The Economic Approach to Environmental and Natural

Resources, 3e

By James R. Kahn

© 2005 South-Western, part of the Thomson Corporation

Renewable Resources and the Environment

Part III

Tropical Forests

Chapter 13

© 2004 Thomson Learning/South-Western

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Introduction

Tropical deforestation is an area of environmental degradation that has captured media attention and is perceived as a metaphor for and indicator of the decline in the biosphere.

While tropical deforestation is not a new phenomenon, the pace of deforestation has increased.

This chapter examines the economic and ecological relationships that shape the answers to questions concerning tropical forest policy.

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Introduction

As defined by the Food and Agricultural Organization, tropical forests are areas located between the Tropics of Capricorn and Cancer where at least 10 percent of the area is covered by woody vegetation.

Tropical rain forests receive over 100 inches of rain per year, with the wettest areas well over twice that amount.

Tropical dry forests are semi-arid with a mixture of grassland and forests.

Figures 13.1 and 13.2 illustrate the distribution of tropical wet and dry forests.

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Tropical Rain Forests

Tropical rain forests tend to be dominated by broadleaved evergreens, with completely interlocking canopies, with some giant trees rising above the canopy.

These giant trees, called emergent trees, support the growth of vines that try to reach the sunlight.

Epiphytes (such as orchids and bromeliads) take seed in the dead organic matter that has accumulated on the limbs of trees.

Below the canopy there is an understory of shrub-like plants, and a series of non-woody plants that occupy the forest floor.

With little sunlight penetrating to the forest floor, most of the species within the rain forest are arboreal (live in the trees).

These include insects, spiders, scorpions, birds, lizards, snakes, frogs, and mammals.

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Tropical Rain Forests

This arboreal ecosystem provides for a rich diversity of species, with up to 95 percent of the world's plant and animal species found in rain forest habitat.

According to Perry, as many as 10 to 30 million yet to be discovered species live in the rain forest.

Rain forest rivers are correspondingly more diverse than their temperate counterparts.

While the nutrients within a temperate forest are stored in the soil, the soil of the rain forest is relatively barren of organic matter.

Nutrients within the tropical forest are immediately absorbed by the lattice work of roots of trees, vines, and other forest vegetation.

These nutrients are stored in the biomass of the plants, particularly in the immense trees that can approach 200 feet in height.

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Tropical Dry Forests

The tropical dry forest has decidedly less rain and biomass per unit acre than the wet forest.

This also results in a greater ratio of nutrients in the soil than in the trees, although the ratio is still less than that in temperate forests.

Animal life tends to be terrestrial, as the grass that covers the areas under the trees and between the trees also forms a significant basis for the food web.

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Benefits of Tropical Forests

The primary importance of tropical forests is as a source of ecological services, including the maintenance of hydrological and nutrient cycles, sequestration of carbon, and the provision of habitat for a variety of species, including humans.

An additional benefit of tropical forests is that they may be harvested to supply wood, which can be used in construction of buildings or furniture, or the manufacture of paper and wood products.

Valuable species of tree include: mahogany, zebrawood, rosewood, padauk, bubinga, cocobola, and teak.

Tropical dry forests serve as an important source of fuel for the majority of people who inhabit the tropics.

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Benefits of Tropical Forests

By softening the impact of torrential rains and preventing erosion of the mineral soils, tropical forests also protect the surface waters.

Reducing the impact of the runoff allows the water to percolate through the soil where it can be absorbed by the roots of plants.

What is not absorbed moves slowly toward rivers and streams without an undue amount of soil erosion.

In large rain forests, such as the Amazon, the water that is transpired by the forest actually falls back on the forest.

Large rain forests create a micro-climate, including their own rainfall.

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Benefits of Tropical Forests

Deforestation may lead to important soil erosion problems in tropical rain forests.

Siltation from erosion can create problems for dams and hydroelectric facilities as the siltation partially or completely fills the reservoir.

This siltation can also be a problem within bays, lagoons, and river mouths where aquatic life is diminished which creates severe problems in regions where fisheries are an important source of food.

Within tropical dry forests, the role of forest vegetation is equally important.

Without trees, shrubs, and grass to slow the rainfall, less water would be absorbed, greater run-off would occur, and rivers would be dry during the certain parts of the year.

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Benefits of Tropical Forests

The tremendous variety of life forms within tropical rain forests offers promise for discovery of new medicines and potential medical advances in the treatment of disease.

Equally important is the existence benefits of the diversity of plants and animals found within the rain forest.

Some of the largest (and most endangered) species live in tropical dry forests.

In addition, the forest represents an eco/agro system that supports populations of indigenous peoples.

The forests provide food, shelter, clothing, and other objects. The indigenous people have developed methods of agriculture

that are compatible with the forest systems.

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Benefits of Tropical Forests

Tropical forests, particularly tropical rain forests, play an important role in maintaining the atmosphere's chemistry.

Tropical rain forests, through the process of photosynthesis, reduce the quantity of carbon dioxide in the air and are the largest terrestrial source of oxygen.

A reduction in the quantity and size of the rain forest will increase carbon dioxide in the atmosphere and contribute to global warming.

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Benefits of Tropical Forests

One of the most remarkable aspects of the rainforest is that it is both remarkably robust and incredibly fragile.

While the forest may recover quickly from small scale disturbances, it may take decades or longer for it to recover from large scale disturbances.

When a single tree falls, the nutrient cycle is uninterrupted and the shade from neighboring trees protects the soil from baking in the tropical sun and from erosion by wind or rain.

However, when vegetation from large areas are removed (usually due to human activity), the nutrient cycle is disrupted, seed dispersers and pollinators leave the area and the soil is subject to baking and erosion.

Recovery may never occur.

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Deforestation

Tropical rain forests have both private and public benefits and since these public benefits accrue not only to the citizens within the country in which the rain forests are contained, but also to the citizens of the world, there is a tremendous potential for two-tiered market failure.

The rate of harvest within the country may exceed the socially optimal rate; however, policies designed to correct this would likely not consider the benefits derived by citizens in other countries.

In other words, even if countries choose internally efficient policies to address market failure, they may not be globally efficient.

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Deforestation

The most comprehensive source of data concerning the rate of deforestation for the period before 1990 is Singh (summarized in Table 13.1).

The annual rate of change in forested area over the period 1981-1990 averaged a little less than 1 percent per year (0.8%), with the highest rate of deforestation in Asia and Central America/Mexico, and the greatest amount of deforestation taking place in tropical South America.

Data for more recent years are based almost exclusively on satellite imagery (Table 13.2).

Deforestation remained a significant and growing problem in the 1990’s.

Even at a relatively slow rate of 0.2% per year only 82% of today’s forests would remain after 100 years (Table 13.3 illustrates cumulative forest loss at different deforestation rates).

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Activities that Lead to Deforestation

The three activities that are primarily responsible for tropical deforestation include cutting trees for timber, cutting trees for fuel, and conversion of land to crop or range land.

In addition, mining and urbanization are sources of deforestation, but not to the same extent as the other three activities.

It is possible to engage in these activities in a way that mimics natural disturbances so that the forest eliminates the disturbances quickly and recovers, and the flow of ecological services is uninterrupted.

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Activities that Lead to Deforestation

While timbering is a major source of deforestation, sustainable harvesting could mitigate its impact.

Sustainable harvesting is a method of timber harvesting where disturbances caused by harvesting are similar to natural disturbances.

There are two basic methods to accomplish this goal: strip harvesting selective harvesting.

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Sustainable Harvesting

The strip method identifies small finger-like areas and cuts all the trees within this area.

The total quantity cut represents 6% to 10% of the volume of wood in the general area where the harvesting activity takes place.

After harvesting, the entire area is left unharvested and undisturbed for a minimum of 30 years.

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Sustainable Harvesting

Selective harvesting would involve the harvest of individual trees, not a small clearing.

These individual trees would be scattered across the entire acreage and would comprise less than 6% to 10% of volume of wood in entire acreage.

Again, once harvest was complete, the entire acreage would be left undisturbed for a minimum period of 30 years.

Care would have to be taken during harvest to minimize the collateral damage to the ecosystem from harvesting.

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Why is Most Timbering Activity Destructive to the Rain Forest? Even though it is technically possible to harvest wood in a

rainforest in a manner that keeps the rainforest intact, virtually all commercial harvesting of rainforests results in destruction to the rainforest.

This is due to a series of market failures, poorly designed government policies and a divergence between private and public benefits associated with changing harvesting methods.

Figure 13.4 illustrates the difference between the income paths of a sustainable and non-sustainable forestry.

Non-sustainable gives an initial high level of income, but low levels of income into the future.

Sustainable forestry management provides lower levels of income for greater periods of time.

Unfortunately, firms may focus on the short term income rather than the long term sustainability.

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Why is Most Timbering Activity Destructive to the Rain Forest? One of the major market failures associated with management

of rainforests involves the public good properties of the rainforest, which create social benefits that the landowners can not capture.

The roll of rainforests as ecological treasures, storehouses of biodiversity, and in global carbon cycling makes rainforests valuable to the rest of the countries of the world.

However, the domestic country tends to consider only domestic costs and benefits when making choices about rainforest use.

As a result, because tropical forests constitute a global public good, deforestation rates which are optimal from a forested country’s point of view may not be optimal from a global point of view.

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Why is Most Timbering Activity Destructive to the Rain Forest? Even where the tropical forest is publicly owned, the

forest might be harvested in a destructive fashion. One of the major reasons is the way that countries

issue leases (concessionaire agreements). The length of the leases is too short a time period

and as a result companies harvest at a faster rate than optimal and have no incentive to reduce the environmental damage associated with the harvest activity.

Granting the firms long term harvesting rights, which they can either exercise or sell, creates an incentive to maintain the productivity of the forest.

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Why is Most Timbering Activity Destructive to the Rain Forest? If the actions of the firm result in a reduction of the

productivity of the forest, then the firm bears the cost.

However, long term leases do not give the firms an incentive to protect the flow of ecological services into the future.

In fact, long term leases may provide the incentive to convert natural forest into plantation forest and dramatically reduce the level of ecological services.

Economists have suggested that better management of the forest resource could be accomplished by changing the fee structure of the lease for harvesting.

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Different Timber Harvest Fee Structures

Fee structures can be based on area, revenue earned, undifferentiated volume, or differentiated volume.

A fee based on area would charge the firm a fee based on the number of hectares in which it operates.

This type of fee would give the firm an incentive to clear cut that area.

In addition, this fee structure also provides an incentive for the firm to harvest species of trees with the highest profit and fundamentally change the stability of the ecosystem.

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Different Timber Harvest Fee Structures

A uniform revenue-based fee structure charges the firm a fee based on a fixed percentage of total revenue.

This type of fee reduces the incentive to clear cut but still retains an incentive for the firms to high-grade harvest because the fee is based on revenue and not profits.

It also gives the firm an incentive to harvest in lower-cost areas such as in the proximity of roads and rivers.

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Different Timber Harvest Fee Structures

An undifferentiated volume-based fee charges the firm per cubic meter of wood harvested.

The fee is constant across all types of wood harvested and will lead to problems of high-grading.

A differentiated volume-based fee charges a different fee for each type of tree species.

If the fees are set properly this type of fee will remove the incentive to high grade.

However there are more administrative costs associated with administering a differentiated volume-based fee.

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Different Timber Harvest Fee Structures

While a fee system can influence how many trees are harvested, and what type of trees are harvested, it can not influence how the harvesting activity is conducted.

As such, fee systems do not provide incentives to ensure that the rain forests are not destroyed by the process of harvesting.

To ensure that harvesting methods are consistent with the recoverability of the forest, the government has choices between two broad categories of environmental policy: direct controls economic incentives.

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Different Techniques for Harvesting

Direct controls would specify the techniques that harvesters would be required to use and place restraints on their activities to protect the rainforest.

For most economic problems direct controls are associated with lower monitoring and enforcement costs as compared to economic incentives, this is not true for forestry.

It is possible for firms to engage in “hit and run” harvesting where the firm goes out into the forest, harvests intensively and destructively and then disappears before penalties can be enforced.

Since the assets of the firm are highly mobile, it is difficult to locate and seize these assets.

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Different Techniques for Harvesting

Economic incentives work better because they can be configured to provide an incentive that exists even before the cutting begins.

The most useful incentive for environmental management of forests is a performance bond, where money is collected from the firm before it begins its activities.

The money is placed in an escrow account, if the firm complies with the environmental regulations during harvesting, the money is returned.

If not, the performance bond monies are forfeited. The focus of performance bonds in this context is not to

remediate damage (as in strip mining) but to prevent large scale disturbances.

Box 13.3 illustrates alternative patterns of harvest that mimic natural disturbances.

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Different Techniques for Harvesting

In a report to the Organization for Economic Cooperation and Development, the author of this textbook outlines a process for creating incentives for environmental protection.

The first step is the development of a system of ecological zoning, which is a process where different areas of forest are assigned legal uses based on ecological attributes of the forest.

A forest with high biodiversity, great importance in watershed protection or which serves as a critical spawning habitat would be set aside as a protected area.

Indigenous reserves could also be established. While some areas could be set aside for agriculture and some

for sustainable forestry operations.

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Different Techniques for Harvesting

Once the ecological zones are established, they are inventoried by the government and then leases to areas available for harvesting are auctioned off, which allows the forestry firm to share some of the economic rents available from the timber.

The second step in the process is to take the area that is leased to the harvesting firm and subdivide it into smaller sections, where only one sub-unit would be worked each year.

Environmental regulations regarding harvesting (how much, what and how) would be developed and a performance bond would be required to assure that environmental regulations are followed.

If a firm was found not be in compliance with the environmental regulations at the end of the first year, the firm would lose the performance bond and the right to harvest in the remaining sub-units.

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Fuelwood Harvesting

In dry tropical forest area, and in mountainous tropical forest areas, harvesting forests for fuel is an extremely important source of deforestation, as more people rely on fuelwood as a source of energy rather than rely on fossil fuels.

Deforestation for fuelwood consumption is largely a result of individual household action and ill-defined property rights.

The combination of open-access for both fuelwood harvest and grazing may lead to rapid degradation of the forest and an inability of the forest to regenerate itself.

In many areas of the sub-Saharan Africa, deforestation has lead to desertification.

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Fuelwood Harvesting

Property rights to forest lands in sub-Saharan Africa once belonged to clans and tribes with established rules for its use and maintenance.

Colonialization passed the ownership of the forest to the central government and when these countries become independent, ownership remained in the hands of the state, which had little authority to dictate the use and conservation of the forest.

It has been suggested that a movement back to community ownership would result in more efficient use of the forests.

Planting new forests that are managed specifically for fuelwood would reduce the demand for fuel in natural forests and also reduce the pressure on existing natural forests, protect watersheds, renew the vitality of the soil, provide habitat and create other ecological services.

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Fuelwood Harvesting

There are two major ways to reduce the demand for fuelwood.

One is to develop and distribute more efficient wood stoves than those currently being used.

The other is to move to the use of technologies that do not require the use of wood, for example solar cookers.

In either case, the policies will not be successful if information about the new technology and demonstrations are not provided with the new stoves.

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Conversion to Agriculture

In traditional forest societies, the conversion of forest land to agricultural use occurred on a relatively small scale and the land was soon reclaimed by the forest.

This type of "slash and burn" agriculture did not result in significant permanent deforestation.

More recently, the speed at which the slash and burn has taken place has accelerated and the large patches which are cleared do not allow the forest to regenerate.

Typically, the soil has little nutrients and a limited ability to support crops resulting in a move from agricultural use to grazing land, although eventually the soil may become too acid to support pasture.

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Sustainable Agriculture

If one accepts the premise that the intact forest and agro-forestry is more productive than conventional agriculture, population increase itself cannot be a significant independent source of higher than optimal deforestation.

An example of this is the decision within Brazil to mitigate the population problems in urban areas such as Sao Paulo and Rio de Janeiro by encouraging population migration to rain forests.

These individuals did not know agro-forestry techniques and therefore, used slash and burn techniques to create a homestead.

One solution to this problem would be to train these individuals in agro-forestry.

An alternative would be cutting the forest and establishing sustainable agriculture. In the long run less forest would be lost to agriculture.

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Sustainable Agriculture

The government can provide secure property rights to the land and provide information about how to produce in a sustainable fashion.

In addition, the government could provide short term financial assistance which would allow farmers to purchase seedlings for perennial pants such as fruit, nut, cacao and coffee trees and provide some income for the farmer’s family while the investment is coming to fruition.

In addition, government policies could be put in place to increase the profitability of the sustainably produced products.

A demand enhancement program could increase awareness of non-timber forest products and increase the price that people are willing to pay for them.

An important part of this program would be ecological certification, which would allow consumers to vote for rainforest preservation with their consumer dollars.

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Industrial Agriculture

In many parts of the world, rainforests are being cleared to provide space for industrial agriculture.

Industrial agriculture generally focuses on crops for export, such as coffee, cocoa, sugar, palm oil, soybeans, corn and cotton, as well as cattle or other livestock.

In addition, some forests are lost to illegal crops such as opium poppies, coca, and marijuana.

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Industrial Agriculture

While industrial agriculture may delay the onset of loss of soil fertility through the use of manufactured fertilizers, pesticides and herbicides, the conversion of rainforest to this use is suboptimal for several reasons.

The first reason is that farming firms do not take account of external costs of their actions in terms of destroying rainforest and ecological services.

The second reason is that very often government policies regarding fertilizer subsidies and tax credits provide an incentive to convert greater quantities of rainforest to production of export crops.

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Macroeconomic Reasons for Deforestation Why should a country establish a system of property

rights or tax incentives that lead to inefficient use of the resource, when alternative systems exist?

There are three potential answers to this question. The forested countries are not cognizant of the effects of

these laws and policies. The laws and policies are not designed with efficiency

goals, but instead are a mechanism for transferring wealth from one segment of the economy to another.

Economic conditions prevent the country from acting in its long-term interests.

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Macroeconomic Reasons for Deforestation The use of government policy for transferring wealth leads to

inefficiencies in virtually every country on earth. Kahn and McDonald (1995) hypothesize that macroeconomic

conditions, particularly high levels of external debt, may constrain countries and force them to take actions to meet short-term cash needs that are not in long-term best interest.

Kahn and McDonald examined the relationship between debt and deforestation and estimated the debt elasticity of deforestation to be 0.17 and 0.31.

A 10 percent decline in foreign debt will lead to a 1.7 to 3.1 percent decrease in deforestation.

Other macroeconomic factors that may contribute to the deforestation include falling prices for the raw materials that tropical countries export, rising energy prices, increasing population, domestic hyperinflation, high urban unemployment, and increasing urban density.

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Rain Forests as a Global Public Good

Rain forests provide habitats for many species, are reservoirs of biological diversity, harbor many plant and animal species that may be of medicinal or agricultural importance, and are important in terms of global carbon cycles.

Whatever level of deforestation is optimal from a forested country's perspective, a slower rate is optimal from a global perspective, due to the global public good nature of the rain forests.

Lowering deforestation levels would make the world better off, but could make the forested countries worse off.

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Debt for Nature Swaps

A debt for nature swap is an agreement between an organization, usually a nongovernmental organization (NGO), and a forested country.

The NGO buys and retires a portion of the forested country's external debt in exchange for a promise to preserve a forest tract.

External debt is a tremendous drain on a developing country's economy, with many countries owing in the tens of billions of dollars and since the banks who hold the debt view their prospects for full and timely repayment as problematic, the debt can be purchased by the NGO for a fraction of its face value.

An increasingly common feature of debt for nature swaps is the establishment of a fund in the forested country's domestic economy that will be used to finance the preservation of the forest tract.

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Debt for Nature Swaps

Several important questions have been raised concerning debt for nature swaps. Will the countries renege on the agreements due to

the lack of enforceability of the agreements? Will forested countries negotiate a debt for nature

swap for a preservation action they would have taken anyway, meaning there is no net preservation gain as a result of the swap?

Will countries use their reduced indebtedness to qualify for more loans, so that the net debt reduction of the debt for nature swaps are small, if not zero?

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The Tropical Forestry Action Plan

The Tropical Forestry Action Plan (TFAP) is a large scale effort organized by the Food and Agricultural Organization, the World Resources Institute, the World Bank, and the United Nations Development Program, to conserve and develop tropical forest resources on a long-term sustainable basis.

There are five operational goals of the TFAP: 1. Integrate forestry and agriculture to conserve the

resource base and make more rational use of the land; 2. Implement forest-based industrial development; 3. Restore fuelwood supplies and support national fuel-

wood and wood energy programs; 4. Conserve tropical forest ecosystems and 5. Remove institutional barriers to wise use of forests.

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The Tropical Forestry Action Plan

The following are a sample of projects supported by the TFAP. Restoring degraded land in Ethiopia highlands by providing "food

for work" for peasants to work on conservation projects, such as terracing deforested hillsides and planting trees.

Planting grasses and multipurpose trees for fodder in Nepal by paying wages for tree planting for the first two years of the project.

Developing forest plantations of fast growing trees in Pakistan to increase incomes of farmers.

Encouraging farmers in Kenya to plant trees for fruit, shade, windbreaks, and fuelwood.

The Tropical Forestry Action Plan is important in two major ways. It provides a framework in which forested countries can recognize

the importance of their forests and develop plans to protect them. It provides direct interventions to reverse degradation and mitigate

some of the economic pressures that lead to deforestation.

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Summary

Tropical forests are diverse ecosystems that provide many benefits, including consumable and nonconsumable benefits.

Microeconomic conditions, such as poorly defined property rights, and macroeconomic conditions, such as high foreign debt, have contributed to a high rate of deforestation of tropical forests.

Improved economic conditions can reduce deforestation. In addition, the provision of informational and environmental

investment provided by programs such as the Tropical Forestry Action Plan provide much promise.

Of particular importance are policies which provide an incentive for sustainable alternatives to current activities.