Two dis­tin­guished pro­fes­sors re­flect on us­ing pol­lu­tion con­trols as In­fra­struc­ture In­vest­ment

Game the­ory tech­niques and re­gard­ing pol­lu­tion con­trol as in­fra­struc­ture could end haze over In­done­sia’s palm oil in­dus­try

Norway-Asia Business Review - - Contents - EUS­TON QUAH AND JOERGEN OERSTROEM MOELLER. REPRINTED WITH PER­MIS­SION OF YALEGLOBAL ON­LINE OF THE MACMIL­LAN CEN­TER AT YALE, YALEGLOBAL.YALE.EDU

Oil to the fire: In­done­sia's slash-and-burn method to pro­duce palm oil xspreads haze through the re­gion, forc­ing neigh­bor­ing Sin­ga­pore­ans to wear masks De­spite po­lit­i­cal pres­sures over many years and var­i­ous en­force­ment mea­sures, palm oil pro­duc­ers in In­done­sia con­tinue to slash and burn to clear land, ha­rass­ing neigh­bour­ing coun­tries with trans­bound­ary pol­lu­tion.

Sim­ple eco­nom­ics may of­fer a new ap­proach for slash-and-burn agri­cul­ture, which if suc­cess­ful might also have rel­e­vance for sim­i­lar en­vi­ron­men­tal en­croach­ments. Farm­ers and plan­ta­tions must find it prof­itable to ditch slash and burn, and those de­mand­ing a haze-free life must con­trib­ute financing. Ben­e­fits and costs must be de­signed in such a way that no al­ter­na­tive ex­ists making coun­tries bet­ter off – cre­at­ing a win/win sit­u­a­tion for ev­ery­body tak­ing part.

Palm oil is the world’s most com­pet­i­tive vegetable oil with global pro­duc­tion more than dou­bling since 2000 and ex­pected to grow even more as ad­vanced economies favour nat­u­ral oils over ar­ti­fi­cial trans-fats for health rea­sons. The palms, na­tive to Africa, were trans­ferred to Malaysia in the 20th cen­tury and later to In­done­sia.

To­day, that re­gion pro­duces more than 80 per­cent of the world’s palm oil.

Eco­nomic losses in health, tourism and can­celled flights along with school and busi­ness clo­sures are an in­dis­putable con­se­quence of haze, but do not hit those re­spon­si­ble. The Asian De­vel­op­ment Bank es­ti­mated the 1997 costs of haze to be USD 9 bil­lion, and that does not in­clude the neg­a­tive im­ages of de­for­esta­tion and pol­lu­tion, high­lighted by ac­tivists and in turn lead­ing to de­creased for­eign di­rect in­vest­ment. Of­ten, the burn­ing of fields gets out of con­trol, trig­ger­ing wild­fires with im­pacts that are dif­fi­cult to es­ti­mate.

The cost of switch­ing to non­burn­ing meth­ods is es­ti­mated at USD 1.2 bil­lion.

The only way to change pro­duc­ers’ be­hav­iour is bridg­ing the cost dif­fer­ence be­tween slash-and-burn ver­sus non­burn­ing meth­ods. Those who re­sent the pol­lu­tion must in­vest D 1.2 bil­lion to avoid the D 9 bil­lion in costs.

Uni­form cross-the-board mea­sures won’t work. About 40 per­cent of the haze orig­i­nates from plan­ta­tions run by large cor­po­ra­tions and 60 per­cent from small land­hold­ers in­clud­ing sub­sis­tence and in­dige­nous farm­ers. The large cor­po­ra­tions have the fi­nan­cial re­sources to ditch slash-and-burn meth­ods, but the small operators do not and cling to traditions.

Mar­ket forces won’t work. Slash-and-burn is less costly than en­vi­ron­men­tally friendly meth­ods re­ly­ing on man­power, heavy ma­chin­ery or new tech­nolo­gies. Un­der cur­rent mar­ket con­di­tions – low prices due in­creas­ing sup­ply amid fall­ing de­mand as well as cur­rency vo­latil­ity and com­pe­ti­tion from soy­bean oil – the ini­tial in­vest­ment will, at best, be prof­itable only in the long run and bur­den the pro­ducer with a short­term cash drain.

If forced to switch to ex­pen­sive meth­ods and if the gov­ern­ments could en­force reg­u­la­tions, small operators would close. Lack­ing co­or­di­na­tion or in­flu­ence, small farm­ers can­not eas­ily hike the mar­ket price for palm oil and they re­sist pres­sure, leg­is­la­tion and rules. Politi­cians are un­der­stand­ably re­luc­tant to tar­get a ma­jor con­trib­u­tor to the do­mes­tic econ­omy, es­ti­mated at about 5 per­cent of In­done­sia’s GDP.

Gov­ern­ments and en­vi­ron­men­tal­ists could dis­rupt the eco­nomic cal­cu­lus by pay­ing re­wards or sub­si­dies to small land­hold­ers that use haze-free meth­ods. Such a sys­tem an­chored in fi­nan­cial re­wards or sub­si­dies, aim­ing to im­prove meth­ods and in­crease en­force­ment, would change the eco­nomic cal­cu­lus. High re­wards

Mar­ket forces won’t work. Slash-and-burn is less costly than en­vi­ron­men­tally friendly meth­ods.

for those who act swiftly could cre­ate a group of pioneers who demon­strate the ad­van­tages. New tech­nolo­gies and syn­er­gies might eventually re­duce cost dif­fer­ences and the need for sub­si­dies, but de­vel­op­ment of new tech­nol­ogy is held back by a lack of eco­nomic in­cen­tives. Such a sys­tem would not avoid pay­outs to large cor­po­rate plan­ta­tions, and or­ga­niz­ers could bor­row from meth­ods in Euro­pean coun­tries that en­cour­age col­lect­ing waste to gen­er­ate en­ergy.

The large cor­po­ra­tions could do more to re­duce haze, but many hide be­hind the small farm­ers and the government is le­nient. Me­dia re­ports this year dis­closed fires in con­ces­sion ar­eas man­aged by six com­pa­nies.

The only so­lu­tion is to fi­nance the costs for small stake­hold­ers to switch meth­ods of land clear­ance. It may seem un­fair – like ex­tor­tion – to ask the vic­tims to pay out to avoid be­ing harmed. But real­is­ti­cally, many in South­east Asia may be will­ing to pay to end the an­nual chok­ing haze that can last three to four months. Such a pol­icy con­forms with wel­fare eco­nom­ics: A pol­icy en­hances wel­fare if those who are bet­ter off can com­pen­sate those who lose and still be bet­ter off.

If such a pol­icy were left to coun­tries di­rectly in­volved in financing, then the amount should be dis­trib­uted ac­cord­ing to rel­a­tive neg­a­tive im­pact. A 2004 study sug­gests that about 94 per­cent of the vic­tim dam­ages are in In­done­sia, 5 per­cent in Malaysia and 1 per­cent in Sin­ga­pore. Game the­ory eco­nom­ics sug­gests that if vic­tims share the costs of con­trol­ling pol­lu­tion in pro­por­tion to their dam­ages then no coun­try would be worse off, no coun­try should be bet­ter off by leav­ing the agree­ment and no al­ter­na­tives ex­ist that make some coun­tries bet­ter off.

But po­lit­i­cal re­al­i­ties rarely work as smoothly as eco­nomic the­ory. Haze has so far been clas­si­fied as an en­vi­ron­men­tal prob­lem, rel­e­vant only for those pro­duc­ing the pol­lu­tion and those suf­fer­ing from the ef­fects. Such a nar­row fo­cus might be re­placed by clas­si­fy­ing such haze as an el­e­ment in eco­nomic and so­cial de­vel­op­ment. As such, pre­vent­ing the burn­ing and the eco­nomic con­se­quences be­longs among the many ac­tiv­i­ties un­der­taken by de­vel­oped coun­tries as well as in­ter­na­tional institutions like the World Bank, the Asian De­vel­op­ment Bank and the newly born Asian In­fra­struc­ture In­vest­ment Bank un­der the la­bel of de­vel­op­ment as­sis­tance.

Lend­ing ex­per­tise and fi­nan­cial sup­port would im­prove en­vi­ron­men­tal con­di­tions in South­east Asia, sav­ing the re­gion’s coun­tries bil­lions of dol­lars while mod­ern­iz­ing pro­duc­tion meth­ods used pri­mar­ily by small land­hold­ers. The ben­e­fits of trans­form­ing this agri­cul­tural sec­tor in Malaysia and In­done­sia might de­liver spinoffs to other sec­tors in the econ­omy in­clud­ing agri­cul­tural ma­chin­ery. And over the long term, the health ben­e­fits might be con­sid­er­able as is the case for switch­ing to a more mod­ern pro­duc­tion struc­ture and oblit­er­at­ing the im­age of a sec­tor mired in out­dated meth­ods. Another sub­stan­tial if non­tan­gi­ble ben­e­fit: Ac­cu­sa­tions by ac­tivists about the sec­tor not be­ing a good cor­po­rate cit­i­zen would no longer be war­ranted.

The world is try­ing to get a han­dle on cli­mate change and en­vi­ron­men­tal prob­lems with lim­ited suc­cess. Agree­ments to limit car­bon diox­ide emis­sions as a re­sult of the Paris agree­ment, to go in ef­fect in Novem­ber, are en­cour­ag­ing but not enough.

A re­wards sys­tem for small stake­hold­ers in economies may serve as a tem­plate for sim­i­lar cross-border en­vi­ron­men­tal prob­lems to an­a­lyse pro­duc­tion meth­ods, tech­nol­ogy and mar­ket struc­ture and de­velop financing and en­force­ment sys­tems, making it prof­itable for pol­luters to switch into cleaner pro­duc­tion meth­ods.

The un­der­ly­ing as­sump­tions in­clude that peo­ple are will­ing to pay for not en­dur­ing pol­lu­tion, small stake­hold­ers will re­spond to eco­nomic in­cen­tives, and in­ter­na­tional fi­nan­cial institutions are pre­pared to clas­sify reduction of pol­lu­tion as in­fra­struc­ture im­prove­ments and there­fore el­i­gi­ble for sup­port. If so, the world may have a much-needed tool to act against global pol­lu­tion.

It may seem un­fair – like ex­tor­tion – to ask the vic­tims to pay out to avoid be­ing harmed. A re­wards sys­tem for farm­ers could serve as a tem­plate for cross-border en­vi­ron­men­tal prob­lems.

Eus­ton Quah is pro­fes­sor and head of eco­nom­ics with Nanyang Tech­no­log­i­cal Univer­sity, Sin­ga­pore. He is also pres­i­dent of the Eco­nomic So­ci­ety of Sin­ga­pore. Joergen Oerstroem Moeller is vis­it­ing se­nior fel­low, ISEAS Yu­sof Ishak In­sti­tute, Sin­ga­pore. He is also ad­junct pro­fes­sor with the Sin­ga­pore Man­age­ment Univer­sity and Copen­hagen Busi­ness School and an hon­orary alumni of the Univer­sity of Copen­hagen.

PHOTO: ISTOCKPHOTO

PHOTO: ISTOCKPHOTO Up­per left: A hazy day on Thai­land’s An­daman coast. The haze is caused by for­est and peat fires on Su­ma­tra is­land. Above: A trop­i­cal for­est fire caus­ing plenty of smoke.

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