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Biopolicy Journal
Pontificia Universidad Católica de Valparaíso
ISSN: 1363-2450
Vol. 2, Num. 1, 1997
Biopolicy, Volume 2, Paper 5 (PY97005) 1997, April 25th 1997
Online Journal - URL: http://bioline.bdt.org.br/py

The Successful Use of Economic Instruments to Foster Sustainable Use of Biodiversity: Six Case Studies from Latin America and the Caribbean*

Commissioned by the Biodiversity Support Program on behalf of the Inter-American Commission on Biodiversity and Sustainable Development, In preparation for the Summit of the Americas on Sustainable Development, Santa Cruz de la Sierra, Bolivia, December 6-8, 1996

Joseph Henry Vogel

Facultad Latinoamericana de Ciencias Sociales (FLACSO), Sede Ecuador Consultant, InterAmerican Development Bank-Consejo Nacional de Desarrollo, Ecuador; US contact address: 2 Wellington Downs, Scotch Plains, NJ 07076. FAX 1 908 561 1907; E-mail: henvogel@uio.satnet.net

Received March 23rd, 1997
Published April 25th, 1997


Code Number: PY97005
Size of Files:
     Text: 170K
     Graphics: Photographs (jpg) - 60K

[Note: this paper is also available in Spanish (PY97105) and Portuguese (PY97205)]

CONTENTS

Executive Summary
Introduction
      The Irreversibility of Extinction
      The Instability of Preferences
      The Humble Alternative to Bankrupt Economics
Case Studies
      Existence [Non-amenable to a case study approach]
      Ecotourism Case 1: The optimal
               price of park admission, Costa Rica
      Case 2: The Marine Park, Saba, Netherlands    
               Antilles
      Environmental Services: Case 3: The Ecological VAT, Parana, Brazil      
               (Value Added Tax) [Imposto sobre
               Ciculacao de Mercadorias e Servicos
               Ecologico - ICMS Ecologico]
      Sustainable Agriculture Case 4: Centro Fatima, 
               Pastaza, Ecuador
      Extractivism Case 5: The Sea Turtle Conservation
               Project, Reserva de Usos Multiples en Barra de Santiago 
               (The Multiple Use Reserve at Barra de Santiago), El Salvador
      Bioprospecting Case 6: The Impossibility of a Successful
               Case without a Cartel

Conclusions and Recommendations Endnotes 1 - 14 Additional Information a - f References

EXECUTIVE SUMMARY

INTRODUCTION

The Samuelsonian equation for the optimal allocation of public goods is a theoretical construct for the conservation of biological diversity. The policy implication of the equation is straightforward: one aggregates all the simultaneous values generated from biological diversity and recommends conserving habitat until the cost of the last hectare conserved just equals the incremental aggregate value. Nevertheless, a fundamental theoretical problem exists in the methodology: preferences are unstable over human generations and any recommendation based on currently observed preferences may turn out to have underestimated the values resultant from the preferences of future generations. This shortcoming does not escape conservationists. To the extent it is routinely ignored, economic theory itself has fallen into disrepute. For example, the distinguished biologist Professor E.O. Wilson states flatly that contemporary economics is bankrupt.

The humble alternative to bankrupt economics recognizes the incommensurability of biological diversity and hopes only to internalize the externalities of protected habitats. The physical scope of these protected areas should be determined not by economic criteria but by safe minimum standards Ä the precautionary principle. Six distinct categories of value can be simultaneously generated from conservation: existence, ecotourism, environmental services, sustainable agriculture, extractivism, and bioprospecting. Seldom will any one of the six be sufficient to justify the opportunity costs of the seemingly more profitable activities that would exterminate biological diversity. The challenge for conservation is to create a package of sustainable activities that in total can alleviate the economic and political pressures to relax or abandon safe minimum standards.

Existence

Existence is the most immediate and largest value for the financing of habitats. It arises from the willingness of people to pay simply to know that biological diversity exists. Not surprisingly, this preference for existence has a positive income elasticity, i.e., as incomes increase a larger quantity of existence will be demanded. Most of the countries where incomes are high have relatively little biological diversity or, conversely, the countries of greatest biological diversity are economically the poorest. Economic theory implies that through trade in existence values, wealthy countries can finance existence in poorer countries thereby making all parties better off. Despite the elegance of such logic, any application is quite messy. The mechanisms to facilitate exchanges depend greatly on the tax codes and legal structures in both the donor and recipient countries. Indeed, the experience of any one successful case cannot be easily copied across countries and often, not even within the same country at a later date. Therefore, governments should analyze the possibilities of capturing existence values within their own current institutional framework and that of likely donors.

Ecotourism

Ecotourism can become a significant source of revenues and contribute not only toward the financing of habitats but also the inculcation of a "green profile". Costa Rica is a leader in ecotourism and has applied a systematic approach toward analyzing this growing market. Both the demand for ecotourism as well as the supply of sites have been carefully studied. On the basis of survey data and econometric analysis, the government has made recommendations regarding the price of admission to the national park system. To go from a low price of USD 1 to the recommended price of USD 4 for foreign tourists, the government perceived the necessity of setting a significantly higher price (USD 15) and then adjusting it downward. This bargaining strategy may be characteristic of many countries where price increases cannot be easily administered without resistance. Likewise, hiding the price of admission in the cost of package tours may also ease acceptance. To promote environmental education among citizens, the price of admission for nationals remains at approximately USD 1.

The success of the Saba Marine Park, Netherlands Antilles, is also based on careful studies and a discerning analysis of data. Saba has imposed zoning on the reef surrounding the island thereby diminishing user conflicts between fisherman and divers. The cost of establishing the marine park has been lower than the revenues generated from dive tourism, just one of the multiple values generated by the park. Such financial sustainability is all the more amazing given the low price per dive, a mere USD 2. The preservation of the reef has also created tremendous multiplier effects throughout the general economy and now accounts for roughly 10% of island production. Economic theory implies that any income-generating asset should be insured against loss and natural capital is no different. A recommendation emerges: the Marine Park should apply demand analysis to determine the optimal price per dive in order to generate revenues and insure the reef against random natural disasters such as a devastating hurricane.

Environmental Services

A central question in public finance theory is when to charge user fees? And when to levy taxes? The answer will depend on the transaction costs of the public good under consideration and will not even be the same over time. With advancements in technology and organization, user fees may become more cost effective and equitable than taxes; contrariwise, with the rising opportunity costs of users in paying those fees, taxes may become preferable.

The case of the Ecological Value Added Tax (VAT) in Brazil is interesting because it does not look at the demand side for environmental services, i.e., user fees vs. taxes, but at the supply side: how are the taxes that are presently collected spent? Through legal reform of the State Constitution of Parana, Brazil, the disbursement of the VAT revenues to municipalities is partly determined by the environmental services rendered. For example, municipal governments that regulate land use can capture an increased share of the Ecological VAT revenues through watershed protection. By monitoring water quality, the state government rewards the municipality according to its performance. In the first four years of the Ecological VAT, some USD 30 million have been redistributed at an incremental administrative cost of only USD 30 thousand. The same environmental authorities that achieved this success on the supply side must now look at the demand side and charge user fees that reflect use.

Sustainable Agriculture

The transformation of forest into pasture has been a leading cause of mass extinction. Given thin soils and heavy rains, pasture is quickly exhausted and ranchers seek new forests to transform into new pasture. Despite this depressing cycle, there is reason for hope. Where fragments of the original habitat remain in close proximity to the abandoned pastures, the forest will return, albeit with less biological diversity. This secondary forest is often appropriate for the semi- domestication of a variety of useful native species. The challenge for sustainable agriculture is to understand sufficiently well the husbandry and cultivation of these species in order to maximize the profitability of such farms without degrading the regenerating forest.

The Centro Fatima in the Ecuadorian Amazon is an experimental station devoted to the study of seven naturally occurring useful species. Although the station is not yet financially self-sustaining, its objective is to generate sufficient information regarding useful species so that it and other farms can become financially self-sustaining. The preliminary results of the Centro Fatima are most promising: very practical biological information has been generated and some species, the tapir in particular, seem quite profitable. Because this information is a public good which can greatly enhance the realization of sustainable agriculture throughout the Amazon basin, national governments and multilateral agencies should subsidize such experimental stations and disseminate the results.

Extractivism

Extractivism is similar to sustainable agriculture to the extent that the population of a native species is being managed. The difference is that sustainable agriculture also manipulates many of the characteristics of the species to enhance productivity whereas extractivism is primarily concerned with removing a portion of the naturally occurring population for human consumption.

The Sea Turtle Conservation Project in El Salvador has developed a project of sustainable extractivism with remarkable success. Prior to its implementation, almost 100% of turtle eggs were being extracted at the Barra de Santiago. Today some 25% of the eggs collected at the Barra de Santiago are hatched and released in the sea. AMAR, the NGO in charge of the project, experimented with different management plans and discovered that a tax, payable in eggs, was the most cost effective. Two dozen turtles eggs from each nest are paid to the game warden who buries the eggs and controls several variables (bacteria in sand, temperature, protection from predators) to maximize the rate of hatching.

Turtles lend themselves to sustainable extractivism inasmuch as they lay many eggs and each egg is relatively valuable; nevertheless, the basic biology behind sustainable extractivism cuts across all species from sea turtles to elephants. AMAR is expanding its efforts to include ecotourism and protection of the mangrove forest from encroachment by neighboring ranchers.

Bioprospecting

Bioprospecting has received disproportionate attention in the popular press as a means to finance habitat preservation. Of the six values that can generate revenues in the short-run, bioprospecting occupies the last place. One predicts low returns for a fairly simple reason: many of the chemicals of interest to biotechnology firms do not exist in one country or even in one species but are diffused across both countries and species. This economic prediction has been confirmed by experience. A price war is emerging among supplying countries as each offers its biological diversity at lower and lower prices: royalties in some contracts have been reported as low as 0.2%.

Interestingly, the same economic argument that is made to defend monopoly patents over biotechnologies can be made to defend an oligopoly right over biological diversity. Royalties should be fixed at a rate similar to other forms of intellectual property, i.e., 15%, and revenues should be distributed among countries that could have provided the same chemical based upon their share of the habitat for the species bioprospected. A protocol to the Convention on Biological Diversity may be the appropriate mechanism to institutionalize a biological diversity cartel.

A pilot project in Ecuador attempts to create a similar cartel structure over indigenous knowledge used in ethnobioprospecting. Just as countries can compete in a price war for the provision of biological diversity in random screening bioprospecting, so too will traditional communities compete in a price war for the provision of useful knowledge in ethnobio-prospecting. The pilot project attempts to manage traditional knowledge in confidential databanks and then negotiate access to the knowledge as a trade secret. Communities that deposit the same knowledge in the databank share in the benefits of any ethnobioprospecting contract.

General Recommendations for the Successful Use of Economic Instruments to Foster the Sustainable Use of Biodiversity

- Protected areas need not be justified in terms of the generation of revenue nor in terms of the opportunity costs of activities that would degrade the habitats and threaten the biological diversity. Cost-benefit analysis cannot resolve the value of biological diversity and any such calculation is a meaningless number. Therefore, set safe minimum standards in the form of protected habitats sufficiently large to maintain long term genetic viability. All habitats of the country should be represented in the protected areas.

- Internalize as many of the external benefits of the protected areas as possible to alleviate economic and political pressures to relax the safe minimum standards.

- Existence is the largest short term source of revenues for protected areas. Analyze the legal and fiscal structures in both donor and recipient countries to facilitate such transfers.

- Ecotourism can also generate significant revenues for protected habitats in the short run. Admission prices should be judiciously set to maximize revenues from foreign tourism. Nationals should be charged a lower price in order to inculcate a "green profile".

- Natural capital should be insured just as if it were man- made. One source to pay for such insurance is through judicious charges for the use of protected areas.

- The choice of taxes or user fees must be made on a case-by- case basis. The disbursement of tax revenues should be partially indexed to environmental services rendered.

- Sustainable agriculture requires scientific rigor. Knowledge about useful species native to secondary forests should be systematized. Governments and multilateral agencies should recognize the public nature of such knowledge and subsidize its creation and dissemination.

- Without a cartel among suppliers of biological diversity, a price war will emerge and bioprospecting will not generate significant revenues. The justification for such an oligopoly is identical to the neoliberal justification for monopoly patents. Governments should endorse a Special Protocol to the Convention on Biological Diversity which institutionalizes a cartel over biological diversity for random screening bioprospecting. Traditional communities should do likewise for knowledge over biological diversity and negotiate access to such knowledge as trade secrets in material transfer agreements.

INTRODUCTION

"Contemporary economics is bankrupt" Ä E.O. Wilson (pers. comm., 24 May 1993)

This terse condemnation could be more easily dismissed by stalwart economists had it not emanated from perhaps the most outstanding naturalist of this century-Professor Edward Osborne Wilson of Harvard University. Consider Wilson's credentials: author or co-author of hundreds of scientific articles as well as several seminal texts in biogeography, conservation biology, entomology, and sociobiology; editor of a half-dozen well received collections in various fields of biology; popularizer of his own technical work in an elegant prose that has won international acclaim; and recipient of the Pulitzer Prize (twice), the National Medal of Science, and the Crafoord Prize of the Royal Swedish Academy of Sciences (sometimes called the environmental Nobel) Hence, Wilson's remark that contemporary economics is bankrupt cannot be taken lightly. Indeed, it almost constitutes a crie-de-guerre: Conservation Biology against Orthodox Economics. This White Paper will attempt to show that Wilson is completely correct in the short-run: the application of orthodox economics to biological diversity is vaulting ambition and reflects a bankruptcy of understanding of biological complexity. The alternative, advocated by Wilson (1993, 310), appears more humble: "...safe minimum standards, which treats each [species] as an irreplaceable resource for humanity to preserve for posterity unless the costs are unbearably high". However, in the long-run, Wilson is probably wrong regarding both the bankruptcy of economics and the alternative approach: eventually our understanding of biological complexity will enable the application of orthodox economics to determine the optimal allocation of biological diversity and, to put it bluntly, extinction.

Although the biological world is immensely complex from the macro viewpoint (intricate relationships among tens of millions of species) as well as from the micro viewpoint (billions of nucleotide pair sequences within the genome of each one of those species), the biological world is nevertheless finite. Our scientific ignorance regarding both the macro and micro complexities means that the optimality criteria from orthodox economics cannot be realized in the short-run for biological diversity-the information simply does not yet exist-but, hopefully, some day it will exist and economics will then be able to assist.

Unfortunately, economists seldom admit that the information needed to apply their criteria is either presently unavailable or prohibitively expensive to obtain; the tendency has been to apply the criteria with the information at hand. A bias results: timber, cattle, and dams are measurable values and can be fairly easily monetized; the amenity, commodity, and moral values of biological diversity (Norton, 1988) are elusive and inherently difficult to monetize and so are conveniently ignored. Not surprisingly, the analysis of costs and benefits for timber, etc., yields net positive benefits largely because biological diversity was absent from the calculation-equivalent to having counted it as zero. One suspects that part of Wilson's disdain for the economics profession originates from this sleight of hand: "Cost-benefit studies consistently undervalue the net benefits conferrable by species since it is much easier to measure the costs of conservation than the ultimate gains, even in purely monetary units. The riches are there, fallow in the wildlands and waiting to be employed by our hands, our wit, our spirit. It would be folly to let any species die by the sole use of the criterion of economic return, however potent, simply because the name of that species happens to be written in red ink." (1993, 310).

Before elaborating the more humble approach that begins with safe minimum standards and seeks only to replicate successful economic instruments for the sustainable use of biological diversity, one should first understand the extreme position that would put every piece of biological diversity on the block with other private and public goods for the determination of the optimal level of extinction. What exactly does the orthodox theory say? In formal economics, the existence of biological diversity would fall under the rubric of a public good: the consumption by one individual does not deprive another of simultaneous consumption. The optimal allocation of such public goods vis-a-vis private goods was solved by Samuelson (1954) in what is widely considered a classic paper: "The Pure Theory of Public Expenditure". In the case of biological diversity, one would want to save enough critical minimum habitat to ensure the genetic viability of its inhabitants against inbreeding. Therefore, the public good is not biological diversity per se, but reserves sufficiently extensive to allow the continued evolution of the species contained within them (Terborgh, 1992, Whitmore, 1990). The Samuelsonian condition for the optimal mix of sustainable reserves (r) vs. the next most profitable alternative, say, timber (t) harvested in clear-cuts,^2 would be expressed as follows:

    n Sigma MRSrt= MRTrt Equation (1) i=1 where, MRSrt=MUr/MUt MRTrt=MCr/MCt
The capital Greek letter sigma (Sigma) indicates summation over n people counting with the first individual, i = 1. The MRSrt is the marginal rate of substitution of reserves for timber and equals the ratio of the marginal utility of reserves over the marginal utility of timber; the MRTrt is the marginal rate of transformation of reserves for timber and equals the ratio of the marginal costs of providing one more unit of reserve, MCr, over one more unit of timber, MCt. In plain English, the condition can answer the question, 'How much acreage in reserves is one willing to substitute for sacrificing how much timber?' In a competitive society, reserves should be expanded or contracted until the summation of the marginal rates of substitution of reserves for timber across all individuals, starting with the individual willing to pay most and summing in decreasing order, just equals the marginal rate of transformation of reserves for timber. This result is more easily understood when the marginal rates of substitution and marginal rates of transformation are expressed in terms of price. Hence, the MRS becomes the willingness to pay across individuals and the MRT becomes the cost of provision of the reserve, both in dollar terms.

One can decompose the group willingness to pay of the left hand side (LHS) of the equation into individual sustainable activities that could be generated by the reserve such as charitable donations, ecotourism, user fees for water provision, soil erosion prevention, carbon retention, extraction of nontimber products, sustainable agriculture and bioprospecting. Just as the existence of the reserve would generate these positive externalities, clear-cut logging would also generate negative externalities. Whether the dollar value of the negative externalities is incorporated on the LHS or the right hand side (RHS) of the equation is largely a question of the distribution of property rights. For example, do the people downstream have a right to clear water and the fish endemic to deep rivers? If the answer is affirmative, then the existing timber operations that silt the rivers and exterminate the fish are suboptimal inasmuch the MRT should be lower as it takes more resources (the value of sedimentation) to create timber (the MCt of the denominator increases) and therefore, the MRT is reduced, and the LHS>RHS. The economic advice would be to increase the number of reserves until diminishing marginal utility sets into reserves and the LHS declines to equal the RHS or, concomitantly, until diminishing returns and increasing costs set into creating reserves and the RHS increases and equality is restored.

Now consider the opposite distribution of property rights: What is the implication for optimal allocation when the property owners upstream have the right to timber without compensating those downstream for the subsequent sedimentation of the river and extinction of the fish? Perhaps surprisingly, the answer is not opposite! There may still be suboptimal provision of reserves to the extent that each person downstream has an incentive not to reveal his/her true willingness to pay those upstream not to fell their timber. Selfish behavior, the core assumption of all economics, predicts that each victim downstream will attempt to free ride on his neighbors' willingness to pay those upstream for the same public good that he or she enjoys. When enough people think in this rational fashion, suboptimality results and there are fewer reserves than would be warranted had everyone expressed their willingness to pay. The solution to the problem of externalities and free-riding is either the internalization of benefits and costs, first articulated by Coase (1960), hereafter referred to as the Coasian solution and/or the state intervention with taxes and subsidies to simulate the optimal conditions, first articulated by Pigou (1949) and hereafter referred to as the Pigouvian solution.

The simplicity of the Samuelsonian condition for optimal provision of public goods is both persuasive and beguiling. To the extent that the model logically derives from a few basic assumptions regarding rationality and selfish behavior, the model is powerful and can cut across cultures and circumstances. To the extent that the model implicitly assumes reversibility of decisions and the stability of preferences, the model is inappropriate to goods which can suffer extinction and/or outlast the preferences on which the Sigma MRSrt was calculated. Therefore, one can accept orthodox economics as it applies to certain fields of resource allocation and reject it as it applies to others. The criterion for acceptance/ rejection is the satisfaction/ non- satisfaction of the hidden assumptions: the reversibility of decisions and the stability of preferences. Inasmuch as neither is satisfied in the case of biological diversity, the model must be rejected. This strong assertion is based on the irreversibility of extinction and the instability of preferences that impact biological diversity and deserves further explanation.

The Irreversibility of Extinction

Contemporary economics is the elaboration of the 19th century application of a metaphor borrowed from 17th century mechanics to the world of business transactions (see Mirowski, 1988). Although orthodox economists even recognize the ahistorical nature of their methodology, they do not appear to be particularly troubled (see, for example, Solow, 1974). Perhaps their ambivalence is because the reversibility inherent in the Newtonian metaphor does not much matter in most circumstances. For example, if we overshoot or undershoot the optimal provision of, say, schoolhouses, and LHS does not equal RHS in the Samuelsonian condition, then we can always correct our mistakes and readjust to the optimal level (albeit, even here there is irreversible loss of childhood development). However, in the case of biological diversity, if we underestimate the optimal provision of reserves, then we cannot correct our mistakes because extinction is, to repeat the cliche, forever. The logical inference is a precautionary principle that would preserve all species (Myers, 1992).^3

In the previous example, the precautionary principle would translate into the virtual cessation of just about all timber activity in primary habitats. Although the timber industry and many consumers would not like this result, it cannot be said to be uneconomic inasmuch as orthodox theory does not have the information to resolve what is the optimal allocation of reserves or timber as implied by the Samuelsonian condition.

The Instability of Preferences

Neoclassical economics assumes that "individuals' preferences are to count" (Samuelson, 1947, p. 223) and that the utility function is exogenous.^4

However, over hundreds of human generations, preferences are not stable and yet, by comparison, the biosphere is. The duration of human preferences can be measured in thousands of days (e.g., fashion in furniture) while the duration of chronospecies is measured in hundreds of thousands of years (e.g., the vertical evolution from Homo erectus to Homo sapiens). From this backdrop of slow biological evolution, the fast cultural evolution of preferences is unstable. For example, one imagines that the basket of goods and services that, say, the Visigoths demanded in pre-Roman Iberia was quite distinct from that of a modern Spaniard and yet, had it not been for intervening human transformation of the Spanish landscape (from forested mountains to scrublands), the biological diversity would have remained much the same.

Instability is just one justification for the precautionary principle based on preferences but it is not the only justification based on preferences. Although preferences are unstable over biological time, that is not to say they are unpredictable. If one looks across stages of economic development, one sees a pattern of preferences toward the environment. In the hunter-gatherer phase of economic organization, the environment is often revered and sacred. In the developing stages of agriculture and industry, the taboos are jettisoned and nature suddenly becomes something to conquer and tame. In the developed stages of the economy, nature is viewed as something to manage and enjoy. Without the precautionary principle, it appears that the net present value of benefits over the stages of development will not be maximized if humanity must pass through the destructive developing stage (for a similar argument, see Krutilla, 1967).

The Humble Alternative to Bankrupt Economics

Given the following facts about biological diversity:

- the macro and micro complexity
- the pervasiveness of negative externalities of habitat destruction
- the rampant free riding of beneficiaries of positive externalities of habitat conservation
- the irreversibility of extinction
- the instability of human preferences over generations
- the long-run preference for preservation over stages of development
- and the sheer scale of the current mass extinction crisis

it seems conservative to assume that humanity has far exceeded what would be the optimal rate of extinction as given by the Samuelsonian condition had all the requisite information been available to make such a calculation. To put it in the terms of the aforementioned Samuelsonian condition, the LHS>>RHS. Hence, the short-run solution is to conserve whatever biological diversity remains and generate economic benefits from the sustainable use of habitats so as to alleviate pressures for destructive development. This humble approach would immediately place constraints on what we can do in the short-run and would sanction only those economic instruments that result in the sustainable use of the existing biological diversity. However, the approach is not definitive: it recognizes that information regarding biological complexities will eventually become available and concedes that at some later date the Samuelsonian condition for optimal provision of public goods can be honestly applied.

Resistance to safe minimum standards will be enormous. Even Principle 15 of the 1992 Rio Declaration only advocates adoption of the precautionary principle by member countries "....according to their capabilities". Therefore, the challenge for the conservationist community is to monetize as quickly as possible both the LHS and RHS of the Samuelsonian condition. The most cost-effective way to accomplish this goal is a case study approach. What have been the experiences of others? To what extent can they be replicated? To what extent must they be adapted? This White Paper will illustrate instruments that have been employed for the sustainability of biological diversity through six cases. Five of the six cases can be qualified as successful; in the sixth case (bioprospecting), it will be shown that the necessary conditions for global success do not yet exist and that any example of individual success is actually counterproductive to global success. Although each case illustrates a different economic value that can be generated from the sustainable use of biological diversity, one should not infer that only one value can be captured in each case. Recall that the summation sign Sigma in the LHS of the Samuelsonian condition implies that each habitat will have multiple uses spread across many individuals; optimality implies the capture of as many distinct economic values as possible from any given habitat (see, for example, Perrings, et al., 1995). Those values are, in order of their probability of generating revenues in the short to medium-term, the following:

I. Existence
II. Ecotourism
III. Environmental Services
IV. Sustainable Agriculture
V. Extractivism
VI. Bioprospecting

I. Existence (Non-amenable to a Case Study approach).

Although payment for the existence (option and bequest values) by wealthy nations to poorer ones may be the most viable economic instrument to conserve large tracts of habitat and biological diversity, existence values are also the least amenable to a case study approach. The reason is twofold; on the one hand such transfers depend on the legal structure within both the donor and recipient country; on the other, the legal and institutional mechanisms even within a given country are rapidly moving targets. For example, two very worthwhile projects were financed with multi-million dollar debt-for- nature swaps in Ecuador in the mid-1980s, the Fundacion Natura, an ecological think tank, and Maquipicuna, a cloudforest reserve in the Northwestern slope of the Andes. Ten years later, one can say both cases were unquestionable successes. However, one could not replicate them even within Ecuador. Any study of either case would only serve historical purposes inasmuch as the Central Bank in Ecuador has adopted a strict monetarist position that such debt-for-nature swaps monetize the debt and are inflationary. Therefore, an analysis of economic instruments for conservation easements, debt-for- nature swaps, and tax incentives are so contextual within the fiscal framework of a country that few cases would be replicable across countries and some would not even be replicable within the same country at a later date. One must analyze the economic instruments for the capture of existence values within a broader economic-legal theoretical framework rather than in a case study mode.

Fortunately, an excellent user-friendly guide exists in the Conservation International report "Encouraging Private Sector Support for Biodiversity Conservation" (Bowles, et al., 1996) that can complement this report. Because of the non- amenability of "existence values" to a case study approach, the spot that would be occupied under this first rubric will be replaced by an additional case in the second greatest generator of revenues, ecotourism.

II. Ecotourism (Case 1): The Optimal Price of Park Admission, Costa Rica

Costa Rica exemplifies the theory presented in the introduction to this White Paper. The country never applied an economic valuation of biological diversity in order to calibrate how much to preserve and how much to extinguish. Instead, the government imposed an ethical decision not unlike Wilson's criteria of "safe minimum standards": approximately 25% of its national territory would be designated as national parks, forests, and reserves. Over the past six presidential administrations, the decision has received unwavering support and the protected areas have truly been protected; they are not the "paper parks" typical of much of the Third World (Fearnside and Ferreira, 1984). To convey the national policy toward biological diversity, government leaders invoke the pithy saying: "salvar, conocer y usar". Unfortunately, the saying loses much of its poetry in translation [mine]: "protect it, understand it, and make use of it." "Salvar" was achieved through legal protection and enforcement from the early 1970s onwards. "Conocer" is an ongoing endeavor which, given the macro and micro complexities of biological diversity, will literally take centuries of dedicated research (one biologist estimated it would take ten years to enumerate all the species in one hectare of Costa Rican rainforest [Whitmore, 1986]). "Usar" is the realization of the aforementioned six values of biological diversity that can generate revenues without endangering that biological diversity, viz., Existence, Ecotourism, Environmental Services, Sustainable Agriculture, Extractivism, and Bioprospecting. In the realization of each one of these values, Costa Rica is at the cutting edge and, were it not for the desirability of regional representation in this White Paper, all six cases could have been drawn from just Costa Rica. Such an achievement is a hopeful sign for every country in Latin America and the Caribbean: small size in both physical and economic terms is no barrier to a broad based program of sustainable development.

At the forefront of sustainable development in Costa Rica is ecotourism. In recent years, tourism has become the largest export, surpassing both coffee and bananas. The major pull to Costa Rica for foreign tourists is the beauty of its natural environment. However, until 1994, Costa Rica had not applied economic analysis to determine the optimal price of admission to its national parks. This lacuna in policy did not escape President Jose Maria Figueres (1994, p. 200) who, on 9 May 1994, just one day after taking office, suggested a change in policy:

"We are talking about charging an adequate entrance fee for our national parks. For the international tourist who pays $600 for an airplane ticket to come to see, for example, Manuel Antonio National Park, it does not make any sense to charge $2.50 to enter the park. Equally, we should not be charging an excess. But $10-15 is still a bargain for what Manuel Antonio offers, and this income will permit us to invest in our national parks. We should join this with a system of international reservations, because it bothers me very much that Manuel Antonio is receiving too many visitors and is being damaged. Ideally, when one makes one's hotel and car reservations before coming to Costa Rica, one should also make a reservation for entrance to Manuel Antonio. Then, 80% of the tourist load of Manuel Antonio could be reserved internationally, and the other 20% could be for those who arrive without reservations. But also we should have an entrance fee that is different for Costa Ricans, and above all for children and high school students, who ought to have access to our natural resources."

There is much economic acumen in the President's remarks. Take, for example, the suggestion of a system of international reservations. Imagine that Northern consumers know that a particular park is fully booked ahead of time and that they will be denied entrance. Indeed, the Manuel Antonio, Irazu, and Poas Parks are approaching carrying capacity. Through a system of international reservations, Northerners would be able to book their holiday another time and, therefore, not only would the Park capture more demand over time (fewer people would be turned away) but private capital (hotels, restaurants, transport, etc.) would also be more fully utilized. Alternatively, the tourist could book another park which was not yet full. Any shift of demand to other parks also enhances the overall utilization of capital. Such a system could be implemented at low cost and result in a tremendous increment in revenues. Once operative, policy makers would also be able to estimate the temporal demand function for each park and charge premia for peak times and discount tickets for the off season, thus also enhancing efficiency.

The President's casual perception regarding the price of admission also makes much economic sense. Three months after Figueres' speech, Gallup of Central America (1994) released its study on the National Parks, sponsored by the government. Among its many conclusions was the suggestion that the price of admission be raised from USD 1 to USD 4 for foreign tourists. The price of USD 1 for Costa Ricans would be maintained. The new administration acted swiftly on these findings and in September increased the price to USD 15 for foreign tourists across the Park System. At first, the price hike seemed a terrible mistake, both politically and economically. Not all the parks faced the same price elasticity of demand. The sudden drop in attendance at some of the park sites caused spill-over effects in the local communities and strong resentment against the Ministry of Environment and Energy. The reaction even became violent as witnessed by the physical expulsion of a park guard in the Caribbean beach resort, Cahuita and the temporary free admission to the park. However, one suspects that the initial shock of the USD 15 price was not so much a miscalculation as a very shrewd bargaining strategy: once people vented their anger at the high price of USD 15 they would be more willing to settle for the target admission price of USD 4.

The policy also drew harsh criticism from experts on park management. Wallace et al. (1995, pp. 6 and 16) expressed the following opinion "[there is the] tendency to put too much emphasis on the price of admission which is only one of many available and necessary mechanisms to manage visitors; nevertheless it becomes the most utilized and important, simply because the revenues are perceived and it is easy to implement. It does not take into account the negative impacts caused by just one mechanism, e.g., discrimination against certain users...It is worth pointing out that there are few protected areas in the world that can financially support themselves just through tourism. Any government that deludes itself with such a fantasy will have an underfinanced system of protected areas, and in the long run, low visitation due to the high price of admission" (translation by author).

One can interpret the criticism in the language of the theoretical introduction to this White Paper. The MRS of tourism, just one of the six values that can be captured from conserving biological diversity, should not be confused with the aggregate of all six values, Sigma MRS. In other words, Wallace et al. are asserting that there is a tendency among policymakers to equate MRS of just tourism with the MRT of Equation (1). Clearly this would be folly. Nevertheless, it would also be an economic mistake to believe that the current price of admission necessarily equals the MRS of tourism. The very worst mistake would be to adjust park size until the current Sigma MRS equals MRT. The humble alternative to bankrupt economics is to raise each component MRS until the aggregate of all values, Sigma MRS, equals MRT thereby alleviating political pressures to relax the safe minimum standard. To achieve this for the component MRS ecotourism, one must inculcate a "green profile" among young Costa Ricans so that they will not only exhibit a higher willingness to pay for admission to their protected areas but also tolerate the opportunity costs of the current policy that protects 25% of the national territory.

The differential price of admission between Costa Ricans and foreigners should be justified as a subsidy to the former rather than as a tax on the latter. Moreover, the discount to Costa Ricans in the price of admission reflects their opportunity costs in protecting 25% of the national territory. Unfortunately, there is no explanation at the park entrances as to why Costa Ricans and foreigners pay different prices. This oversight can be remedied cheaply. A simple sign at the entrance to each Park or even on the obverse of the ticket should read in English (the lingua franca of tourism): "For the past twenty years, Costa Rican have subsidized the National Park System with an estimated USD 2 billion of forgone revenue. Hence, the difference in the admission price for Costa Ricans and non-Costa Ricans. Thank you for your support."

In public speeches, the Minister of the Environment and Energy, Rene Castro, outlines a strategy for the parks that captures much of the above reasoning. He illustrates the strategy with an analogy entitled "From the Opera to the Stadium".

"The conservation areas of Costa Rica should be like the opera: a select public (researchers, students, lovers of nature) that pay to admire our biodiversity ('Domingo, Pavarotti, and Carreras') in a theatre ('conservation area') at a price that permits maintenance of the area, its infrastructure, research, education and extension programs and protection." (translation by author)

At first the analogy may sound a bit elitist, however as Castro fleshes out the analogy, one sees that the intent is quite the opposite:

"Like that which occurs in the opera - the popularization of its stars - Costa Rica should popularize its biodiversity, taking it to the stadiums and just like that which happens with concerts, the greatest incomes will be generated there. These stadiums will be the private reserves, in which the tourists that do not understand much about biodiversity will enjoy it and, in one way or another, will help to safeguard the permanence of such areas" (translation by author).

Castro's analogy will resonate among heterodox economists. Preferences are no longer seen as something stable and given but as something malleable and deterministic. Inasmuch as certain preferences generate positive externalities, government intervention is justifiable in shaping them. Even mainstream economists are not totally unsympathetic to this argument. For example, the economist Henry C. Wallich (1960; 1965, p. 44) coincidentally used the same opera analogy in his book The Cost of Freedom: "To rate an attendance at the opera and a visit to an (inexpensive) nightclub as equivalents, because the market puts a similar price on them, goes against my grain. So does the equation of a dollar's worth of education and a dollar's worth of chromium on an automobile. And a plausible case would probably be made, on the basis of the evolution of the species, that opera and education do represent more advanced forms of consumption."

Through selective subsidies, the Costa Rican government would like to promote "more advanced forms of consumption." Hence, "economic development" is no longer measured by just the typical capital to labor ratio (K/L) but also by the emergence of a "green profile" of preferences. This can be gleaned from the suggestion in the aforementioned speech by President Figueres that entrance fees to the parks be different for children and high school students - regardless of the revenues lost (when the park reaches carrying capacity). Interestingly, such intervention in the formation of preferences does not necessarily contradict a market-oriented approach to sustainable development. Castro acknowledges that the government is not the best provider for many of the services that are complementary to the protected areas (e.g., rafting, horseback riding, restaurants, accommodations, nurseries that provide photo opportunities with animals, etc.) and the Ministry has actively promoted private reserves in the surrounding areas through the Costa Rican Network of Private Reserves (the 100 largest account for 150 thousand has. of forest cover). One can explain the logical consistency of government intervention into the formation of preferences and government abandonment of ancillary services to the private sector in terms of cost effectiveness. The government is selecting activities that it believes it can do best: whereas, say, rafting is not cost effective, the inculcation of a green profile is. To the extent that inculcation is an information good with high fixed costs and low marginal costs, government intervention makes tremendous economic sense (see Sustainable Agriculture [Case 4] for a similar economic argument regarding the generation of knowledge).

Although the decision to change the price of admission of the parks is basically the outcome of a political process, the decision as to how much to change that price cannot be resolved by rhetoric. It must be resolved by careful data collection, statistical analysis, and microeconomic reasoning. Since 1994, the Costa Rican government has continued to undertake scientifically rigorous studies of the parks to understand the demand function for each park and how to generate more revenues. For example, in 1996, the Programa Ambiental of the University of Costa Rica (ProAmbi) released a short synopsis of its survey findings entitled "Aspectos mas relevantes de los resultados del proyecto de manejo de visitacion" ("The Most Relevant Aspects of the Results of the Park Visitation Management Project" [translation by author], sponsored by the InterAmerican Development Bank and the Ministry of the Environment and Energy (IDB-MINAE). Among the results are the following: the most common way to arrive at the national parks were 51% in private cars, 18% in public transport, and 11% in tours. For foreigners, the composition varied in 33% in tours, 29% in rented cars, and 15% in public transport. Using these statistics, microeconomic reasoning can be deployed to enhance revenues. For example, the method of arrival is very important in the willingness to pay admission. Assume for the sake of illustration that the average foreigner spends 8 days in Costa Rica and the price of the airfare and hotel are USD 1,000. Recall that the primary pull to Costa Rica is the natural beauty of the country. At a hypothetical price of admission per park of USD 15, with three parks visited, the price for a tour package including admission to all three parks, hotel, and airfare will rise from USD 1000 to 1045. The tourist will not feel the pain and is probably willing to pay the extra USD 45 (in economic terminology, his or her demand is inelastic). This same average tourist should also be willing to pay the USD 15 differential at each park entrance if his package tour were only USD 1000, generating the same budget for the trip, USD 1045. However, people do not exhibit such mathematical rationality. Tourists become more hesitant to pay the extra USD 15 once in Costa Rica than had the price already been incorporated in a package before arrival. Although such behavior is an anomaly for neoclassical economics, it is totally predictable from a Skinnerian psychological approach to consumer behavior (Alhadeff, 1982). One would expect such inelasticity for both the prepaid package tours and individual tourists arriving by public transport (once at the gate, one might as well go in) but less so with the rented car. Survey data enable such marketing decisions regarding differential prices and discounts to be made wisely.

Another useful statistic for planning purposes is the perception that the parks are crowded. The surveys found that the 82% of the foreigners and 71% of the nationals stated that they found the parks little or not crowded. The higher incidence of this perception among foreigners probably reflects the different population densities between, say, Costa Rica and the place of origin of the tourists (New York, London, Amsterdam). At what point do hordes of tourists deprive each individual tourist of the sense of wilderness? One suspects that quite often the social carrying capacity will precede the ecological carrying capacity of a park. Armed with such knowledge, the government can gear public advertisements toward foreigners and Costa Ricans as to when is the best time to visit particular parks thereby spreading out the demand and enhancing both the utilization of capital and enjoyment of the park.

There is still much work that can be done based on the survey results. For example, ProAmbi should do a follow-up survey in order to analyze any divergence between expectations and reality with respect to planned visitations to the parks. The 1996 survey reports that 38% of foreign tourists said they intended to visit only one park, the remaining 62% were thinking of visiting 2 parks or more, and of those, 39% would visit more than three parks, and 28% more than four parks. Such information should be augmented by a random sample of tourists exiting the country to establish how many parks they actually visited during their stay. When the expectation and the reality are significantly different, one must seek causes and ascertain whether the problem can be remedied in a cost effective fashion. For example, if one discovers that the cause for fewer visitations than expected is time lost in ascertaining schedules of departures of tours or public transport, the remedy is obvious. At low cost, the Ministry of the Environment and Energy could publish weekly timetables and distribute them in hotel lobbies.

Survey data afford not only policy implications for the marketing of existing parks but also policy implications as to how the parks should be improved. Figueroa et al. (1996) of ProAmbi and the InterAmerican Development Bank performed a sophisticated econometric analysis of the demand function for each one of the parks in its final report entitled "Informe Final: Evaluacion economica del proyecto de inversion para el sistema nacional de areas de conservacion (SNAC) de Costa Rica" ("Final Report: Economic Evaluation for Investment Projects for the National System of Conservation Areas of Costa Rica" [trans. mine]) The baseline for the analysis was the demand for the current state of the park and what it would have been had certain improvements been made. The econometricians used "dummy variables" to enable comparison of demand functions where the parks were distinct. The econometric studies separated out private demand (the willingness to pay) and incorporated all the social benefits to see if, incrementally, the improvement would be socially worthwhile, i.e., Delta Sigma MRS>Delta MRT. An important point to remember is that the studies were made prior to any commitment of the multilateral agencies to finance the improvements. However, should such funding suddenly become available, the Park System could take off the shelf a project with supporting analysis, ready to go. Such preparedness can also be proactive. With a portfolio in hand, the government can also better sell Costa Rica as a destination for international moneys earmarked for sustainable development.

Returning to the central theme of this case study, the hard nose economist may ask: What has been the change in revenue with the change in the price of admission? Since the initial price shock of USD 15 in 1994, the price of admission to the parks has been readjusted downward and is now USD 5 for foreigners and remains USD 1 for Costa Ricans. To see how the increased price has generated more income, one need only compare the income statistics of the National Park System ^a since the policy went into effect. Income from admissions in 1994 was 200 million colones (roughly 1 million USD); in 1995 it rose to 500 million (2.5 million USD); and in 1996 it is estimated to reach 600 million colones (3 million USD). However, due to the increased price, some isolated cases of kidnappings, and the contraction of the tourist market due to the opening of Cuba and other cheaper destinations, visitation at the parks declined 50% in 1995-96. So one sees that despite the fall in Park attendance by 50%, revenues have nevertheless increased threefold! From the viewpoint of revenue enhancement, this is a tremendous success.

Ecotourism (Case 2): The Marine Park, Saba, Netherlands Antilles

The economics of reef preservation lends itself well to the theoretical framework presented in the introduction. Reefs generate multiple externalities only a few of which are capable of being internalized. The most outstanding of these are also the most difficult to internalize: the existence value of their unending beauty and the incubator service for fisheries beyond the reef. To calculate the existence value of reefs, one would have to measure willingness to pay across international borders through the technique known as contingent valuation (see Hanemann, 1994) and then devise mechanisms to assess payments and distribute proceeds. Given the theoretical infancy of such techniques and the stagnant or declining foreign aid by First World governments, the prospects seem dim for institutionalizing existence values. To internalize the incubator service of reefs is no more promising. It would require tracking the origin of fish and coordinating compensation with those who benefit in other jurisdictions or in international waters. Because ocean currents disperse fish larvae, the reef on to which the larvae ultimately affix is not predictable. Once a certain level of development is reached, fish tend to settle onto the reef and remain there the rest of their lives. Theoretically, if one could track the life history of each fish caught, then one could charge for the service of incubation provided by reefs up-current provided there were some type of international agreement. Perhaps in the future, genetic tests on random samples of larvae and caught fish will become sufficiently cheap to make such internalization feasible. Nevertheless, there would still be the possibility that any given reef may not contribute significantly more than any other reef to justify the transaction costs of internalization. In such a situation, internalization is less desirable than a simple tax on fish with the proceeds distributed to the authorities that protect reefs.

Because reef organisms are sedentary (e.g., sponges), they have often evolved strategies of chemical defense (toxins) not unlike the plant world. These toxins are of extreme interest in medical bioprospecting. Indeed, one of the most promising new fungicides comes from a sponge endemic to a reef off Papua New Guinea and the patented compound has been named papuamine after the country of origin (Emsley, 1994). Unfortunately, the hope of internalizing the value of such bioprospecting is not high. Like the external benefits of a fish hatchery, the beneficiaries of bioprospecting usually lie outside the jurisdiction of the country which generated the benefit. The Convention on Biological Diversity (CBD) attempts to end such free-riding by requiring benefit-sharing with countries of origin. However, samples of organisms collected before the ratification of the CBD are considered public domain as is the case with papuamine. Even more troubling is the fact that the major country of demand for biological samples, the USA, has not ratified the CBD and can bioprospect many of the same organisms in reefs within its own jurisdiction (e.g., the US Virgin Islands, Puerto Rico, and the Florida keys; or in the example of papuamine, Hawaii, Guam, and Samoa). In the long run, multilateral accords will probably emerge that recognize the rights of countries of origin to participate in economic rents whenever they could have supplied the same organism (see Bioprospecting [Case 6] for a similar argument regarding plant medicines). Cooperation toward such multilateral accords is extremely important inasmuch as one quarter of marine biological diversity lies in the reefs (Myers, 1979).

Living reefs also afford another extremely valuable but difficult externality to internalize: the protection of shorelines (Norse, 1993). Here the difficulty arises not because of high transaction costs or foreign jurisdictions, but because of a cognitive bias in the perception of risk. At relatively low cost, meteorologists can estimate the probability of hurricanes and actuaries can calculate what are typical damages to the shoreline with or without a living reef. Premia could then be assessed to those commercial entities that are protected from a living reef (when the reef dies, it disintegrates thus leaving the shoreline unprotected to the surf). One suspects that commercial entities will resist such internalization not just because those entities will want to free ride off the reef but because of a well documented cognitive bias to underestimate the expectation of low probability-high value events (see Tversky and Kahneman, 1974). The rational and risk neutral person would be willing to pay a premium that equals the expected loss of the event, i.e., the probability of the event multiplied by the loss incurred due to the event. However, when probabilities are extremely low, there is the behavioral tendency to confuse the low probability as if the expectation were also low. Hence, people invest in infrastructure in physically risky locations (earthquake zones, scrublands that suffer brush fires, and shore lines susceptible to hurricanes) accepting expected losses that normally they would not. The government could mandate all commercial entities that benefit from the shoreline protection afforded by the reef to contribute the value of that expected benefit toward the maintenance of the reef. However, because of the aforementioned cognitive bias, this solution will be most unpopular and would have to be accompanied by a vigorous educational campaign.

One sees from the previous discussion that reefs have tremendous aggregate economic value (Sigma MRS) even though the most valuable externalities cannot be easily internalized. Fortunately, the opportunity costs of preserving reefs (MRT) is not as high as, say, preserving primary forest. Therefore, the imposition of a "safe minimum standard" through the creation of marine parks will not receive the same resistance as would, say, the creation of a forest reserve (compare the political pressure that can be exerted on the government by large wealthy timber interests to the political pressures exerted by small poor fisherman). To the extent that citizens are law abiding, the mere legal status of "park" is an inexpensive mechanism to protect reefs against immediate threats like anchorage damage, overfishing, irresponsible diving, poaching of coral, dynamite fishing and cyanide poison fishing. To the extent that citizens are not law abiding, such legal protection will have to be supported by policing and a rational penalty structure (the price of the fine must be set so that expectation of being fined, i.e., caught in the misdemeanor times the price of the fine, will be greater than the value of the furtive activity). Given the fiscal meanness of governments worldwide, how can one finance the institutionalization and enforcement of legal protection? The obvious and legitimate solution is to insist that reefs are a quintessential public good that warrant subsidization through taxation (the Pigouvian solution). The case of Saba is outstanding because the Saba Marine Park (SMP)^b was able to become financially self-sufficient without dependence on the obvious and legitimate solution of taxation.

The SMP was established in June 1987 and is administered by the NGO Saba Conservation Foundation which promotes the preservation of the environmental and cultural resources of the island. Similar parks exist elsewhere in the Caribbean and there is already a substantial scientific literature regarding their management (see Dixon, et al., 1993 and 1995). The SMP drew on the experiences of others and was designed using the best principles of coastal management which include the creation and enforcement of zoning for different activities. The rationale for zoning is that many uses are mutually exclusive and zoning reduces user conflicts while at the same time enhancing the capture of the highest value of each use. For example, diving is mutually exclusive with fishing inasmuch as divers do not relish being entangled in transparent fishline or pierced by a sharp hook.

Experienced divers also come to Saba to see big fishes like groupers and snappers which are the same fish sought by fisherman. The value of observing a grouper or snapper is far greater than the value of catching it for food. Although zoning may be the principal cause for greater size of fish, other factors have also contributed. For example, jobs in a recent construction project were more profitable than fishing thereby alleviating the pressure on fish stocks in the fishing zones as well as in the no fishing zones (Roberts et al., 1993, Polunin and Roberts, 1993). This is a very hopeful sign. It means that reef fishing is an inferior good: as higher incomes prevail, the pressure against fish stock abates.

From establishment in 1987 until becoming fully self-financing in 1993, the SMP had spent only USD 345,000 in total.^5

The SMP achieved this feat by internalizing what externalities it could. High on that list was ecotourism, donations, a recompression chamber, and cruise ship tourism (2-300 passengers). This success is all the more amazing when one considers the low price of dive fees, a mere USD 2, and the fact that dive fees constituted one third of the income generated in 1994, USD 50,000 of 153,000. When one also considers that the average overnight tourist spends USD 122 in Saba, one is reminded of President Figueres' remarks quoted in Case 1 (The Optimal Price of Park Admission, Costa Rica), paraphrased for the reality of Saba: "For the international tourist who pays $122 per day to dive in the reefs off Saba, it does not make any sense to charge $2 to enter the marine park." Indeed, surveys conducted in 1994 showed a willingness to pay of USD 5.5 per person per dive. There were 25000 dives in the SMP in 1994 and had the dive fee been adjusted to the willingness to pay (assuming perfect inelasticity), the SMP would have generated another USD 87,500.

Besides the direct externalities of existence, incubator service, bioprospecting, shoreline protection, etc., there are also the pecuniary externalities for the entire Saban economy. In a comprehensive study, Rainald Framhein (1995) assumes that the multiplier for Saba is 1.6 and documents that the SMP has brought to Saba some USD 1.8 million dollars per year of which 86% comes from dive tourists. With an initial investment of only USD 325,000, one can calculate that the break-even point (assuming a linear relationship over time) of the Marine Park occurred within the first few months of its creation. The SMP is a remarkable success and has been well studied and documented. For these reasons, it is ideal for replication elsewhere.

The trouble with success is that one can become complacent and not believe that there is room for improvement. The SMP accounts for the generation of more than 10% of the GDP of Saba (USD 14 million in 1994) and one imagines that if the reef becomes degraded, tourists will choose other destinations (e.g., Australia, Belize, the Galapagos, and the South Pacific). Although the SMP has instituted programs that guarantee degradation will not be from use of the reef, there are other threats to the reef outside the control of park management. Perhaps the greatest is hurricanes.^6

The El Nino phenomenon destroyed the reefs of the Pacific coast of Ecuador in the early 1980s and virtually ended diving there; Hurricane Hugo destroyed much of the reefs in Jamaica in 1989 which, to date, have failed to recover. If something similar were to happen to Saba, it would be not just an environmental tragedy but also an economic one. The rational solution is to insure the reef at least for its pecuniary value to the Saban economy of USD 1.8 million per year. Assuming a market interest rate of 10% per year, such economic protection could be obtained through an insurance policy with a face value of USD 18 million. For the sake of illustration, assume that a devastating hurricane happens once every 200 years, 1/200, then the expected loss per year to GDP is 1/200 X 18 million or USD 90,000. Assume further that the cost of underwriting such insurance is a 100% mark-up of the expected loss, and so, the premium would cost 180,000 per year. Given the fiscal meanness of governments worldwide, who will pay for the insurance of the reef against a devastating hurricane? The obvious and legitimate solution is to insist that reefs are not only a public good but also a national asset that should be insured through taxation (the Pigouvian solution). Nevertheless, perhaps the SMP can defy this logic and achieve self-financing of insurance through judicious pricing of its already internalized externalities.

The easiest and most cost effective adjustment is to raise the dive fee. The Saba Conservation Foundation would have to design clever survey instruments that would reveal willingness to pay for the park across individuals (divers, day trippers, cruise people), estimate the demand function, and calculate the price of admission that maximizes dive fee income. Because the marginal cost of each tourist is fairly constant at USD 1 (divers go out in fixed size groups with guides), the economic problem is to choose the dive fee that maximizes profits for the SMP. This is illustrated in the Figure.

    Figure 1 Hypothetical demand function for dives and determination of profit maximizing price. Compare the areas of the rectangles which represent profit at a price of USD 2 and 15.

Suppose that the profit maximizing dive fee turns out to be USD15 and quantity of dives demanded decreases by 50%. The increment in total income from dive fees from the price increase would be [(15-1)X 25,000 X 0.5] - [(2-1) X 25,000] or USD 150,000. The balance to pay for the insurance premium (USD 180,000-150,000=30,000) could likewise be raised by increasing other fees (recompression unit, mooring fees, etc.).

Because of the irrationality of consumer behavior, it may be wise to hide the increased dive fee in the price of the package tours. Although this may seem unpalatable, one must remember that the risk of a devastating hurricane is also hidden from human perception through a cognitive bias to confuse low probability as if the expectation were also low. Just as irrationality can frustrate optimal allocations, it can also be harnessed to correct such distortions.

III. Environmental Services (Case 3): The Ecological VAT (Value Added Tax){Imposto sobre Circulac o de Mercadorias e Servicos Ecologico [ICMS Ecologico]}, Parana, Brazil

The transformation of taxes into user fees allows the incidence of the tax to fall on the beneficiary of the public good and the finance of that public good to be drawn from the sum of those fees.^7

One can illustrate the efficiency and equity of user fees versus different types of taxes through the example of highway construction. The apportionment of, say, income taxes to finance the construction of highways is more distortive than raising the funds through a tax on the registration of cars: many people who pay income taxes do not own cars and would be subsidizing those who do. Moreover, the owners of cars may not value a dollar's worth of highway as much as a dollar's worth of some other type of consumption. Hence, taxing income to finance highways is both inequitable (non-car owners subsidizing car owners) and inefficient (dollars are spent where they are not most valued). Although a tax on the registration of cars is more equitable and efficient than a tax on income, one should not conclude that a tax on the registration of cars is optimal. Such a tax would overcharge people who own cars but do not use the highway while subsidizing others who use the highway intensively. Theoretically, a toll on the highway appears the optimal solution. A toll is a user fee: one pays in proportion to one's use of the good. However, in practice, there are transaction costs associated with user fees. In the case of highway tolls, there is a growing sentiment in the US that these transaction costs (collection of the toll, increased traffic, and all the associated costs including deaths) warrant the removal of toll booths and the adoption of taxes on gasoline to finance highway construction and maintenance. A general result emerges from this example: the best economic instrument to finance a public good depends largely on the peculiar transaction costs of that good (see Barzel, 1989).

The same complexities in the financing of highways occurs in the financing of environmental services. Urban areas receive multiple environmental services from neighboring rural areas. An outstanding example is the provision of clean water through the maintenance of watersheds. Like the previous example of highway construction, the apportionment of, say, income taxes, to finance the maintenance of watersheds is more distortive than a fee that is based on the use of water. Inasmuch as some individuals may have low taxable profits but nevertheless consume much water (e.g., personae juridica like cheese factories, pig farms or car washes), such individuals would be paying a water bill which does not reflect the costs associated with their share of consumption of water. In terms of both efficiency and equity, the individual should pay a fee that not only reflects the cost of extraction and management of the water consumed by that individual but also part of the opportunity costs of the habitat. Because habitats provide other values (Existence, Ecotourism, Sustainable Agriculture, Extractivism, Bioprospecting), one would not want to assign the opportunity costs of the whole habitat to just one of those values. Instead, one should assign a portion of the opportunity costs to each of the values generated. That portion should equal the percentage contribution of that value to the total value of the habitat, i.e., MRS/Sigma MRS. Therefore, the ideal user fee per unit of the environmental service would charge the beneficiary the average cost of each value.^8

There is probably no government in the world that has succeeded in internalizing the values of a habitat and incorporating pro rata opportunity costs into user fees. Nevertheless, among the existing mechanisms for financing the multiple use of habitats, there are varying degrees of inequities and inefficiencies. Many governments are moving in the right direction. One such example is the State of Parana in southern Brazil. The Instituto Ambiental do Parana (Environmental Institute of Parana, IAP), a state agency, has succeeded in changing the criteria for the distribution of the proceeds of the Value Added Tax (VAT, in Portuguese: Imposto sobre Circulacao de Mercadorias e Servicos [ICMS]) so that providers of environmental services may receive compensation.^9

The VAT accounts for more than 90% of tax revenues collected by the State and, under the new criteria, 5% is now earmarked for the environment. Of that sum, 50% goes to municipalities that maintain watersheds and the other 50% to municipalities that maintain Units of Environmental Conservation which may be outside the watershed. This redistribution of tax revenues was legalized in Complementary Law no. 59 to the State Constitution in 1991 and is known as the Law of the Ecological VAT (Lei do ICMS Ecologico). In 1993, the law was amended in Complementary Law 67/93 (annex) to include indigenous areas as a Unit of Conservation.

In terms of the previous theoretical discussion, the Ecological VAT does not discriminate the level of use by individuals. Each taxpayer pays the VAT according to his or her general consumption which is probably not proportional to his or her consumption of environmental services. Hence, the Ecological VAT does not correct this inefficiency and inequity. The efficiency and equity of the Ecological VAT is achieved on the RHS of the Samuelsonian condition, Equation (1). Those who are providing environmental services are now being compensated for a part of the opportunity costs of protection of the habitat and those who perform better are compensated more. Quite correctly, formulas for performance indices are written right into the law and are beyond political manipulation.

The mechanism for the implementation of the Ecological VAT follows four steps:

1. collection and processing of data regarding areas of conservation for each municipality
2. calculation of the indices for fiscal compensation with reference to water-sheds and units of conservation
3. publication of the results
4. periodic evaluation of the process.

Any municipality that maintains areas of conservation through land use ordinances can benefit from the law. First, the municipality must register its areas in the State Cadastre of Conservation Units administered by the IAP which is also responsible for all the technical details of implementation. For example, the IAP will conduct scientific analyses to determine the physical, chemical, and bacteriological parameters of water samples and then calculate the index for the municipality. Through such indexation, the municipality has an incentive to invest in activities that would enhance water quality and thereby improve the index. Likewise, should the municipality let the water quality deteriorate, the index would fall and so too would its share of the Ecological VAT. The incentives are working as evidenced by a 68% improvement in water quality in 1995 as municipalities undertook measures that cost less than the incremental income obtained via a higher index. The data to compute the indices are collected yearly and the results are published. Transparency is maintained at all times.

The success of the Ecological VAT can also be seen in the level of participation and the distribution of revenues. In 1995 there were 170 registered units in the Cadastre and the estimate for 1996 is 190 units. The reform has had a large impact on rural municipalities situated in watersheds for urban areas. Some of these watersheds are as large as 1,500 km^2 and their physical size figures into the calculation of the index of compensation. In total there are 38 hydrographic basins which could be covered by the Ecological VAT Law comprising an area of 8,000 km^2. Some 71 rural communities have already benefited. An outstanding example is the municipality of Piraquara which serves as the watershed for the metropolitan region of Curitiba, a city of some 1.5 million people. Proceeds from the Ecological VAT now account for 85% of the municipal budget of Piraquara, making water its greatest asset. Other successful impacts can be seen in the municipality of Ceu Azul. Approximately 80% of the municipality lies within the National Park of Iguacu and the Ecological VAT has relieved development pressures. Another municipality that has benefited greatly is Guaraquecaba located on the Parana coast. Guaraquecaba has extensive mangrove forests and since the institutionalization of the Ecological VAT, municipal tax revenues have multiplied sixfold permitting the launching of several social welfare projects.

In as much as the total sum of the Ecological VAT is fixed at 5% of the VAT, rewards for performance are dependent upon relative improvement and not absolute improvements. For example, if all municipalities improve the water quality equally, none will receive greater compensation because the index of each would have increased proportionally. Although such competition may be good to foment improvements, at some point, municipalities may become frustrated that an investment has been made, the results obtained, but no more funds are forthcoming. A benchmark year should be established and if the environmental quality improves across the board, then the percentage of the total VAT proceeds dedicated to the Ecological VAT should either increase or additional fees should be imposed on the heaviest users of water (e.g., cheese factories, pig farms, or car washes). Unfortunately, one suspects that any attempt to institutionalize fees on the heaviest users and further compensate providers will meet with stiff resistance due to a flaw inherent in all democracy: the interests of industry are concentrated and can organize to lobby governments against reform; in contrast, the interests of providers may be too dispersed to facilitate organization and lobby governments for reform (see, Olsen, 1965 for the theoretical explanation of this argument). Although user fees are a move in the right direction, the challenge for IAP would be to reduce the transaction costs, both technical and political, in implementing them.

Recall that the best instrument for the finance of a public good ultimately depends on the peculiarities of the transactions costs of that public good. In the example of highway construction, tolls seem to be the most efficient and equitable mechanism but yet the transaction costs are so high that taxes on gasoline are preferred. Perhaps the same will be true in the comparison of the Ecological VAT vs. a user fee. In 1995, the State of Parana distributed 30 million dollars to the municipalities through the implementation of the Ecological VAT^c at an incremental administrative cost of only 32 thousand dollars. Such success is truly phenomenal.

IV. Sustainable Agriculture,Case (4): Centro Fatima, Pastaza, Ecuador.

One of the greatest tragedies of the late twentieth century has been the expansion of cattle ranching into the tropics. Primary forests were cleared for pasture despite thin soils and heavy rains. The resulting erosion guaranteed that cattle-grazing would be a short-lived enterprise. Ranchers would have to abandon their clearings and move on to virgin forest as the fertility of their pastures quickly gave out. Private investors and government agencies ignored the social costs of the deforestation which, combined with high interest rates, made cattle look attractive in the calculus of net present value. Indeed, the impetus to adopt sustainable development in the Third World owes much to the scale of cattle ranching in the Amazon basin and its blatant unsustainability (Hecht and Cockburn, 1990). The demand for cattle was fuelled by a worldwide shift in diet away from vegetable protein and toward beef. One may question whether the pervasive "hamburger culture" will persist over time as more and more people come to understand and suffer the insalubrious effects of a diet loaded in animal fat. Given the expected instability of this widespread preference for beef and the magnitude of the negative externalities of deforestation, it seems almost certain the aggregate value of the services of the primary forest would have been of greater value than the cattle which replaced it. In terms of the Equation (1) elaborated in the theoretical introduction to this White Paper, the LHS>>RHS. The rational alternative to pasture is not only to preserve the pockets of primary forests that remain in the Amazon but also to give some lebensraum to species which may have been cornered into those pockets (see the discussion of "the living dead" species in Extractivism, Case [5]). Despite the disappearance of much primary forest, there is still reason for hope. Forests can return and the native flora and fauna adapted to secondary growth will find an expanding niche. In the language of economics, the challenge is to try to internalize the externalities of the biological diversity in these newly created buffer zones to the extant primary forests.

One external benefit that can be internalized is the management and harvesting of the native flora and fauna. To the extent that such management and harvesting do not permanently degrade the local ecosystem nor homogenize the biological base, such activities can be classified as sustainable agriculture. However, the term should be distinguished from forest gardening or management of game which are more closely associated with extractivism. Sustainable agriculture changes the distribution of flora and fauna toward significantly higher representation of the commercially viable species than would be found in natural conditions. Nevertheless, many useful species cannot be semi- domesticated and one must deploy techniques from game management and sustainable extractivism.

A key concept to sustainable agriculture is the acceptance of a multiplicity of useful species and a rejection of monocultures. In the case of flora, such farming requires careful analysis of plant physiology and ecology. In the case of fauna, such farming requires not only a careful analysis of physiology and ecology but also the sociobiology of the native animals. Unfortunately, urban advocates of sustainable agriculture tend to embrace a romantic fantasy of rugged individualism; pioneering families that go to the forest edge and harvest the native flora and fauna without any outside assistance. The reality is quite different. In order for sustainable agriculture to yield even a modest livelihood, the same scientific principles that underpin the Green Revolution of monocultures or the zootechnology of cattle ranching must now be directed toward establishing a science of sustainable agriculture. The failure of the Green Revolution and zootechnology is not an indictment against science itself but rather an indictment against its misapplication to, respectively, monocultures and cattle. Both the rigor and precision of the scientific method are now needed to ascertain the best methods for the optimal sustainable yield of native organisms.^10

The establishment of a scientific basis for sustainable agriculture is an example of a pure public good: the consumption by one person of such knowledge does not prevent others from simultaneously consuming the same knowledge. Compare, for example, the physical state of a technical article on the reproduction of a native species after consumption of that article (reading it) and the physical state of an apple after consumption of that apple (eating it): in the former, the product still exists for others to consume; in the latter the product is literally being digested. Because of the "public goodness" of knowledge, each potential consumer of knowledge has an incentive to let someone else generate it and then free ride. Not surprisingly, the total quantity of knowledge generated in society is less than that which would be warranted by its worth. In terms of Equation (1), the Samuelsonian condition, the market tends to generate a suboptimal allocation of knowledge and the LHS>>RHS. The economic question arises: Should such knowledge be internalized through the establishment of intellectual property rights (the Coasian solution) or should it be subsidized by government (the Pigouvian solution) and thrown into the public domain?

In the case of the generation of knowledge on sustainable agriculture, the most efficient solution is probably the Pigouvian: government subsidy of the systematization of knowledge learned about native species and release of that knowledge into the public domain. For example, the transaction costs of negotiating every detail of animal husbandry learned in an experimental station with tens of thousands of farmers spread over the Amazon basin would be huge, probably far greater than the value of the knowledge. It makes much more sense for government to subsidize such experimental stations and diffuse the knowledge acquired at the stations free of charge to the tens of thousands of farmers who could benefit. However, the same strategy would not be optimal for medicinal plants. As will be seen in Bioprospecting (Case 6), the potential demand for medicinal plants is so much greater than, say, the knowledge of how to feed a tapir without getting bitten, that the transaction costs are surmountable for the former but not the latter. To think that we must adopt either the Pigouvian or the Coasian solution for all knowledge about flora and fauna is to commit the fallacy of composition: to believe that what is true of the part is also true of the whole.

The Centro Fatima^d in Pastaza, Ecuador is an experimental station of the Organizacion de Pueblos Indigenas de Pastaza (Organization of Indigenous Peoples of Pastaza, OPIP) dedicated to the study and eventual commercialization of native species of secondary growth forest: it should be seen as an antecedent to future small farms predicated on the science of sustainable agriculture. The Center is located in the uplands of the western Amazon (900 m) which was one of the first areas in all of the Amazon to experience colonization in the late 1940s. The station is minute when measured on an Amazonian scale and comprises a mere 28 has. The vegetation is secondary growth forest and was naturally re-seeded from small patches of primary vegetation on the steeper slopes of the property and the still untouched "Blue Mountains" some 50 km to the west in the foothills to the Andes. There are streams that cross the farm and have been dammed to create holding areas for alligators and turtles. Evidence of the failure of cattle-grazing can be seen in the price of land in the surrounding community. A hectare of degraded pasture may sell for as little as USD 160 and the Center hopes to incorporate an adjoining 100 has. if its budget allows such expansion.

The Center is directed by Medardo Tapia, a university graduate in agronomy. Both Mr. Tapia and his wife, Ruth Arias, have dedicated themselves to the systematic study of tapirs, capybaras, collared peccaries, pacas, black agoutis, Salvin's currassows and native turkeys. The Tapias are well educated and reflect a generation of agronomists and educators who, upon graduation from Latin American universities, could not find meaningful work in their profession. Both share the entrepreneurial trait known as locus of control (LOC), the psychological orientation that one can make a difference in the world (see, for example, Brockhaus and Nord, 1982). The Center started in 1986 in collaboration with OPIP, the Escuela Politecnica de Chimborazo (The Polytechnical School of Chimborazo, ESPOCH) and the Provincial Council of Pastaza. Today, OPIP is solely responsible for the Center. The Tapias joined the Center with the intention of raising native flora but found fauna more rewarding. Over the years, they have experienced tremendous financial struggles and are often viewed as rather eccentric by neighboring farmers. Nevertheless, as the station receives much outside attention, acceptance widens in the local community. Although the Tapias are of fair complexions and are originally from urban Riobamba, they have also won acceptance by the indigenous people and their representatives. Both see the Center as an emerging model of sustainable agriculture and a local focal point for education and community political action. The success of Centro Fatima was recognized nationally in 1994 when Mr. Tapia received the Blue Planet Award, the Ecuadorian prize for ecological merit given to just one individual that year.

It should be emphasized that the Center is not yet a financially sustainable farm. It is an experimental station that will enable the emergence of future commercial farms. This point escapes many economists who visit the farm and are somewhat anxious to know the profitability of the operation. Mr. Tapia pokes fun at one visiting German economist who granted that the farm was fascinating, but insisted on questioning him, over and over again, on its profitability. Mr. Tapia is not obsessed with whether or not the farm is profitable. Profits are not his primary objective. He seeks a way of life that is meaningful and that will sustain his family. In the language of theoretical microeconomics, the behavior he and his wife exhibit can best be modeled by the assumptions of "satisficing" rather than "maximizing" (see Simon, 1959). This distinction is of utmost importance: even if just a low percentage of young Latin American agronomists are "satisficing", the total number may be enough to launch sustainable farms throughout the Amazon basin. One must also not conclude that such individuals are destined to subsistence incomes. In the academic literature of successful entrepreneurs of the North, whose success is measured in tens of millions of dollars, very few state that their original objective was to make money (see Casson, 1982). Rather it was an obsession to do whatever they were doing extremely well. Financial success is often a byproduct of excellence. The Tapias share such passion and for them there is no dichotomy between work and leisure. They achieve what E.F. Schumacher (1973, p. 52) envisioned in his famous book Small is Beautiful: Economics as if People Mattered: "work and leisure are complementary parts of the same living process and cannot be separated without destroying the joy of work and the bliss of leisure."

The space constraint of this White Paper does not permit the author to review the rich detail of the research conducted at Centro Fatima on the seven species under study nor on the sophisticated systems analysis of the material-energy flows of the station. The interested reader should refer him/herself to the 100 page scientific document available in Spanish through Centro Fatima entitled Sistematizacion del proyecto de domesticacion, manejo y produccion de cinco especies de mamiferos silvestres y dos especies de aves de la amazonia ecuatoriana, (Tapia, Arias, and Schultz, 1996; Systematization in the Project of Domestication, Management, and Production of Five Species of Wild Mammals and Two Species of Birds from the Ecuadorian Amazon, [Author's translation]). However, to give a flavor of the work carried out at the Center, the most important of the species studied, in terms of its financial potential for sustainable agriculture, will be briefly sketched: the tapir (Tapirus terrestris).

In The Diversity of Life, Wilson (1993) quips that animals which were slow, large, and tasty were high on the list for extinction. Perhaps there is a converse to this quip: if not yet extinct, that which is slow, large, and tasty may be an excellent candidate for sustainable agriculture. With the exception of slowness, the tapir seems to fit this bill (perhaps its speed enabled it to escape extinction). The tapir resembles a pig although phylogenetically it is closer to the horse or rhinoceros. An adult tapir measures 0.8-1.1 m in height, and 1.7-2.01 m in length, and weighs between 227-250 kg. With the assistance of visiting graduate students from ESPOCH, the Center has collected quantitative details on the tapir (e.g., heart and respiratory frequencies, body temperature, number of red and white blood corpuscles, and average percentage hemoglobin) as well as more qualitative characteristics regarding its ecology and sociobiology. The tapir grazes primarily on undergrowth up to 1.5 m in height and does not uproot the plants. When suffering from parasites, the tapir is believed to choose certain plant species. At Centro Fatima, the tapirs have been observed to eat over a hundred different species, consuming per year an estimated 3,140 kg per animal. The carrying capacity of the land per individual tapir is estimated between 1.1-1.6 ha and of the 7 individuals that roam the 22 has. of secondary growth at Centro Fatima, there is no evidence of overgrazing.

The sociobiology of the tapirs is also fascinating. The tapir is solitary except during heat and nursing of the young. The female is sexually receptive every two months and procreation seems to be synchronized to the fruit-bearing epoch of some plant species. The female is in oestrus for approximately 15 days during which she becomes quite anxious. During heat, she will nibble on the ears and feet of the male and run in increasing large circles. Oestrus is evidenced by yellowish vaginal secretions. The tapirs communicate by chirps that almost sound like a bird and the chirps of the female are louder during oestrus. The gestation period is from 390-400 days. Contrary to reports in the established literature that tapirs only give birth in water, a tapir at the Center was observed giving birth to one offspring in a patch of primary forest even though water was nearby. Tapirs can give birth to twins. The young will communicate with the mother by slightly softer chirps and are nursed at night and weaned after five months. Despite its rotund shape, the tapir is fairly swift and is a good swimmer especially when being attacked by one of its predators, viz., man, jaguars, the boa or anaconda. Water is also the favored location for defecation.

The tapir is docile toward man and hence management of the animal is relatively easy. An indigenous person describes the tapir as follows: "The animal is very sociable. Taken as a pup, one can easily tame it; it knows how to behave near the house; it goes to eat in the mountain and then returns to sleep near the house." (Bianchi 1981, quoted in Tapia, Arias, and Schultz, 1996, p. 20). Nevertheless, between the two varieties of tapir, the brown and the black, the black appears to be the more aggressive. Members of the Quichua ethnic group in the region have further classified tapirs into four varieties: the big, the small black, the red, and the reddish brown. Unfortunately, genetic tests (e.g., electrophoresis) have still not been conducted which could elucidate the phylogenetic relationship among the varieties.

As fascinating as the biology of the tapir may be, many readers will share the German economist's fixation with profitability. Is "tapir-culture" profitable? The answer lies in the application of the aforementioned biology. The tapir requires no inputs in terms of bought food, medicine, or parasiticides and very little labor (the Centro Fatima has only one manual laborer). Once one knows its physiology, ecology, and sociobiology, management is fairly easy. The meat of a tapir is considered delicious and an adult tapir can presently fetch USD 330 in the local market. Given that the carrying capacity of the tapir is 1.1-1.6 has. and the young reach maturity in 2 to 3 years, the revenue generated per hectare per year by the tapir is roughly USD 100. Recall that the there are other useful species co-existing in roughly the same environs all with their own commercial utility as well as the other values of sustainable reserves, i.e., existence, ecotourism, etc. Recall also that the value of degraded pasture in the abutting properties to the Center is as low as USD 160 per ha. To make the economic calculation of profit, one would have to aggregate all these values and subtract out the cost of capital (basically the land and rudimentary infrastructure of fences), the inputs (minimal supplies and pro rata share of the one manual laborer), and the opportunity costs of the Tapias. Given the very low costs of the first two items, it is this last item which determines the "profitability" of the Center as a commercial farm. However, as previously mentioned, the Tapias do not view the Center as a "job" but rather as way of life that they have chosen. Hence, cold cost-benefit analysis is not truly meaningful.

The Tapias should continue to publicize the work of the Center and put the results in the public domain. The profitability of sustainable agriculture throughout the Amazon basin will depend heavily upon the data they and similar centers amass regarding seemingly esoteric details of the physiology, ecology, and sociobiology of the native fauna of secondary growth forests. Such centers should exist in every country in the Amazon basin and networks should be established to share the knowledge generated and coordinate efforts to avoid duplication. The government in each country of the region as well as international agencies should financially support the generation of this most valuable information - a pure public good.

V. Extractivism (Case 5): The Sea Turtle Conservation Project, Reserva de Usos Multiples en Barra de Santiago (The Multiple Use Reserve at Barra de Santiago), El Salvador.

The theoretical foundation for extractivism is grounded in evolutionary biology. Members of any species can produce many more offspring than can be supported by the ecosystem. Through both selective pressures from the environment and competition for resources among members of the same species (conspecifics), most offspring do not reach maturity. This simple observation is the backbone of evolution. In a famous passage in The Origin of Species, Charles Darwin (facsimile of 1859 edition, Adler [ed.], 1952, 33) commented that if the average number of offspring born to a female elephant over her reproductive life, a mere six, all survived and went on to have six offspring in turn, the original pair of breeding elephants would become 19 million strong in just 750 years. Obviously, some mechanism exists to dampen this potential. Darwin observed that some offspring exhibit characteristics which will enable them to capture fewer resources than their conspecifics and that these individuals will be selected against in "the struggle for existence." The characteristics of the survivors are not so much selected "for" as simply the characteristics that remain when conspecifics are eliminated. Darwin called this mechanism "descent with modification by means of natural selection". Elephants have few offspring and, compared to sea turtles, a relatively large fraction of elephant offspring do survive into adulthood (approximately 30%); ecologists classify this reproductive strategy as k-selected. Sea turtles have many more offspring (thousands over their reproductive lives) and very few survive to maturity (less than 1% from any nest); sea turtles are considered r-selected.

The upper limit of population for a given species in an ecosystem is known as its carrying capacity and is represented in the scientific literature by the capital letter K. If one harvests a portion of an adult population, then one can expect that the offspring that have not yet reached maturity will find the competition for resources among conspecifics less tough, or to put it in the language of ecology, the offspring will find themselves in a relatively open niche. More offspring will reach maturity and the population will expand to its upper limit K. The speed of restoration will depend on whether the species is r or k-selected. Elephants will rebound slowly from low population levels because they are k-selected but sea turtles can be expected to rebound fairly quickly because they are r-selected. However, if one harvests too many individuals from a population, then the species will be put in tremendous peril despite the openness of the niche. The danger arises from either accidents (e.g., storms, fires, freezes) or inbreeding (the expression of homozygous recessive genes which are usually deleterious). The tropical ecologist Daniel Janzen (1986) has wryly nicknamed small endangered populations "the living dead"-they live and seem to thrive in an open niche but over time they are doomed to extinction. Hence, the trick to sustainable extractivism is to harvest enough members of a population in order to make extractivism profitable without threatening the species by reducing the population to a nonviable size. The dynamics of such sustainable extractivism are sufficiently robust to apply across species, from elephants to sea turtles, and can be represented in a single diagram (see Figure 2).

The ordinate refers to the adult population (not the infant population), the abscissa, time, and the origin is extinction. Without human selective pressures, an adult population at level B would move toward the carrying capacity K at which time the population would be kept in check by competition for resources among conspecifics. A population at carrying capacity reflects the natural condition and can be considered an indicator of a healthy ecosystem. In the case of sea turtles, the number of adults have been drastically reduced because of both direct predation for meat and shell as well as indirect pressures from shrimp nets which drown the turtles. Hence, one suspects that the niche at sea is fairly open for offspring. This scenario is portrayed at time t2 when the hypothetical population B has potential to move toward K if human selective pressures like shrimp nets were removed. The expansion would take place in time (t3-t2). An alternative scenario is a population so depleted by commercial fishing that its numbers are at or below point A. In such a case, it is only a matter of time, t1, before the species goes extinct. It is "the living dead".

To this basic ecological framework, one can add some more specifics regarding the biology of sea turtles. When one considers that under natural conditions, less than 1% of the eggs of any nest would hatch and survive to reach maturity, one realizes the tremendous potential for the sustainable extraction of the eggs. If one could guarantee the survival of that 1% of eggs, then one could theoretically harvest 99% and still allow a slow restoration from t2 to t3 of the sea turtle populations to their carrying capacity K. So, if one intervenes to protect, say, 25% of the eggs, liberating the hatchlings at sea, then through human intervention one could quickly restore the sea turtle population toward its carrying capacity K and achieve a healthy ecosystem at a rate much faster than t3-t2 and, at the same time, enjoy 75% of the eggs for human consumption.

    Figure 2: The Logistic Curve of Population Growth

The Sea Turtle Conservation Project of the Environmental Association AMAR of El Salvador^e has launched sustainable extravisim of sea turtle eggs which corresponds to these basic principles from biology. The turtles form part of the larger wetland ecosystem in one of the best conserved stretches of forests left in El Salvador. The beach and wetland are protected in the "Reserva de Usos Multiples en la Barra de Santiago" ("Reserve of Multiple Uses of the Barra of Santiago") and the forest is protected in the National Park, ominously called El Imposible. The species of sea turtle that are managed are Leopidochelys olivacea and Dermochelis corlaceai. Neither species is in immediate threat with global extinction even though local populations have declined largely due to human selective pressures. It must be noted that El Salvador is a minor location for nesting compared to Mexico, Nicaragua, Panama, and Costa Rica. For example, the Barra de Santiago in El Salvador may witness up to 300 nesting turtles in any given season; at Playas Nancite in Costa Rica, there may be as many as 110,000 (Cornelius, 1991, p. 124). Assuming that the selection of a beach by the sea turtle is random, all of the eggs in El Salvador could be harvested without threatening the species with extinction.^11

In other words, El Salvador could free-ride off the protection of sea turtle nests in neighboring countries. However, if El Salvador were to adopt such a selfish strategy and every neighboring country were to do likewise, then of course the sea turtle species would indeed be threatened with extinction. Hence, the fact that AMAR is actively pursuing sustainable extraction of sea turtle eggs reflects not only a high ethical standard but also a commitment to environmental education based on the principles of sustainable development.

AMAR recognized that in order to promote sustainable development at Barra de Santiago, a management plan would have to be acceptable to the community residents. Prior to the implementation of the Project in 1989, the turtle eggs were an open access resource first come, first serve. Because the personal cost of collection was below the value of the eggs collected, almost 100% of the eggs laid were being collected. One can cast the problem faced by AMAR in the economic language of the theoretical introduction to this White Paper: How to internalize the benefits of sea turtles at Barra de Santiago in order to contribute toward the optimal level of sea turtles in the Pacific? The directors experimented with various methods analyzing each to find the best. At first, AMAR attempted to exchange basic goods, machetes, fishlines, etc. for the eggs. AMAR was reluctant to give money for fear that the money would not be spent wisely. Inasmuch as the community had many basic needs that were not being met, benefits in necessities seemed more appropriate. However, the collectors expressed dissatisfaction with the foodstuffs, etc., and much preferred a money payment. Here one sees an economic lesson that will also reappear in Bioprospecting (Case Study 6): there is no substitute for money. From economic theory, one knows that money is always at least as good as an in-kind benefit and usually much better (if one wanted the particular in-kind benefit one could buy it with the money or buy something else that generates more satisfaction). AMAR quickly came to the realization that how community members spend the income generated from eggs is beyond the environmental mission of AMAR. Nevertheless, AMAR was still uncomfortable with the idea of buying eggs with money, and experimented with other management plans.

Another plan tried was the cordoning off of the beach on certain days to allow only the patrols to collect. From a genetic viewpoint, collecting all the eggs from just a few nests on a few days is not as advantageous as collecting a few eggs from all the nests everyday. For example, it is far better to collect 24 eggs from the 96 laid in each of 12 nests (24 eggs/nest x 12 nests = 288 eggs collected in total) than to collect all 288 eggs from just three nests (3 nests x 96 eggs/nest). Collecting from just a few nests on a few days increases the homozygosity of the population and also excludes the community from actively participating in sustainable extractivism (understanding that a portion of each nest must be preserved). Moreover, cordoning off the beach involved heavy costs: both patrolling against interlopers and doing the labor intensive job of collecting eggs (the value of labor of the patrols is greater than that of the collectors). Given these drawbacks, AMAR continued to experiment.

One suggestion was the issuance of identity cards for the egg collectors and thereby control collection by charging each licensed collector with a fixed quantity of eggs. Although licensing egg collectors is an internalization of an externality in the spirit of the Coase Theorem, its feasibility depends largely on the legitimacy these licenses will have in the community and the subsequent cost of policing them. AMAR would either have to raffle the licenses (inviting accusations of fraud) or hold an auction (inviting accusations of elitism). Given the negative feedback from the community, the plan to issue identity cards and license egg collectors was abandoned.

The alternative to internalizing the externality of eggs through licenses (the Coasian solution) is a system of tax (the Pigouvian solution) payable in eggs. Like an egg charge for licences, a tax would mean a partial shift in the burden of costs of implementing sustainable development. Rather than paying for eggs or cordoning off the beach and collecting the eggs, AMAR would shift the incidence of burden to the collectors by making them pay in eggs for the right to collect eggs. This shift is completely justified by the efficiency criterion from economics that he or she who benefits should pay the cost associated with the benefit. Indeed, the collectors are benefiting from the existence of the turtles and should pay the costs of sustaining that resource.

Under the egg tax, each collector surrenders two dozen of the eggs collected from the nest to the Park patrol and receives, at the same time, a certificate that the eggs were collected legally. Even though nesting takes place at night, it is nevertheless difficult to avoid the taxman. Sea turtles typically take an hour or more to make a nest and lay their eggs; there is sufficient time for the patrol to spot a person lingering on the beach. The sequence of events is the following: many people from the community walk all night long in order to come upon a beaching turtle during the turtle season (July- December). Spotting a turtle emerging from the surf is basically a raffle. Although many people lose much time walking the beach without being the first to spot a turtle, this de facto raffle does not cause the resentment that would be generated by a de jure raffle of licenses. Moreover, the de facto raffle has many positive externalities: people love to gamble and finding a turtle has this element of diversion; more people are involved in the sustainable extravisim when the raffle is de facto than de jure and hence more people are becoming environmentally literate.

The first person to spot the turtle has established a claim to the eggs that the turtle will lay. Because more than one person may spot the turtle at the same time, conflicts ensue. A more definitive claim on the spotted turtle than merely following it up the beach, is to pick it up and carry it to the vegetation zone where it lays its eggs. Because the turtle may weigh 50 kg, egg collecting has become an activity of male adults. The patrols joke that as the turtles emerge from the surf they stop and seem to wait to be spotted by a collector and carried off to the vegetative zone of the beach. In as much as the turtles have long reproductive lives and may nest a couple of times per season, there is a ring of truth in this speculation. Perhaps the turtles have been imprinted that they can avoid the arduous task of climbing the beach by waiting at the surf for a free-ride. Testing such human-sea turtle symbiosis against nesting behavior in more natural conditions would be an interesting thesis for a student of sociobiology/ ethology.

As the collector waits an hour or more for the eggs to be deposited, the patrol on a three wheel motorcycle will spot the silhouette of the collector and stop to inspect whether a turtle has nested. Usually, the patrol will recognize the collector and there is no need for the patrol to wait around for the eggs to be laid; he asks the collector when the turtle began nesting and then continues his patrol to find the next nesting turtle and collector, returning in an hour or so when the eggs should have been laid. When the eggs are finally laid, the patrol checks to see if the turtle had been tagged on a previous nesting and if not, then tags the turtle on the front flipper. The patrol will recruit the collector to assist him gather data and handle the turtle which is anxious to return to the sea. The patrol then enters into his notebook a registration number, the date and hour of nesting, zone of the beach, wind, tide, rain, the species of turtle, length of shell, width of shell, width of head, number of eggs laid, time laid, and person who collected the eggs. This data is later entered into a computer program for statistical analysis. After the data is collected, the patrol signs an official certificate that the eggs have been legally collected and hands it over to the collector in exchange for the two dozen eggs. The mechanism of control through the certificate is the following: The National Wildlife and Park Service issues the certificates that the bearer has paid the egg quota and that the eggs may be legally sold. Anyone caught selling eggs without the certificate is fined. Of course, there is some leakage. If a collector wants the eggs for his personal consumption and is undetected on the beach by the patrol, then he may perceive little reason to surrender voluntarily the two dozen eggs. However, the eggs are sufficiently valuable (from USD 0.10-30/egg depending on the season) that collectors rarely eat them preferring to sell them as a cash crop. Moreover, the 90+ eggs of a typical nest would be a lot of eggs for any family to eat.

What happens to the collected eggs surrendered to the patrol? This is the real beauty of this project. Perhaps the willingness of the members of community at Barra de Santiago to pay the egg tax is that they can see that their egg tax is being well spent! The patrol delivers the eggs to Roman Ruiz whose job is to maintain a pen of turtle nests. Mr. Ruiz is in his early 40s and lives with his family at the edge of the beach. He is from the community and has a primary school education. He performs the data collection and monitoring with the precision and dedication that would be the envy of many universities in the North. Again, one sees the principle of Locus of Control (LOC) that was characteristic of Medardo Tapia, the director of the sustainable experimental farm in the Amazons (Sustainable Agriculture [Case 4]). Mr. Ruiz like Mr. Tapia is a person who has made a tremendous difference in the success of the program and is widely credited for efficiency. Mr. Ruiz simulates ideal natural conditions to hatch the eggs and then releases the hatchlings at sea. The pen is constructed of bamboo and the slats are sufficiently close that pigs and dogs cannot enter and root for the nests. The pen is also in close proximity to Mr. Ruiz's home which also provides protection against theft. From time to time, the pen is re-located to avoid contamination of bacteria from previous hatchlings. In order to maximize successful hatching and maintain a 1:1 sex ratio, the temperature is maintained between 29-30 C. Less than 29 C and there will be predominantly males; more than 30 C and there will be predominately females. At extremely high temperatures, no eggs will hatch. Mr. Ruiz achieves temperature control by placing a roof of palm leaves over the pen to protect the sand from the sun. A thermometer is placed in the sand at the same depth of the eggs and is checked to see whether the palm leaves should be placed on the roof (if >30 C) or removed (if <30 C). Each nest has an identification label regarding the date of nesting and the incubation period is 45-50 days. Hence, the monitoring and control of temperature during this period is a significant amount of work. When the eggs are due to hatch, Mr. Ruiz places a bottomless plastic bucket around the nest in the sand (marked by a stick) so that when the hatchlings come to the surface of the sand, they will not escape the pen. On the day the author visited the site, 29 of the 32 eggs that were in one of the artificial nests of the pen hatched and were removed to a holding tank. Mr. Ruiz takes great pride in this high success rate and meticulously records the data for later input into the computer. In the morning the turtles are allowed to walk on the beach for a few meters in order to be imprinted with the experience and then they are taken out beyond the surf and released in the sea.

What would have been the normal hatching success rate without the program? Because of the dense population of Barra de Santiago (8,000 inhabitants along 9 km of beach, 1/2 km wide), probably 100% of the eggs would be collected and so there would be no eggs left to hatch. Even if a nesting turtle were to escape detection, because of the fluctuating temperature on Barra de Santiago, it is not uncommon for none of the 90+ eggs to hatch. Cornelius (1991, p. 125) reports from a scientific study on the same species of turtles in Costa Rica that, under natural conditions, "Hatching success ranged from 0.8% to 10% for all study nests". Besides the uncertainties of hatching, there is the gauntlet that the hatchlings must run from beach to sea. There are many roaming pigs on the Barra de Santiago as well as dogs that would eat not only the hatchlings but also the nesting turtles themselves. The dangers are not over when the hatchlings reach the water as Mr. Ruiz discovered from experience. At first, Mr. Ruiz released the hatchlings near the shoreline but most of the turtles died in the breaking waves and washed ashore dead. Hence, by releasing the hatchlings beyond the whitecaps and controlling incubation, most of the selective pressures that explain why turtles are r-selected (many offspring, few survive) are removed. The skeptic may fear that the release of 24 hatchlings per nest (roughly 25% rather than 1%) may result in overpopulating the sea with turtles. However, this is not the case inasmuch as in other locales along the Pacific coastline, 100% of the eggs are being collected and at sea many adult turtles are being lost to commercial fishing. One suspects that there is an open niche for these released hatch- lings and that AMAR is helping to restore a healthy marine ecosystem. The success of the program can be seen in the following statistic: In 1989 when the program was initiated, only 580 turtles were hatched and released; five years later the number had grown to 10,700.

The AMAR project is a fascinating case study not just from a biological viewpoint of conservation but also from the economic viewpoint of management. The organization AMAR originally began to protect forests and its acronym stands for Amigos del Arbol (Friends of the Trees). However, the founders of AMAR perceived a tremendous opportunity for sustainable development through the protection of sea turtles and quickly concentrated organizational resources into that activity. Such flexibility is characteristic of successful entrepreneurs who often begin in one line of business and switch lines several times until they find the most lucrative activity. In the sustainable extractivism of sea turtles, AMAR found a visible activity that could become a springboard for further environmental protection. Building upon the success of the existing project, AMAR has created a host of related activities that contribute toward the sustainability of the ecosystem of the Barra de Santiago. There is an interpretive center where school children come to visit and learn about the coastal ecosystem and its wildlife. There is also a program to secure legal protection of the mangrove forest on the other side of the sandbar in order to prevent abutting landholders from illegally expanding their pasture (the limits of the Park have traditionally been defined by where the mangrove forest ends, hence, if the landowners destroy neighboring mangrove forest, they attempt to claim the land as theirs). Because the land may be worth as much as USD 5,000/ha. there is a strong pressure to destroy the mangrove and AMAR sees the legal demarcation of the limits of the Park as a top priority. AMAR is also pursuing the possibilities of ecotourism and environmental education focused on the nesting turtles, the mangrove ecosystem, and a nearby archeological site. Unfortunately, AMAR does not yet have a sufficient budget to carry out all aspects of its management and development plan.

Although it is difficult for an outside consultant to make meaningful suggestions based upon a short visit, one activity that could enhance revenues would be a commercialization of the Gift of Christmas program to foreign tourists. At Christmas time, the game wardens of AMAR hold a ceremony where children liberate hatchlings to the sea. As mentioned in the theoretical introduction to this paper, the most significant source of revenues for sustainable development of biological diversity in the short-run is "existence". Wealthy people are willing to pay to know that biological diversity exists. One could expand the Gift of Christmas program year round by selling Northern tourists a one day tour to visit the beach, liberate the hatchlings at sea, and take a boat ride in the mangrove forest. In Costa Rica, such tours fetch up to USD 90. For those tourists who would like to stay overnight to witness the nesting of the turtles, the accommodations of one of the hotels should be improved with the revenues gained from the day trips. Likewise, an "adopt-a-turtle" program could be initiated through a cooperative agreement with an NGO in Europe, Japan, or North America. If each egg collected is worth, say, USD 3 in the international adoption market, then there is a handsome potential for a margin of USD 2.70-2.90 per egg (USD 3.00 - 0.10 [or 0.30 depending on market conditions of the eggs]). If the 10,700 hatchlings liberated in 1994 represented 25% of all the eggs collected in the Barra de Santiago, then there is the potential of liberating of 42,800 hatchlings if every egg were adopted. This would generate USD 128,400 in existence value. AMAR demonstrates both the expertise and dedication to expand in such directions.

VI. Bioprospecting (Case 6): The Impossibility of a Successful Case Without a Cartel

Bioprospecting is often perceived as the salvation to biological diversity. Not only is there little evidence that the royalties from bioprospecting can significantly contribute toward the financing of habitats (Aylward, 1993) but the absence of a multilateral accord to fix the royalty rate guarantees that the royalties will be meagre (Vogel, 1995). Nevertheless, many commentators in both the popular and academic presses have seized upon isolated anecdotes of billion dollar drugs (e.g., taxol) or biotechnologies (e.g., polymerase chain reaction, PCR) as examples of the potential economic value that may exist. Models are sought as to how to capture some of this value and dedicate it to the habitat from which the biological samples were taken. Usually, the model found is that of Instituto Nacional de Biodiversidad (INBio) of Costa Rica (Reid et al., 1993). Without doubt, INBio is the most comprehensive model of bioprospecting in the world and is deserving of the favorable press. However, seldom mentioned in the press coverage is the fact that most of the biological diversity of Costa Rica is not endemic to Costa Rica but diffused from Chiapas in southern Mexico to Beni in northern Bolivia. Also ignored is the fact that bioprospectors are not interested in species per se but secondary compounds which are not necessarily unique to the species (e.g., the active compound in taxol is paclitaxel which has been found in both Taxus brevifolia of the Pacific Northwest of the US and Taxus baccata of Europe). Because secondary compounds are diffused across international boundaries and taxa, a bioprospecting institution such as INBio is granting access not just to the biological diversity of the home country, in this case, Costa Rica but also to the biological diversity of the entire region, Mexico, Guatemala,...Peru, and Bolivia. These two facts, diffusion of species and diffusion of secondary compounds, are key to understanding why INBio or any other successful institution cannot be viewed as a model to replicate in the quest to internalize the value of biological diversity for bioprospecting.^12

Economic theory is powerful in its simplicity. From basic principles, one can explain and predict. One knows that the price of any good in a competitive market will equal its marginal cost. In the case of bioprospecting, there are many countries which can supply the same secondary compounds. Given competition among potential suppliers, the economist expects the price to be driven down to the marginal cost of supplying botanical samples - a nominal fee. This simple implication is confirmed by experience. The transnational giant Monsanto, Inc. has negotiated bioprospecting contracts with the International Cooperative Biodiversity Groups (ICBG) for access to samples with royalties as low as 0.2% on net sales (RAFI, 1994, p. 7). Even INBio, probably the most advanced bioprospecting institution in the world, is believed to be receiving royalties of only 2%.^13

Is a 2% royalty or even a mere 0.2% royalty necessarily bad? Ever since Adam Smith, the public has come to appreciate the beneficial role of competition. Through the removal of market barriers, more firms can enter an industry and each will impose discipline on its own internal operation, passing on savings to consumers through lower prices. Competition enhances both efficiency and equity. However, in the case of bioprospecting, such competition is bad, both inefficient and inequitable. The explanation is somewhat abstract and draws from the economics of information. In modern economies, a certain class of goods exists which are extremely costly to create but nevertheless extremely cheap to reproduce. Almost all goods that experience this cost structure, viz., extremely high fixed costs coupled with extremely low marginal costs, are based in information (e.g., software, publications, symbols). Once the producer of the information good releases that good to the public, he or she has almost no control over its consumption (non-exclusion). Given the inadequacy of the usual exclusionary mechanisms (e.g., fences, locks and keys) for information goods, the granting of a monopoly through intellectual property rights (IPR) is the only instrument that permits creators to recoup the fixed costs of their creation. Under IPR protection, any competition through illicit copying is considered piracy and is both inequitable and inefficient. In a world of pirates, there are fewer creations and the economy is deprived of information goods (e.g., software, etc.).

Surprisingly, the rationale for IPR has an exact analog in the realm of biology. Although biological diversity is not an intellectual good, it is very much an information good; indeed, it is not uncommon to see the phrase "genetic information" in the scientific literature. As an information good, biological diversity shares a similar cost structure: extremely high opportunity costs in the maintenance of habitats but extremely low costs of accessing components of those habitats (see Vogel, 1994). Hence, competition will drive the price of biological samples down to their marginal costs and deprive countries from recouping the opportunity costs of conservation.

If one accepts monopoly patents, copyrights, trademarks as legitimate instruments to enable the emergence of a market for information goods, then one should accept oligopoly rights over genetic resources to enable the emergence of a market for habitats. Countries which supply biological samples should fix a royalty rate and distribute economic rents and countries which demand biological samples should respect the cartel. Unfortunately, spokespersons of the biotechnology industry refuse to recognize such logic and wish to continue either the de jure free access of the old "common heritage of mankind" doctrine (see insert 1) or a de facto free access disguised in bilateral accords (e.g., the Monsanto-ICBG deal of a 0.2% royalty). The position even becomes hypocritical as Northern biotechnology companies complain bitterly about intellectual piracy in the South (see insert 2).

Insert 1

    There is a flower that grows in Ecuador

    President George Bush vacillated over whether or not to sign the CBD at The Earth Summit, Rio'92. He decided against signing based on communications from industry leaders such as Kirk Raab, then CEO of Genentech. Raab defended his lobbying of Bush with these remarks: "I don't believe mixing in industrial property rights is the least bit appropriate. If you dig up a little piece of dirt in Naples...or pick a flower in Ecuador, I don't think there is necessarily a requirement that the country of origin has some predetermined economic rights."

    Sally Lehrman, "Genentech Stance on Biodiversity Riles Staff" Nature, 9 July 1992, p. 97.

Insert 2

    Privatize Profits, Socialize costs

    The motto of the US Biotechnology Industry

    "Meanwhile businesses based upon copying and 'counterfeiting' intellectual property are thriving in some countries, notably India, Brazil, Argentina, Egypt and Turkey. Their influence has sometimes made it difficult for those countries to reform their laws. In the publishing, fashion, film-making and music sectors, this has led to substantial lost revenue. In the pharmaceutical industry, this sometimes leads to human, as well as economic costs" Edmund Pratt, Jr. former CEO of Pfizer, Inc. paid announcement in The Economist, 27 May 1995, p. 24.

    Through some simple word substitutions, advocates of a cartel over biological diversity and associated knowledge can make exactly the same argument as to why companies, like Pratt's Pfizer, should pay an oligopoly price:

    Meanwhile businesses based upon extracting and synthesizing natural information are thriving in some countries, notably the US. Their influence has made it difficult for that country to ratify the CBD. In tourism, advertising, and plant breeding, this has led to substantial lost revenue. In the pharmaceutical industry, this sometimes leads to human, as well as economic costs.

The Convention on Biological Diversity (CBD) attempts to correct the inefficiencies and inequities of free access by recognizing the sovereignty of a country over its genetic resources. In various articles of the CBD, signateur countries are compelled to share the benefits of biotechnologies that utilize genetic resources with the country of origin. Unfortunately, the drafters of the CBD failed to perceive that sovereignty would result in a price war that would deny all countries any economic rent. To make matters worse, the CBD refers to benefits of bilateral accords without specifying the worth of those benefits or even how to measure them. Such ambiguity is unthinkable for an economist. Indeed, as Ronald Coase, the 1991 Nobel Memorial Laureate in Economics, has quipped, economics is the most advanced social science, not because of any theoretical sophistication, but simply because it has a convenient measuring rod: money (see Posner, 1993, p. 208). When the Parties to the CBD embrace "benefit-sharing" in things like "technology transfer", they toss out the profession's powerful tool. The economist suspects that the money value of the technologies transferred under bilateral accords will also be extremely low: a dumping of out dated technologies at inflated appraised values, thereby cheating not only the suppliers in the South but also the governments in the North of corporate taxes (e.g., the appraised value will be subtracted from revenues in determining taxable profits).

What would be an efficient and equitable royalty rate for bioprospecting? One cannot look toward the market for an answer inasmuch as the market reflects the outcome of a price war among suppliers of biological samples. Theoretically, the rate would depend on the degree of substitutability of natural secondary compounds as a whole with other activities that could yield the same function (e.g., gene therapy or rational molecular design). However, one would need the cartel in place before one could observe industry willingness to pay for secondary compounds vs. gene therapy or rational molecular design. The problem of an efficient and equitable royalty rate even becomes circular as one would probably also have to suggest what would be the more favorable rate before suppliers would join the cartel. In Genes for Sale, Vogel (1994) suggests a royalty on net sales of 15% based upon what is commonly observed in other forms of intellectual property where there is monopoly control. This 15% could conceivably have the following two-tier structure: the institution that provides the sample would enjoy between 1-3% as payment for the value added to the genetic resources and countries which protect the same genetic resources would share the economic rent of 12-14%.

Although some 160+ countries have ratified the CBD, the world leader in biotechnology, the US, has not ratified as of the date of this publication (December, 1996). Undoubtedly, suggestions of a cartel and a royalty of 15% will harden the opposition of the US toward the CBD. The non-ratification status of the US has serious ramifications inasmuch as any US firm is free of legal obligations to the "fair and equitable sharing of benefits arising out of the utilization of genetic resources" as set forth in Article 1 of the CBD. The US even gains a comparative advantage in bioprospecting simply because it has not ratified. For example, a US firm could enjoy free access to much of the biological diversity of the South by simply bioprospecting within US jurisdiction. Consider the extent of biological diversity that falls under US jurisdiction but yet is part of larger ecosystems that fall under the jurisdiction of CBD ratified countries: Hawaii, Guam, and Samoa (the South Pacific Island nations), Alaska (Canada and Russia), the Continental US (Canada, Mexico, and Caribbean nations), Puerto Rico and the Panama Canal (Latin American nations), ex situ genebanks, botanical and zoological gardens, and possibly even US embassy grounds (the some 160+ countries that have ratified the CBD as of December 1996).^14

Ironically, the non-ratification of the CBD also deprives the US government from "benefit-sharing" over the resources provided by its federal park lands. For example, the aforementioned PCR technology derives from Thermus aquaticus (Taq), a thermophilic bacteria taken from Yellowstone National Park. Cetus Inc., sold the patent rights over PCR to Hoffman-LaRoche for USD 300 million and eventually the technology could generate USD 1 billion per year in revenues (Chester, 1996, p. 23). In contrast, Yellowstone National Park gets nothing. Had the discovery of Taq occurred under the CBD and a cartel charging a 15% royalty, the US Department of the Interior would have received up to USD 150 million per year (assuming that Taq is endemic to Yellowstone National Park).

The drafters of the CBD failed to foresee the consequences of competition among suppliers of the same secondary compounds or the ramifications of the non-ratification status of the US. Both problems can be remedied via a Special Protocol to the CBD. Such a protocol should incorporate the following points:

1. The amendment of national laws on intellectual property rights to require Certificates of Origin (see Tobin, in press) on products that utilize biological diversity.

2. Scientific analysis to determine the taxon at which the biochemical is found and a clearing house mechanism to determine the range of the habitat for those taxa in order to identify the commoners.

3. The establishment of a fund to receive a royalty of 15% on net sales of biotechnologies that use biological diversity and the distribution of the money collected to cartel members according to the representation of individuals in the taxon in which the biochemical is found.

4. A tracking of holders of intellectual property that use biological diversity and a verification as to whether the economic rent has been paid.

5. A filtration of the first and fourth points to permit a clouding of title on biotechnology exports from non-ratified CBD countries to ratified CBD countries whenever the economic rent has not been paid to the fund.

The Special Protocol would force industrial end users in non-ratified countries to voluntarily pay the royalty or risk losing the export market through challenges to ownership of the exported biotechnology.

A subset of bioprospecting is ethnobioprospecting and it too can be cartelized. Traditional knowledge facilitates the identification of lead compounds and can benefit communities whenever the knowledge has not yet fallen into the public domain. Because cultural erosion is happening much faster than biological erosion, incentives should be given to the biotechnology industry to conduct ethnobioprospecting before random screening bioprospecting. One possible incentive would be to keep the royalty rate at 15% with half of that sum going to intermediaries that have isolated the compound (7.5%), a quarter going to the member communities of a trade secret cartel (3.25%), and the remaining quarter to the member countries of the biological diversity cartel (3.25%).

Although there can be no successful case study of bioprospecting without cartelization, efforts exist to move in the direction of a cartel. A project entitled "The Transformation of Traditional Knowledge into Trade Secrets" is currently underway in Ecuador. The project attempts to achieve a cartelization of traditional knowledge within Ecuador and then expand the organizational structure to neighboring countries. The project is a collaborative effort by the InterAmerican Development Bank-Consejo Nacional de Desarrollo Program on Environmental Capacity Building, CARE-Ecuador, and the NGO EcoCiencia. The project began in late 1995 and will enter a pilot phase in the regions of the Coast, Sierra, and Amazon in early 1997. The project sets out to catalog traditional knowledge in customized databases written in FOXPRO 2.53. Each participating community will have its own file in the database and will not be able to access files of any other community. The database is maintained at regional centers (NGOs or universities) and is safeguarded through a hierarchy of access restrictions. Because traditional knowledge is usually not unique to any one community, the manager of the database filters the deposited knowledge across communities to determine which communities are commoners to the same knowledge. He or she then filters this knowledge against what is already in the public domain through the on-line botanical database known as NAPRALERT from the University of Illinois-Chicago. That knowledge which is not yet public can be negotiated as a trade secret in a Material Transfer Agreement (MTA) with either industrial end-users or intermediaries. The benefits from the MTAs are to be paid in money and split between the government and all communities that deposited the same knowledge in the database. The share of the communities is then used to finance public projects previously identified by each community. Recognizing that traditional knowledge is not unique to one country, the project attempts to refine a set of standards from the pilot phase so that other countries may adopt them and help forge an international cartel.

A 200 page book entitled From Traditional Knowledge to Trade Secrets (Vogel [ed.], in press)^f is available in both English and Spanish through EcoCiencia. The book is authored by five contributors spanning the professions of botany, economics, information science, law, and microbiology and lays out the theory behind the cartel and step-by-step instructions to transform traditional knowledge into trade secrets. Software and technical specifications for setting up the database are also included.

CONCLUSION AND RECOMMENDATIONS

As evidenced in the opening quote to this White Paper, there is much hostility between economists and conservationists regarding the allocation of habitats and the subsequent fate of biological diversity. The inclination of the economist is to put a dollar value on biological diversity, admit that the estimates are crude, and then boldly plug the estimates into a cost-benefit analysis of the project under deliberation. Despite the rigor of any such analysis, the resulting net gain or loss will be a meaningless number. The conservation biologist David Ehrenfeld (1988, p. 214, 216) explains both the illegitimacy of the approach and its inherent danger: "It is not possible to figure out the true economic value of any piece of biological diversity, let alone the value of diversity in the aggregate. We do not know enough about any gene, species, or ecosystem to be able to calculate its ecological and economic worth in the larger scheme of things...I cannot help thinking that when we finish assigning values to biological diversity, we will find that we don't have very much biological diversity left."

Conservationists are not alone in the rejection of the indiscriminate application of cost-benefit analysis. No less of a theorist than E.J. Mishan (1972, p. 20), pointed out the limits of cost-benefit analysis and the duty of practitioners:

"If the unmeasurable effect is completely beyond his [the economist's] range of reasonable guesses, so that a decision cannot be reached by the economist on the basis of the measurable data and by reasonable guesswork, he serves the public better by confessing the truth: that, with the existing techniques and information, he is unable to discharge his task."

What then is the economist's task? This White Paper attempts an answer: First it is to emphasize the impossibility of the application of cost-benefit analysis to projects that jeopardize the existence of species. Second, it is to emphasize that the decision to protect biological diversity is not only an ethical decision but also an economic one: in the absence of information, the prudent decision is to adopt the precautionary principle in the form of safe minimum standards. Lastly, it is the economist's task to provide instruments that can internalize the external benefits of biological diversity and make people pay when they benefit. People should pay, not because habitats must compete with timber, cattle, and dams, but because there is tremendous political pressure by the vested interests behind timber, cattle, and dams to encroach on protected habitats. The generation of revenues from the sustainable use of biological diversity can create countervailing pressures against the exterminators. This has been the humble alternative to bankrupt economics.

This White Paper has reviewed six categories of economic value that can be derived from the sustainable use of biological diversity: Existence, Ecotourism, Environmental Services, Sustainable Agriculture, Extractivism, and Bioprospecting. Although each case can be considered a success, and a few, remarkable successes, all can still profit from the application of contemporary economic theory. The challenge for sustainable development is to improve upon these, the best cases and replicate them whenever possible.

ENDNOTES

^1 A more pessimistic view is that the environmental cost to acquire the needed information would expunge that information thus rendering the application of orthodox economics impossible. This would be analogous to the Heisenberg principle in chemistry.

^2 In contrast to clear-cutting, strip logging does not threaten biological diversity and would be incorporated in the left-hand side of Equation [1] as a value of extractivism. See Anderson (1990).

^3 At what taxon should one preserve? The species, population, individual, or gene? If one preserves everything, then what will be eaten? Vogel (1994) explores these logical inconsistencies and suggests that the 'genetically coded function' should be the object of conservation.

^4 Exogenous means that the formation of preferences lies outside the realm of inquiry of economists and is for, say, psychologists or sociologists to resolve. John Kenneth Galbraith (1958) has long criticized this assumption as simply ridiculous and points to the manipulation of preferences through sophisticated advertising. If preferences are manufactured, then demand is not independent of supply and optimality becomes fairly meaningless.

^5 The statistics in this and the following two paragraphs are drawn largely from 'The Value of Nature Protection: Economic Anlaysis of the Saba Marine Park' by Rainald Framhein (Summary for the Government of Saba, draft, September 1995). The qualitative descriptions are drawn largely from 'A Self- financing Marine Park: The Saba Case' by Tom van't Hof and Kenneth Buchan (CANARI Workshop on Revenue Generation for Protected Areas, June 1995).

^6 The same argument can be made for oil spills. Saba is downwind and downcurrent from the St. Eustatius Oil Terminal. However, the liability lies with the Oil Terminal which can control the risks and enjoys the benefits from its risk-generating activities.

^7 This could be considered a type of "privatization" distinct from the sale of publicly owned assets to the private sector. The State still owns the asset but charges as if it were a private agent. The State is unable to sell the asset for the simple reason that no private agent would pay its aggregate value Sigma MRS. Because only a few of the externalities are capable of being internalized, any private agent would degrade the habitat for alternative uses that generate financial returns greater than the user fees for that one MRS that was capable of being internalized. Hence, the sale of the publicly owned asset would be inefficient.

^8. Because marginal costs falls below average cost, the price of each value cannot be set at the marginal cost without incurring continual losses. See Rosen (1992, pp. 337-341) for a discussion of the alternatives to average-cost pricing.

^9 The statistics in this and the following paragraphs are drawn largely from internal documents and in-house publications from the IAP, such as "a Lei dos ICMS Ecologico como exercicio do federalismo fiscal a servico o da conservacao do meio ambiente, no Estado do Parana" (The Ecological VAT as an Exercise in Fiscal Federalism at the Service of Environmental Conservation in the State of Parana" (author's translation), Wilson Loureiro, Secretaria do Meio Ambiente, and "ICMS Ecologico: Desenvolvimento Susyentavel: O presente do Parana para o futuro do Brasil" (Ecological VAT: Sustainable Development: The Parana of Today for the Brazil of Tomorrow" [author's translation].

^10 For a discussion on the biology of sustainable yields, see Extractivism Case 5, The Sea Turtle Conservation Program in El Salvador. Suffice it ti say here, that a portion of any healthy population of a species can be harvested without any threat to the long term survival of the species.

^11 Cynthia J. Laguex (1991, p. 142) writes 'For the past 40 years nearly 100% of the olive ridley (Leopidochelys olivacea) eggs laid on the Pacific coast of Honduras have been collected and sold in El Salvador or Honduras. It is apparent that the turtle population cannot withstand this level of exploitation without experiencing detrimental effects. In fact, it is rather perplexing why olive ridley nesting still occurs on these beaches.' The explanation of this paradox is that the turtles that come ashore in El Salvador and Honduras are a random spill over effect from more popular sites in Mexico, Nicaragua, Panama or Costa Rica.

An alternative hypothesis is that the turtles are returning to the same beach where they were hatched and are therefore older than 40 years. If the alternative hypothesis is correct, then thousands of turtles will return to Barra de Santiago to nest in the future.

^12 There are also other reasons why INBio is not an appropriate model to replicate. See, Feinsilver and Chapela (1996).

^13 Royalty rates are usually not disclosed and are viewed as confidential information. Non-disclosure makes evaluation of bioprospecting contracts impossible.

^14 The embassy grounds of CBD ratified countries would be covered by the CBD.

FURTHER INFORMATION

^a For more information about the National Park System, please contact:

Karla Ceciliano,
Gerente, Fundacion de Parques Nacionales y Asesora, Ministro de Ambiente y Energia.
Apdo. Postal 1108-1002
Paseo de los Estudiantes
Telf 506 381 6248 or 257-2239
FAX 506 222 4732
email: mcabezas@cariari.ucr.ac.cr

^b For more information on the Saba Marine Park, please contact:

Kenneth C. Buchan, M.Sc.
Saba Marine Park
P.O. Box 18
Saba, Netherlands Antilles
Telf. 599 4 63295
FAX 599 4 63435

^c For more information on the Ecological VAT, please contact:

Wilson Loureiro
Head of the Department of Conservation Units
Instituto Ambiental do Parana
Rua Pedro Rolim de Moura, 45
CEP: 80.030-250 Ä Curitiba Ä PR ÄBrazil
Telf. 55 41 253-036/322 6163
FAX 55 41 222 2850

^d For more information regarding Centro Fatima, please contact:

Medardo Tapia and Ruth Arias
Centro F tima, Casilla Postal 16-01-800
Puyo, Pastaza, Ecuador
Telf. 593 3 833 765
FAX 593 3 883 064 (Attn: address above)

^e For more information about the Sea Turtle Conservation Project, please contact:

Eunice Ester Echeverria,
Asociacion Ambientalista AMAR
21 Av. Norte # 1314,
San Salvador, El Salvador
FAX-TEL (503) 225 6167
or (503) 276 4970

^f For more information regarding the transformation of traditional knowledge into trade secrets, please contact:

Joseph Henry Vogel, PhD
2 Wellington Downs
Scotch Plains, NJ 07076 USA
FAX (USA) 1 908 561 1907
Telefax (Ecuador): 593 2 222 274
Email: henvogel@uio.satnet.net

For a copy of From Traditional Knowledge to Trade Secrets: Prior Informed Consent and Bio-prospecting (Vogel [ed.], in press), please contact:

Patricio Mena, EcoCiencia
Isla San Cristobal 1523 y Seymour
Quito, Ecuador
FAX: 593 2 451 338/339

ACKNOWLEDGEMENTS

The author would like to thank the following individuals who read and commented on early drafts of this White Paper: Rafael Calderon, Mauricio Castro, Luis Corral, John A. Dixon, Rosa Ferrin, Julio Guzman, Cristina Hernandez, Mark Kenber, Ilana Locker, Nicolas Lucas, Peter May, Ricardo Melendez, Jacob Olander, Meg Symington, Henry C. Vogel, and Sven Wunder. A special thanks goes out to the principals involved in the case studies: Ruth Arias, Rene Castro, Karla Ceciliano, Eunice Ester Echeverria, Wilson Loureiro, Eduardo Mansur, Maria Schultz, Medardo Tapia, and Tom van't Hof. Translations are always difficult and especially so when done as the author is writing the document. Consuelo Espinosa (into Spanish) and Camilo Gomides (into Portuguese) not only translated the text just in time but also with sufficient adroitness to spot errors in the original that had escaped English-speaking reviewers. The flaws that remain in the document are the sole responsibility of the author. Support has been provided by the Biodiversity Support Program, a consortium of World Wildlife Fund, The Nature Conservancy and The World Resources Institute, with funding by the United States Agency for International Development. The opinions expressed are those of the author and do not necessarily reflect the views of the US Agency for International Development.

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