Principle of Interest-Pay-Say in Community-Based Environmental Management

1. Principle of Interest-Pay-Say in Community-Based Environmental Management Daigee Shaw President Chung-Hua Institution for Economic Research Taipei, Taiwan

2. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Outline • Challenges of community based environmental management • Principle of equal participation • Principle of interest-pay-say • Conclusion

3. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Challenges of CBEM • Community-based Environmental Management (CBEM): • An application of participatory democracy • Setting a trend towards solving environmental problems using local capacity • However, some questions are raised • CBEM is suitable for which types of environmentalmanagement? • How to distribute responsibilities and benefits among stakeholders? • This paper addresses the 2nd question • Attempts to provide proper incentives using the principle of interest-pay-say in order to offer a solution

4. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Problems of Decentralization • Difficulties in internalizing externalities between communities • Endangering equity by channeling resources into the hands of local elites • Free-riding: With a small and equally distributed share of voice, each stakeholder has few incentives to monitor the management of commons

5. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Economics of the Firm • Orthodox Neoclassical Theory of the Firm • Profit maximization subject to technological conditions (production function) • View the firm from outside • Frictionless • Cooperation • No self-interest • However, if we view the firm from inside • Incentive to integrate, cooperate? • Metering problem (Alchian and Demsetz, 1972) • Rent-seeking (Tullock, 1967; Krueger, 1974) • Agency problems (Jensen & Meckling, 1976)

6. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Economics of the Firm • Many forms of firms: • One-man firm • Partnership • Not-for-profit organization • The traditional Soviet firm • Socialist labor-managed firms • The labor-owned firm • Stakeholder-owned firm

7. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Principle of Equal Participation(theoretical model) The commons concerning n individuals A community-based public good management system Let Ci be individual i’s input (the level of effort s/he would like to make for the management of the commons). Total input C = ΣCi Total output B =a C The output gained by individual i is Bi = biB Individual i’s utility U =U (Bi, Ci)

8. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Principle of Equal Participation(theoretical model) Based on the principle of equal participation b= 1/n Each individual has the same share of output which is irrelevant to each individual’s contribution First-order condition maximizing the utility of i Marginal rate of substitution of benefit for effort = marginal rate of transformation divided by the number of individuals Free-riding deters the willingness to contribute to management. The tragedy of the commons and efficiency loss hence occur.

9. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Principle of Equal Participation(application) Everyone is entitled to have a say in national or local policies in most democratic countries (e.g., the US, the UK, Canada and EU). - Keeping the drafts of policies open for public discussion - However, most of the comments come from interest groups and related industries rather than ordinary residents who may be affected to a rather large extent

10. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Principle of Equal Participation(application) Community forest management in Meghalaya (India) - A democratic way of management that increases participation has been introduced to replace the traditional consensus from selected adult males. - However, the emergence of a new elite dominates the decision-making process due to the introduction of the democratic way of management to replace the traditional consensus presents a threat to the voice of the local people (Nongkynrih 2006).

11. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Principle of Interest-Pay-Say (theoretical model) Def: A proportional share of interests and financial contributions corresponding to votes bi = Ci / ΣCi Then, FOC: Marginal rate of substitution in utility terms = marginal rate of substitution of production The share of benefit compensates the effort. Therefore, each individual is willing to contribute to the optimal level.

12. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Principle of Interest-Pay-Say(application) Water Boards of the Netherlands - Integration of various interests - Allocation of the share of participation according to the interests & responsibility that channel the costs & benefits for each individual. - 100% representation of the interests Principle of interest-pay-say

13. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Principle of Interest-Pay-Say(application) Water associations (Genossenschaft) in North Rhine-Westphalia, Germany - Principle of interest-pay-say - Famous for their efficiency of water management

14. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Conclusion • Challenging the appropriateness of applying the principle of equal participation in community-based environmental management. • Advocating the principle of interest-pay-say as an alternative • Reason: Offering proper incentives to meter, integrate, cooperate, and to solve • Rent-seeking problem • Agency problems • Not only good for environmental management, but also for providing other kinds of public goods

15. Outline CBEM Equal Participation Interest-Pay-Say Conclusion Conclusion Those who are interested in the decision-making have a corresponding proportion of responsibility (financial contributions) and rewards (votes). Providing an alternative view of equity that takes differential interests and capacity into account. A proper institutional design can strengthen the aspects of expertise, information and incentives 100% representation of the interests Offset or minimize the concerns of equity loss caused by the deviation from the principle of equal participation.