The unnecessary conversion of tropical forests to other land uses is a damaging process that affects humanity on both a local and global level. This deforestation is defined by the Food and Agriculture Organization (FAO) as “...the long-term reduction of the tree canopy cover below the minimum 10% threshold” and was responsible for the 9.4% degradation in the earth's forest cover between 1990-2000 (FRA 2000, p.24). While some degree of deforestation is an inevitable externality of economic development, to degrade forests beyond the optimal rate will harm future generations. The vast majority of the damage occurs within the world's three main tropical regions, Africa, Asia and South America, the latter of which is host to 48% of the world's rainforests and 60% of global deforestation (Hansen et al 2009). These figures are concerning for many reasons ranging from the economic and political implications of global warming to the everyday hardships suffered by indigenous forest dwellers.
On a micro level, rainforests act as atmospheric quality regulators by absorbing rainwater and releasing water vapour during dry periods. This helps avoid flooding and soil erosion during the stormy seasons and also helps control regional and foreign climates countries, which can also be affected by rainwater from rainforests. According to The Prince's Rainforest Project: “the Amazon releases 20billion tonnes of moisture every day helping to water crops thousands of miles away” (2009, p.4). Tropical forests are also home to around 50 million indigenous people (Rainforest Foundation, 2009) whose livelihoods depend on both timber and non-timber forest products, such as fruit, oils and medicine. As well as acting as a regulator of groundwater and provider of various products, rainforests also act as a receptacle for CO2 ; the process of deforestation can directly or indirectly increase net global greenhouse gas emissions. (Fearnside & Laurance, 2000). An example of a direct effect of deforestation is the phenomenon of ‘slash and burn' agriculture, the temporary cutting and burning of forest land for shifting cultivation, which creates CO2. Indirect effects depend on the land use, e.g. forestry for cattle ranching or paddy fields will lead to an increase in methane. While it is often the developing countries of the world's tropical regions that suffer the direct externalities of these practices, the cost of climate change is imposed on all countries (Hanley et al, 2001, p.220). Rainforests are also incredibly biodiverse, and are home to some 6 million different species 99% of which have yet to be studied (The Prince's Rainforest Project, 2009, p.22). There is a multitude of reasons, which can be split into two categories; proximate and fundamental causes of deforestation. Proximate causes are the obvious reasons for which forests need to be cleared: logging, non-timber product harvesting or for agriculture/livestock space. Fundamental causes, as observed by Panayotou (1995, p.34) are, imperfections inherent in the market system, including ill-defined or absent property rights, high transaction costs and a failure of the market system to reflect the true value of preservation. A second fundamental cause is the competition for space between humans and other species. For many, rising populations coupled with high poverty rates are key causes of deforestation as governments with growing populations and trade deficits are far more likely to use forests for revenue rather than explore the incentives to preserve. (Perman, 2003, p.616). These economic disincentives to preserve are to blame for the excessive levels of deforestation we are seeing.
While most of the literature points towards wasteful levels of deforestation across the tropical regions, forest conversion can be efficient to an extent. It makes economic sense for a forest to be mined just up until the prices are high enough to rationalize the planting and sustainable management of new forests (Mendelsohn, 1994, p.750). In other words, the optimal rate of forest conversion occurs when the marginal benefits of deforestation (md), for either agriculture or timber harvesting, equal the marginal benefits of preservation (mp). Since the benefits of preservation are unlimited, we must divide by the discount rate, r for (mp/r). The benefits of preservation can then be split into two components, global benefits, (mpG/r) and local benefits (mpL/r).
Social optimum: (mpL + mpG /r) = md
This is optimality is shown in figure 1 below at the point X*, where the two marginal benefit curves intersect. If global benefits are not accounted for, i.e. without international intervention, the equilibrium is lower down at X**and only the local benefits are taken into account . As with other public goods, there is very little incentive for a country to pay a share of the costs when it can enjoy the benefits for free. The international community must agree to pay the tropical nation a sum equal to or greater than the area abc, which is the tropical nation's loss of benefits (net costs). The area dgef represents the global benefits of preservation enjoyed by other countries. Of course, as with any open access good, a lack of property rights means there is a temptation to reap the benefits of preservation without actually paying a share of the costs as it would be impossible to stop free-riders from enjoying the benefits. Where there is a problem of free-riders, there is a disincentive for forest-owning nations to bear the costs of preservation when they could quite easily transform forest land into agriculture or infrastructure for revenue. While these profits are immediately visible, forest clearing may not always be the most economically optimal solution, as the global benefits of sustainable forestry often far outweigh private benefits from harvesting. A study of forest clearing in Malaysia showed that while unsustainable logging techniques produced greater private benefits, the global benefits from foregone flood protection and non-timber products etc, were worth more. There was a total economic value loss of around 14% ($1,800/ha) when the forest was unsustainably managed (Kumari, 1994). It is up to the governments of these nations to implement policies which will control the incentives encountered when forests are cleared (Hanley et al, 2001, p.231).
The problem of absent property rights is recognized as one of the main causes of forest degradation and as many of the tropical forest-owning nations tend to be less developed countries with economies relying on agriculture, this provides further impetus for forest clearance (Barbier, 2001 p.156). These agriculture-intensive economies provide poor farmers with few economic opportunities, forcing them to clear forest land at the margin for subsistence agriculture (Rudel & Roper, p.56). The national debts typical of developing countries coupled with a devaluation in currency will also encourage deforestation as governments will subsidise forest clearing activity in order to increase, now more profitable, exports to steady the trade balance. (Kimsey, 1991). This ‘immiserization' model of deforestation emphasises the importance of population growth and the resulting actions of poor individuals and can be applied to small tropical nations such as the those in Africa, where over half of the deforestation is carried out by impoverished farmers in order to meet their subsistence needs (The Prince's Rainforest Project). But it is not just rising populations and poverty levels that cause deforestation, many macro-agents, such as private investors or governments can determine the rate of deforestation by investing capital to harness a forest's economic potential.
The Environmental Kuznets Curve identifies an inverse u-shaped relationship between GNP/capita and environmental disamenities in developing countries (Koop & Tole, 1996, p.232). In the deforestation case, as GNP/capita increases, deforestation will also increase up until a threshold point, after which, it will fall as GNP continues to increase. Rudel and Roper identified an EKC-type relationship between GNP levels and levels of deforestation as shown in figure 2. Initially at point A, GNP is low and deforestation is due to poor farmers being forced to practice subsistence agriculture. As GNP rises, the curve slopes downwards, indicating a drop in deforestation levels, due to an improvement in economic opportunities for peasant farmers. Between points B and C, the relationship becomes positive, this time as a result of private investment and government subsidies for forest-clearing activity. After point C, GNP continues to rise but we can see a steep downward-sloping in the curve, indicative of a wealthier nation's demand for forest preservation. After the threshold point of GNP as been passed, the country's economy, being less agriculture-intensive, allows poor farmers more labour opportunities in urban areas (Rudel & Roper, 1997, p.61).
There have been a number of measures taken to curb the currently high deforestation rates in developing countries, the most effective of which is the system of debt-for nature swaps. This scheme involves the swapping of a developing country's foreign debt in return for forest preservation on behalf of the creditor. There is increasing pressure on developed countries to seek economically sustainable methods of production and equally increasing pressure on developing countries to repay foreign debts due to rising world interest rates. A system of debt-swapping agreements allows developed countries to effectively pay for the preservation and sustainable management methods of developing countries. This not only benefits both parties but addresses the problem of missing markets by reflecting the true global value of forest protection. Other policies for tacking deforestation include ecotourism, which gives tourists from the developed world a chance to see preserved rainforests or other protected areas of the natural world. Displaying the preserved land brings in much more revenue than using it for crop plantations (Friends of the earth).