Integration of environmental concerns into agricultural policies of industrial and developing countries

World Devrlopmenl, Vol. 20, No. 2, pp. 241-253, 1992. 0305-750X/92 $5.00 + 0.00

Printed in Great Britain. 0 1992 Pergamon Press plc

Integration of Environmental Concerns into Agricultural Policies of Industrial and

Developing Countries

ERNST LUTZ The World Bank, Washington, DC

and

MICHAEL YOUNG* Commonwealth Scientific and Industrial Organization, Lyneham, Australia

Summary. - The question which this paper addresses concerns the types of environmental and resource-related agricultural policy adjustments that could properly address the costs of resource degradation and increase long-term prospects for sustainable development. Various public policy approaches (e.g., Polluter-Pays Principle, fiscal measures, regulations, etc.) are discussed and analyzed with regard to their environmental and resource impacts. The paper provides illustrative experiences from industrial and developing nations and, where possible, lessons and insights of relevance to policy making in developing countries are sought.

1. INTRODUCTION

It is probably accurate to say that in the past the environmental effects of many policies have often been neglected or not been given adequate attention in agricultural policy making, as elsewhere. Moreover, the cumulative and ultimate effects of a policy change on resource use and development have often been overlooked. What is needed now is that environmental concerni receive proper, balanced consideration during the development and implementation of pricing and other policies which affect resource use (OECD, 1989; Johnson, Wolcott and Aradhyula, 1990).

As far as resource pricing policies are concerned, a set of principles is needed for the design of an incentive framework that gives the correct signals to resource users and developers. Collectively, and providing the emergent policies are consistent with these principles, the outcome should be “right,” not in the narrow sense of short-term economic efficiency, but in terms of efficiency that accounts for the resultant structural changes and includes external effects. In addition, the transitional arrangements to this preferred policy framework themselves should be in line with the overall objectives.

From a theoretical point of view, agricultural production will be most efficient when the costs borne by producers include any negative external costs, and when inputs are acquired at their social opportunity cost. That is, the policy framework associated with production should seek to correct for market failures and remove any divergence between the private and social costs of resource use. Conceptually, and providing that all other related product and input prices are subject to the same discipline, this approach would result in resource use and production at a level which is optimal from a (broad) efficiency point of view. Essentially, such a policy framework would ensure an optimal allocation of resources.

*The authors are listed in alphabetical order; senior authorship is not assigned. The authors are indebted to Jock Anderson, Richard Cabe, John Cleave, Herman Daly, John English, Vijay Jagannathan, Raymond Noronha, and William Magrath for valuable comments and discussions. Also, two anonymous reviewers for World Development have made many useful comments, which are greatly appreciated. The views expressed, however, are entirely those of the authors and should neither be attributed to any other individual, nor to the World Bank, CSIRO, or the OECD.

241

242 WORLD DEVELOPMENT

In agricultural policy analysis, most approaches - of either a partial or a multi- market type - have not considered the environmental impacts that might be associated with a set of policies on the output or input side. In some cases, these impacts may be negligible. In others, such as fertilizer, pesticide, or livestock subsidies, they may be significant. In our view, environmental effects should not, a priori, be assumed to be negligible and excluded from agricultural policy analysis (or policy reform packages). Rather, analysts should, on a case-by- case basis, consider whether environmental effects might be significant, and if so, decide whether their inclusion in the analysis would be merited (either qualitative/descriptive or quantitative).

Existing policies are usually the provisional outcomes of a complex interplay of economic interests (Petit, 1985), bureaucratic consideration and the prevailing wisdom of what the right policies are (Rausser and Foster, 1990). The process of policy formulation and modification also occurs in an environment of limited information and considerable uncertainty. In addition to the existing forces and factors, environmental concerns are now emerging and are, at first glance, “complicating” the picture, but appear so only from a short-term perspective.

The question which this paper addresses is: What types of environmental and resource- related agricultural policy adjustments could properly address environmental costs and increase long-term prospects for sustainable development? The focus of the paper is long-term economic development since some short-term policies and approaches to growth may not lead to sustained development. The paper reflects experiences in both industrial and developing countries. Where possible, lessons and insights of relevance to policy making in developing countries are sought.

Agricultural production activities have an impact on human health, flora and fauna, the soil, the water and the air. Some effects are on-site, others off-site; some are immediate, others are long term. A paper could be structured according to areas of impact (and it may perhaps be valuable to produce concise overview papers for each of these areas). The public policies that are discussed in this paper, however, are generic and crosscutting in the sense that a policy may have an impact in a number of areas. The paper therefore is structured according to major areas of public policy in the agricultural sector, which are of relevance to natural resources and the environment.

2. POLICY FORMULATION: A CASE FOR “INTEGRATED” POLICY MAKING

An important lesson that has emerged from industrial countries is that agricultural and environmental policies should be “integrated.” Integrated policy development and implementation require conscious tradeoffs to be made among competing objectives. Integration requires that full account is given to environmental objectives during the formulation of agricultural policies and, similarly, that environmental policies must reflect a recognition of their potential impact on agricultural output, incomes and prices (Just and Antle, 1990). It requires recognition and acceptance of the fact that objectives are rarely fully complementary and are often contradictory (OECD, 1989; Young, 1990; Hrubovcak, LeBlanc, and Miranowski, 1990).

It may be somewhat idealistic to think that decision making by policy makers is fully objective, equitable, and concerned with sustainability. But whether or not that is the case, economists undertaking policy analysis should supply policy makers with integrated analyses which include consideration of the likely environmental effects and impacts of policy decisions on overall welfare and distribution of income.’

Integration can be supported by the creation of institutional arrangements (including administrative procedures), and the formulation and implementation of policies which help to better achieve related objectives. Unintegrated policies are often characterized by the belated recognition of their consequences for the objectives of other sectors. Integration suggests the development of policies that are preventative and anti- cipatory rather than reactive (OECD, 1989). To the extent possible, likely structural changes, investment and changes in land-use practices should be anticipated.’ Moreover, given the limitations of correctly anticipating changes, the policy set should be capable of adaptation to changing circumstances.

Integrated policy making, “at full maturity,” requires a well-developed institutional setup. Something can be done, however, by any policy maker or adviser even at a relatively low cost, namely to ask whether a proposed agricultural policy change will have an environmental impact, and if so, whether the impact might be cumulative. It may be costly to determine the specific linkages in precise quantitative terms, but the qualitative impact can be thought through and may well be obvious. Examples of obvious cases are pesticide subsidies, which have added to pollution and health effects (Repetto, 1985), and the tax schemes in Brazil which have promoted

INTEGRATION OF ENVIRONMENTAL CONCERNS 243

rain forest clearing (Binswanger, 1989). There- fore, the integrated policy-making approach, in more or less developed form, can and should be recommended for countries at any level of development.

3. MEASURING SUSTAINABLE AGRICULTURAL OUTPUT

Over the last two decades agricultural output in developing and industrial countries has expanded at an impressive rate. For developing countries as a whole, the expansion rate during 1965-80 was 3.1% per annum, and during 198& 86 it was 3.6%.3 That performance has been achieved by an expansion of cultivated area, the adoption of new varieties along with the use of new techniques, high-energy inputs such as fertilizers and pesticides, and irrigation.4 Some policy improvements may also have played a role. In industrial market economies agricultural production expanded at an annual rate of 0.9% during 1965-80 and a strong 2.5% during 1980- 86, achieved not by area expansion, but by an intensification of production.

There is mounting evidence, however, that some of the growth in the agricultural sector has occurred at the expense of long-term resource degradation. In the United States, for example, it has been estimated that the off-farm cost of soil erosion is $3-13 billion per annum with the best single value estimate being $6.1 billion in 1980 dollars (Clark, Haverkamp and Chapman, 1985). Also in the United States, extensive ground water and surface water contamination has been reported (National Research Council, 1989; Batie, 1988). In the United Kingdom &200 million in capital costs and an annual expenditure of f10 million will be required over the next 20 years to bring all drinking water within the European Community’s standard for maximum permissible concentrations of nitrate (OECD, 1989). Repetto et al. (1989) analyzed depletion of timber, petroleum and top soil in Indonesia over 1970-84. While GDP grew during that period at an average annual rate of 7.1%, the growth of income corrected for depletion of the three resources was only 4.0%. For Mali, Bishop and Allen (1989) estimated annual income losses due to soil erosion at 0.62.4% of 1988 agricultural GDP. When the impact of erosion in one year on yields in the following 10 years is considered, the losses are 4-16% of 1988 agricultural GDP.

Costs of this sort are either not included in national accounts or not separately identified and hence, in economies where resource depletion/ degradation and pollution issues are important,

decision makers are not being accurately in- formed about the efficacy of their policies. A natural resource accounting framework is needed, which recognizes the difference between true income generation and the depreciation of resource stocks, and which more accurately measures true, sustainable income (Ahmad, El Serafy, and Lutz, 1989). This approach would enable policy successes and failures to be judged more reliably. Research efforts are under way to build such accounts, which might allow policy impacts on the environment to be better identified (Cabe and Johnson, 1989; Lutz and Muna- singhe, 1991; van Tongeren, 1990; Young et al., 1991).

The development of coordinated agricultural policies which account for their environmental impacts does require additional information. This is particularly the case when many of the impacts are off-site, lag behind the practices which cause them, and are cumulative. The gathering of additional information can obviously be costly. Those costs need to be compared to the potential benefits that can be reaped from improved policies.

4. THE POLLUTER-PAYS PRINCIPLE

One recommendation is that a policy concerned with true growth and sustainable development should try to internalize the external costs arising from production activities.j

Internalizing external costs essentially means making the polluter pay for them. This principle is often referred to as the “Polluter-Pays Principle. ‘16 As defined by the Organization for Economic Cooperation and Development (OECD) the principle’s emphasis is on allocating the cost of pollution control and prevention measures. If applied throughout all countries, it would ensure that no country, through the use of differing pollution control and prevention strategies, could obtain an unfair trade advantage. Its rationale is based on the economic advantages of improving efficiency in the allocation and use of resources by internalizing pollution control and prevention costs and then transmitting this information to consumers.

One consideration is the relationship between property rights and the Polluter-Pays Principle. Theoretically, if one can assume completely specified, exclusive property rights, which are costlessly transferable and costlessly enforced, voluntary exchange would lead to the efficient allocation and use of resources (Coase, 1960; Randall, 1983). That is, the initial distribution of property rights is irrelevant to the efficient


allocation and use of resources. But most environment-related property rights are not specific nor exclusive. Moreover, the private, social and political information and transaction costs associated with reallocating property rights are often so high that the initial distribution of property rights virtually determines the nature of resource use.

The Polluter-Pays Principle as defined by the OECD avoids the need for concern about property rights by taking the position that, in practice, they are determined by law and government policy. If a government introduces a pollution prevention and/or control program, then its actions imply that the polluters affected by the program no longer have the right to pollute and should be required to pay the costs of the control program (Young, 1990).

An exception to the rule of trying to make polluters pay could be made during the transition period when a pollution prevention and control program is introduced. Occasionally, short-term transitional assistance may be necessary to achieve more speedy adjustment and acceptance of a policy change. The ultimate aim, however, is to equate the private and social costs of resource use and investment.’ The rationale is based on the economic advantages of achieving efficiency in the allocation and use of resources by internalizing pollution control and prevention costs.

The question whether the Polluter-Pays Princi- ple, an economically sound policy prescription adopted by OECD countries, should also be recommended for developing countries, is a difficult one. Some might argue that trying to internalize external costs is inequitable where the large majority of farmers are poor. But probably a large share of inputs which result in externalities are used on the larger, commercially oriented farms. In addition, where negative effects occur, some of these are borne by the poor themselves. Pesticide poisonings are a case in point. One could also argue that the Polluter-Pays Principle supports long-term efficiency and sustainability that should not be sacrificed because of (valid) poverty concerns. Instead, poverty should be addressed directly and parallel with environmentally sound policies. Therefore, while internalizing external costs may be more difficult in developing than in industrial countries, mechanisms for implementing it do exist and, when pursued, are likely to lead to more efficient land use practices and, in the long run, greater economic growth.

There is an additional dimension that should be considered in applying the Polluter-Pays Principle to developing countries. Since a large majority of individual agents as well as the

countries themselves are poor, there may be a role for international mechanisms including grant funding to promote the adoption of environmentally sound production practices in an economically efficient way. Such funding might be particularly appropriate in the case of activities with long pay-off periods and where there are associated positive international externalities.

5. FISCAL POLICIES

(a) Outputpricing

Output prices are manipulated in most countries to achieve a variety of social and economic objectives. The key policy instruments used include tariff barriers that raise local prices, direct payments to producers and processors, export enhancement schemes, organized market- ing arrangements, guaranteed prices, and various forms of income tax exemption schemes. In most industrialized countries the aggregate effect of these measures has been to raise prices and make them more stable. Producer subsidy equivalents for many products and in many countries exceed 30% (OECD, 1989; Centre for International Economics, 1988; Tyers and Anderson, 1988). Distortions are also prevalent in many developing countries (USDA, 1988), but cases of taxation appear still more prevalent than sub- sidization (Lutz and Saadat, 1988), motivated generally by the objective to raise revenues and a political desire to keep food prices low.

In interpreting the effects of output pricing policies on the nature of investments, the intensity of resource use and the environment, two relationships are apparent. First, price-raising policies increase the intensity of resources use (especially fertilizer and pesticide use), and stimulate further investment in these industries. But because price raising mechanisms over-ride the national tendency of markets to promote resource use in accordance with natural compara- tive advantage and environmental capacity, the resultant increase in land-use intensity tends to increase water and even air pollution from agriculture. Selective and preferential tariff barriers also tend to shift production toward loca- tions that provide the greatest opportunity to profit from these distortions. In the case of the Netherlands, for example, preferential tariff agreements have caused intensive animal production to shift toward Rotterdam and have created a need for land-use controls and input taxes to offset the major air and water pollution problems that have emerged (OECD, 1989; Young, 1990). Second, some price controls also increase price


stability which, in turn, increases fertilizer and pesticide application rates and reduces the tendency of farmers to spread risk by growing a variety of crops.

(b) Input taxes

Taxes on inputs can be used to encourage farmers to adopt agricultural practices that are environmentally favorable and make them pay for at least part of the cost of pollution prevention and control. This approach has been advo- cated by Weinschenk (1987). After a systematic discussion of various policy alternatives and their implications, Weinschenk concluded that a tax on yield-increasing inputs, particularly nitrogen, “would not only reduce surplus production [in the European Community] but would also encourage a less intensive and ecologically more desirable use of the land.“s An interesting point in this regard is that profit-maximizing behavior by itself, even in the absence of taxes, would lead to reduced input levels “under most conditions.“’

Input charges are used in Sweden to contribute to the cost of government programs designed to reduce water pollution from fertilizers and dam- age to the environment from pesticides. In the Netherlands, a levy on manufactured feed inputs is used to finance research and extension costs associated with pollution from intensive animal husbandry. In addition, livestock numbers above a prespecified density are taxed. In Iowa, input charges are levied in the form of increased registration fees and dealer licenses. The collected revenues are put into a “groundwater fund.“‘a

The charges mentioned above are relatively small, and are generally used to finance research, extension, development activities and some clean-up costs. A commitment to the involve- ment of farmers in the allocation of the money collected, and a guarantee that all revenue collected will be spent on activities of ultimate benefit to the polluting industry, has been important in gaining political acceptance of these charges. Applied to developing countries, input levies would have the effect of promoting the further development of environmentally and technically appropriate technology.

(c) Znput subsidies

Fertilizer and pesticide subsidies have not been common in industrialized countries. An exception is Australia, where fertilizers were subsidized until 1986 to encourage adoption and

usage. Irrigation water, however, is commonly subsidized, and where the soils are saline, this tends to aggravate salinity problems. Marginal cost pricing for all purchased inputs is a precondition to the efficient use of natural resources, but few industrial countries are implementing marginal cost pricing as a matter of course. Progress is being made in a number of them by changing property rights for water and other resources so that private markets emerge for the rights to use scarce resources. The most common example of this approach is the introduction of transferable water rights.

(d) The case of pesticide subsidies in developing countries

Pesticide imports by developing countries increased rapidly up to 1980. They increased about fivefold (in volume terms) during 1967-80.” Pesticide usage, while it can make an important contribution to short-term productivity gains, does have negative effects on human health, nontargeted species, soil and water. It also causes increased pest resistance. John Nickel (1989), the director of the Centro International de Agricul- tura Tropical (CIAT) said, for example: “The Rice Program has been working with a number of countries to assess pesticide usage and has found that over-application of insecticides is one of the chief causes of high production costs, destruction of natural enemies, and environmental pollution.“‘*

In many developing countries pesticide subsidies were introduced to encourage the adoption of a technology that was initially unfamiliar to farmers. Even after pesticide use was widespread, however, many of these subsidies have been maintained at considerable financial cost to governments. Repetto analyzed pesticide policies in a sample of countries in the early 1980s (Table 1) and found that the average rate of subsidy in those countries was 50%.

Fiscal, economic and long-term ecological factors suggest a gradual reduction of the rate of subsidy on inputs in situations where output prices are relatively undistorted. But where externalities associated with input use exist, one could even go one step further and, depending on the size of those effects, also recommend a phased elimination of subsidies in cases where agricultural output is taxed. Where output prices are relatively undistorted, consideration of the negative side effects of input use could argue for imposing tariffs or taxes such that farmgate prices would represent real costs, including external and long-run costs. The removal of a pesticide


Table 1. Pesticide imports of developing countries, 1967-86

Year

Current Price value index*

(US$m) (1977 = loo)

1977 Constant

value (US$m)

1967 210 64 328 1970 295 62 476 1972 320 66 485 1973 467 67 697 1974 659 76 867 1975 876 102 874 1976 858 111 773 1977 979 100 979 1978 1,178 94 1,253 1979 1,225 96 1,276 1980 1,531 102 F,501 1981 1,540 111 1,387 1982 1,485 119 1,248 1983 1,642 125 1,314 1984 1,930 128 1,508 1985 1,804 128 1,409 1986 1,891 127 1,489

Source: FAO, Trade and Production Yearbook (various issues). *Since a price index for LDC pesticide imports is not available, and since a US dollar-based index is needed, the prices for pesticides paid by US farmers as shown in the FAO Production Yearbook were chosen as the deflator.

subsidy and/or the imposition of a pesticide tax would be expected to reduce pesticide consumption (depending on the price elasticity and the degree to which substitutes exist). Users would have an increased incentive for judicious usage and for the adoption of alternative methods such as the Integrated Pest Management (IPM) approach. Depending on the farmers’ responses and options, agricultural output may or may not be negatively affected by the policy change.13

A good example of positive reform is the case of Indonesia where, because of reduced pesticide subsidies, fiscal savings amounted to US$lSO million annually during 1985-88 (Brady, 1989). Simultaneously with the subsidy reduction, more pest-resistant rice varieties became available, and the extension network was able to successfully persuade farmers to adopt IPM methods.

(e) Income tax policies

An example of a well-intended policy with some unanticipated effects is the income tax

concession for forestry in the United Kingdom, which led to widespread planting of pine trees that resulted in declines in wildlife habitat, landscape amenity values and available grazing land. Another example is tax concessions for land clearing and development in Australia, which were introduced in 1950. When the adverse effects of these concessions on the environment became apparent in the early 1980s they were removed. Recently, the OECD (1989) has concluded that income and capital taxation policies should be neutral to environmental and agricultural objectives. The reasons include the difficulty in targeting tax concessions so that their influence on resource use and development is efficient, and the difficulty in justifying the favoritism that such tax concessions give to the rich.

Binswanger (1989) has pointed out that income tax and capital market policies in Brazil have had important environmental implications. These policies have accelerated the pace of settlement in the Amazon and led to the deforestation of land in premature, uneconomic and/or environmentally unsustainable ways. Other Latin Amer- ican countries have subsidized livestock production on large estates through tax incentives and other means. As a result, tropical forests have been cleared for grazing purposes, even though carrying capacity is low and pasture deterioration rapid. The incentives make the activity financially profitable even though it is questionable on social, economic, and environmental grounds.

(f) Other subsidies

The policies of many industrial countries reflect a growing interest in landscape quality, wildlife preservation and the retention of species diversity. Few mechanisms exist to internalize these benefits and, hence, they tend to be undersupplied by private landholders. Moreover, once lost, they are not easily restored. Changes can be irreversible.

To avoid these losses and enhance the social benefits associated with the development of these assets, some industrialized countries are providing grants for landscape improvement, creating new property rights mechanisms, and reimburs- ing farmers for the costs of activities which enhance environmental quality. Easements to protect heritage values and retain future options are also being introduced.

In several industrial countries, because of government reluctance to enforce regulations, farmers are being offered subsidies to encourage them to adopt nonpolluting agricultural practi-


ces. One example is the United States Conserva- tion Reserve Program which pays farmers not to crop highly erodible soil for a lo-year period. The many US cost-share programs which subsi- dize the adoption of best management practices is another. This policy approach is contrary to the Polluter-Pays Principle. Moreover, paying farmers not to pollute may also make them perceive that they have a right to pollute and/or that they should only attempt to adopt nonpolluting activities when they are paid to do so. The permanent acquisition of cropping rights, however, would overcome the above problems.

If at all, incentives should only be offered for those practices which are nonpolluting and enhance environmental quality when farmers act in a way that improves the landscape and provides other positive benefits, such as enhanced wildlife habitat. Management agreements are often used to provide such incentives.14 One further point needs to be made. As many of the benefits from the protection of biodiversity in developing countries flow to developed countries, cogent arguments can be mounted for these developed countries to pay for at least part of the cost.

6. REGULATIONS AND ENFORCEMENT

When fully complied with or enforced, regulations which require farmers to adopt environmentally favorable practices internalize the costs of pollution prevention and control and give the correct economic signals to farmers. Theoretical economists often object to regulations on the grounds that they seem to ignore the concept of optimality. After consideration is given, however, to administrative costs, transaction costs, information needs, and the frequency with which input and product prices change, regulations can be more efficient than taxes and subsidies (Das- gupta, 1982).

Regulations can be looked at as a special case of a tax where no tax is applied up to a certain threshold level. When that level is exceeded, the actual tax is equal to the expected penalty multiplied by the probability of getting caught. If the probability of being caught for violating a regulation is close to zero, then compliance is also likely to be low. This likelihood points toward the centrality of proper enforcement if the regulatory approach is to succeed.

Examples where regulations have been used to internalize costs include the banning of insec- ticide spraying in Belgium while crops are in flower, and the prohibition of the aerial spraying of pesticides in Sweden. Several countries regu-

late agricultural practices such as manure spread- ing and cultivation of erodible soils.

There are some positive industrial country experiences with regulations to restrict undesir- able investments and prevent certain activities. Controls on the construction of new animal shelters in sensitive water catchments and the prohibition of aerial spraying in Sweden have worked. Dutch controls over the amount of manure which can be spread per hectare, however, and requirements that it be plowed in within 24 hours, are proving difficult and, in many cases, impossible to enforce. The problem is that it is virtually impossible to estimate how much each farmer has spread on a site. The general experience is that regulations for the control of structural improvements can be enforced cost effectively, but that enforcing subtle changes in agricultural practice can be very difficult.

Several industrial countries are beginning to define the types of agricultural practices necessary to protect the environment, and to require farmers to prepare management plans which indicate how these environmentally desirable practices will be adopted. Examples of the trend toward the use of management plans can be found in the Netherlands where animal manure management plans are required, in Denmark where farmers are being required to prepare fertilizer plans, and in the United States where, under new conservation-compliance provisions, farmers who wish to continue to receive price support and/or crop highly erodible soils were required to prepare soil conservation plans before 1990. In the Netherlands, these plans have the additional advantage of making it relatively simple to levy a tax on farmers who produce surplus animal manure. Provided there is a will to enforce regulations, such plans can also simplify enforcement procedures (OECD, 1989; Young, 1990). A precondition for this approach is a well- developed institutional and -physical infrastruc- ture that is not prone to corruption or capture.

A related issue of growing importance is the standards set for pesticide registration and food residuals (Hofsten and Ekstrom, 1986). A number of developed countries are moving to make registration criteria more stringent and reduce maximum permitted residuals in food and water destined for human consumption (US Congress, 1988; Archibald, 1990). This trend has implications for international trade as countries are introducing new nonprice tariff barriers associated with the more stringent standards. Exam- ples include the European Community ban on the import of US beef produced with growth hormones and the United States’ ban on Austra- lian beef containing organo-chlorine residues


(Young, 1990). Countries which set less stringent standards are losing markets to those which match them. Indeed, one could go so far as to suggest that the optimal strategy for countries that export the majority of their agricultural produce may be to match the highest standards that exist in the world (Young, 1990). Develop- ing countries should follow this kind of market change closely in order to avoid possible setbacks in terms of market access.

Land use planning and zoning are also possible tools to influence land use according to public policy objectives such as to minimize polluted surface water runoff and erosion or to prohibit deforestation and conversion of wetlands. Opti- mal spatial management of agricultural pollution combined with discharge reductions can substan- tially reduce the costs of total and marginal abatement (Braden, et al., 1989). Implementing the right practices at critical points in watersheds can greatly reduce sedimentation with much less inconvenience than requiring farmers every- where to reduce erosion below certain levels. The possibilities and limitations for land use planning in a developing country context are discussed in Lutz and Daly (1991).

The regulatory approach, while it has been successfully applied in a number of specific instances in industrial countries, is less relevant to developing countries because institutional capabilities are generally weak, enforcement is difficult, and monitoring expensive. Often, the literacy skills of farmers and farm workers are also limited. But the regulatory approach is clearly needed in some areas such as pesticides, where highly toxic ones should be (and are often being) banned, and where other restrictions and instructions for proper handling and application may be needed.

Generally, the standards which apply in developing countries are lower than those found in OECD countries.15 This disparity has attracted the exportation of pesticides from industrial countries, where such products have been banned. Two basic policy options exist to deal with this issue: developing countries could adopt equally stringent standards and/or industrial countries could ban the exportation of products whose use is not approved in the producing country. The problem with the second option is that some “third country” may come in and nullify the intended policy effect. The related moral question is whether it is right for a country to profit by jeopardizing the health of people in another country simply because if it does not supply the chemicals, someone else might.

7. RESEARCH

The research priorities, agenda and attitudes of today can contribute significantly to making the production practices of the future more sustainable. Obvious examples are the breeding of pest-resistant varieties and development of biological pest control measures. In this regard, Nickel (1989)) speaking from the CIAT perspective, said:

The availability of a large, well characterized germplasm collection makes possible genetic solutions to many problems rather than relying too heavily on agricultural chemicals. This “seed versus bag” philosophy does not mean that we believe the world will be able to feed itself without the use of inputs, or that we think small farmers should not use them. Indeed small farmers need to use inputs, especially fertilizers, to get the most from their small parcels and maintain soil fertility. It does mean that we attempt to develop technology that is not overly dependent on purchased inputs; that we try, whenever possible, to find genetic rather than chemical solutions to production constraints. This is particularly applicable with regard to resistance to insects and diseases. I6

Given the uncertainty as to whether enough

food can be produced for growing populations, it is understandable that short-term production objectives have had priority over others in agronomic research. There is now increasing recognition, however, that environmental and sustainability concerns should be given greater weight than has been hitherto the case. This change requires a rebalancing of research objectives. Some research is being reorientated along these lines, but more can and should be done. As York put it: “Still more progress must be made, and all agricultural research should embrace sustainability as a fundamental precept.“”

8. EXTENSION AND EDUCATION

The more conventional approach to encourage farmers to adopt environmentally benign technologies and to control agricultural pollution is to rely on extension services to persuade farmers to adopt environmentally favorable practices.i8 This approach, however, is generally only suc- cessful when the proposed change does not decrease net farm income.”

The nature of the information about product performance which is supplied with inputs, can be very important. In the case of pesticide use, many companies perceive that they should guarantee complete control of plant pests. Moreover, in a number of OECD countries


liability laws force companies to recommend application rates which give control in all circumstances and conditions. Often, the result is a breakdown in natural control mechanisms and the need for more pesticides. By changing pesticide labeling arrangements so that extension advice is attached to pesticide drums, the Dan- ish government has been able to halve application rates, significantly improve the environment, and raise farm income (Young, 1990).

Actual behavior of farmers also depends on their income level and their conservation ethic. The higher farmers’ income levels, the more likely it is that environmentally benign actions will be taken by those with a positive attitude toward conservation. Lynne. Shonkwiler and Rola (1988) have found empirically that: “The [conservation] intentions will generally be highly correlated with actual behavior if the farmer has sufficient income actually to implement the desires and has a situation needing conservation attention.“” They also found that: “Economic incentives will increase effort, but responsiveness will differ with the strength of conservation- related attitudes.“”

In a similar study, Van Kooten, Weisensel and Chinthammit (1990) found that “concern for soil quality, as documented by some researchers, does have practical significance in changing agronomic practices; but when soil is relatively deep, it takes a fairly substantial concern about soil quality before it is possible to distinguish clearly the agricultural practices of farmers who are truly concerned with stewardship from those who are not.“** Education systems and local farmer groups could perhaps be used to streng- then positive attitudes toward soil conservation in particular, and sustainable development in general.

To what extent these results are applicable to farmers in developing countries is not clear. It is hypothesized at times that poor farmers tend to heavily discount benefits in the longer-term future, since pressing current needs have priority. It is plausible that short-term financial productivity gains are needed for the poor to adopt techniques that are environmentally benign, and that these must be low cost (Anderson and Thampapillai, 1990).

9. LAND TENURE AND CREDIT POLICIES AND LONG-TERM INVESTMENT

Land rights have an impact on how a cultivator uses and treats the land. It has been hypothesized that the greater the degree of tenure security, the more a cultivator is motivated to make invest-

ments and adopt production techniques that are beneficial to the long-term productivity of the land. Whether this is indeed the case is not clear; the available evidence is inconclusive and/or contradictory. 23 More work needs to be done in this area, and environmentally relevant issues should be given more attention (erosion levels, investments to maintain the long-run productivity of the soil, etc.).

Land rights and credit are interlinked: the higher the degree of security of tenure, the greater the creditworthiness of the farmer and therefore the better the access to credit. Feder and Onchan (1987) have found empirical support for this theoretically plausible argument. In the OECD countries mortgages over land titles are common. To the extent that investments in the land are personally profitable to the cultivator (as compared to social profitability), access to credit may be important.

Larger farmers tend to have easier access to formal credit markets than small ones, whose access may be limited to the informal market where implicit interest rates tend to be high. The reason for this higher rate is due not only to market imperfections but also to high retailing costs and the high risk of defaults. The higher interest rates for and higher risks faced by small farmers puts pressure on them to invest in activities with short pay-off periods. Conceptu- ally, this set of circumstances is not conducive to the adoption of environmentally benign practices that characteristically produce more lasting but fewer immediate benefits.

10. MACROECONOMIC POLICIES

Agricultural policies and environmental effects cannot be looked at in isolation. Macroeconomic policies and the general institutional framework, and policies in other sectors are important and can have direct or indirect efficiency, distributio- nal and environmental consequences in the agricultural sector.24 Likewise, agricultural policies may have implications for other sectors. Efficient pollution control strategies therefore must consider all major sectors, since the degree of control in one sector depends on the control apphed to other sectors.*’

Tracing the effects of changes in macroeconomic policies on the natural resource base is difficult as interactions between the economic system and the environment are complex and our understanding of them limited. In addition, a policy change such as a devaluation can have both positive and negative effects. Ideally, one would wish to have access to a comprehensive


model of the economic and ecological system. But few, if any, such models exist for most countries. Moreover, those that do exist tend to be structured in a manner that makes the evaluation of environmental problems difficult. The best that policy analysts can do under the circumstances is to try to assess the impact of specific reforms, first qualitatively and then, where possible, quantitatively.

11. SUMMARY AND CONCLUSIONS

Environmental factors, as elsewhere, have not been given enough weight in agricultural policy making in the past. At the same time, however, one must acknowledge that much has been done and is being done that is in line with sustainable development. Nevertheless, improvements are possible, particularly in the following areas:

(a) The development of “integrated” policies that attempt to anticipate the effects of policies on the environment, income distribution, value added and other objectives;

(b) The preparation of natural resource accounts and other information that enables decision makers to better appreciate the environmental costs of the policy options under consideration;

(c) The development of policies that internalize external costs and apply to all forms of resource use; application of the Polluter- Pays Principle to all forms of resource use;

(d) The introduction of mechanisms that com- pensate resource users in developing coun-

tries for the cost of creating positive

international externalities associated with, for example, the maintenance of biodiver-

sity; (e) The phased reduction of input subsidies

NOT

1. In doing this, one needs to keep in mind that one is operating in a second-best world. It is therefore possible that a specific policy reform, however well intended and justified, may make things worse rather than better when there are large distortions elsewhere in the system. Ideally, one would want to use a general equilibrium model to test a proposed policy change and the nature of the adjustment process. But few such models exist, and they are costly to build. In spite of possible drawbacks, we believe that one should try to work toward partial changes in the hope of moving from the current state to an improved second-best world. This includes both avoiding changes in the

and their replacement with charges and transferable property rights arrangements that reflect the full marginal costs of resource use;

(f) The modification of income and capital taxation policies so that they have neutral effects on the intensity of resource use and the quality of the environment;

(g) The modification of regulations and the institutional framework that surrounds them so that they help to internalize environmental costs (applicability in developing countries, however, is more limited than in industrial countries because of generally weak institutional capaci- ties);

(h) The modification of research policy so that, where it has not already been included, sustainability becomes a fundamental precept in agronomic research;

(i) The promotion, by agricultural extension services, of environmentally sound agricultural practices, which are low-cost and financially profitable;

(j) The development of more secure land tenure and related arrangements so that agricultural production technologies become more sustainable and incentives are created for cultivators for more long-term investments; and

(k) The modification of macroeconomic policy formulation procedures and general institutional arrangements so that full consideration is given to their effects on the environment and the agriculture sector.

Progress in several of these areas will be dependent on analysis that sheds additional light on both the physical impacts of projects and policies on the resource base and on the economic valuation of the benefits and costs that flow from them.

‘ES

wrong direction and implementing “safe” changes in the right direction.

2. This is particularly important from an environmental point of view since some problems appear as lagged results to slow structural changes. In the Netherlands, for example, a preferential tariff agreement which favors the use of cassava as an animal feed has facilitated a dramatic expansion in intensive animal production. Ten to 15 years after the introduction of the agreement the disposal of animal waste, the reduction of nitrate pollution, and the control of


ammonia emissions have become major problems (Young, 1990).

3. Source: World Bank (1988).

4. Not only were environmental effects associated with the production increases, but the latter are dependent on nonrenewable fossil fuels (Chapman and Barker, 1991).

5. While in this paper we only deal with agricultural policies, it is obvious that internalization of external costs is needed in all sectors.

6. While the idea of making the polluters pay has been around for a long time, the OECD formally adopted a limited version of the principle in 1972. The formal agreement states: “The principle to be used for allocating cost of pollution prevention and control measures to encourage rational use of scarce environmental resources and to avoid distortions in international trade and investment is the so-called “Polluter-Pays Principle”. The Principle means that the polluter bears the expense for carrying out the above- mentioned measures decided by public authorities to ensure that the environment is in an acceptable state. In other words, the cost of these measures should be reflected in the cost of goods and services which cause pollution in production and/or .consumption. Such measures should not be accompanied by subsidies that would create significant distortions in international trade and investment.” This Principle, reaffirmed in 1974, goes on to state that: “there may be exceptions or special arrangements, particularly for transitional periods provided that they do not lead to significant distortion in international trade and investment” (OECD, 1986) pp. 12-13.

7. Those countries which are applying the Principle report gains associated wth the introduction of input levies to finance pollution prevention through targeted extension programs and transitional subsidies to stimulate investment prior to the introduction of strict regulations. One example is the Netherlands where there are taxes on manufactured animal feed. Regula- tions and taxes on animal manure and disposal are causing industries to develop new technology and relocate in areas with greater unused environmental capacity (Young, 1990).

8. Weinschenk (1987), p. 49.

9. Harper and Zilbermann (1989), p 692.

10. Chuck Ackermann, Iowa Department of Agricul- ture, personal communication.

11. The calculations were based on information from the FAO Production and Trade Yearbooks, and use pesticide prices paid by farmers in the United States as a deflator. While in nominal terms, imports continued to increase, in volume terms significant reductions occurred in 1981 and 1982. The level reached in 1980 was subsequently surpassed only in 1984. What the

import figures imply for actual consumption is difficult to gauge, since production figures of pesticides in developing countries as a whole are not available. It is, however, likely that production capacity for the chemicals in question has increased and that consumption therefore increased faster than what the import figures indicate.

12. Nickel (1989), p. 4.

13. There is now mounting evidence in the United States that agricultural output is not negatively affected by the banning of pesticides. The ban of Alar for use in apples is one example.

14. In entering into such management agreements it is desirable, first, that the agreement is made in a manner which guarantees that the desired environmental benefits will be realized. This means, for example, that if the aim is to prevent cropping then the cropping rights should be permanently acquired. Second, the payment should not exceed compensation for the reduction in expected net farm income caused by the adoption of the practices required under the agreement. Third, the agreements should not be structured in a way and for a length of time which enables farmers to hold the socially desired environmental benefit to ransom as a means of increasing their compensation (OECD, 1989). Most of the management agreements which exist in Europe, however, only run for a specific period of time such as five years and hence put farmers in a very advantageous position. Either (a) annual payments should be limited to reimbursement for the cost of necessary practices such as moving or (b) there should be economic penalties for failing to renew an agreement

15. A related issue is that those developing countries, which wish to continue to export products to developed countries, may soon be forced to set standards which are equivalent to those found in industrial countries.

16. Nickel (1989), p. 4.

17. York (1988), p. 1.

18. In Australia an attempt is being made to change each farmer’s sense of responsibility for the environment by establishing local land care groups.

19. In Sweden, for example, reducing fertilizer application levels to that which could be expected to maximize net farm income has been found to increase profits by 100-150 Skr per hectare (OECD, 1989).

20. Lynne, Shonkwiler, and Rola (1988), p. 14.

21. Lynne, Shonkwiler, and Rola (1988), p. 18.

22. Van Kooten, Weisensel, and Chinthammit (1990) p. 104.

23. Historical evidence from Australia indicates that short-term leases and restrictions on property rights


were one cause of land degradation (Young, 1983); on the other hand, Atwood (1990) presents evidence from Africa which calls into question the validity of the conventional view. See also Migot-Adholla et al. (1990).

24. For example, policies which apply to secondary industry can influence agricultural development. Poli- cies which affect the quantity of residual cadmium in

phosphate fertilizers are one example of such an influence.

25. For example, Gianessi et al. (1986) have pointed out that if several (nonpoint) erosion sources are to be controlled, the necessary degree of control for any one source, such as cropland, depends on the degree of control applied to other sources, such as rangelands, and point sources such as municipal treatment plants.

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Documents

Integration of environmental concerns into agricultural policies of industrial and developing countries