Extractive Reserves as Property Right Regime for Biodiversity Conservation in the Brazilian Amazon

Timo Goeschl & Danilo Camargo Igliori

Fourth Bioecon Workshop on the Economics of Biodiversity Conservation

Venice28 August 2003

Department of Land Economy

Research

1. Preliminary efforts: presented at the first Biecon workshop, Rome, May 2002

2. Progress:

1. Dynamic Hotelling Model, paper presented at the Eaere annual conference, Bilbao, June 2003 (available at https:\\www.gruponhaise.com/eaere2003/session03.htm)

2. Analysis of Property Rights

Policy problem

• Maintenance of biologically diverse ecosystems

• Land requirements and the opportunity costs of non-conversion

critical trade-off for developing countries

Brazilian answer

• In the 1960s and 1970s:– Development programme– Road building – New settlements– Agriculture and pastureland

• From the 1980s: – Conservation becomes part of the development

agenda– New instrument: Extractive reserves

Extractive Reserves• Objective:

– conservation and development in territorial spaces of ecological and social importance

• Approach:– Property rights over land and biological capital stock held by the

federal government.– Property rights over the flow of NWFP contracted out to indigenous

community

• Assessment:– Highly ambiguous (Peluso 1992, Allegretti 1994 versus Andersen et

al. 2003, Southgate 1998, and others)– Key problem: Competition with plantations producing NWFP using

preferred production conditions

NWFP competitors

Plantation• Owns all assets• Free choice of

technology• Free choice of stock of

biological/genetic capital

• Cost dynamics (technology vs. genetic depreciation)

Extractive Reserve• Owns only outputs and

non-biological inputs• Restricted to technology

approved under use plan• Fixed biological/genetic

capital stock• No cost dynamics

Can ER work in theory?

• Competition between highly heterogeneous producers

• Factors in favour of viable Extractive Reserves– Spatial aspects: market power

Transportation costs, spatial differentiation

– Intertemporal aspects: cost dynamicsYield loss dynamics, pesticide, genetic improvement

– IO aspects: Vertical interactions with competitorsSupply of germplasm to intensive production

Are these factors sufficient to generate long-run positive profits?

Model

• Positive analysis• Construct ‘most favourable’ scenario

– Stylised model of spatial duopolistic competition between two heterogeneous competitors

– Heterogeneous dynamics: One competitor features production cost dynamics of investment and depreciation of biological capital

=> Dynamic Hotelling model

• Assess long-term viability of an extractive reserve under this scenario

Markets for NWFP

• Revenue source for ER• Commodities: Rubber, nuts, oils,...• Common feature: Products produced using a

biological capital stock• Market participants:

– Extractive reserves– Plantations / Quasi-plantations

Horizontal interaction only

Proposition I

If biological inputs are priced and relatively scarce, then

the extractive reserve can sustain long-run positive

profits.

Proposition II

If biological inputs are not priced or not relatively scarce

and initial production costs for plantations are high, then

the extractive reserve can earn interim positive profits

while plantation costs converges to limit price at which

reserve exits.

Markets for biological inputs

• Relies on cost dynamics of plantation depreciation of genetic inputs

• Critical issue: price of biological inputs• ER as biological input supplier:

– Uses locally abundant biological capital– Uses local human capital (knowledge)– Neg. link between market share on NWFP and

demand for biological inputs

Vertical and horizontal interaction

Proposition IIIIf the rate of exogenous technological progress is low, the reserve will make positive long-run profits on both the output and input market.

If the rate of technological progress is moderate, the reserve will make positive long-run profits on the input market only.

Proposition IV: Vertical interaction is not strictly improving reserve’s welfare position.

Markets for new NWFP

• NWFP: Limited long-run revenue potential• But evidence of short-run potential through

temporary monopoly on NWFP market• Can ER generate sequences of new NWFP?

– Uses locally abundant biological capital stock– Returns to product search?

• Cost of product search• Pool of potential products in capital stock

Evidence

0

0.2

0.4

0.6

0.8

1

1.2

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

years

mar

ket s

hare

extraction

cultivation

Development pathways

Analysis suggests three possible pathways(1) Continued production of existing NWFP(2) Discovery of new NWFP(3) Supply of biological inputs

Question: Property rights in place to support pathways bygenerating rents for relevant inputs/outputs?

Property rights within the reserveSTATE

Land Ownership

Determines the constraintsover resource exploitation

Long term concession

External Monitoring

Use Plan

COMMUNITY

Institutional rights over the exploitation of NWFP within the

Reserve's designated area

HOUSEHOLDS

Exclusive rights over the exploitation of natural resources in individual land plots

Institutional Support

Internal MonitoringLegitimate the community

PRs within the reserve– Existing NWFP

• Boundaries and population with use rights are clearly defined;

• Community designs operational rules;• Monitors are the appropriators themselves; • There is an association, which is a local forum for conflict

resolution;• Governmental authorities do not challenge autonomous

institutional building.

Extractive reserves have most of the necessary institutionalcharacteristics proposed by Ostrom (1990)

• Critical input: search activity directed towards the discovery of new NWFP with revenue potential.

• Problem: - individuals in the reserves cannot exclude others from

benefiting potential discoveries;- there are few incentives for putting efforts in R&D

activities;

Also: Lack of necessary expertise to carry outsystematic research and product development.

PRs within the reserve– New NWFP

• Critical input: knowledge about production-relevant characteristics of the local biological capital stock.

• Problem: there is currently no mechanism to reward information with respect to biological characteristics, productive properties and resistance to diseases

PR within the reserve– Genetic resources

PRs in the wider economy

Output Property Right

NWFP Private PR

Discovery No private PR

Genetic Resources No private PR

Discussion

Development Pathways

PR Ex NWFP Discov. Biol. Inputs

Inputs E D D

Outputs E D/E D

E: effective; D: deficient

Conclusions

• Three development pathways under ER framework• PRs supports the extraction of existing NWFP• Existing NWFP is theoretically viable only under highly

restrictive conditions• Conditions generally not fulfilled in reality• PRs does not support the other two pathways• Development objectives unlikely to be realised under

given set of PRs

Questions: Is it feasible to change the PR structure toenable reserves to pursue the other pathways?