Session 7 Valuing Changes in Production—Basic Principles with an Example from the Philippines

1. Session 7Valuing Changes in Production—Basic Principles with an Example from the Philippines John A. Dixon johnkailua@aol.com The World Bank Institute Ashgabad, November 2005

2. Change in Productivity – more than just Ps and Qs?? • The most basic valuation technique – relies on physical measures of changes in production (the Qs) and prices, often market prices (the Ps) • Then, P x Q = a monetary value • Key assumption – the prices are non-distorted and reflect opportunity costs Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

3. Applications of Change in Productivity approach • Natural resource sector – changes in crop production, forestry, fisheries, aquifers, others • Human Health – another form of change in productivity • Ecosystems – harder to measure but possible. E.g. watersheds, coral reefs, mangroves, others Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

4. Cautions • Cause and effect links need to be clearly understood – percentage change in mangroves and decrease in fish catch • Prices – make sure prices are appropriate for the commodity and the scale – e.g. Mendelsohn study on value of tropical rainforest (per ha) never considered marketing all the output! Or the Puerto Rican mangrove damage study – buying mangroves retail by the hectare! Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

5. Advantages • Produces valuation results in monetary term and can be easily explained to Minister of Finance (and the press and public)! • Transparent approach that can be easily re-calculated and used to provoke a discussion(e.g. if you don’t like my numbers, give me better ones!) • Does NOT rely on CVM!! Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

6. Valuing Productivity Impacts in Palawan, Philippines Palawan – An application of the change in production approach with unidirectional externalities (or, should Mr. Coase visit Palawan?) 3 main user groups (all legal users): • Loggers • Traditional fishermen • Resort operators / scuba divers Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

7. Changes in Production Crops, fisheries, water Health Opportunity cost/ecosystems Hedonic Approaches Property value Land values Wage differential Survey Techniques CVM (Contingent Valuation Method) Surrogate Markets Travel Cost Valuation Techniques Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

8. Change in Production – the study site PALAWAN Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

9. Change in Production – changes in variables/ productivity over time -- PALAWAN Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

10. Change in Production - PALAWAN The Economic Analysis: • Examined Generation of Gross Revenues from three industries • Logging • Fisheries • Tourism • Assumptions • Revenue information easier to obtain than cost data (second best solution); not a BCA! • Even imperfect information can prompt better disclosure and increased provision of data Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

11. Change in Production - PALAWAN Gross Revenues Over 10 Years (millions $) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

12. Is a Coasian solution possible?? • Coase Theorem: irregardless of the initial resource(or property rights) allocation, with trade it will be possible to reach a pareto superior outcome • What do you suggest in the case of Palawan? • What are the most likely obstacles to a Coasian solution • What about equity issues? Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

13. Other alternatives include (and their pros and cons) • Government imposed logging ban (but question of an “economic taking”)?? • Fisherman and tourism resort operators join forces to “buy out” the loggers – what are the problems with this?? • Alternative logging practices – can these solve the externality problem and allow continued logging?? Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

14. Palawan revisited • Loggers stopped initially and then returned • Reef damaged but has recovered over the past 10 years • Tourism has expanded – but this is a case of before/after analysis NOT with and without analysis! • Valuable for planning land use in other sites Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

15. Change in Production – the lessons from the PALAWAN study • Modest research costs to produce useful results • Value of combined ecological-economic analysis • Broader applicability of approach • Valuation and evaluation techniques exist that can be used • Useful for convincing decision makers that these resources have value Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

16. Change in productivity can be used in many situations • Changes in recreational values • Change in agricultural productivity in the Iran due to changes in water quantity and quality • Change in fish catch due to stock degradation (Caspian; worldwide) • Change in lake water quality due to shoreline development Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

17. A Final Note – Gross vs Net Values • Change in productivity should normally be done on a net value basis (seeking changes in economic values, not gross revenues) • Sometimes, however, gross values are presented (as in Palawan) • The correct measure depends on the resource and the type of change (lost production versus complete loss, and production decisions made) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production