Download Conservation and employment creation: Can

Conservation and employment creation: Can
privatizing natural resources bene…t
traditional users?
January 29, 2011
Abstract
The establishment of a private property regime is often proposed
as a solution to the degradation of natural resources. While arguably
more e¢ cient than open access, private property often comes at a distributional cost (Weitzman, 1974) as traditional users of the resource
lose income and employment in the process.
The present paper demonstrates that, in the case of renewable resources, traditional users may gain from privatization even if they are
denied ownership of the resource. Indeed, a private owner maximizing pro…ts tends to preserve the resource, which results in long-term
increases in employment. Hence, the short term losses to traditional
users from lower labor demand and loss of rent must be weighted
against the long term gains from employment creation. We derive
conditions under which privatization is Pareto-improving, bene…ting
both the new and traditional owners of the natural resource.
Keywords: Renewable resources, Open access; Privatization; Employment creation
JEL-codes: O13; Q23; Q28
1
Introduction
Open access to natural resources, like water, …sheries, pastures and forests,
is widespread in developing economies and often characterized by excessive
exploitation of the resource (see for instance Baland and Platteau, 1996).
1
Motivated by …scal and environmental concerns, governments seek to restrict
access to these resources. This is typically done by privatizing, that is by
de…ning and enforcing exclusive property rights.
From an e¢ ciency point of view, privatization may be desirable. It is well
known that open access leads to a “tragedy of the commons”, characterized
by economic loss and environmental degradation. With well de…ned property
rights, pro…t maximizing behavior leads to the conservation of the resource
and thereby improves economic e¢ ciency. However, while privatization of
the commons may bene…t the economy as a whole, this change in property
regime necessarily harms labor. Samuelson (1974) and Weitzman (1974)
demonstrate that, in the absence of redistribution, workers are always better
o¤ under an ine¢ cient open access regime than under private property. This
is because privatization restricts the use of a resource, and thereby reduces
the demand for labor and, hence, labor incomes. In the words of Weitzman
(1974, 234) “....there may be a good reason for propertyless variable factor
units to be against e¢ ciency improving moves toward marginalism like the
introduction of property rights or tolls unless they get a speci…c kickback in
one form or another.”It is also clear that traditional users may bene…t from
privatization when given adequate property rights over the resource (see e.g.
Roemer and Sylvestre, 1995).
In this paper, we demonstrate that, in the context of renewable resources,
privatization necessarily increases employment in the long run, which is positive for labor. This e¤ect is based on the conservation e¤orts by the private
owner, which leads to a larger future stock of the resource. Conservation
implies a short term reduction but a long term increase in labor demand.
This increase may be large enough for privatization to be Pareto-improving.
By focussing on a static framework, the literature has ignored the dynamic impact of privatization in the case of renewable resources, and has
thereby overlooked its long run conservation properties. A number of contributions, keeping with the traditional, static approach of the open access
resources, have extended the Weizman framework. For instance, de Meza
and Gould (1985) show that when the commons consist of di¤erent resources,
privatization can increase employment on some of them, even though total
employment must fall. In another paper, de Meza and Gould (1987) demonstrate that, if multiple inputs are simultaneously used on the commons, the
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welfare of traditional users may go up. For example, a well-managed pasture
may increase the value of the cattle so much that cattle owners bene…t from
the privatization of the commons, even though they lost their free access
to it. In a similar vein, Brito et al (1997) investigate the case where labor
supplied to the resource is not uniformly productive, and show that, under
some conditions, labor returns may again rise. Finally, Baland and Francois (2005) show that the open access resources protect poor people against
adverse income shocks, a property which may be hard to replicate with a
privatized resource in the presence of information problems.
To illustrate the potential bene…ts of restricted access, consider the case
of the island of Hispaniola (Diamond, 2005). The two countries that share
this island, Haiti and the Dominican Republic, have experienced radical differences in both economic and ecological performance. Despite the geographical and historical similarity between the two countries, per capita income
is …ve times higher in the Dominican Republic than in Haiti. Ecologically,
there are also sharp di¤erences, with 28% of the Dominican Republic being
forested, compared to only 1% in Haiti. Moreover, the remaining forests of
Haiti are continuously being threatened by peasants felling trees for charcoal
production.
In Haiti, weak formal institutions and short-sighted policies have led to
a de facto open access to the forests, resulting in a tragedy of the commons.
In contrast, the Dominican Republic has had for a long time a top-down
approach to environmental management, launched under the Trujillo era
(1930-61). Trujillo took control over the forests and was personally involved
in the forest industry. In the process, he expanded national parks and enforced forest protection, curbing wasteful practices of indiscriminate logging
and burning, and prohibiting people from free access to forests. In the long
run, this policy contributed to higher income levels in the population and a
sounder ecology.
The paper is organized as follows. Section 2 presents the model, starting
with the equilibrium under open access then moving on to the privatized
arrangement. Section 3 contains the analysis, comparing labor income under
the two property regimes. Section 4 concludes.
3
2
The model
We consider an economy composed of two sectors: a resource extracting
sector and another sector. In the resource sector, the production technology
is such that, in period t, the marginal productivity of labour is equal to 1 if
the number of workers lt does not exceed the existing stock of the resource
Rt . Otherwize, the marginal productivity of labour falls to zero and the
resource is exhausted.
There are two periods, and no discounting. The amount of the resource
which has not been harvested in period 1 grows at a given rate g, so that the
available stock of resource in period 2, R2 , is given by:
R2 = max [0; (1 + g)(R1
where R2 is equal to zero if l1
l1 )] ;
(1)
R1 .
Total labour endowment in the economy is normalized to 1. When not
employed in the resource sector, workers …nd employment in the other sector,
where they earn a wage rate given by:
wt = f (1
lt ) = w(lt );
(2)
with w0 > 0.1 For the sake of simplicity, we assume that w(0) = 0: We also
assume that, if all workers are employed in the resource sector, the wage rate
in the alterantive sector is greater than one: w(1) > 1. This implies that, in
equilibrium, the resource sector does not absorb all workers in the economy.
We …rst analyze resource allocation and labor income prevailing under open
access before turning to the situation under private property.
2.1
Open access to the resource
Under open access, income from the resource is shared equally among all
workers in that sector. To simplify the analysis, we consider the case where
the resource is scarce so that, if exactly R1 workers are employed in that
sector, the resulting wage rate is smaller than one: w(R1 ) 1:2 Under that
1
If the wage rate is constant, property regimes are irrelevant to labour incomes.
When the scarcity assumption is violated, so that w(R1 ) > 1; the resource is not
fully exhausted in the …rst period. The resource therefore also generates employment
2
4
assumption, as long as l1 < R1 ; the marginal productivity of labour in the
resource sector exceeds returns to labor in the alternative occupation. As
a result, the equilibrium number of workers under open access, l1O ; must
be larger than R1 , which implies that the resource is exhausted in the …rst
period. In equilibrium, the average productivity of labour in the resource
sector equals the wage in the altenative sector:
R1
= w(l1O );
l1O
(3)
Figure 1 illustrates the open access equilibrium number of workers in the
resource sector, l1O , and the associated wage, w(l1O ).
1
w(l1O )
w(l1 )
l1
R1
l1
R1
l1O
1
Figure 1: First period equilibrium under open access
There are two di¤erent sources of ine¢ ciency under open access. Weitzman (1974) and Samuelson (1974) focused on the static ine¢ ciency. This ine¢ ciency is due to employment sharing in the resource sector which involves
crowding externalities, and is captured here by the fact that the marginal productivity of some workers is equal to zero in equilibrium. Our model however
highlights another, dynamic externality: traditional users do not internalize
the impact of their harvesting decisions on the future stock of the resource.
and income in the second period. However, the analysis of this case produces very similar
results to the one reported here and is therefore omitted.
5
As a result, open access leads to the overexploitation of the resource in the
…rst period and destroys long-term employment opportunities in that sector.
Both the static and the dynamic externality lead to the overexploitation
of the resource. In fact, given our scarcity assumption, w(R1 )
1, the
resource is fully depleted in period 1 and R2 = 0. Under open access, all
workers are employed in the alternative occupation in period 2, and total
labor income over the two periods is given by:
I O = w(l1O ) + w(0) =
2.2
R1
:
l1O
(4)
Private ownership
Under private ownership, resource owners decide on the number of workers
to hire in period 1, l1 ; and period 2, l2 ; so as to maximize pro…ts. Without
loss of generality, we refer here to a situation where exclusive property rights
over the resource have been given to a single owner over the two periods.
Pro…ts are given by:
= (1
where l2 = (1 + g) (R1
accounted for.
w1 ) l1 + (1
w2 ) l2 ;
(5)
l1 ) ; so that the dynamic externality is explicitly
Maximizing pro…ts with respect to l1 yields the following …rst order condition:
1 w1 (1 w2 ) (1 + g) ;
(6)
where the strict inequality sign involves a corner solution, with an optimal
level of …rst period employment in the resource sector, denoted by l1P , equal
to zero, and second period employment given by l2P = (1 + g) R1 . Otherwize,
both l1P and l2P > 0, and the expression holds with strict equality. Let us
consider the corner solution …rst and rewrite equation (6) as follows:
1
w (0)
(1 + g) (1
w((1 + g)R1 ));
which, when holding with equality, de…nes a threshold level of initial resources, R1 = R(g): For all levels below that treshold, pro…t maximization
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involves full preservation of the resource in period 1. In contrast, if R1 > R1 ;
equation (6) holds with equality and can be re-written as follows:
1
w l1P = (1 + g) 1
w((1 + g)(R1
l1P ) ;
(7)
which de…nes the interior solution l1P > 0: Note that, with an interior solution,
both l1P and l2P are increasing in R1 : a larger initial resource stock implies
more employment and, hence, higher wages in both periods.
Total labor income with an interior equilibrium is given by:
I P = w(l1P ) + w((1 + g) R1
l1P );
(8)
where the …rst term and second term represent …rst and second period labor
incomes respectively. With a corner solution, I P = w((1 + g) R1 ).
3
The Analysis
We start the analysis of the model by emphasizing the e¤ect of privatization
on employment and wages. We …nd that:
Proposition 1 Under private property, the …rst period employment in the
resource sector is strictly smaller and the second period employment strictly
larger than under open access.
Proof. This follows immediately from the fact that, since w(R1 )
1,
the resource is fully exhausted in the …rst period under open access, while
pro…t maximizing owners always preserve some resource for the future.
Consider for instance g = 0. In this case, cost minimization implies a
balanced extraction path over time: l1P = l2P = 21 R1 . A positive growth rate
is an argument in favor of increased conservation, implying l2P > l1P : In this
way, whereas employment in the resource sector under open access is biased
to the present, under private ownership, employment is biased to the future.
Regarding wages, we can conclude that:
Proposition 2 First period wages are strictly lower and second period wages
are strictly higher under private ownership than under common access.
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Proof. Given equation (2), wages are a function of employment in the
resource sector. The proof of Proposition 2 then follows directly from the
proof of Proposition 1.
These two propositions highlight the major trade-o¤ regarding labour
incomes when privatization is considered.3 As shown by Weitzman (1974),
privatization of an open access resource does reduce employment and income
in the …rst period, by eliminating overcrowding on the resource. Hovewer,
privatization also preserves the resource for future exploitation, which increases income and employment in the second period. The net e¤ect is in
general indeterminate, and depends on the initial stock of the resource and
its growth rate.
To make more precise statements when comparing labor incomes across
the two property regimes, we need an additional assumption about the wage
function. This is due to the fact that, depending on the concavity or the
convexity of the wage function, a (small) reduction in period 1 employment
may have a relatively small or a large e¤ect on wages in period 2. For instance,
consider the particular case where g = 0: Under open access, I O = w(l1O )
with l1O > R1 ; while under private property, following equation (7), I P =
w(R1 =2)+w(R1 =2): Comparing the two levels of income, we …nd that I O > I P
provided the w(:) function is weakly convex. However, if w(:) is concave
enough, I P can exceed I O , if the increase in second period wages (from 0
to w(R1 =2)) that follows privatization is large enough to compensate for
the decline in …rst period wages (from w(l1O ) to w(R1 =2)). To avoid these
complications, we assume in the next propositions that the function w(lt ) is
linear: w(lt ) = alt : The scarcity assumption implies that, in what follows, we
focus on R1 < 1=a.
Figure 2 provides a graphical illustration of the linear case. The graph
displays the resource growth rate on the horizontal axis, and the initial resource stock on the vertical axis. g 0 denotes the threshold level of initial
resources below which privatization leads to full conservation in period 1,
and above which there is resource extraction in both periods. g shows the
threshold level of initial resources at which I O = I P . The letter ’P’and the
letter ’O’ indicate the areas where labor incomes are higher under private
ownership and open access respectively.
3
Note that these two propositions also hold for w(R1 ) > 1, i.e., when open access does
not lead to full depletion in period 1.
8
R1
1
a
g
P
O
O
O
P
1
g'
g
g
Figure 2: Private ownership vs. open access
From Figure 2 we observe that:
Proposition 3 For any given level of the resource, there always exists a
treshold level of the growth rate, above which labor income is strictly higher
under private ownership than open access, and below which labor income is
strictly higher under open access than private ownership.
Next, we have that:
Proposition 4 For any given growth rate of the resource, there always exists
a threshold level of the resource, above which labor income is strictly higher
under private ownership than open access, and below which labor income is
strictly higher under open access than private ownership.
As discussed above, when g or R1 are small enough, open access is preferred by the traditional users. By contrast, with large g or R1 ; privatization bene…ts traditional users. Moreover, the range of initial endowments
for which private ownership Pareto-dominates open access increases with g:
These results indicate that workers gain from privatization when R1 and g
are large, that is when the potential for resource preservation and future
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employment is important. In that case, privatization is necessarily Paretoimproving, even if traditional users are not directly compensated for the loss
of their access rights. Conversely, when R1 and g are small, privatization
lowers the incomes of the traditional users, unless they are also given a large
enough share of the property rights.
3.1
Discussion
Privatization of a natural resource often consists in transferring property
rights to a single owner, typically a semi-private or a state company. Where
the resource is concentrated, this may involve a dominant position on the
local labor market, which may a¤ect employment negatively. It is therefore important to discuss the consequences of privatization when the private
owner is not a price-taker, as assumed so far, but a monopsonist on the labor
market. As a wage setter, the monopsonist understands that w1 = al1 and
w2 = al2 . Modifying the pro…t function (5), we then have:
m
= (1
al1 ) l1 + (1
al2 ) l2 :
(9)
It is easy to show that, with this objective function, the monopsonist will
choose a lower level of employment in period 2, and increase exploitation of
the resource in period 1. As a result, the employment and income gains from
privatization are lower than under a competitive private owner.
We have also only considered an open access situation, in the sense that
traditional users simply equate the current income they derive from the resource (i.e. their average productivity) to the opportunity cost of labor. As
has been documented by Ostrom (1990) and Baland and Platteau (1996),
traditional communities are often able to implement a number of rules to
preserve the resource, typically by restricting access to their members or imposing better management practices. In these circumstances, ’common property’ involves a more e¢ cient pattern of use than open access, resulting in
larger incomes for the traditional users. The case for privatization is then
less clear as the set of circumstances under which privatization will raise
their incomes is much more restricted. Also, we have assumed that privatization involves secure property rights in the future. In many circumstances
however, future rights to the resource are not perfectly guaranteed, which
prompts current owners to over-exploit the resource. This again reduces the
case for privatization.
10
Finally, we have considered in this paper a two period model. This choice
was made for simplicity, and in the appendix, we provide an in…nite horizon
version of the model, in which corresponding results can be derived. Interestingly, private owners always preserve some of the resource and thereby
provide positive employment in all periods. It follows that, for any initial resource stock, there always exists a positive discount rate below which private
property Pareto-dominates common property. Relatedly, we also ignored the
role played by discount factors to evaluate the e¤ects on wages and incomes.
(The generalized version of the model developed in the appendix explicitly
incorporates a discount rate.) The e¤ects of discouting are as expected:
larger discount rates lead to less preservation of the resource under private
property, thereby reducing future employment gains for the workers. The
current values of those gains are also discounted more heavily so that the
discounted welfare of workers under private property is also lower.
4
Concluding remarks
Privatization typically restricts access to resources that have traditionally
been freely available to local communities. While there are strong e¢ ciency
arguments in favor of restricting access and enforcing clearly de…ned property
rights, changes in property regimes may have negative distributional implications. In particular, it has been shown that, without adequate compensation,
employment and labor incomes from the resource necessarily fall.
In the present paper, we focus on renewable resources and investigate the
distributive impact of privatization in a dynamic perspective. We demonstrate that, since private owners preserve the resource, employment rises in
the long run but falls in the short run. When the initial stock of the resource
or its growth rate are large enough, the long run e¤ect dominates, which
leads to an increase in total employment and labour incomes. In these circumstances, privatization not only leads to e¢ ciency gains, but also bene…ts
the traditional users of the resource. The arguments in favour of privatization
are less relevant if it implies the creation of a monopsony on the local labour
market, if future property rights are uncertain, if discount rates are high or
if traditional communities already enforce sustainable practices in the use of
the resource.
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References
[1] Baland, J.-M. and P. Francois, 2005, Commons as insurance and the
welfare impact of privatization, Journal of Public Economics, 89: 211231
[2] Baland, J.-M., and J.-P. Platteau, 1996, Halting degradation of natural
resources: Is there a role for rural communities?, Clarendon Press, Oxford.
[3] Brito, D., Intriligator, M. and E. Sheshinski, 1997, Privatization and the
distribution of income in the commons, Journal of Public Economics, 64:
181-205
[4] de Meza, D. and J. Gould, 1985, Free access vs private ownership: A
comparison, Journal of Economic Theory, 36: 387-391
[5] de Meza, D. and J. Gould, 1987, Free Access versus Private Property
in a Resource: Income Distributions Compared, Journal of Political
Economy, 95: 1317-25
[6] Diamond, J., 2005, Collapse: How societies choose to fail or survive,
Penguin Books.
[7] Hardin, G., 1968, The Tragedy of the Commons, Science, 162: 12431248.
[8] Ostrom, E., 1990, Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge University Press
[9] Roemer, J. and J. Sylvestre, 1993, The Proportional Solution for
Economies with both Private and Public Ownership, Journal of Economic Theory, 59: 426-444
[10] Samuelson, P.A.,1974, Is the rent collector worthy of his full hire?, Eastern Economic Journal, 1: 1-7.
[11] Weitzman, M., 1974, Free access vs private ownership as alternative
systems for managing common property, Journal of Economic Theory,
8: 225-234.
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5
Appendix: An in…nite horizon extension
In an in…nite horizon framework, pro…t maximization implies:
1
wt = (1 + g) (1
(10)
wt+1 )
where represents the discount factor and t the time period. As in the
two period model, the technology in the alternative occupation is such that
wt = alt : For the sake of notation, we also assume that a = 1, so that equation
(10) can be rewritten as:
1
ltP = (1 + g) 1
P
lt+1
(11)
which can be expressed as:
P
lt+1
= 1 + bt (l1P
(12)
1)
1
:
where b = (1+g)
In this appendix, we shall focus on the case where R1 1. The extension
to large endowments in the resource follow easily at the cost of notational
complexity. The biological process of growth of the resource stock, Rt , is
such that:
Rt+1 = (1 + g) (Rt lt )
(13)
which can be written as a function of initial stock as subsequent use as:
t
X
t
Rt+1 = R1 (1 + g)
(14)
l (1 + g) :
=1
Using equation (12), and using the fact that
t
X
(1 + g) =
(1+g)t+1 (1+g)
;
(1+g) 1
we
=1
obtain:
2
6
Rt+1 = (1 + g)t 4R1
(1 + g) (1 + g)1
(1 + g) 1
t
1+g P
l1
b
1
b
1+g
t+1
b
1+g
b
1+g
1
3
7
5
(15)
In the limit, the transversality condition implies that the resource should be
exhausted, that is: limt!1 Rt = 0. Using equation (15), this implies that:
R1
(1 + g)
+
g
13
l1P
1
(1+g)2
1
1
=0
(16)
or, equivalently:
l1P = 1 +
1 + (1 + g)2
(1 + g)2
!
R1
(1 + g)
g
(17)
which describes the optimal extraction path in the …rst period.
Looking to welfare, the discounted utility of a worker under the privatized
regime is equal to:
1
1
X
X
t 1
t 1 P
P
U =
wt =
lt :
(18)
t=1
t=1
Using equations (12) and (17) and rearranging terms, we obtain:
!
2
(1
+
g)
1
+
(1
+
g)
1
(1 + g)
+
;
UP =
R1
2
1
g
g
(1 + g)
(19)
while the discounted welfare of a worker under the commons is equal to
p
U O = R1 :
(20)
The welfare impact of privatization can then directly be obtained by comparing U P and U O given in the last two expressions. Again, one can easily
see that U P > U O if R1 is close to one, the growth rate of the resource is
large or the discount factor is close to one. It is also easy to show that if the
discount rate is low enough ( (1 + g) > 1), the discounted value of the wage
rates under private ownership exceeds that under open access.
14