The Economics of Desertification, Land Degradation, and Drought

enefits. Common indicators of economic returns are the net present values (NPVs) 34 and the internal
rate of return (IRR), 35 which are used to compare alternative scenarios—in this case, adoption or no
adoption of conservation practices.
The analyst’s choice of the value for the discount rate and time horizon has a crucial impact
on profitability and, thus, the results of CBA. Usually, discount rates differ depending on whether
they refer to an individual or to the society as a whole. When CBA is applied to evaluate options from
an individual’s perspective, discount rates are higher, as individuals are thought to have a higher time
preference. This assumption is related to their attitudes toward risk and uncertainty, market
distortions, and other institutional settings. From a society’s perspective, the use of low discount rates
is justified with considerations on intergenerational equity and sustainability. Some authors use the
current long-term rate of interest, provided by financial markets, as the appropriate discount rate
(Crosson 1998). Studies have used discount rates ranging from 1 to 20 percent and time horizons from
5 to 100 years. A useful review is provided in Clark (1996). It is often noted (see, for example,
Barbier 1998) that CBA is a difficult implementation due to the required amount of information on
costs and benefits. 36 When data are available, CBA can be specified to assess the profitability of the
adoption of conservation measures. Profits or returns to conservation measures are calculated as the
difference between the value of the crop yields and the costs of production .37 Off-site and indirect
costs also need to be subtracted from profit when the CBA is applied from society’s perspective. The
same procedure can be applied to nonconserving agricultural practices. The NPV of returns to
conservation is therefore the difference between the discounted stream of profits with and without the
implementation of conservation measures. This method usually estimates the returns to specific
conservation measures, not to conservation per se (Lutz, Pagiola, and Reiche 1994).
Numerous studies have applied CBA to analyze the profitability of conservation practices in
different areas of the world (see Appendix B). Whether conservation appeared to be profitable
depended on the regions studied and the type of conservation measured (Lutz, Pagiola, and Reiche
1994), the type of crops, the choice of discount rate (Shiferaw and Holden 2001), and the intensity of
a conservation measure (for example, hedgerow intensity) (Shively 1999). Nkonya et al. (2008b)
found that sustainable land management practices can be profitable from a private perspective as well
as from society’s perspective.
The decision to adopt conservation measures is based not only on economic reasons (such as
costs and benefits) but also on a variety of other factors (Drake, Bergstrom, and Svedsater 1999). A
number of studies that investigate the determinants of the adoption of soil and water conservation
measures, other than primarily financial factors, are reviewed in a later section on adoption models.
Economic Valuation of Nature and Its Services—A Review
A full accounting of all the benefits deriving from the various ecosystem services in accordance to
MA (2005b) is difficult to undertake. In this report, we focus on the economic benefits. This approach
is based on a utilitarian philosophy, and it tends to underestimate the full costs. The utilitarian
approach relies on the concept of utility as a measure of value: Alternative states are compared
according to the utility they generate, irrespective of how this utility is derived. Environmental
benefits are treated equally to any other benefit, assuming they can be traded off. Usually, this means
that a loss in environmental quality can be compensated for by an increase in another type of
34 Present value of cash inflows and cash outflows C; NPV is used to analyze the profitability of an investment. Index t
represents the time dimension of the investment, and r is the discount rate.
35 The IRR of an investment is the interest rate at which the NPV of the costs equals the NPV of the benefits of the
investment. The higher a project’s internal rate of return, the more desirable it is to undertake the project.
36 In its basic form, CBA does not consider the distribution of benefits and costs over individuals, and any increase in
net benefits is desirable, regardless of to whom they occur (Barbier, Markandya, & Pearce 1998). Considerations about
intergenerational equity are not part of CBA analysis, even when the costs and benefits of disadvantaged or poor population
groups can be of greater importance than those of better-off groups.
37 Costs are usually related to additional labor and capital requirements for the conservation measure and the loss in
productive area. Installing soil conservation measures leads to a reduction of the planted area, which is measured as a loss of
crop yield. Additional labor, sometimes capital, is needed to install and maintain conservation measures. Assumptions on
labor inputs and wage rates may influence the outcome of CBA; therefore, it is important to obtain an accurate assessment of
the costs of labor and capital.
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