Decentralised coordination of soil functions?

The problems of soil degradation can be analysed from an economic perspective in different ways. As was done in the Sustainable Netherlands study (ISOE, 1993), for example, one could describe current and future economic trends and analyse the associated degradation effects. The global picture that would emerge from such an analysis – ignoring population growth for the time being – is that degradation is primarily caused by the advancement of certain forms of agricultural land use in connection with deforestation. The scarcity of fertile soil is becoming more and more noticeable, particularly in the developing countries. This scarcity is not only a consequence of high population growth, but is also the result of overexploitation and unwise use of soils. Soils in developing countries are deteriorating due to the removal of nutrients, while erosion is reinforced by large-scale and/or non-adapted utilisation and desertification, and accelerated where water is also scarce. In the industrial nations, on the other hand, soil degradation occurs as a consequence of agricultural land use, particularly in the form of contamination. This is compounded by the expansion of settlement areas, urbanisation, extraction of natural resources, industrialisation, etc., especially at the local and regional level (see Section D 1.3.3).

The underlying causes of these various forms of soil degradation become more apparent if one applies an economic analysis of land use (allocation theory). Above all, the question is to what extent the market is at all capable of guaranteeing a global solution to the problem – i.e. putting a stop to rapidly advancing soil degradation.

Soils perform a number of functions, i.e. they offer a range of different utilisation options, depending on their natural characteristics, some of which can be influenced by humans (see Section D 1.1.2.1). From an economic point of view, therefore, every area of land embodies a kind of production function, with soil characteristics representing the production factors and soil functions the output. The various soil functions, or categories of output, form a complex network of relationships with each other and also with the specific characteristics of the soil. In some cases, conflicting relations exist, i.e. utilisation of the soil for one function excludes other utilisation options or at least restricts them, whereas other cases may feature complementary relations. Another problem is that short-term use may contradict long-term objectives.

The economy, as the central element of the anthropogenic sphere, is the primary source of demand for soil functions and as such is primarily responsible, along with population growth and population distribution, for the degradation of soils. From an economic perspective, soil degradation is caused by inadequate resolution of the allocation problem along the temporal axis, i.e. by non-optimal allocation of scarce resources in order to achieve a long-term increase in net social welfare. In most countries on this planet the solution to the allocation problem, i.e. coordination of soil supply and demand according to the various soil functions, is provided through the interactions of market relations and state regulations (such as planning regulations that limit the scope for using specific areas of land). If one ignores natural influences for the time being, soil degradation is thus a consequence of market and/or political failure, although this “failure” is frequently only related to some soil functions. Attention is therefore focused in the following on specific aspects of market failure.

Market failure inducing soil degradation, meaning inadequate (long-term) coordination of the many anthropogenic demands with limited (or even declining) land use potential, can be expected if

– there is no clear definition and implementation of exclusive property rights to soils as functional entities (which can be attributed to political failure in many cases),

– for non-legal reasons (e.g. on the basis of physical soil characteristics), there is no possibility of excluding others from the use of soil functions, i.e. soils have the characteristics of a collective asset with regard to certain functions, – individual knowledge of the long-term benefits and costs of exploiting soil functions or of the relations between the respective soil functions is inadequate, or where short- and long-term utilisation interests diverge to the extent that short-term considerations dominate to the detriment of crucial long-term needs,

– transaction costs are high (transactional market failure) and

– severe external effects occur (usually as a consequence of political failure) which subvert the control function of market prices.

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Such failures are widespread and thus crucial factors contributing to the degradation of soils worldwide. Further explanation of this will be provided in the following.

If one examines these aspects, one after the other, it would appear that coordination deficits and thus soil degradation are firstly the result of poorly defined soil and land use rights. This is the case, for example, when the legal framework restricts or revokes the right of the owner to exclude others from using his land. The principle of liability is then restricted, it becomes more difficult to apply the “polluter pays” principle and a situation is engendered in which others can take (short-term) advantage of this non-exclusiveness – without having to invest in the sustainability of the land use. Any opportunity favouring “free-rider” behaviour – such as toleration of legally impermissible use of land by a third party – may thus lead to overexploitation or inappropriate use of soils (Hardin, 1968b). There are several basic ways in which land use rights are regulated.

Particularly problematic as far as the prevention of soil degradation is concerned are open access systems, where users who make endeavours to maintain long-term land use potential must constantly fear that others will harvest the fruits of their efforts (Hartje, 1993). This results in the threat of overexploitation, especially where population density and industrial land use are increasing. As a form of land use for long-term maintenance of the soil utilisation potential, common property regimes are regarded rather sceptically, but they can function under certain basic conditions – low opportunity costs, strict limitations on the number of users, pronounced homogeneity of interests, clear regulation of collective liability, etc. (Ostrom, 1990; Hartje, 1993). Considerable research efforts are being made in this area, especially in the U.S., guided by the notion of common property resources (International Association for Common Property Resources).

Soils lend themselves well, on account of their spatial delimitability, to a clear definition of property rights. Therefore, the accusation of market failure is not generally applicable; many manifestations of soil degradation must be attributed instead to political failure. Many countries still lack a clear allocation of property rights and/or any assertion of acquired rights (World Bank, 1992). In such cases, overexploitation or inappropriate use, i.e. degradation of soils, is the inevitable consequence. The allocation of clear property rights, combined with state guarantees for these rights, is a key recommendations for sustainable land use policies.

Allocating property rights does not suffice, however, as a means to prevent soil degradation. Rather, further coordination shortcomings that favour soil degradation and make additional measures necessary may even appear where a clear definition and implementation of property rights is guaranteed on the basis of the existing legal structure.

Such coordination deficits result from the fact that property rights can be defined primarily only for the carrier and yield function. This approach is doomed to failure in the case of other soil functions due to the operative mechanisms or natural soil characteristics (Micheel, 1994). Any restriction of the habitat function, for example, due to utilisation of the soil for pastureland purposes (clearing of tropical forests) not only has a direct effect on local or regional biodiversity, but also has global implications on account of the interlinkages between ecosystems. Consequently, with regard to soils one can designate

– the habitat function as a global collective asset,

– the regulation function as a collective asset whose spatial reference is determined by ecosystem interrelations, and – only the production and carrier function as individual assets.

This means that the formulation of exclusive property rights and thus market-related coordination appear successful only for the carrier and production function, whereas this is not possible without qualification for the functions with collective asset characteristics. Use options therefore exist which do not involve any form of payment. In the short term it may be individually rational to exploit the existing utilisation potential as thoroughly as possible (see Hardin, 1968b; Buchanan, 1968; Weimann, 1991; Gschwendtner 1993 on “free-rider behaviour”). In that case one can expect an overexploitation of the global environmental functions of the soil, i.e. a conflict results between individually rational short-term behaviour and the globally desired objective of long-term maintenance of environmental functions (Althammer and Buchholz, 1993). This individual, short-term perspective may undergo fundamental change in the direction of long-term preservation of a specific resource if there is direct experience of environmental damage (Axelrod, 1986; Weimann, 1991). However, this can only be expected to a limited extent, because there is usually

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inadequate perception of global interrelations, especially of the individual’s contribution to damage caused. A negative influence on long-term environmental preservation functions can especially be expected, when increasing scarcity of agriculturally useful land and high population growth induce a struggle for survival and thus an emphasis of the utilisation function of soils.

It is becoming increasingly evident that any assessment of the various soil functions depends on a country’s level of development, population density, available land, the opportunities it has for importing food, and the extent of other land utilisation needs (e.g. for settlement purposes). At the same time, there is a growing realisation that special attention must be devoted to all measures that bring about a sustainable increase in yield capacity of soils (with respect to food production), given the rate of population growth and the global decline in agriculturally useful land. The Council therefore attaches special priority to recommendations aimed at achieving that objective.

Allocating definitive property rights is not sufficient to solve the problem of global coordination shortcomings, because most individuals concerned have inadequate knowledge of the long-term benefits and costs of soil function utilisation or of the relations between the individual soil functions, or because short-term utilisation interests dominate over long-term interests. A good example of these information problems that make market coordination difficult is that of the environmental impact on soils which result from utilisation in the past (problem of inherited pollution). In many cases, only previous owners possess sufficient information regarding possible restrictions of soil functions. As a result of the uncertainty involved in making a qualitative assessment of an offer, the potential users of production and carrier functions are then faced with the problem of

– either assuming the risk of having to accept possible utilisation limitations regarding the acquired land,

– making extensive investments to acquire information via external expertises, with a residual risk of undetected qualitative shortcomings

– or of accepting higher costs for conducting negotiations and drawing up a contract to ensure that the previous owner is liable for any limitations of utilisation.

These alternatives may involve such high risks and costs that a transaction does not take place. On the other hand, a seller of land may also be induced to dispense with a transaction because of the possible risk that an existing qualitative impairment of the soil functions is subsequently identified for which he must then bear the cost.

Such information problems thus lead to a situation in which also the soil functions that can be allocated individually are not subjected to market-based allocation (Hecht and Werbeck, forthcoming). One consequence of the inadequate market allocation of carrier and production functions is the inefficient utilisation of these functions within the spatial limits of the relevant land market. This may then result in global consequences if locally inefficient utilisation of the carrier and production function triggers direct effects on ecologically relevant global soil functions (as habitat function). Secondly, long-term transnational and global restrictions may result, through the international division of labour, from local restrictions of soil functions if the demand for these functions shifts to unused land in other areas, regions or countries (utilisation of marginal soils) as a consequence of local displacement of utilisation demands, where further qualitative impacts on soil functions then occur. This development could also reinforce, for example, the transfer of soil-sensitive economic activities from the OECD states to countries with a lower degree of industrialisation (Sorsa, 1993).

In many cases soil degradation problems can also be attributed to a combination of information problems and a disparity in short- and long-term soil utilisation interests. Enormous increases in food production per hectare have been achieved through the so-called “green revolution” (high-yield cereal varieties, large-scale mechanisation, fertilisation, application of pesticides and plant protection agents, etc.). In some cases, however, this increase was

“bought” with soil erosion, overacidification of the soil or pollution of groundwater and surface waters with harmful substances, i.e. – as was not perceived until later – with a violation of important conditions for sustainability.

Thoughtless application of such forms of soil utilisation to countries with different soils may even aggravate this problem of long-term loss of functions.

This clearly demonstrates the importance of transaction costs in land markets and how these can cause serious coordination deficits. In most cases, the bulk of transaction costs are incurred through the determination of concrete cause and effect relations and through negotiations, and less as a result of market implementation (Box 15).

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This problem is aggravated by external effects since efficient allocation of soil functions is also obstructed in the event that others are impaired (or favoured), as a result of an economic activity, without being compensated accordingly (or

Box 15

Transaction costs are costs of

– defining and allocating property rights (costs of market implementation), – determining cause and effect relations and thus the relevant target groups,

– coordinating divergent interests through negotiations in order to arrive at clearly defined regulations, – safeguarding the outcome of negotiations by means of monitoring systems and sanctions.

Transaction costs may therefore exceed the benefits obtained through the global allocation of soil functions via market mechanisms; failure to reduce such transaction costs will hinder or even prevent market coordination at the global level.

having to pay). In the case of negative external effects, the scarcity of the utilised soil function is not conveyed, in the form of appropriate pricing. A striking example is impairment of soil functions due to depositions of pollutants from the air. If, for example, the production function of a forest soil is impaired by NOxdepositions caused by other agents, the holder of the property rights to this function, usually the forest owner, would, in fact, have to enter into negotiations with the emitter of the airborne pollutants in order to receive payment from the latter for use of the forest soil. However, clear verification of the extent of the reduction in function by a certain emitter of harmful substances is not possible as a rule because of the high number of potential polluters, the numerous synergy effects and the large transboundary area that is often involved. This problem is aggravated still further when there are different national implementation regulations regarding damage claims. In such cases, it is highly unlikely that soil functions can be efficiently allocated through decentralised negotiations.