J.J. MACGREGOR
Department of Forestry, University of Oxford, United Kingdom
1
A discussion paper prepared for the course on Land Use for Forestry and Agriculture held at the Department of Forestry, University of Oxford, 1959. A note on this course appears later in this issue.
IT is a surprising thing to find that, in spite of the important changes which have taken place in the subject of applied economics since the 1930's, the application of the modem tools of economic analysis to problems of forestry has been somewhat neglected. There has been a common belief that forestry is somewhat different from all other branches of economic activity and, therefore, it demanded economic methods of its own. Consequently, " forestry economics " as it has been termed, has come to be bound up very largely with what seem to be complicated formulae involving interest calculations and it is very seldom that what could be termed an orthodox economic approach - such as one would find in studies of agriculture, the coal industry, or the textile industry - is found.
This article has for purpose:
1. To survey the economic factors which determine the level of productivity of land when used for forestry - and in particular to consider any economic determinants which seem to be peculiar to this form of economic activity. These economic influences will be discussed with reference to the orthodox, generally-used, tools of economics.2. To illustrate, very briefly, the use of economics in the formulation of policies regarding the use of land for forestry. Reference, in this section, will be made to existing topics relating to the use of land for forestry.
The physical factors influencing productivity are fairly obvious - soils, topography and climate - and it would be reasonable to expect that the productivity influences in forestry are similar to those of agriculture but the long-term production period obscures the effect of seasonal influences. Trees tap different layers or strata and to this extent it may often happen that sub-marginal land for agriculture may be supra-marginal for forestry and vice versa. There can be no doubt, however, that fertility of the forest soil has an enormous effect in the return from the forestry investment.
Physical factors therefore have a direct bearing on productivity, and studies have shown the close relationship between " fertility " and volume produced, and the volume per unit of time - a subject which will be considered further.
But when considering productivity in this context reference is being made to an economic concept and the standard of measurement must be value produced. If attention is being given to the productivity of land - an attempt is being made to isolate that proportion of the total value product which is attributable to land - rather than to labor and capital. This isolation of the contribution of a single factor of production cannot be done with complete accuracy - but one way of arriving at an estimate is by using:
(a)
an estimate of the gross value of timber produced;
(b) and then by exhausting the gross value product (G.V.P.) of all payments to the factor of production employed other than to land - which gives a residual of the price which could be paid for the land.
But this residual can also be considered in another way. The gross value produced within an enterprise is the same as the sum of the contributions of the separate factors of production employed - since the G.V.P. and the total costs are the two sides of one equation. If the assumption that the amounts paid to labor and capital are true reflections of their marginal product can be accepted - then it follows that the residual is a true measure of the land's contribution to the total product. Therefore, the aim is to calculate this residual - the net return to land.
One of the most distinguishing features of forestry is the length of time for the productive process depending, of course, on the soil quality and climate and success in selection of Species. For the economist, the importance of this waiting period lies in the role of interest on capital - as an agent of allocation or as a guide to the alternative uses of capital open to the investor, whether he is the Government or a private individual. In forestry - interest on capital accrues at a compound rate and, therefore, assumes great proportions in the structure of costs. This holds true whether the forest authority borrows capital from a government Treasury or not - and whether it pays interest or not - for although capital may be free to the authority it is not free to the economy - and it is important that investments are made with reference to the relative yields in alternative uses. This reference to alternative uses is, in fact, the crux of economics - which was defined by Professor Lionel Robbins in his Essay on the Nature and Significance of Economic Science as the study of the allocation of scarce resources among competing ends, which have alternative uses. Economists speak of the concept of opportunity costs which states that, the " real costs " to society of a given policy (e.g., investment) are measured by the " opportunity costs " of that policy - or the values of product foregone. Returning to time in forestry, therefore, in the calculations of the net product of land - it is necessary to construct a time investment schedule and a time revenue schedule, in which outlays are accumulated at interest from the year of their origin to the end of the production period, and so with revenues - which " earn " interest.
What, then, are the chief determinants of productivity of land under forestry? They are the ruling rate of interest and the length of the production period; the level of costs - and especially the level of initial costs of creation; the size of forest unit - and the importance of economies of scale; the volume and speed of production; and the price of timber with the price of the immature timber an important factor in total revenues. The question of price raises very complex issues, for it is, itself, subject to many influences - the most important of which are transport costs, related to location of the forest; the national income of the buying country; the trends in the key timber-demanding industries; the elasticity of substitution between timber and other products, the relation between the supply price of domestic timber and foreign timber; and the relative monopoly power of the forester and timber user. The question of the determination of the price of timber is extremely complex, for the demand for timber is a derived demand and consequently we are taken into the field of the level of demand for the products made, in whole or in part, from timber.
Interest accounts for a very high proportion of the total costs of forestry, especially when the creation of a new forest unit is being considered. A rise in the rate of interest of as little as I percent affects the costs of forestry very markedly indeed. In the north of Scotland, a rise from 4 percent to 5 percent would increase total costs per 100 acres by 52 percent.2 The rate of interest considered in making profitability calculations must be the rate actually paid - if the capital is actually borrowed, or the " national " rate of interest or " opportunity cost " rate when the Government makes the investment. Clearly, the degree to which a rate of interest equal to the opportunity cost rate is looked for, will depend on other influences over policy than the purely economic. But, if economic motivation is the key to policy, some idea of the national rate of interest must be calculated. The production period is a very important determinant of land productivity under forestry when interest is accruing at a compound rate. From one country to another there is quite a range of time within which general-purpose timber can be grown with relatively short rotations, say, for a pulp or a pitwood demand. Here technical and economic arguments can be conflicting - if technical experts argue that light thinning is desirable, or that slowly grown timber is desirable - whereas economics may dictate that policy should concentrate on the production of quickly grown timber. Such matters should be settled by the market demands for timber. A difficulty, however, arises when policy is decided, because it is not possible to know what the market will be in 10 to 15 years' time and the elasticity of supply in forestry is low.
2
Dr. K. R. Walker, unpublished thesis, 1959, page 237.
The greater the initial establishment costs at interest over the entire production period, the greater will be the cost burden. For policy, therefore, attempts should be made to minimize the initial costs of forestry creation. A constant search goes on for methods which will achieve reduction in cost, and in this connection in the United Kingdom mention can be made of the Work Study Section of the Forestry Commission which aims, among other things, at providing the most efficient way of performing given tasks.
Perhaps, as a further illustration, the question of housing costs - a problem for the United Kingdom Forestry Commission, might be mentioned. Housing costs, if charged to the account of the Commission, would represent a very high proportion of the total costs when interest has been paid.3 If private costs of a forest enterprise are considered then these costs are indeed costs to be included. If, however, the " social costs " of forestry as carried on by a government authority is considered - and it can be shown that the authority's investment in housing does not constitute a net claim on resources (since the forest workers would have been housed elsewhere), - then such costs must not be charged to the authority's account.
3
They amount to 40 percent of the costs per 100 acres if the interest rate is 5 percent. K. R. Walker, op. cit., page 233.
Thus, so important is the inflation of costs in forestry by compound interest, that all possible attempts must be made to secure the maximum product per unit of input of all factors of production, at all stages of the forest cycle. Forest planners and managers should constantly examine the proportions of the different factors of production employed and ask whether costs could be cut (and output maintained) or whether output could be increased, per unit of cost, by a reallocation of the proportion of factors employed. In economic parlance, the factors of production must be employed in such ratios that their marginal products are equal.
The size of the forest unit will also have an important influence upon costs; for example, on fencing costs and on the incidence of overhead or fixed costs. How far it is possible to benefit from a large forest through economies of scale is a subject which requires empirical research. It is almost certainly true that economies are possible through the planning of a smooth, uninterrupted flow of operations and full utilization of labor with no idle capacity, all of which might be impossible in a small forest unit.
Just as costs must be minimized, production must be maximized. High volumes, produced in the minimum time, are what must be aimed for, always assuming that this policy is consistent with the market demands for timber. This is more the task of the technical expert than of the economist and, indeed, much work is being done on this important aspect of forestry productivity. The price of timber is a very wide subject and can only be mentioned here as a major determinant of value productivity of forest land. Many of the determinants already mentioned above are outside the control of the forester, but often he could enhance the chances of increasing prices for example by devising more efficient extraction methods and by pursuing standardization policies. But little can be done about such influences as the high transport costs in the United Kingdom compared with those of Sweden and some other countries - where floating is combined with a volume density near to the sawmills, and where the relatively cheap sea transport gives overseas shippers an advantage at our ports - which are never far away from the main center of demand. Where high transport costs are inescapable, however, much thought should be given to the relative merits of long hauls of timber to timber-using industries and the alternative of locating those industries near to the timber-producing areas.
To sum up, therefore, economics focuses attention upon the key variables involved in the productivity of forest land, namely physical productivity, the length of the production period, the rate of interest and, consequently, upon total revenues. On the other side of the equation the key variables are capital requirements and the time required by the production period, the rate of interest and, therefore, total production costs. Questions such as opportunity costs and substitution of factors of production at the margin are seen to be of vital importance.
From general economic influences over the level of land productivity under forestry, it is necessary to turn ' very briefly, to some actual examples of policy problems encountered. Most countries face the problems of what kinds of timber to produce, what size of forestry estate to aim for, and where to locate the forests. For other countries, forests are already present as natural resources and, although the above questions may be relevant, the main problem here may be how much timber to extract, i.e., what is the optimum level or intensity of cutting?
The chief difficulty in answering the first few of these problems is that it involves economic forecasting. On the one hand, the economist will argue that the kind of timber a country should produce depends on market demands but, on the other hand - in view of the long waiting period between investment and output - market demands may have changed, and the elasticity of supply in forestry is low. The size of a forest estate and its location will depend on such things as the comparative advantage enjoyed by one region over another, and on the opportunity costs involved in deciding on land for forestry rather than for agriculture or other economic activity. Again, however, comparative advantages change and require readjustments of resource allocation and these are likely to be difficult to make where forestry is concerned. With growing reliance on artificial, as opposed to natural mature forests, it is likely that important shifts will take place in the comparative advantages which regions enjoy in timber production. Much of the very valuable virgin forest, long regarded as among the " free gifts of nature " is being worked out or becoming more remote and inaccessible. Forestry, like agriculture, has its intensive as well as its extensive margin -the intensive work being applied to the older second growth, or the artificially managed forests near to the centers of population and demand. With improvements in technique and of knowledge about the requirements of specialized industries like pulp, changes can be expected and here the shift of the U.S. pulp production away from the west to the south and east can be quoted. The planned production of the raw material, of quick growing conifers, provides a very distinct comparative advantage over other areas. In the postwar years, it has become clear that West African timbers have a distinct comparative advantage in the hardwood trade. At present, by the silvicultural practices of the tropical shelterwood system, it is hoped, by the administration there, that this comparative advantage will be maintained or even increased - mainly through the encouragement given to economic species and their concentration on existing areas of forest.
There are so many factors which determine the optimum size of a forest estate within an economy that it can probably never be calculated accurately - and, as already noted, the figure calculated is bound to change. Mention has been made of the principle of division of labor and specialization. Resources invested in forestry by an economy must not be able to add more to the national income if they were transferred to other uses. A judgment on this, as stated, involves many difficulties. It involves looking ahead to future prices - to the terms of trade between timber and substitutes - both in terms of home and imported supplies. Furthermore, it involves considering whether land should be used for agriculture rather than for forestry or, indeed, whether the land should be used at all. It is a question of relative net products, and the optimum size of forest estate will be where resources are used in such a way as to provide equimarginal products of all factors of production in all uses. This is an economic optimum to be remembered even if it cannot be accurately delineated.
When forests exist and the question is how much to extract, then economic theory indicates that it will pay to extract timber up to the point where the marginal cost of extracting the timber equals the marginal revenue produced.4 From a practical point of view there is more likelihood that this can be more accurately calculated than the exact size of forest estate which constitutes an economic optimum.
4
For a thorough analytical discussion of this moving equilibrium of a forest enterprise see K. E. Boulding, Economic Analysis, Hamish Hamilton, London.
Some reference must be made to experiences in the actual planning of land use. Many factors often combine to limit the full realization of land product potentialities. In a recent paper entitled European and Near East Experience of Planned Land Use presented to the Seventh British Commonwealth Forestry Conference, 1957, the author drew attention to some of these limitations which had been noted by the Near East Forestry Commission of FAO. The major limitations found to operate were:
1. inadequacy of existing laws, (a) for the settlement of disputed land ownership, and (b) for supervision of private forests;2. lack of clear policy on segregation of forests from agricultural land;
3. inadequate knowledge of the extent of rights of user enjoyed by villages, tribes or individuals over forest produce and grazing;
4. insufficient and inadequate staffing of forest administrations;
5. inadequacy of research institutions;
6. inadequate machinery for forest propaganda.
It is clear that the economic potentialities of land are not always fully investigated, even in reaching decisions about land use. In defence of this, it is sometimes said that the essential data for making these economic enquiries are often lacking - but can it be said that vigorous attempts are made in such cases to fill in the statistical gaps as quickly as possible? Are officials who deal with land-use policy always aware of the key economic variables involved? The evidence is that they are not. This was clearly brought out in a study by Dr. K. R. Walker whose thesis for a D. Phil, degree the author was recently privileged to supervise. In this study he used the economist's approach to question existing methods of providing land for the Forestry Commission in the United Kingdom. Dr. Walker5 came to the conclusion after discussing the problem of land allocation with many officials, that the method could only be described as " intuitive ", and apparently the only principles which emerged were those of " least sacrifice " and " maximum benefit " to agriculture. In other words, it appeared to be in the national interest to transfer land from agriculture to forestry provided that the existing pattern of agriculture was not disturbed and that the forestry scheme could provide certain advantages for agriculture. (The only specific criteria appeared to be "ewes" per acre - a variable standard - and land poor enough was allowed to go for forestry.) In other ways it could be argued that government policy worked against the economic use of land and, in the United Kingdom, financial subsidies for marginal farm land prevented it being readily transferred to other uses. The economic potentialities of forestry have been given little weight although the Treasury expects the Forestry Commission to operate as a profitable enterprise, unless it has been given special authority to act as a social stabilizer.
5
" The Forestry Commission and the Use of Hill Land: the Government Planning Approach Considered, " Scottish Journal of Political Economy, Vol. VII, No. 1, February 1960.
The planning methods of allowing the Forestry Commission to have the " left-overs " from agriculture have not been a success, and it was perhaps not surprising that in 1959 there has been a change in policy - and no longer is a fixed area of forest to be acquired by the end of the century. Dr. Walker raised the question: how different could the supply of land for the Forestry Commission have been if it were to be judged solely on economic criteria? To answer the main question he made calculations about the relative productivity of land under forestry and agriculture, based on the costs and returns of 1953, assumptions having been made concerning trends in productivity of labor, wage costs, extraction costs in forestry, the rate of interest, and the terms of trade between forestry and agriculture. The brief conclusion was that at all moderate rates of interest (4 to 5 percent) forestry was likely to be considerably more productive than agriculture in most of the hill areas studied.
Four administrative changes appeared to Dr. Walker to be necessary to increase supply of land to the Forestry Commission so that it could fulfil its program on an economic basis:
1. The Forestry Commission should be allowed to pay a higher price per acre in order to obtain better land or larger blocks for scale economies.2. The present indiscriminate method of allocating grants to hill farms must be replaced by one which limits the grants to those farms where the rise in the net output is not impossible to achieve.
3. The Forestry Commission should be encouraged to raise its wages in order to maintain and attract labor supply.
4. Government should adopt a less rigid attitude towards the entire question of type of land which is considered suitable for the Forestry Commission.
In the last resort, however, the decision is a political one and the economic considerations may consciously be weighted less than conservation or social influences. All the economist can hope to do is to point out the possible economic consequences of a given policy on a basis of what appear to be the determining assumptions.
