Monthly Archives: October 2006

87 – Economics and the future

One of the most difficult issues in economics is how to deal with time, especially for issues that extend over the very long term. Steve Schilizzi and I have just published an edited book on this subject, with contributions by some outstanding economists. Here is a snippet from the introduction, and a list of the chapters.

The basic question addressed in this book is, how should we assign a present value to benefits and costs that occur in the future? In other words, how, and to what extent, should future benefits and costs be discounted in the present? The question is multifaceted, complex, and not solely economic. For example, the answer may depend to some extent on elements of religion, biology and social and political context.

Religion

A number of religions have had strictures on charging interest on loans, which has implications for the rate at which private investors would discount future benefits and costs to the present. The Bible tells us: Love your enemies, do good and lend, hoping for nothing therefrom (Luke 6:35). Related to this Christian tradition, Britain, up until 1832, had usury laws prohibiting interest rates above 5 per cent. Similarly, in the pure Islamic tradition, even today interest on any lending is strictly forbidden. On the other hand, the undesirability of imposing a strict anti-usury position was long recognized, including, for example, by the tolerance of Jewish money lenders in Christian and Muslim communities. Imola (d.1387) observed that, he who practices usury goes to hell; he who does not, to poverty.

Biology

The logic of trading off present and future benefits and costs can be detected in biology. For example, evolutionary biologist Steven Pinker (1997, p. 394) has observed that, ‘The struggle to reproduce is a kind of economy, and all organisms must “decide” whether to use resources now or save them. Some of these decisions are made by the genes. We grow frail with age because our genes discount the future and build strong young bodies at the expense of old ones.’

Social and Political Context

Individuals are likely to treat the trade-off between present and future in different ways depending, to some extent, on their personal circumstances and the social context within which they find themselves. For example, after cyclone Katrina ravaged New Orleans in 2005, thousands of people were sheltered in a large sports stadium, the ‘Superdome’. The Superdome became notorious for the lawlessness that ensued among a section of its temporary inhabitants prior to the complete evacuation of the city. After the evacuation, a tourist interviewed on radio observed that the perpetrators of the appalling crimes he had witnessed appeared to be behaving ‘as if they had no tomorrow’. For them, there appeared to be no trade-off between present benefits and future costs (and in the circumstance, perhaps they were right). Similar observations were made during the Peloponnesian War in the 5th century bc, when Athenians trapped behind the protective walls linking Athens to Piraeus fell victim to hunger, squalor and ultimately to the bubonic plague; thousands died. The historian Thucydides painted a horrific picture describing how hopelessness about the future took hold of the Athenians and how theft, crime and lawlessness flourished.

While recognizing these other potential influences, this book is concerned with present–future trade-offs in a variety of economic contexts, and the authors are all economists. The economic contexts examined range from private individuals making financial decisions with relatively short time horizons, through to political representatives who must make decisions on behalf of the whole community, with a range of financial and non-financial consequences over the extremely long term. In the first category, the relevant decision makers include business managers, consumers and private investors, while the latter category includes governments, bureaucrats, and so-called ‘ethical’ investors.

Contents

1. Time and discounting in economic decision making  David J. Pannell and Steven G.M. Schilizzi

2. Investigating net benefits from alternative uses of resources  Bill Malcolm

3. Avoiding simplistic assumptions in discounting cash flows for

private decisions  David J. Pannell

4. Compounding and discounting under risk: Net present values

and real option values  Greg Hertzler

5. Risk, discounting and the public sector  John Quiggin

6. Reconsidering reconsidered: Why sustainable discounting need

not be inconsistent over time  John C.V. Pezzey

7. Discounting the distant future using short time horizons:

Investments with irreversible benefits  Steven G.M. Schilizzi

8. Discounting future prospects, and the quest for sustainability  Alan Randall

9. How should we discount the future? An environmental

perspective  Michael D. Young and Darla Hatton MacDonald

10. Discounting the future  Cédric Philibert

11. Discounting the distant future: Why so many voices and so

little consensus?  Steven G.M. Schilizzi

12. Time will tell: Pending questions on discounting  Steven G.M. Schilizzi and David J. Pannell

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J. and Schilizzi, S. (eds) (2006). Economics and the Future: Time and Discounting in Private and Public Decision Making, Edward Elgar, Cheltenham, UK and Northampton, MA, USA.

Buy it from the publisher here.

Pannell, D.J. (2005). Thinking like an economist 9: Time is money, Pannell Discussions, No. 33, 3 January 2005

Pannell, D.J. (2005). Thinking like an economist 10: Values in the very long term, Pannell Discussions, No. 34, 10 January 2005

Pinker, S. (1997). How the Mind Works, London: Penguin.

86 – Adoption of conservation practices by rural landholders: implications for research and extension

A multi-disciplinary team has published a review of past research on adoption of conservation practices by rural landholders. Here is an edited extract summarising implications of the review for researchers and extension agents.

We provide the following suggestions for biophysical scientists to help them achieve greater adoption by landholders of conservation practices being researched (based on Marsh, 1998).

(i) Be conscious of the type of practices that landholders adopt more readily – those with high relative advantage and high trialability. Appreciate that landholders have legitimate reasons for non-adoption. If the community has a wish to reduce a particular form of environmental degradation originating from rural properties, but the available practices for reducing the degradation conflict with goals of landholders (e.g. salinity treatments highly unprofitable to farmers), one sound response for scientists is to consider the viability of developing new technologies or practices that achieve both community and landholder goals.

(ii) Encourage a participatory process. Working with landholders forces researchers and extension workers to recognise that their own goals may be different to landholders’ goals, and reduces the risk of them making incorrect or over-simplified assumptions about what landholders’ goals really are. In a participatory project, the research/extension can be adapted in response to this improved understanding. Such interaction also increases landholders’ knowledge of the research and their ownership of, and faith in, the results. It may help landholders to understand and appreciate the goals of researchers. Participation also helps to develop better programs and recommendations by making better use of local knowledge so that recommendations are more often corroborated by subsequent experience, and in this way promotes landholders’ trust in R&D and extension over the longer term.

(iii) Look constructively at what landholders are doing already. Work with them where possible rather than against them (or at least acknowledge the difficulty of getting them to stop believing that what they are already doing is appropriate). This suggestion acknowledges the importance of local knowledge in landholders’ decision making, and the importance of respecting their personal goals and perceptions. We suggest that scientific and local knowledge can be highly complementary.

(iv) Adoption of conservation practices by landholders is not solely a biophysical issue, it is also an economic, social and psychological issue, so biophysical researchers can benefit from working closely with economists, sociologists and psychologists. Social scientists should be involved in projects from an early stage, including in problem definition and project design, so that their advice can influence the direction of the research, rather than being limited to analyzing the results (e.g. attempting to explain landholders’ responses or lack of response).

Attending to these suggestions would help to enhance trust and credibility in the relationship between researchers and landholders. This is crucial if researchers are to influence the adoption process.

Given the importance of trialability for adoption of an innovation, it may be useful for researchers and extension agents to consider ways in which landholder learning from trials can be enhanced. One possibility suggested is to provide information about the trial performance of familiar reference land uses or practices that are as similar to the innovation as possible, in conjunction with information about the performance of the innovation. It may be feasible to facilitate physical observation, or at least present results of physical measurements, of important processes that are not readily visible (e.g. groundwater processes). Perhaps it is possible to provide rules of thumb about final yields based on the early growth rates of plants that have long lags before harvest (e.g. woody perennials). Similarly, where a novel land-use requires large-scale adoption to achieve environmental benefits, ways to predict those benefits based on performance in small-scale trials may be helpful.

A criticism of traditional extension is that it viewed the extension process primarily as a matter of communication. Lack of adoption was blamed on a failure of the extension communication process. The solution was to better target extension and to improve the methods of information delivery. The assumption was that farmers were information deprived and relatively passive recipients of knowledge. In reality, farmers have excessive information (e.g. from consultants, banks, accountants, agronomists, agribusiness firms, other landholders), some of which is conflicting, and they are almost never passive recipients. Recognising its place within this complex web of information sources, extension needs to be more focused on credibility, reliability, legitimacy, and the decision-making process. Features of current conservation-related extension that mitigate against the development of credibility include: short-term funding, rapid turnover of staff, the youthfulness and inexperience of many staff, and the lack of technical farming expertise of many staff.

Expectations for extension. Even with the most expert and persuasive extension, landholders are not likely to change their management unless they can be convinced that the proposed changes are consistent with their goals. Therefore, expectations about the extent of change that is likely to result from extension need to be realistic. Large changes made by large numbers of landholders are not likely to be attributable to extension in most cases. For one thing, landholders and their lands are highly heterogeneous. Any given practice only advances the goals of some landholders, and often only on some of their land.

It is likely that the main contributions of extension will be through raising awareness and, to some extent, changing perceptions of the relevance and performance of an innovation. It is much more difficult (and sometimes ethically contentious) to change the goals of people. It seems that the Landcare movement in Australia has increased the emphasis given to conservation goals by landholders, but the extent of increase has been modest for most landholders.

Extension is unlikely to persuade landholders to make greater use of a practice with which they already have personal experience, unless the extension provides new information about a change that increases the attractiveness of the innovation (e.g. new information about how to better implement the innovation, or about new incentive payments to encourage adoption).

Another important issue for extension (as for science) is that it does not have automatic legitimacy and credibility – these have to be earned. The key determinant of an adviser’s credibility to a farmer is trust. Trust is, in turn, strongly related to the extent a farmer believed an adviser understands and respects the goals of the farmer. Trust determines the nature of the role that an adviser may play in the social aspects of the decision-making process of the landholder. Without trust, an adviser may only expect to participate as a provider of information that will be later evaluated within a closer circle of trusted contacts.

The conduct of extension. Any sound extension campaign needs to use multiple methods. Multiple extension channels, repetition, multiple deliverers of the message, and harnessing of peer pressure are among the standard tools of effective extension agents. Reliance on any particular method (e.g. print articles, verbal presentations, group extension, advertisements) will fall short of the potential impact on adoption from a diverse portfolio of extension approaches and channels. One advantage of using multiple approaches is that it increases the chances of reaching more of the relevant groups of landholders. Secondly, different landholders have different learning styles and prefer to receive information in different ways, or through different channels. Thirdly, repetition can help to reinforce a message and build confidence, especially if it comes through different channels and from different sources.

A notable trend in extension practice in Australia over the last 15 years has been the substantial decline in public funding for traditional one-on-one extension and a rise in group-based extension. Group-based extension is, of course, an important part of the extension system, but like any extension approach it has its limitations. In the 1990s, group-based extension processes came to be relied on in the National Landcare Program, partly in response to perceptions about their ability to harness peer pressure to address what were often perceived (incorrectly in some cases) to be environmental problems requiring collective action by landholders for their effective resolution. Group-extension processes grew in favour among extension theorists in response to an increased emphasis on adult learning principles and participation by stakeholders. They were embraced by state agriculture agencies, in significant part, for budgetary reasons.

While group-extension approaches are undoubtedly useful, the swing from individuals to groups may have gone too far. For example, the introverted personality profiles of graziers described in the work of Shrapnel and Davie (2001) indicate the continued importance of one-on-one extension. Noting the importance of credibility in effective extension, Vanclay (2004, p. 221) observed that, “Credibility is developed over time through the provision of credible, practical, useful answers that assist farmers in [their] day-to-day operations. Group facilitators who never provide on-farm advice rarely develop credibility and their ideas are easily dismissed.”

A history of valuable advice relevant to a landholder’s goals is probably the single most important source of credibility, but it can be enhanced to some extent by a wide range of factors, including: (i) authority and technical expertise of the extension agent; (ii) perceived similarity of the extension agent to their audience; (iii) local profile of the extension agent (e.g. local residence); (iv) communication skills of the extension agent; (v) personal relationships between the extension agent and landholders; and (vi) extension-agent acknowledgement of/empathy with the circumstances and problems of landholders.

Adviser credibility and trust is a valuable commodity, but it is only earned slowly. Adviser credibility and trust can be easily lost by the support of an innovation or practice clearly unsuited to local circumstances, or through the evangelical promotion of a practice that is clearly in conflict with the goals of landowners. In the past two decades, the role of government extension agents in many states has changed away from that of supporting landholders in making good decisions to achieve their own goals, towards encouraging landholders to make decisions that achieve outcomes for the public good. In many situations, this has the potential to reshape the social contract between adviser and landholder, creating a far more complex social interaction that may be less comfortable for both. The importance of this changed social relationship is not recognised by the relevant public agencies, which publicise their programs using the rhetoric of community development, yet place clear requirements for technology transfer outcomes upon their agents.

David Pannell, The University of Western Australia

Further Reading

Marsh SP (1998) ‘What can agricultural researchers do to encourage the adoption of sustainable farming systems?’ SEA Working Paper 98/05, Agricultural and Resource Economics, University of Western Australia.

Shrapnel M, Davie J (2001) The influence of personality in determining farmer responsiveness to risk. Journal of Agricultural Education and Extension 7, 167-178.

Vanclay F (2004) Social principles for agricultural extension to assist in the promotion of natural resource management. Australian Journal of Experimental Agriculture 44, 213-222.

 

This discussion is an edited extract from:

Pannell, D.J., Marshall, G.R., Barr, N., Curtis, A., Vanclay, F. and Wilkinson, R. (2006). Understanding and promoting adoption of conservation practices by rural landholders. Australian Journal of Experimental Agriculture 46(11): 1407-1424.

If you or your organisation subscribes to the Australian Journal of Experimental Agriculture you can access the paper at: http://www.publish.csiro.au/nid/72/paper/EA05037.htm (or you can buy a copy on-line for A$25)

Otherwise, email to ask me for a copy: David.Pannell@uwa.edu.au

85 – Adoption of conservation practices by rural landholders: implications for policy

A team of economists (including myself), rural sociologists, and a social psychologist has published a cross-disciplinary review of literature on adoption of conservation practices by rural landholders. It is available online at the journal web site this week. Here is an extract from the conclusion of the paper, summarising implications of the review for policy makers.

Some government officers express frustration at the lack of adoption by landholders of conservation practices and call for additional social research to better understand adoption. Sometimes it can be helpful to better understand the adoption of specific practices, but the influences on adoption in general have been studied intensely and we believe that they are sufficiently well understood. Rather than more research into adoption, the more pressing need is to apply what is already well established in the adoption literature.

As we have seen, one implication is that if a practice is not adopted in the long term, it is because landholders are not convinced that it advances their goals sufficiently to outweigh its costs. A consequence of this is that we should avoid putting the main burden for promoting adoption onto communication, education and persuasion activities. This strategy is unfortunately common, but is destined to fail if the innovations being promoted are not sufficiently attractive to the target audience. The innovations need to be ‘adoptable’. If they are not, then communication and education activities will simply confirm a landholder’s decision not to adopt, as well as degrade the social standing of the field agents of the organisation. Extension providers should invest time and resources in attempting to ascertain whether an innovation is adoptable before proceeding with extension to promote its uptake.

For some environmental issues, the real challenge is to find or develop innovations that are not only good for the environment, but also economically superior to the practices they are supposed to replace. If such innovations cannot be identified or developed, there is no point in falling back onto communication. Promoting inferior practices will only lead to frustration for all parties.

Sometimes unattractive practices can be made sufficiently attractive by the provision of financial incentive payments (e.g. through economic policy instruments). However, it is important to be realistic about the potential of this approach. In some cases, the level of payment required to achieve sufficient adoption would be more than can be justified by the resulting environmental benefits. In some situations, the most sensible strategy is not to attempt to encourage uptake of existing technologies or systems. Rather, it may be more sensible to attempt to develop better practices (more effective and/or more adoptable), or it may be that research and policy needs to address the task of living with the problem.

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J., Marshall, G.R., Barr, N., Curtis, A., Vanclay, F. and Wilkinson, R. (2006). Understanding and promoting adoption of conservation practices by rural landholders. Australian Journal of Experimental Agriculture 46(11): 1407-1424.

If you or your organisation subscribes to the Australian Journal of Experimental Agriculture you can access the paper at:

http://www.publish.csiro.au/nid/72/paper/EA05037.htm (or you can buy a copy on-line for A$25)

Otherwise, email to ask me for a copy: David.Pannell@uwa.edu.au

84 – Estonia and Latvia

I recently spent two weeks visiting Estonia and Latvia. This discussion provides some history, some observations and some impressions about these fascinating countries.

Estonia and Latvia (together with Lithuania, known as the Baltic states) were the western-most parts of the former Soviet Union. They are small countries – Estonia is only slightly bigger than Switzerland and has a population of only 1.3 million – that have been pushed around by their various neighbours for centuries.

Prior to World War 1, Estonia had been ruled in sequence by Denmark, Sweden, Germany and Russia for eight centuries, while Latvia had been ruled by Germany, Poland, Sweden and Russia. Finally, in 1920 they were granted their independence, only to lose it again in 1940, when Stalinist Russia took control of the Baltic states, with Germany’s agreement. Russia set about terrifying the local people into submission, deporting to work camps in Russia, or just shooting, many thousands of intellectuals, artists and others.

In 1941, after only a year of Russian rule, Nazi Germany invaded, and set about massacring the Jewish communities in these countries. At one point, 25,000 Jews were killed in two days outside Riga (the capital of Latvia).

If that wasn’t bad enough, in 1944 the Russians re-invaded. It speaks volumes about how bad it had been under that one year of Russian rule (1940-1) that, with the prospect of Russia returning, hundreds of thousands of people fled to the west, including most of the remaining intellectuals. They felt that things would be much worse under Russia than under the Nazis!! The deportations and murders started up again and continued until Stalin died.

A small number of countries, including the USA and the UK, never accepted that Russian rule of the Baltic states was legitimate. Australia was also a strong supporter, apart from one year. Shamefully, in August 1974 Gough Whitlam’s government withdrew recognition of the Baltic states as separate counties. This decision was reversed in December 1975 by Malcolm Fraser’s new government.

The long history of internal and external pressure for Baltic independence finally bore fruit after the failed Moscow Coup of 1991. The last of the Russian troops left in 1994, and 10 years later the Baltic states joined NATO and the EU.

I have long had a negative attitude to the idea of patriotism. I thought, and still think, that American patriotism is a bad thing for the world. But two weeks in the Baltics gives one a much better understanding of how people can love their country. How could you fail to be passionate about your national identity and independence after what these people have been through? It is something that us cosy, safe Australians can hardly begin to understand. They each have their own languages, and their own distinct cultures, but they have only been independent countries for two brief periods totalling 35 years in the past 800 years. Between 1940 and 1949, Latvia lost 35 percent of its population to war, deportation, exile and mass murder.

We saw photos of how the shops had been almost completely empty towards the end of the USSR. A butcher’s shop with no meat. A 100-metre queue to buy bread. Since the mid 1990s, the economies of these countries have been transformed. The supermarkets are as well stocked as any I’ve ever seen, even if a lot of the food items seem unusual to us. Now the income level in Estonia has reached half the EU average, which is a phenomenal transformation, with Latvia only a little behind that.

One of the most striking things about travelling around in the countryside, which we did quite a bit of, is the low level of commercial agriculture. One sees a couple of cows here, a few sheep there, but remarkably few animals overall, and minimal evidence of cropping. Mostly what one sees is forest. There must be commercial agriculture somewhere, if only to provide the locally produced milk and vegetables, but we didn’t manage to stumble upon it, apart from some small plots of potatoes.

I found this lack of agricultural production quite extraordinary, especially since agriculture was a major activity before and during the Russian era. Explanations that we were given by Estonians included the following. (a) After the break up of the USSR, the directors of the communal farms took the equipment and sold it, leaving local farmers without tractors and other essential machinery; (b) Many of the workers on communal farms were people without a history in agriculture, and the communal farming system did not allow them to build up the skills to farm on their own; (c) many skilled farmers were deported. I’m also not sure what happened to property rights to land. I suspect that property rights are a key factor, but I wasn’t able to find out anything about that. Whatever the reasons are, much land that was formerly in productive agriculture has been abandoned and has reverted, or is reverting, to forest. Even the massive financial support that the EU provides to farmers is apparently not sufficient to reverse this.

Although Russian rule is finished, the ongoing influence of Russia is palpable. There was an explicit policy of Russification, and hundreds of thousands of Russians were moved into the Baltic states. Of the current populations, 25% of Estonians and 30% of Latvians are ethnically Russian. The Russian influence is even more pronounced in the cities: there are actually more ethnic Russians than ethnic Latvians in Riga, the biggest city in the Baltics. One hears Russian in the streets constantly, and public signage and advertising is in Russian as well as the national language.

During the USSR era, the locals were required to learn Russian, and many ethnic Russians would not converse in anything other than Russian. Now the tables have turned, especially in Estonia. The remaining Russians have become a disadvantaged minority, with big social problems in some areas. Only Estonian language is accepted for official purposes, so older Russians are struggling to pick up a difficult language that they managed to avoid for decades. (Estonian is related only to Finnish, and not to any other European language.)

Related to this, it was striking that the poor people we saw begging on the street were mostly old, and I think they were mostly Russian. It was very sad to see so many old ladies begging – something I have not seen anywhere else. My daughter Rosie was constantly stopping us so that she could give a few coins to some desperately sad looking old lady.

Another strong social trend is that, since they joined the EU, many of the young people of these countries have moved to western Europe, especially the skilled young people. This has resulted in a major shortage of labour and skills, and predictably wages have risen.

One of the most visible of the Russian legacies is the preponderance of big, ugly, grey, concrete, rectangular apartment blocks. Even in the country, we kept coming across two or three story apartment blocks in the middle of nowhere, built to house immigrant Russians. Now most of them are desperately run down, and many are abandoned. We were also struck with how run down many of the buildings are generally. Even most private houses seem terribly neglected on the outside. The part of Riga where we stayed, in particular, is just awful – dirty and dilapidated to an extent I’ve only seen in developing countries before.

Despite all the problems, economic growth has been rapid and relentless. I expect it will all look radically different in 10 or 15 years. It will be fascinating to come back and have a look.

David Pannell, The University of Western Australia