Weak Complementarity and Ecosystem Benefits Estimation: Soil Conservation in Flores, Indonesia

We illustrate a strategy for valuation of forest ecosystem services by studying the demand for its weak complement, agricultural labor –a commodity that has market prices. In our case study forest protection in Ruteng Park of Flores, Indonesia, provides soil conservation benefits to farmers living near the protected area. Econometric analyses of forest hydrology and household data shows that soil erosion is a weak complement to agricultural labor demand. Based on estimated coefficients of the model, we find that 10 to 30 percent decrease in soil erosion can enhance agricultural profitability by 8 to 15 percent. Our study suggests that policies that protect tropical forest watersheds can potentially provide substantive ecosystem benefits to local people. Consequently, policy makers should devote more resources to preserve and regain tropical forest and to reverse the rising rates of tropical deforestation. 1 Espinoza is a graduate student at North Carolina State University, Pattanayak is a research economist at Research Triangle Institute and Sills is an assistant professor at North Carolina State University. The data for this study are drawn from a broader ‘economics of biodiversity conservation’ project led by Randy Kramer at Duke University. Direct all correspondence to: Subhrendu Pattanayak, Center for Economics Research, Research Triangle Institute, RTP, NC 27709-2194. Email: [email protected]. INTRODUCTION Land uses that impact ecosystem functioning in the form of soil erosion can have profound economic implications, particularly in economies that are highly reliant on their natural capital. Forest protection can mitigate natural rates of soil erosion on adjoining lands, thereby providing vital benefits to agrarian communities that consider soil to be an input into agricultural production. Public protection of forests may be warranted in the case of forests that are bordering farming communities because many of the services from the forests, such as soil conservation, are public goods (Pattanayak, 1997). Government intervention is required to conserve forests, if the benefits of conservation justify the costs. However, absence of information on the nature and magnitude of the ecosystem benefits of this kind impedes forest policy (Panayotou, 1994). Therefore, in this study we focus on estimating the latent but potentially substantial ecosystem benefits of natural soil conservation from protected forests. We use a three-stage framework to estimate the change in producer surplus (change in quasirent) due to changes in level of soil erosion that are induced by forest protection. (Freeman, 1993). Stage 1 relates soil conservation to the forest protection. In stage 2, we establish the link between soil conservation and labor demand in downstream agriculture. In our econometric model, we control for the effects of fixed inputs into production such as water condition, farm size, and irrigation index and market factors such as labor, coffee and rice prices. In stage 3, we analyze economic welfare changes that result from the soil conservation induced by forest protection. This change in economic welfare is measured as changes in producer surplus, which is equivalent to change in area under labor demand curve (Maler et al.,1994; Huang and Smith, 1998). SOIL CONSERVATION: A POSITIVE EXTERNALITY IN FORESTED ECOSYSTEMS Erosion is a natural process that can be accelerated by human activities, including deforestation (Arnold et al., 1996). Soil erosion is widespread, posing one of the most serious environmental problems around the world (Pimentel et al., 1998). Soil erosion potential is increased without protective vegetation because the soil becomes vulnerable to being swept away by wind and water (Manyatsi, 1998). In addition, over-cultivation and compaction cause the soil to lose its structure and cohesion and it becomes more easily eroded. Tree and residue cover protects the soil from raindrop impact and splash, tends to slow down the movement of surface runoff and allows excess surface water to infiltrate. Loss of vegetative cover is especially widespread in developing countries due to high population growth, and inadequate agricultural practices (Pimentel et al., 1998). Forests are important in terms of soil conservation because they help to maintain soil stability and water quality. Typically, forest conversion is followed by land uses that interfere and negatively affect soil and hydrological processes (Pattanayak, 1999). Forests minimize soil erosion, enhance soil quality, and restrict shallow mass movements. In watersheds with forest and non-forest lands, the soils will be conserved on lands that are immediately downstream from the forests, not just the land directly underneath the forest canopy. Therefore, activities on lands adjoining downstream lands that are negatively impacted by soil erosion will receive the external benefits of forest protection. Although most soil erosion studies focus on the physical aspects, many of the causes of erosion are socioeconomic. Some of the major factors are (1) lack of awareness of the problem, (2) ‘open’ access to erosive lands, (3) insufficient resources to attain conservation practices, (4) inadequate or lack of technical agencies, (5) environmentally damaging farming pratices, and (6) non-quantified benefits of conservation (Veihe, 2000). Our study addresses this last factor. Note, although there are several benefits from forests, in this study we focus only on soil conservation benefits of forested ecosystems to downstream farmers. WEAK COMPLEMENTARITY: THE CONCEPTUAL BASIS FOR ECOSYSTEM VALUATION The concept of weak complementarity between ecosystem services and other inputs provides the theoretical framework for this study. Huang and Smith (1998), show that by assuming weak complementarity, input demand can be used to measure changes in producer surplus induced by changes in environmental inputs into production. They extend the literature that has used weak complementarity to measure consumer surplus change (M]ler, 1974). We contend that soil conservation by adjoining forests is an exogenous input into farming. It is weak complement to agricultural labor because it can the two necessary conditions for weak complementarity. That is, first, it is possible that labor demand is nonessential, so that at a choke price of w*, demand for labor is zero. Second, at the choke price, the marginal productivity of soil conservation can be zero, implying that that change in soil conservation has no welfare significance unless the wage is low enough to make labor demand positive. The condition that soil conservation is valuable as long as it contributes to agricultural production is based on the fact that we are only valuing soil conservation as an input to farming. Huang and Smith (1998) suggest that by focusing on the demand function for weak complement (e.g. labor), researchers could substantially economize on the data demands for valuation and therefore can avoid the measurement of full profit functions. In sum, we contribute to the scarce literature on estimation of forest ecosystem benefits, in developing country contexts, by empirically implementing the Huang and Smith’s proposal regarding demand for weak complements to natural resources.