4.3 Second, with very few exceptions, the conventional accounts only covereconomic activities that are reflected ir. market transactions. This second deficiency is atthe root of the criticism of the accounts concerning their failure to reflect adequately thedegradation of the environment and natural resources. In addition to the failure toaccount for non market environmental activity, the conventional economic accounts failto measure the non marketed production that takes place within households. Sincefuelwood production is a major example of this non market household activity, this is amajor deficiency.

4.4 In the past few years, there have been a number of research efforts directedtowards both these deficiencies. The recommended approach (especially by Ruggles,1986) for improving the usefulness of the accounts for distributional analysis is to linkthe accounts directly to the basic census micro-data sets that provide the raw data. Thislinkage is now possible due to modem computer hardware and, in fact, has been done inseveral countries such as Norway.

4.5 Extending the accounts to greater coverage of non market activity isreflected in a number of efforts to introduce accounting for environmental activities.4 Inaddition, there is a non-binding recommendation by the advisory committee on revisionof the U.N. System of National Accounts (SNA) to include non market householdproduction to the extent that this production covers goods that are also sold in ordinaryriarkets. Presumably, fuelwood production meets this criterion.5

4 These efforLs have been surveyed by Peskin (1990).

5 Apparently the advisory committee chose to confine household production to the production of goods (withclear market counterparts) rather than services in order to ease valuation problems. If the home-produced goodsdo have clear market counterparts, then market prices can be used for their valuation. However, the abovemodel suggests that this distinction between household-produced goods and services, while a statisticalexpedient, may not be justified economically. The model suggests that goods derive their value only to the

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4.6 One approach to expanding the conventional economic accounts in thismanner has been suggested by Peskin (1989). The general strategy is to introduce nonmarketed goods and services as if they were marketed. As indicated below, fuelwood isjust one such non-marketed activity. The valuations of these goods and services wouldbe based on estimates of what the consumers ov these goods and services wouldactually be willing to pay for their use.

4.7 In order to capture all of the relevant non market activity associated withhousehold fuelwood production, three sorts of modifications to the conventionaleconomic accorints would be needed. First, household fuelwood production has to betreated as if it were a non-household production activity. Second, the implications ofthe use of environmental services has to be explicitly recognized. In particular, themodified accounts should recognize that the environment serves households,agriculture, and industry as a receptor of pollutants (such as soil runoff) and as a directprovider of benefits to society (recreation services, amenity services, services to plantand animal species, etc.). Furthermore, the provision of these services may be in conflict(e.g., more waste disposal services usually means less of the direct beneficial services tosociety). Third, the deterioration in the stock of environmental assets, such as forests,has to be accounted for in a manner not unlike the way the conventional accounts treatthe deterioration of reproducible capital such as plant and equipment.

4.8 There are several ways to incorporate these concepts into a nationalaccounting framework. The following scheme is fairly straightforward and has theadvantage of preserving all the features of the conventional national accounts.

extent that they support services. Also, the model suggests that from the household's poLit of view, the valueof a good, such as fuelwood, depends not so much on market fuelwood prices, but more on the household'searning capacity (the "wage") ana the price of energy substitutes. Only if all markets were perfectlycompetitive would market fuelwood prices reflect the true value of household fuelwood production. Yet, ifmarkets were perfectly competitive, it would be hard to explain the co-existence of two alternative sources offuelwood-the market and the household.

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Figure 1:Modified National Iocome and Product Accounts

INPUT OUTPUT

Compensation of Employees. Personal ConsumptionProprietor's Income InvestmentIndirect Taxes Inventory ChangeGross Return to Capital Exports

ImporlsGovernrnent Goods and Services

CHARGES AGAINSTGROSS NATIONAL PRODUCT GROSS NATIONAL PRODUCT

Capital Depreciation (-) Capital Depreciation (-)

CHARGES AGAINST

NET NATIONAL PRODUCT NET NATIONAL PRODUCT

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4.10 The first new entry is a deduction for "Natural Resource Depreciation."This entry covers the value of depletion an degradation of all environmental andnatural resources. In principle, this depreciation entry should equal the differencebetween the discounted present value of the net benefits generated by the resource atthe beginning and the end of the accounting period. In the absence of estimates of netfuture benefits, some investigators (e.g., Repetto, 1990) have obtained an estimate bymultiplying the physical change in the resource times an average unit "rent." Forresources where the "benefit" generated can be identified as the current extracted yieldof the resource (e.g., timber from forests, minerals from mines, etc.) the rent is estimatedby the difference between the cost of extraction and sales.

4.11 The validity of this procedure depends on certain strong assumptions.6Moreover, it is only practical where the resource generates clearly marketed outputs.Thus, if in addition to marketed timber, forests produce non-marketed fuelwood,recreational amenities, and habitat for endangered species, the Repetto procedure willnot be viable. Furthermore, even if the outputs are marketed, there may not be anyobservable rents. This situation is very likely to occur when there is open access to theresource. Examples are open access fishing and unrestricted gathering of fuelwood.Peskin (1991) discusses these issues and suggests alternative approaches, one of whichis to estimate changes in resource values directly by applying the present value formulausing simple extrapolations to determine the stream of future net benefits.

4.12 Subtracting out Natural Resource Depreciation converts NET NATIONALPRODUCT to MODFED NET NATIONAL PRODUCT. Since the next major aggregateshown in the proposed modified accounts is MODIFIED GROSS NATIONALPRODUCT, the two depreciation entries, Capital Depreciation and Natural ResourceDepreciation are then added back on both sides of the accounts.

4.13 The next entry is "Household Production", which serves to increaseconventional GNP and NNl'. To simplify the presentation, the value of the output ofhousehold production is set at its input value. Thus, it is entered equivalently on bothsides of the accounts.7 How the value is determined is not self-evident. As discussedabove, fuelwood production could be measured by multiplying a physical measure offuelwood produced times a market price, assuming some private fuelwood markets exist.Another alternadve would be to multiply the number of hours in fuelwood productiontimes the household's potendal market wage. However, in the spirit of the above partialequilibrium model, the market wage should be deflated by the market price of fuelwoodenergy substitutes.

4.14 F-Alowing this adjustment, on the left side of the accounts are entriescovering the value of environmental waste disposal services to both industries andhouseholds. These entries serve to measure the positive value of pollution to polluters.

6 The strongest appears to be the "HoteUling" rle: that net benefits increase over time exactly at the maiket rateof interesL In addition, the approach assumes that there are no monopoly profits.

7 It would be possible to allow for a difference in input and output values. However, this would require abalancing entry similar to the 'Net Environmental Benefit" entry discussed below.

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The underlying assumption is that the waste disposal represented by this pollution is afreely provided factor input which is of value to the polluter.8 (As a matter ofconvention, it is being treated like a subsidy. Thus, it is entered with a negative sign. Inprinciple, these entries should be valued according to how much the polluter would bewilling to pay for the privilege of disposing his or her wastes into the environment. Inpractice, (see Peskin (1991)), the entries can be valued according to the prospectivecosts of eliminating the pollution.

4.15 While the discharge of pollutants may be of value to the polluter, thereleased pollutants generate social damages in terms of impairments to health and, moregenerally, impairments to the ability of people to enjoy the positive services of thenatural environment. The value of these damages are entered as negatively signedentries on the right side of the accounts. In principle, these entries are measured in termsof what affected parties would be willing to pay to avoid the damages. In practice, thevalue of pollution damage has been estimated by a number of techniques familiar in theliterature on estimation of pollution-control costs and benefits. (See Freeman (1979)).

4.16 While both the Environmental Waste Disposal Service entries and theEnvironmental Damage entries may be far more significant for industrial production thanfor household production in industrial countries, this may not be the case in developingcountries. In particular, fuelwood production and associated deforestation activities dogenerate wastes. The "costs" of both fuelwood gathering and fuelwood burningwould be very much higher than they are at present if gatherers and users were not freeto gen-rate these wastes. Thus, gatherers and uses receive a "subsidy", the value ofwhich should be entered on the left side of the accounts. Furthermore, the wastesgenerated, such as sedimentation for deforested lands, can have serious consequencesfor water-based recreation and for water-dependent ecosystems as well as for suchincome-producing sectors as hydro-electric power, agriculture, and fishing. The value ofthese damages could be significant.

4.17 Two other entries are required to complete the accounts. On the right sideare Direct Consumption of Environmental Services. These cover the positive (non-waste disposal) services that the environment provides to recreation, to esthetics, and tothe ecology. On the left side of the accounts, there is a balancing entry termed "NetEnvironmental Ben-,fit." The term is defined as the sum of waste disposal services(signed positively) and direct consumption services less environmental damages. Thisentry assures that the final aggregate, MODIFIED GROSS NATIONAL PRODUCT,equals CHARGES AGAINST MODIFIED GROSS NATIONAL PRODUCT.

4.18 In its highly consolidated form, the account displayed does not contain thedetailed information needed to support a general equilibrium analysis of householdenergy production. However, it is not possible to generate the consolidated accountwithout first assembling much of this detail. In a U.S. EPA pilot study of theChesapeake Bay region, for example, each consolidated account was supported byabout 15 detailed accounts that served to disaggregate the consolidated information by2-digit Standard Industrial Classification. These tables, in turn, were supported by even

8 Were this not the case-that is, were pollution elimination costless-, its elimination would be much easierthan it appears to be.

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more detailed files that provided information often at the plant level of detail. Thus, it ispossible to identify use of environmental services and sources of environmental damagein industrial and household detail as well as by geographical location. Since allinformation is indexed by standard industrial and regional codes, linking the informationto other data sets, such as the Population Census, is quite easy. These linkages withstandard economic and demographic information sets facilitate the use of theinformation in the modified accounts as an input to forecasting and simulation modelsand for more informal analyses.9

4.19 Presumably, building a set of environmental/economics accounts thathighlight the role of household fuelwood production would require data in similar detail,but not necessarily in equal detail for all sectors of the economy. Since fuelwoodproduction is dominated by rural households, more economic detail would seem berequired for these economic activities that are dominant in rural regions-agriculture,forestry, and fishing. Within these sectors, however, the requisite detail might be greaterthan typically required for most general economic analyses in industrialized countries.In particular, it may be necessary to not only classify activity by economic sector (e.g.,agricultural crops) and by product within economic sector (e.g., coffee), but also by thesex and age of the laborer. Thus, the data supporting the proposed account may notonly identify levels and location of crop production but also the composition of thelabor involved in the production broken down by sex and age. The reason for thisdetail is that earlier studies (Brio, 1974; B6rio et. al., 1985; and Kumar and Hotchkiss,1988) have shown that fuelwood production Ls performed by women and youngchildren. Moreover, agricultural activities, which may be an important source ot moneyincome, often competes directly for this same labor pool. Neglecting the sexualcomposition of the labor force can thus lead to an underestimation of the consequencesof the competition between market and non market activity.

9 An earlier effort by Peskin (1981) to build similar environmental accounts for the United States generateddata that permitted simulations of the costs, benefits, and income-distributional effects of a number ofalternative environmental policies.

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V. Implementation Strategies and Data Needs

5.1 There is only very limited experience actually implementing an accountingsystem along the lines discussed in the previous section. Most of this limited experiencehas been confined to industrialized countries. Moreover, the focus has been almostexclusively on accounting for the environmental and economic activities of businesses.The proposed accounting frameworks have neglected the non market activitiesoriginating in the household sector, with the possible exception of the householdsector's non market use of the environment as a receptor of wastes from automobilesand from sanitary sewerage.10 Fortunately, however, the non market behavior of thehousehold sector has been investigated in both industialized and developing countries,although not for the purpose of integrating the information into a system of nationalaccounts."1 Thus, while the experience is limited, there is enough known to developguidelines that would support a successful implementation strategy.

Sectoring and aggregation

5.2 The basic approach to implementing the system is to attempt to account forall the inputs consumed and outputs generated by the economic sectors represented bybusinesses, governments, and households regardless of whether these inputs andoutputs are marketed or non marketed. Of course, faced with finite resources for such aformidable task, one must simplify the task by aggregating the above economic sectorsinto a smaller number of manageable groups and by focusing attention of those sectorsthat, on a priori grounds, are the more important to the economy. In addition, choiceshave to made regarding aggregation over space as well as over economic sectors.Spatial aggregation may be necessary for analytical reasons. For example, the responseof households to energy price increases in forested areas are likely to be different fromthe mesponse in areas farther removed from sources of fuelwood. Spatial aggregationmay also be required for political reasons in nations where regional identity is important.

5.3 These choices of aggregation and of relative importance have to be madeto get the accounting process started. However, as information develops, differentaggregations may appear to make more sense and other sectors may gain in relativeimportance. It must be remembered that accounting in a dynamic process should alwaysbe open to continual revision.

5.4 For heavily agrarian African countries, it is likely that preliminaryaggregation choices should permit identification of those key sectors responsible fordomestic food production, food processing, agricultural exports, key extractiveindustries, and households, grouped into urban and rural regions. More aggregationcould be expected for the small manufacturing industries and for the trade sector.

10 The U.S. AID is funding an exploratory project in the Philippines that may include an accounting of thenonmarket production activities of the household sector.

11 The following is a representative sample of this literature: Bloch (1995), Kinsey (1986), Peskin, J. (1982),Gauger, et. al. (1980), Zick and Bryant (1987), and Gronau (1980).

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5.5 These aggregation choices, however, will be heavily influenced not onlyby what sectors are perceived to be "important," but also by the cost of developingdata on sector inputs and outputs. These perceptions and data development costs willdiffer country by country. In the initial stages of developing the accounting system,there will be heavy reliance on existing data sets. Doing so, of course, reduces the costsof data development but also helps identify the more important sectors, since it is thosesectors that are likely to have demanded past data collection resources.'2

Developing input-output information

5.6 In order for the accounts to support analyses of the complete economicimplications of policies affecting the household production of fuelwood, the list of sectorinputs and outputs should be equally complete. In industrialized countries, theconventional economic accounts, especially for countries that have adhered to theaccounting matrix system of the UN System of National Accounts, already generates thisinformation for marketed inputs and outputs. If, in addition, the industrialized countryhas an extensive natural resource and environmental policy system in place, there islikely to be data on non market inputs and outputs (e.g., waste disposal services andtheir costs, natural resource consumption, pollution, environmental amenities, etc.).

5.7 However, in developing countries, data on both marketed and nonmarketed inputs and outputs may be hard to obtain. One possible approach would be to"borrow" the data from industrial countries, modifying them, when possible, to accountfor local conditions. Thus, if all that is known regarding a particular manufacturing oragricultural operation in Africa is total production, then market and non market inputsand outputs could be inferred from data on similar operations in industrializedcountries.13 Engineering judgment could be used to adjust the data for the likelydifferences in labor/capital ratios, production technique, or product mix. When a similarstrategy was employed in a U.S. pilot study,14 the published estimates stimulatedknowledgeable sector experts to come forth with better information. It is possible that asimilar response could be expected in a developing country.

5.8 It is important, therefore, to not be over cautious in the development anddissemination of the accounting information. The dissemination of "bad" data is animportant step in the development of a complete accounting system.

Developing household information

5.9 The complete accounting framework requires that non market householdproduction be treated similarly to business production. What is needed is a completeaccounting of all marketed and non marketed household inputs and outputs. The inputsinclude purchases of goods and services, the use of the natural environment for

12 The importance of household activity in developing countries perhaps explains why existing data onnonmarket household activity appears more abundant in, say, Cote d'lvoire than in the United States.

13 This approach may be attempted in Indonesia using a combination of U.S. and Dutch data.

14 See Peskin (1981) for an overview of this project.

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enjoyment and for the disposal of wastes, and the consumption of its own labor services.The outputs include sales of marketed goods, marketed labor services, and theproduction of non marketed commodities such as fuelwood.

5.10 This information can be developed from three types of surveys: householdtime-use surveys, expenditure surveys, and employment surveys. While examples of allthree exist, there appear to be no cases in either developed or developing countrieswhere all three types have been consolidated into a single survey instrument. As aresult, it is difficult to "observe" the trade-offs between marketed employment,household fuelw'od production, and the price of energy suggested by the above time-use model. It may be possible to infer such trade-offs by looking at the aggregated dataon time use, employment, and expenditures over time (See Ironmonger, 1989), but, giventhe costs of surveying, it would be more efficient if these trade-offs could be viewed byexamining a cross section of households at a single point in time.

5.11 Thus, the development of such a single, comprehensive survey instrumentshould be an objective of the accounting effort. Such a survey should, at a minimumidentify time use spent in household fuelwood production, expenditures on fuelwoodenergy substitutes, and employment in sufficient detail to correspond to the sectorclassification used in the input-output accounting of business activity. Before such asurvey is developed, it may be possible to simulate the results by matching responsesfrom separate time-use, expenditure, and employment surveys, to the extent that suchsurveys exist. The match could be based on similar income, demographic, and locationalcharacteristics, and attributing such characteristics to a whole population.Unfortunately, the databases for such work are not well developed. Most energysurveys do not collect the requisite economic information, and most economic surveystypically ignore non-marketed fuelwood production. At this point we have to makefairly substantial assumptions concerning regional production of fuelwood based onaverage use per person. A starting point may be including questions and plans foranalysis in the Living Standards Surveys being conducted by the UNDP/World Bank.

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VI. Applications of the Accounting Scheme to Tanzania

6.1 Peskin (1983) illustrated the insights provided by an expanded nationalaccounting framework using data from Tanzania.15 He was especially interested in howsuch accounts could assist in project evaluation-specifically, the evaluation of ahypothetical project to develop fuelwood plantations. Such plantations could reducethe time and effort needed to gather fuelwood and, at the same time, help preservenatural forests. On the other hand, plantation forestry makes considerable demands onthe available labor. To the extent that this labor is drawn from other productiveactivities, there may be considerable effects on the size and composition of totalproduiction as well as the availability of foreign exchange. Depending on the size ofthese effects, plantation forestry may appear less attractive when considered from thepoint of view of the economy as a whole than from the point of view of the projectconsidered in isolation. Specifically, by not viewing the project in the holistic termsprovided by the expanded accounts, the true opportunity costs of the project may beunderstated.

6.2 The starting point of the analysis is tscertain the importance offuelwood in the Tanzanian economy. The following, based on official statistics(Tanzania Bureau of Statistics, 1981), is a highly consolidated version of the TanzanianGDP:

Figure 2: CONVENTIONAL GDP ACCOUNTS FOR TANZANIA, 19q0(millions of Tanzanian shillings)

INPUT OUTPUT

Employees Compensation 10,673 Govemment Purhases 5,494Profits and Proprietors Private Consumption 31,369Income 23,319 Investment 8,748

NATIONAL INCOME 33,992 Exports 5,689IndireTaxes 5,176 Imports -10,847Subsidies 408NET NATIONAL PRODUCT 38,760Capital Consumption 1,666

CIHARGES AGAINSTGROSS DOMESTIC PRODUCT 40,426 GROSS DOMESTIC PRODUCT 40,426

6.3 Since the focus of this example is solely on fuelwood, he made only twomodifications to the accounts. First, Employee Compensation was modified to accountfor the imputed value of household labor used for the cutting, gathering, and transportof fuelwood.

6.4 In making this modification , it is necessary to account for the fact that theTanzanian accounts already include in NATIONAL INCOME about 11,533 millionshillings as the imputed value of household production of agricultural, hunting, fishing,and forestry products. Of this total, about 207 shillings is attributed to householdfuelwood production, based on an estimate of fuelwood volume produced times a value

15 A brief description of this study may be found in Peskin (1989).

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set to approximate the market price. However, the fuelwood market in Tanzania is smalland confined to urban areas, while most fuelwood consumption is in rural areas.Therefore, the market price may be unrepresentative of the unit value placed onfuelwood by rural households.

6.5 Using Allen's (1983b) data, an alternative estimate can be obtained bymultiplying an estimated 137 million person-days per year spent in household fuelwoodproduction times the Tanzanian minimum wage assumed to be 20 shillings per day. Thiscalculation yields a much larger estimate of the value of fuelwood production: 2,746million shillings as opposed to the "official" figure of 207 million shillings. The effect ofusing this higher number in the accounts is to increase NATIONAL INCOME by 2,539million shillings (2,746 - 207). On the input side of the accounts, this increase isbalanced by an increase in Private Consumption by the same amount.16

6.6 The second modification is to account explicitly for the depreciation of thecapital value of forests as a fuelwood generator. (In this exercise, he was not accountingfor the capital value of forests in terms of its generation of other goods and services,both marketed and non marketed.) Calculation of depreciation, especially for assets thatgenerate non market services, is somewhat controversial. Therefore, depreciation wascalculated under three alternative approaches.

6.7 First, he applied the "net rent" approach of Repetto (Repetto, et. al. 1990).Essentiallv under this approach, depreciation is calculated by multiplying fuelwoodextraction net of regeneration times the average unit rental value of the extractedfuelwood. This method will provide a theoretically correct estimate of depreciationassuming the so-called "Hotelling rule": the rate of return to the owners of anextractable resource increases at the market rafte of interest. Lacking an cbserved rent,he used the imputed value of the cutting (2,746 million shillings) divided by thefuelwood consumption, estimated by Allen (1983b) to be about 18.7 million cubic metersin 1980. Allen also estimates that about 5.7 million cubic meters, or 31 percent,regenerated. Thus, of the gross consumption of 2,746 million shillings, about 840shillings worth of fuelwood regenerated. This implies that the net depreciation is about1,906 million shillings (2,746-840).

6.8 The second approach is to estimate the lifetime of the fuelwood asset(defined as all sources of fuelwoc - including brush), the returns over this lifetime, andthe implied present asset value. "Straight-line" depreciation can then be estimated bydividing present asset value by estimated lifetime. Lifetime can be estimated in thefollowing manner. The stock of fuelwood remaining at any time equals:

R (t) = So + G(t) - C(t)

where So is the initial stock, G(t) is the annual regeneration, and C(O) is annualconsumption. Initial stock is estimated to be 902.7 million cubic meters. Regeneration isestimated to be about 0.3 cubic meters per hectare-but only for cut fuelwood. (That is,cutting is assumed required for regeneration.) As noted above, in the base year of 1980,cutting was estimated to be about 18.7 million cubic meters. It is estimated that this will

16 The implicit assumption is that the consumption value of fuelwood equals the household labor input value.

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increase over time in proportion to population growth, which, in turn, is estimated toincrease at about 2.5 percent per year. Thus, cutting over time is estimated to be 18.7 (1+ 0.025)t million cubic meters. Since there are 336.5 cubic meters per hectare, theseassumptions imply that

Gt) = (0.3) x 18.7 (1 +0.025)'336.5 and C (t) = 18.7 (1 +0.025)'

Inserting these values into the equation for R (t) . This equation can be solved for thatvalue of t when the remaining stock of fuelwood is exhausted (R (t) = 0). This value, T,is the estimated lifetime or, given our assumptions, 157 years.

6.9 The present asset value of the fuelwood fo:est can be calculated bydiscounting the consumption value ( or C (t) = 2746 (1 +0.025)' ) over the lifetime of 157years at an assumed interest rate of 12 percent. Thus,

157

PVO = 2746 (+ 0.025)1 = 29,622,411 thousand shillings

Dividing this by 157 yields a straight-line depreciation of 188,677 thousand shillings.

6.10. A third estimate of depreciation can be based on the economic definitionof depreciation, namely, the change in asset value over time. During years near the baseyear, this value can be quite small for assets with long lifetimes. In this case, depreciationequals PVO -PV1. Of course, we do not know how present values will change over time.However, we can establish a depreciation "schedule" by assuming that theconsumption value will continue to grow at the same rate. Under this assumption, PV1equals 29, 622, 409 thousand shillings. Thus, first-year economic depreciation equalsonly 2,000 thousand shillings. Of course, other assumptions are possible. Therefore, thecalculations are only illustrative.

6.11. Given these enormous disparities, it is apparent that much more researchwill be required before a single depreciation figure can be entered into the modifiedaccounts. Nevertheless, for illustrative purposes, we shall use the straight- line estimate inthe modified Tanzanian accounts.

The modified accounts thus take the following form:

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Flgum c 3: MODIFIED GDP ACCOUN'TS FOR TANZANIA, 1980(millions of Tanzanian shillings)

INPUT OUTPUT

Eimployees Compensation 10,673 Govemrnment Purchases 5,494Plus Value of Household Private Consumption 31,369Fuelwood Production 2,539 Plus Household FuelwoodEquals Modified Employee Consumption 2,539Compensation 13,212 Equals Modified PrivateProfits and Proprietors Consumption 33,908Income 23,319 Investnent 8,748

MODIFED NATIONAL INCOME 36,531 Exports 5,689Indirect Taxes 5,176 Imports -10,874Subsidies -408Less Depreciation ofFuelwood Forests -189MODIFIED NET PRODUCT 41,110Capital Consumption 1,666Plus Depreciation ofFuelwood forests 189MODIFIEDGROSS DOMESTIC PRODUCT 42,965 GROSS DOMESTIC PRODUCT 42,965

6.12 Accounting for household fuelwood production in this illustrationincreases consumption by 2,539 million shillings or 8 percent. Capital consumptionincreases by the value of fuelwood forest depreciation of 189 million shillings or 11percent. Overall Tanzanian GDP increases by the amount of fuelwood consumption(2,539 million shillings) or 6 percent.

6.13 The 2,539 million shillings of conventionally-uncounted consumption issupported by an equal value of household labor. This labor, while neglected in theconventional accounts, is in competition for labor elsewhere in the economy. Thehypothetical plantation project would similarly compete for this labor. According toAllen (1983b), approximately 648 million additional person-days will be required peryear to meet current fuelwood demands from plantations. A conventional cost-benefitanalysis would treat these additional person days as a cost against which the benefits ofnatural forest preservation would be compared. At the assumed minimum wage of 20shillings per day, this cost would be about 12,960 million shillings. However, if theplantation labor were drawn from the pool of non market labor, a conventional benefit-cost analysis would value the labor near zero-justifying the project without the needto quantify its benefits.

6.14 The expanded accounts provides a different perspective. Regardless oftheir previous status as "under-" or "unemployed", the expanded accounts wouldshow some output reduction (some of which would be non marketed, householdoutput) due to the labor required by the plantations. Indeed, since the estimated 12,960million shillings of additional plantation labor equals the total market value of employedlabor in Tanzania in 1980, it is quite likely that the plantations would have to draw onnon market as well as market activities. Neglecting the value of these non marketactivities necessarily implies that the opportunity costs of the project will beunderestimated. Using an expanded accounts to support the benefit-cost analysismakes the neglect of these non market activities much less likely.

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VUI. Summary and Conclusions

7.1 The notion that GNP does not accurately reflect production in poordeveloping countries has widespread acceptance. The problem of under-measuringnational production has been well known for decades. Instead of trying to account forthe many areas of informal trade and production, we have focused only on fuelwoodproduction. There are several reasons for choosing fuelwood production. In thepoorest countries uncounted fuelwood production is the main source of energy for mosthouseholds. Inattention by policy makers to this sector also could lead to distortions inother energy markets. These are complicated matters that require a comprehensiveeconomic framework because of the tradeoffs households must make between utilizingtheir labor for collecting fuel compared to purchasing more convenient fuels with scarcecash income.

7.2 The national accounts are weak in measuring household production and,particularly, in their ability to account for women's time. In low income countries, theamount of time spent on energy collection and use may contribute significantly tooverall economic output. The value of this output is not readily computed since it willvary depending on the opportunity cost of time, the market value of the collectedfuelwood, and other factors. Nevertheless, the contribution of the informal productionto the economy should not go uncounted.

7.3 Policy makers in certain instances can be misled by the notions that largeinfrastructure projects are superior to more mundane projects that may deal with informalhousehold production. In the agricultural development literature, there is a consensusemerging that labor-intensive forms of agricultural development may lead to moreequitable economic growth than labor-substitution methods (see Mellor, 1976). Theargument is that the labor displacement by large, capital intensive agricultural schemesleads to conc ntration of wealth that is unhealthy for the larger economy. Likewiseover-investment in large capital intensive energy schemes that do not lead to significanteconomic growth with widespread benefits for society may do nothing but aggravateinequality while hindering economic growth. Until we understand both the linkagesbetween the formal and informal energy production--especially in low income countries--we will not be able to *ietermine whether this is true for the energy sector as well.

7.4 This paper has not dealt with the environmental externalities involved inhousehold energy production. (see Teplitz-Sembitzky and Schramm, 1989). Obviously,the use of locally produced biomass saves foreign exchange for imported oil for oilimporting countries, but the collection of biomass from unmanaged sources that drawdown tree stocks without replanting them would depleted national resources. Inaddition, households that switch to agricultural residues may be depleting soils oforganic matter, reducing agricultural produ -ftion. These are all important issues that mustbe addressed at a later stage.

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7.5 One of the most important contributions of including householdproduction in the national accounts is not only that the value of household productionis more accurately reflected in economic accounts, but the fact that the impact ofdevelopment can be more fairly measured. Such a framework is essential for evaluatingthe benefits of energy projects, especially in poor developing countries where informalproduction is a large component of unmeasured GNP.

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References

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Allen, Julia C. 1983b. "Value of Labor for Wood Collection" (July, 4) (Processed).

Barnes, Douglas and Liu Qian, 1991. "Urban Interfuel Substitution. Energy Use. andEquity in Developing Countries: Some Preliminary Results." paper presented atthe 1991 International conference of the International Association of EnergyEconomics, East-West Center, Honolulu, Hawaii, July 8-10.

Becker, Gary S. 1981. A Treatise on the Family Cambridge, Mass.: Harvard UniversityPress.

B&rio, Ann-Jacqueline. 1974. "The Analysis of Time Allocation and Activity Patterns inNutrition and Rural Development Planning."Food and Nutrition Bulletin. Vol. 6,No. 1, pp. 53-69.

Berio, Ann-Jacqueline.. Patrick Frangois, Alice Odounfa. 1985. "Seasonality ActivityPatterns and Household Food Supply in the Rural Areas of Ivory Coast." paperpresented to the IFPRI/FAO/AID workshop on Seasonal Causes of HouseholdFood Insecurity, Policy Implications and Research Needs, Annapolis, Maryland(December 10-13).

Bloch, Farrell E. 1975. The Allocation of Time to Household Work. Working Paper No64, Industrial Relations Section, Princeton University.

Cecelski, Elizabeth. 1987. "Energy and Rural Women's Work: Crisis. Response andPolicy Alternatives". International Labour Review, vol. 126, p. 45.

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Freeman A. Myrick III. 1979. The Benefits of Environmental Improvement: Theoryand Prxatige. Baltimore: John Hopkins Press for Resources for the Future.

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Gronau, Reuben. 1980. "Home Production-A Forgotten Industry." The Review ofEconomics and Statistics, Vol. LXII, No. 3 (August).

Ironmonger, Duncan, ed. 1989. Households Work Sydney: Allen & Unwin.

Kinsey, Jean. 1986. Modeling the Value of Household Production and Leisure Time:An Historical Development. Paper presented at the Human resources researchSymposium, St Louis, Mo. (March).

Mellor, 1976. The New Economics of Growth: A Strategy for India and the DevelopingWorld. Ithaca: Comell University Press.

Peskin, Henry M. 1983. National Accounts and the Development Process (Illustrationwith Tanzania} Washington, D.C.: Resources for the Future (Processed).

Peskin, Henry M. 1989. "A Proposed Environmental Accounts Framework." in YusufJ. Ahmad, Salah El Serafy, and Ernst Lutz, eds. Environmental Accounting forSustainable Development Washington, D.C.: The World Bank.

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Peskin, Janice. 1982. "Measuring Household Production for the GNP", FamilyEconomics Review (3) 16-25.

Repetto, Robert, William Magrath, Michael Wells, Chuistine Beer, and Fabrizio Rossini.1989. Wasting Assets: Natural Resources in the National Income AccountsWashington, D.C.: World Resources Institute.

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Appendix A

The Fuelwood Production Model

1 The following model-an application of the household production modelof Becker (1981)-illustrates how household fuelwood activity interacts with othermarket activity. For those not interested in the mathematical derivation, the model isexplained in the section that immediately follows.

2 The model consists of the following endogenous variables:

u Utilityz "Z"-goodsQ Market goodsME Purchased energyF Fuelwood energy (nonmarket)E Total energyTH1 Household production time (except for

fuelwood)TF Fuelwood gathering timeTW Work time (market)L Leisure

The following parameters are not determined by the model:

T Total timePQ Market prices of goods (except purchased

energy)PnE Market price of purchased energyw Wage rate

3 These variables and parameters are related by a system which assumes thathousehold utility depends on leisure, L, and a vector of goods and services that are"produced" within the household with various home-produced and purchased inputs.The model assumes that the household derives no utility from goods themselves but onlyfrom transformation of these goods. In effect, the household gets no utility from food,per se, but only from "meals"-a transformation of the food. The transformed goodsand services are represented by the variable Z. The resulting utility function is thus:

U =U(Z, L). (1)

4 In this model, the production process that generates the "Z"-goods isrepresented by a production function that contains only three inputs: market-purchasedgoods, Q, energy, E, and the time the household devotes to this production activity, Tn.Thus,

Z = Z (Q,E,TH). (2)

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5 However, the household has the choice of purchasing the energy on themarket or producing the energy itself through the collection of fuelwood. To keepmatters simple, the model assumes that these two sources of energy are perfectlysubstitutable. Thus,

E=ME +F (3)

where MAE and F are quantities of purchased energy and fuelwood respectively.

6 Fuelwood is generated by a another production process that assumes noinput other than collection time, TF:

F=F(TF). (4)

7 To the extent the household uses purchased goods and energy, theamounts consumed cannot exceed money income available. Since this model is notdynamic, it would never be in the household's interest to save its money income.Therefore, the following equality must hold:

WTw=PQQ + PEME, (5)

where w Tw is money income, PQQ is expenditure on market goods, and PEME isexpenditure on market energy.

8 The only real constraint in this model is the amount of available time, T.Thus, the following time budget must hold:

T =Tw+TH+TF+L. (6)

9 The economic problem facing this household is to maximize its utility,described by equation (1), subject to the time constraint imposed by equation (6), theproduction processes described by equations (2) and (4), and the assumptions embodiedin equations (3) and (5). This constrained maximization problem is equivalent tomaximizing the following Lagrangian:

A - U [Z (Q, ME +F (TF), TH1), L+ Xi (w TW - PQ Q - PEME)+ X2(T - TW - TH - TF- L)

10 Maximization leads to the following first order conditions:

UQ - ALPQ = 0 )

-L= UL - A2= °aL ~~~~~~~~~~~~(8)

- 29 -

aA= UM8 - AIPE = °WME (9)

a = UTF- A2 =0 arTF (10)

AT= UTH - 2 = (11)

- = ;L1W -A2 = OaTw (12)

Inspection of these first-order conditions leads to several important, albeit notunexpected, results.

From (12),

AI (13)That is, in equilibrium, the nominal money wage equals the shadow price of time dividedby the shadow price of income. This ratio has been identified as "the opportunity costof time." (Kinsey, 1986, p. 32).

From (7), (8) and (12),

. Jr = w

UQ PQ. (14)

The marginal rate of substitution between leisure and purchased goods equals the realwage (the money wage divided by the price of goods).

From (7) and (9),

UQ= PQUM, PME. (15)

The marginal rate of substitution between purchased goods and purchased energy isequal to the ratio of their respective prices.

Fmally, from (9), (10) and (12),

UT), w

UM, PE. (16)

- 30-

The marginal rate of substitution between fuelwood labor and purchased energy is equalto the real energy wage-that is, the money wage deflateJ by the price of purchasedenergy.

World Bank Industry and Energy Department

ENERGY SERIES PAPERS

No. 1 Energy Issues in the Developing World, February 1988.

No. 2 Review of World Bank Lending for Electric Power, March 1988.

No. 3 Some Considerations in Collecting Data on Household Energy Consumption,March 1988.

No. 4 Improving Power System Efficiency in the Developing Countries throughPerformance Contracting, May 1988.

No. 5 Impact of Lower Oil Prices on Renewable Energy Technologies, May 1988.

No. 6 A Comparison of Lamps for Domestic Lighting in Developing Countries, June1988.

No. 7 Recent World Bank Activities in Energy (revised October 1989).

No. 8 A Visual Overview of the World Oil Markets, July 1988.

No. 9 Current International Gas Trades and Prices, November 1988.

No. 10 Promoting Investment for Natural Gas Exploration and Production inDeveloping Countries, January 1989.

No. 11 Technology Survey Report on Electric Power Systems, February 1989.

No. 12 Recent Developments in the U.S. Power Sector and Their Relevance for theDeveloping Countries, February 1989.

No. 13 Domestic Energy Pricing Policies, April 1989.

No. 14 Financing of the Energy Sector in Developing Countries, April 1989.

No. 15 The Future Role of Hydropower in Developing Countries, April 1989.

No. 16 Fuelwood Stumpage: Considerations for Developing Country Energy Planning,June 1989.

No. 17 Incorporating Risk and Uncertainty in Power System Planning, June 1989.

No. 18 Review and Evaluation of Historic Electricity Forecasting Experience, (1960-1985), June 1989.

No. 19 Woodfuel Supply and Environmental Management, July 1989.

No. 20 The Malawi Charcoal Project - Experience and Lessons, January 1990.

No. 21 Capital Expenditures for Electric Power in the Developing Countries in the1990s, February 1990.

No. 22 A Review of Regulation of the Power Sectors in Developing Countries,February 1990.

No. 23 Summary Data Sheets of 1987 Power and Commercial Energy Statistics for 100- Developing Countries, March 1990.

No. 24 A Review of the Treatment of Environmental Aspects of Bank Energy Projects,March 1990.

No. 25 The Status of Liquified Natural Gas Worldwide, March 1990.

No. 26 Population Growth, Wood Fuels, and Resource Problems in Sub-SaharanAfrica, March 1990.

No. 27 The Status of Nuclear Power Technology - An Update, April 1990.

No. 28 Decommissioning of Nuclear Power Facilities, April 1990.

No. 29 Interfuel Substitudon and Changes in the Way Households Use Energy: TheCase of Cooking and Lighdng Behavior in Urban Java, October 1990.

No. 30 Regulation, Dereguladon, or Reregulation--What is Needed in LDCs PowerSector? July 1990.

No. 31 Understanding the Costs and Schedules of World Bank Supported HydroelectricProjects, July 1990.

No. 32 Review of Electricity Tariffs in Developing Countries During the 1980s,November 1990.

No. 33 Private Sector Particip.:ion in Power through BOOT Schemes, December 1990.

No. 34 Identifying the Basic Conditions for Economic Generation of Public Electricityfrom Surplus Bagasse in Sugar Mills, April 1991.

No. 35 Prospects for Gas-Fueled Combined-Cycle Power Generation in the DevelopingCountries, May 1991.

No. 36 Radioactive Waste Management - A Background Study, June 1991.

No. 37 A Study of the Transfer of Petroleum Fuels Pollution, July 1991.

No. 38 Improving Charcoaling Efficiency in the Traditional Rural Sector, July 1991.

No. 39 Decision Making Under Uncertainty - An Option Valuation Approach to PowerPlanning, August 1991.

No. 40 Summary 1988 Power Data Sheets for 100 Developing Countries, August 1991.

No. 41 Health and Safety Aspects of Nuclear Power Plants, August 1991.

No. 42 A Review of International Power Sales Agreements, August 1991.

No. 43 Guideline for Diesel Generating Plant Specification and Bid Evaluation,September 1991.

No. 44 A Methodology for Regional Assessment of Small Scale Hydro Power,September 1991.

No. 45 Guidelines for Assessing Wind Energy Potential, September 1991.

No. 46 Cure Report of the Electric Power Utility Efficiency Improvement Study,September 1991.

No. 47 Kerosene Stoves: Their Performance, Use, and Constraints, October 1991.

No. 48 Assessment of Biomass Energy Resources: A Discussion on its Need andMethodology, December 1991.

No. 49 Accounting for Traditional Fuel Production: the Household-Energy Sector andIts Implications for the Development Process, March 1992.

For copies, please call (202) 473-3616 or extension 33616.

INDUSTRY SERIES PAPERS

No. 1 Japanese Direct Foreign Investment: Patterns and Implications forDeveloping Countries, February 1989.

No. 2 Emerging Patterns of International Competition in Selected IndustrialProduct Groups, February 1989.

No. 3 Changing Firm Boundaries: Analysis of Technology-Sharing Alliances,February 1989.

No. 4 Technological Advance and Organizational Innovation in theEngineering Industry, March 1989.

No. 5 Export Catalyst in Low-Income Countries, November 1989.

No. 6 Overview of Japanese Industrial Technology Development, March 1989.

No. 7 Reform of Ownership and Control Mechanisms in Hungary and China,April 1989.

No. 8 The Computer Industry in Industrialized Economies: Lessons for theNewly Industrializing, February 1989.

No. 9 Institutions and Dynamic Comparative Advantage Electronics Industryin South Korea and Taiwan, June 1989.

No. 10 New Environments for Intellectual Property, June 1989.

No. 11 Managing Entry Into International Markets: Lessons From the EastAsian Experience, June 1989.

No. 12 Impact of Technological Change on Industrial Prospects for the LDCs,June 1989.

No. 13 The Protection of Intellectual Property Rights and I idustrialTechnology Development in Brazil, September 1989.

No. 14 Regional Integration and Economic Development, November 1989.

No. 15 Specialization, Technical Change and Competitiveness in the BrazilianElectronics Industry, November 1989.

INDUSTRY SERIES PAPERS cont'd

No. 16 Small Trading Companies and a Successful Export Response: LessonsFrom Hong Kong, December 1989.

No. 17 Flowers: Global Subsector Study, December 1989.

No. 18 The Shrimp Industry: Global Subsector Study, December 1989.

No. 19 Garments: Global Subsector Study, December 1989.

No. 20 World Bank Lending for Small and Medium Enterprises: Fifteen Yearsof Experience, December 1989.

No. 21 Reputation in Manufactured Goods Trade, December 1989.

No. 22 Foreign Direct Investment From the Newly Industrialized Economies,December 1989.

No. 23 Buyer-Seller Links for Export Development, March 1990.

No. 24 Technology Strategy & Policy for Industrial Competitiveness: ACase Study of Thailand, February 1990.

No. 25 Investment, Productivity and Comparative Advantage, April 1990.

No. 26 Cost Reduction, Product Development and the Real Exchange Rate,April 1990.

No. 27 Overcoming Policy Endogeneity: Strategic Role for DomesticCompetition in Industrial Policy Reform, April 1990.

No. 28 Conditionality in Adjustment Lending FY80-89: The ALCID Database,May 1990.

No. 29 International Competitiveness: Determinants and Indicators,March 1990.

No. 30 FY89 Sector Review Industry, Trade and Finance, November 1989.

No. 31 The Design of Adjustment Lending for Industry: Review of Current Practice,June 1990.

INDUSTRY SERIES PAPERS cont 'd

No. 32 National Systems Supporting Technica' Advance in Industry: The BrazilianExperience, June 26, 1990.

No. 33 Gha.ia's Small Enterprise Sector: Survey of Adjustment Response andConstraints, June 1990.

No. 34 Footwear: Global Subsector Study, June 1990.

No. 35 Tightening the Soft Budget Constraint in Reforming Socialist Economies,May 1990.

No. 36 Free Trade Zones in Export Strategies, December 1990.

No. 37 Electronics Development Strategy: The Role of Government, June 1990

No. 38 Export Finance in the Philippines: Opportunities and Constraints forDeveloping Country Suppliers, June 1990.

No. 39 The U.S. Automotive Aftermarket: Opportunities and Constraints forDeveloping Country Suppliers, June 1990

No. 40 Investment As A Determinant of Industrial Competitiveness and ComparativeAdvantage: Evidence from Six Countries, August 1990 (not yet published)

No. 41 Adjustment and Constrained Response: Malawi at the Threshold ofSustained Growth, October 1990.

No. 42 Export Finance - Issues and Directions Case Study of the Philippines,December 1990

No. 43 The Basics of Antitrust Policy: A Review of Ten Nations and the EEC,February 1991.

No. 44 Technology Strategy in the Economy of Taiwan: Exploiting Foregin Linkagesand Investing in Local Capability, January 1991

No. 45 The Impact of Adjustment Lending on Industry in African Countries,June 1991.

No. 46 Banking Automation and Productivity Change: The Brazilian Experience,July 1991.

No. 47 Global Trends in Textile Technology and Trade, December 1991.

No. 48 Are There Dvnamic Externalities from Direct Foreign Investment? Evidencefor Morocco, December 1991.

No. 49 Do Firms with Foreign Equity Recover Faster From Financial Distress? TheCase of Colombia, December 1991

No. 50 International Competition in the Bicycle Industry: Keeping Pace withTechnological Change, December 1991.

No. 51 International Competition in the Footwear Industry: Keeping Pace withTechnological Change, December 1991.

No. 52 International Trends in Steel Mini-Mills: Keeping Pace with TechnologicalChange, December 1191.

No. 53 International Competition in Printed Circuit Board Assembly: Keeping Pacewith Technological Change, December 1991.

No. 54 Efficiency, Corporate Indebtedness and Directed Credit in Colombia,December 1991.

Note: For extra copies of these papers please contact Miss Wendy Young onextension 33618, Room S-4101