Chapter 2 THE POLICY CONTEXT

It is increasingly recognised that public policy is one of the most important factors determining the outlook for the forest and forest products sector. Indeed, public policy appears to be at least as important as macroeconomic or technical trends, or the age structure of the forest resource, and more difficult than any of them to analyse scientifically. This chapter attempts to describe and analyse the policy context for the forest and forest products sector, covering not only policies for the sector itself, but, more importantly, policies for other sectors which have a significant impact on the forest and forest industries sector.

The objectives of this chapter are: to identify those policy areas, inside and outside the forest and forest products sector, which may have a significant impact on the sector, the main issues and areas of uncertainty; to develop a "base scenario" for these policies, describing developments considered the most likely to occur by the authors of ETTS V; and, to estimate the direction and magnitude of the changes in the forest sector which might result from changes in these policies.

This analysis will make it possible to identify some of the main areas of uncertainty in the base scenario (presented in chapter 11), and to guide the creation of alternative policy scenarios.

This type of analysis (explicit consideration of the policy context, especially for "non-forest" policies) is new in the ETTS studies, and is based on intensive preparatory work, notably an ad hoc meeting on the question in June 1994, prepared by an informal meeting in January 1993. The basic document on the topic, reviewed by the meeting, will be issued as an ETTS V working paper, by T.J. Peck and J. Descargues. The preparation of this paper was financed by the Government of Switzerland, with significant input from the Forestry Policy and Planning Division of the FAO and the Chair of Forest Policy and Forest Economics of the Swiss Federal Institute of Technology in Zurich. Section 2.3 is essentially a summary of the working paper and the meeting's conclusions: for further information and background analysis, readers are referred to this documentation.

For 100 years or more, the backbone of national forest policies in Europe has been to preserve or expand the productive potential of the forest resource by protecting it against harmful outside influences (insects, fire, encroachment by other land uses, etc.) and by preventing excessive cutting levels, so as to ensure a reliable long-term supply of wood and all the other goods and services derived from the forest. The tools used to implement these policies vary widely according to circumstances, but typically include monitoring and inventory to detect and analyse trends, requirements for a management plan by all owners, subsidies for various silvicultural measures, or, in some cases, favourable fiscal regimes, extension services, and, perhaps most importantly, the management activities of public forest services. The commitment to these overriding objectives has been strong and sustained (except in times of war), and supported by public opinion everywhere.

Some countries have had long-term policies to expand their forest resource or to improve its quality; among them are Bulgaria, France, Finland, Hungary, Ireland, Spain and the United Kingdom. These programmes, along with natural extension onto marginal agricultural land have outweighed losses of forest land to other uses, notably urban and infrastructure, causing Europe's forest area and growing stock to expand steadily since the early 1950s.

During the 1980s, there were some major additions to the forest policy objectives and some organisational adjustments. The most important was the much-increased awareness of the importance of functions of the forest other than wood production, especially the conservation of biodiversity and the provision of recreation. These are now given equal weight to sustainable wood supply in the forest policy objectives in all European countries; this development has led to a wide range of measures: differing management practices; prevention or severe limitation of harvesting on some areas; the publication of guidelines for good practices; extension programmes; etc. Foresters and forest policies had always been aware of these benefits, but had often given them lower priority than wood production when choices had to be made, or assumed that they would be a natural side effect of management for wood production.

Partly as a result of an increasingly sophisticated and assertive environmental movement, forest policy has moved up the political agenda and become the subject of serious political (as opposed to technical) debate in many countries.

The passionate debate about tropical deforestation, focused (in Europe) essentially on the protection of natural ecosystems, has accelerated the reassessment of the goals and methods of European forestry, a process which is still ongoing. The drawing up of internationally agreed lists of criteria and indicators of sustainable forest management to clarify thinking and facilitate international comparisons, with the interlinked movement in favour of certifying that wood has come from sustainably managed sources, will no doubt lead to further changes in management goals and methods.

As these new demands are being made on forest managers, public and private, public budgets all over Europe are under severe pressure because of the structural deficits in many countries. Thus, the demand for new services and pressure to incur additional costs comes at a time of reduced availability of public funds. One reaction has been to increase the efficiency and cost effectiveness of forest administration by giving private or, more often, giving a less official status to forest services, discouraging waste of any sort and encouraging cost-conscious management. There have also been calls to increase income from other sources than wood sales or public funds, notably from user fees for various services, but these have encountered numerous political and practical difficulties.

Developments and policy choices in a number of other sectors will have a major, if not determinant, influence on the outlook for the forest and forest products sector. Therefore, this chapter outlines a "base scenario" for these developments and policy choices, arising from the meeting mentioned above.

It should be stressed that this scenario only covers changes in policies which could have a significant impact on the forest and forest products sector. Policies where no major changes are expected and those where changes would not have a significant impact on the sector are not discussed in this chapter. The policy scenario presented in this chapter has been reviewed and approved by the ad hoc meeting, and will be compared in chapter 11 with the scenarios arising from the other parts of the study.

(i) Economic growth

Governments perceive a choice between giving priority to controlling inflation, notably through restrictive monetary and fiscal measures, and giving priority to attacking unemployment through stimulating economic growth. Indeed all macroeconomic management policies seek the path to steady, strong and inflation-free growth: unfortunately, no universally applicable and reliable prescription has yet been found. In the early 1990s, inflation was brought to historically low levels in most western countries at the cost of slow and, at times, negative growth and very high unemployment, which in 1993 averaged 10.3 per cent in western Europe. This level of unemployment is widely considered intolerable in the long term because of the social pressures it creates. For this reason, it is expected that the second half of the 1990s will be marked by measures to reduce unemployment and stimulate growth, including the further lowering of interest rates, the easing of lending restrictions and the increased allocation of public funds for certain activities, including construction (i.e. public works, improvement of the housing stock, notably for energy conservation, and conversion for the use of special groups such as the elderly) and regional development (i.e. infrastructure, tourism, rural industries, especially in poorer and more remote areas). Nevertheless, there is a high degree of uncertainty for this hypothesis, as governments now have less room to manoeuvre than before due to international factors (multinational firms; official commitments, as in the EU monetary and other agreements; pressures of currency markets), as well as in some cases, strong domestic constraints regarding public budget deficits.

The impact on the forest sector of measures to encourage growth would be chiefly to generate stronger demand for forest products, particularly those used in the construction industry. Support for rural economies could also be reflected in assistance for establishing and modernising forest industries and forestry in areas targeted for such assistance.

(ii) Energy

Oil prices have not risen in real terms between the early 1970s and the mid 1990s, as the development of new sources of fossil fuel (natural gas, North Sea and Alaska, etc.), energy conservation in housing and transport, and the collapse of effective price support mechanisms in OPEC have made the oil market once again a buyer’s market. There have been no significant supply interruptions (e.g. nuclear accident, war) for some time, and the western economies have been able to "absorb" supply limitations when they have occurred (e.g. Gulf war).

There is strong intellectual pressure from "green" and other sources, for governments to take firm preemptive action to reduce consumption of fossil fuels and nuclear-generated electricity, encourage the use of renewable energies (seen as the only valid long-term solution), and to reduce carbon output into the atmosphere. The main policy measure proposed is heavy taxes on fossil fuels (a carbon tax). However, given the plentiful availability of fossil fuels in the foreseeable future (discounting the type of supply interruption mentioned above), scientific uncertainty about fossil fuel reserves and the climate change, and the high short-term political and economic cost of a carbon tax at a rate which would have a significant impact, there is at present little evidence that governments will pay more than lip service to these ideas.

Again, the uncertainties surrounding this scenario should be stressed: another Chernobyl, or a political upheaval in a producing area which caused more than a temporary disruption of supplies could lead governments to radical policy changes in a rather short time.

If energy prices continued broadly unchanged, the large scale use of wood as an energy source would remain uneconomic in almost all circumstances. This would very probably prevent the development of a large market for energy wood, perpetuating the forest management problems associated with weak markets for small-sized wood and the difficulty of covering the costs of thinnings. It would also render economically unviable the proposals for energy plantations, widely put forward as a solution to the problem of surplus agricultural land.

The energy price also is one of the main factors determining the viability of various uses for wood processing residues. A stable energy price would favour their use as a raw material over use for energy, and make the disposal of residues which cannot be used as raw material more difficult and expensive.

Finally, a low price for energy would discourage the use of waste paper and other urban waste as a source of energy. Since these must be disposed of in some way, and landfill is increasingly unacceptable, the pressure to use them as raw material for paper, competing with virgin fibre, would become even greater than at present.

(iii) Environment

Although quite far-reaching measures to protect the environment and promote sustainable development have already been introduced, and further measures could be quite costly, it is felt that the political momentum built up through UNCED and the campaigning of the many environmental NGOs is such that further movement is inevitable. Some of the forms that such a movement might assume are: the drawing up and strict application of national (or even multinational) strategies for sustainable development; further limits on pollution, possibly with the increased use of market-based mechanisms, such as tradeable permits; the setting aside of larger areas for the protection of biodiversity (natural reserves); implementing much stronger regulation of waste disposal and obligating waste "generators" to pay the full cost of environmentally acceptable disposal, which are often significantly higher than the charges levied at present; and, limitations on the development of nuclear power.

There are enormous differences between countries in the strictness and effectiveness of environmental legislation. To bring all countries to the level of environmental awareness of, say, Germany or the Netherlands would already have significant consequences. However, in this scenario, it is supposed that the leaders in this field will themselves advance and that other countries will catch up to them, stimulated by international institutions, such as the EU, and international conventions, such as those negotiated in the UN/ECE. In addition, the interconnectedness of economies and populations will make it rapidly inconceivable for one European country to have a significantly higher or lower level of environmental legislation than its neighbours and trading partners.

The consequences for the forest sector would be far reaching and complex, and should be explored in detail. A partial list is set out below:

- larger areas of forest will be managed for the conservation of biodiversity (natural parks), thereby removing an increased amount of area from wood production;

- the adoption of more environmentally conscious management guidelines, which would slightly reduce harvest levels, but could increase costs significantly;

- the development and application of systems to certify that wood and forest products have come from sustainably managed forests. This would drastically reduce the markets for wood from non-sustainably managed sources, and add a cost to wood from other sources (due to the management of the certification systems), but could be positive in its effects on the acceptability of wood in an area of environmentally conscious consumers. The existence of credible certification systems and, equally important, the public debate which would inevitably accompany their inception would probably strengthen wood's position as the major renewable and environmentally friendly raw material. It is also likely to favour certain suppliers at the expense of others, thereby affecting trade patterns: it is not unreasonable to suppose that wood from primary or natural forests would be at a marketing disadvantage compared to wood from plantations or from forests managed in a "near natural" way;

- the encouragement of recycling would reduce the markets for the products of virgin fibre, thereby putting economic pressure on wood production; it might also favour the use of wood and paper products in general, which are in most cases more suitable for recycling than their competitors. In addition, it will impose limits on certain additives and processes which are widely accepted now, notably wood preservatives, but also resins, paints and lacquers, and various synthetic facings, such as aluminium and paperboard combinations, etc.;

- the general imposition of the real costs of disposal on waste "generators" will cause numerous detailed changes in technology and industrial practice, especially in major industries situated near large markets. It is difficult to forecast the overall direction of change.

- concern with disposal costs will probably also encourage energy generation from wood processing residues and used forest products, assuming that the present reluctance in some countries to consider energy generation an acceptable form of waste disposal subsides.

(iv) Agriculture

The agricultural policies of the past 30 years or more have led to the overproduction of food in most of Europe, the distortion of agricultural trade, and high costs for both the public budget and consumers in the form of prices "supported" at excessive and unsustainable levels. There is now a general determination at the national and international (EU, GATT) levels, to correct this position. There are, however, numerous problems due to the complexity of the systems and policies and the large number of people, almost all in vulnerable rural areas, directly or indirectly dependent on these subsidy programmes.

There seems little doubt that considerable areas of agricultural land (tens of millions of hectares in Europe) will be withdrawn from food production over the next two decades or used in a much more extensive way (lower yields of food per hectare, less inputs). However, governments are also committed to maintaining employment and the standard of living in rural areas, indeed, to raising them in the poorest areas. They are therefore expected to seek viable alternatives to food production on much of the land concerned and to provide public financing for such alternatives, although at considerably lower levels than at present.

Forestry would be one of the very few realistic options for large scale conversion of agricultural land; indeed, encouragement to afforest agricultural land are in place, notably in the EU. There has been, however, a rather limited reaction to these schemes because of the traditional antipathy in many areas between forestry and farming, technical problems, fears of lowering land values, unwillingness to accept the lower income proposed from forest ry, etc. There is little doubt that if sufficiently high subsidies were offered, the conversion would take place quite rapidly.

Afforestation of agricultural land could also play a major role in providing renewable energy (through energy plantations, see discussion above) and acting as a carbon sink to mitigate climate change.

The main consequence of significant afforestation of agricultural land (with efficient wood production as the major objective) would be a higher level of wood supply at some time in the future. However, the size, species composition and timing of this future supply would depend critically on the policy decisions to be taken in the next few years, notably on: the level of subsidies; the management objectives (wood production, recreation, creation of suitable habitat for wildlife or hunting, etc.); the type and location of land afforested, although it is likely that in most cases it would be more fertile than existing forest land; and, the species and silvicultural regime chosen.

It should be pointed out that there could be fairly widespread expansion of forests on agricultural land, without any significant effect on wood supply: natural encroachment creating low value scrub forests; lack of management by owners who simply take the subsidies as an end in themselves without stressing wood production; management for recreation or biodiversity, or for high-quality timber with a very long rotation, etc.

An important aspect is that if afforestation took place as a result of agricultural support programmes, it would of necessity be supply driven and relatively price inelastic, as the major part of the costs would be covered by the subsidy programme.

(v) Trade

Trade and environment may well be the central topic of the next set of multilateral trade negotiations, after the completion of the Uruguay Round and the setting up of the World Trade Organisation. Richer countries seek to prevent "environmental dumping", while developing countries are suspicious that these measures could be used as non-tariff barriers to prevent their access to markets and increase their costs. Trade in forest products, especially proposals to ban the importation of wood from non-sustainably managed sources, has already been the subject of discussion and conflict at the international level, and it seems certain that forest products will be at the centre of the discussion on trade and the environment at the WTO. It is believed that, despite the great technical and political problems, arrangements will be made to define, at an international level, acceptable practices in forest management, and to put in place a system for certifying that a particular piece or consignment of forest products has come from acceptable sources. If it is to be at all effective, this system must be practically universal, which could imply setting standards at levels lower than would be wished by some environmental movements.

The last decade has seen the emergence of a number of fast-growing economies mostly around the Pacific Rim. The rates of economic growth in the world's largest country by population, China, have also been impressive; however, many experts consider the foundation of this growth fragile, and there is uncertainty due to political and social factors and the strong contrasts between regions of China as regards economic growth. In most cases, this economic growth has been founded on a dynamic expansion of exports. As a consequence, traditional trading areas, including Europe, have seen their share of world trade diminish. This trend is expected to continue and spread to other regions, such as Latin America. Up to now, the growth of many of these countries has not led to correspondingly higher living standards, in part because much of the profit has been reinvested. This is expected to change, however, and European firms will have the opportunity to export more of all types of goods and services to these "emerging economies". Likewise, European industries, which have lost ground in some sectors, have shown that they remain competitive in others.

The consequences of the application of common environmental standards in the forest sector will depend to a large extent on the detailed measures adopted. Conceivably, present normal practice could be found acceptable, and there could be little change in trade patterns and the competitiveness of different supply regions. However, it is more likely that the management of primary forests, whether tropical, temperate or boreal, will be subject to much stricter standards than before, and that those countries who obtain a significant part of their wood from primary forests (e.g. tropical hardwood producers, but also Canada and Russia), may find it more difficult to export to Europe. In any case, such countries will have to absorb considerably higher production costs, brought about by more intensive management policies.

All wood producers would have to bear the costs of the certification system, costs which they may or may not be able to pass on to consumers. However, the existence of a credible certification system, negotiated with the participation of all governments (including their environment ministers) and under the attentive scrutiny of the NGO community, would make a strong assertion that forest products are renewable, sustainable and environmentally friendly. Some competing materials would find it more difficult to undergo the intense scrutiny currently devoted to all forest-related questions, so the final result of the debate on the certification of forest products may well be a competitive advantage for the forest and forest products sector as a whole.

The main global consequence of the fast growth around the Pacific Rim will be an increased demand for forest products: whether this will also result in increased prices depends on the capacity of the system as a whole to respond to the increased demand by increasing supply (e.g. by developing fast-growing plantations). Another consequence will be export opportunities for products and for equipment and services (e.g. consultancy).

(vi) Transition economies¹

Immediately after the momentous political changes which took place in 1989-90 in the former centrally planned economies of eastern Europe, there was an upsurge of optimistic forecasts for the rapid recovery of these economies to near western standards of living in a relatively short time. However, as the magnitude of the necessary social, economic and personal changes became clearer, this optimism was succeeded by severe pessimism and cynicism, encouraged by the deep slump experienced in all the countries in the first half of the 1990s. At present (autumn 1994), only two of these economies are expanding, all of them are well below their 1989 levels of output, there has been a steep drop in living standards, and increases in unemployment and inflation. However, it is believed that the necessary steps have been or are now being taken in the transition economies of eastern Europe to lay the basis for sound growth in the future and the establishment of stable, market economy institutions. The pre-1989 levels of output will be recovered as the economies start a process of convergence with the more advanced, western market economies.

However, there are enormous differences between the transition economies as regards their basic endowments of resources and skilled labour, the policy choices made for the transition process (e.g. shock therapy versus gradualism), and the determination of governments to stick to their policy choices, even during periods of unrest and uncertainty; often, such periods are attributed to the transition process itself rather than to the chronic economic mismanagement whose consequences it is intended to correct. Thus, while there is every likelihood of satisfactory growth in some transition economies, in others, progress is sure to be slow. There is also very great uncertainty about the speed of recovery and future growth rates.

The most important consequence for the forest sector will be the growth in demand for forest products which would accompany recovered economic growth, especially given the strong pent-up demand for good quality housing. In addition, the per capita levels of paper consumption are very low by western standards, and would be expected to rise fast as real income expanded. At first, this demand might be met in part by imports, especially as these countries' industrial infrastructure is old, inefficient and polluting.

(vii) The role of the public sector

The size of budget deficits is causing concern in almost all market economies, and most governments are committed to reducing it, despite the evident political problems of raising taxes and/or reducing benefits. Furthermore, the rise in health-care costs seems unstoppable, as an increasing number of both older and younger people, as well as unemployed, are becoming dependent on a smaller number of "productive" people of working age; these two socio-demographic factors combined place severe structural strains on public budgets. There is now, and will continue to be, strong pressure to reduce less essential expenditure and to ensure that public money is spent efficiently. In the future, proponents of both new and existing expenditure items must be prepared to justify themselves politically on a regular basis, and it will be difficult to persuade finance ministries to direct public funds to anything other than a small core group of essential activities.

Over the past decade or so, one popular way of raising state income and reducing calls on the public purse has been privatisation of state owned industries or other enterprises. Increasingly, all branches of government are being called on to demonstrate why they should continue to be owned and managed by the state. This applies even to certain functions traditionally seen as the exclusive responsibility of the state, such as managing prisons or certain police duties. However, in several countries, the "obvious" candidates for privatisation (mostly those state owned manufacturing industries which are profitable) have already been privatised, and further movements in this direction are increasingly controversial.

There is an apparent contradiction between this determination to keep public expenditure and public deficits under control and the scenario proposed above which advocates economic stimulus in the fields of construction and rural development to keep unemployment at acceptable levels. However, this only illustrates the difficult policy dilemma facing governments, who must reduce unemployment while keeping budget deficits within manageable limits. The scenario proposed is that public funds will indeed be used to stimulate employment and rural economies, but that corresponding savings will be sought from other areas.

It will be increasingly difficult to attract public subsidies for forestry activities; these will be expected to be self financing according to normal commercial criteria, or to demonstrate clearly (i.e. in quantitative terms) the value to society of the unmarketed goods and services of the forest. It will be necessary to find innovative means of financing the supply of non-wood goods and services (e.g. by charging users), and to reduce the costs of wood supply. Unjustified operating deficits of public forest services will be reduced, as will the levels of subsidy to private forest owners. For this reason, and due to the developments in the GATT negotiations on public subsidies, forest industry subsidies will be reduced to create a "level playing field" between trading partners.

In recent years, the operational functions of public forest services in many countries have been administratively separated from the policy and oversight functions. The latter have often remained in the responsible ministry, while a fairly autonomous agency, run on quasi-commercial lines, has been given the responsibility of managing public forests. In many countries this management has been successful in increasing efficiency and reducing costs. In a few countries, such as Sweden, the UK, and outside Europe, New Zealand, there has been serious discussion or real action to privatise state owned forest, transferring ownership to private individuals or companies. It is too early as yet to evaluate the success of these moves, which are highly controversial.²

However, in practice the consequences of this mood are the same, whether privatisation is carried out or not: a more rigorous, wood-supply oriented management of public lands, and an effort to finance non-wood goods and services directly and explicitly, rather than through a general deficit of public agencies or an untargetted subsidy regime.