The Economics of Desertification, Land Degradation, and Drought

Theoretical Framework for the Economic Valuation of DLDD Impacts
This section first presents background information necessary for the economic valuation of land
resources. A methodological framework is developed so that a systematic comparison between the
costs of action against land degradation and the costs of inaction is possible.
Natural resources are often classified as either nonrenewable or renewable. Land is
considered to be in between these two categories and is treated as a semirenewable resource. When
the rate of depletion is faster than the rate of regeneration, the land resource is degraded. The actual
rate of land degradation depends on many factors—some of which are site specific, such as soil type,
slope, and climate, whereas others are dependent on land user’s choices (for example, production
technology and cropping systems). It is often the case that degradation rates for agricultural land
exceed naturally occurring rates (Barbier 1999).
Land is a fundamental input in agricultural production, and fertility is one of its most
important characteristics. Considerations about land productivity and land degradation are implicitly
or explicitly incorporated in the farmers’ decision processes. Although conservation measures often
do not erase all the negative effects, they are often capable of mitigating the consequences of
degradation. For instance, depending on the degree of substitutability between human-made capital
and natural capital, one can restore fertility by increasing the use of inputs, by changing land
management, or by changing the cropping system.
Actions against degradation are beneficial for the land but usually lead to higher production
costs for farmers (in terms of labor or capital requirements or lost productive area). Economic analysis
helps address the question arising from these trade-offs, such as whether the benefits due to soil
conservation are worth the additional costs (Lutz, Pagiola, and Reiche 1994; Requier-Desjardins
2006).
The economic assessment of environmental and climatic problems has received increasing
international attention in recent years. The Stern Review on the Economics of Climate Change was
released for the British government in October 2006 (Stern 2006). TEEB was launched as a
consequence of the G8+5 Environmental Ministers Meeting in Potsdam, Germany, in March 2007.
The main outputs of TEEB were an interim report released in May 2008 describing the first phase,
and the final reports are targeted at specific end users (policymakers, businesses, administrators,
consumers) of the second phase (2008–2010). More details on the Stern Review and TEEB can be
found in Box 3.1.
We propose following a framework similar to that put forward by those reports: an economic
evaluation of the costs of action (that is, the costs of mitigating land degradation) versus the costs of
inaction (that is, the costs induced by continued degradation). Because land degradation is a process
that takes place over time, intertemporal considerations will characterize farmers’ decisions. This
means that the benefits derived from land use (and the value of the land) need to be maximized over
time and that farmers must continuously choose between land-degrading and land-conserving
practices. From an economic perspective, the current profits of adopting land-degrading practices are
continuously compared with the future benefits that derive from the adoption of land conservation
practices. A rational farmer will let degradation take place until the benefits from adopting a
conservation practice equal the costs of letting additional degradation occur. Each farmer determines
his or her own optimal private rate of land degradation. 32 This optimal private rate mainly depends on
the costs and benefits that the farmer directly experiences, such as yield declines due to degradation.
Typically, productivity losses are referred to as on-site costs (taking place on the farmer’s plot of
land). Hence, those ecosystem services that result in lower production levels are considered in the
decision, whereas those that do not become measurable in terms of lost production are neglected. In
fact, many of the costs related to land degradation do not directly affect an individual farmer. As a
consequence, the private rate of degradation is not likely to reflect the optimal rate of degradation
from society’s viewpoint.
32
The optimal rate of degradation will thus not lead to zero degradation but will usually include at least some level of
land degradation.
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