The role of international agreements in environmental conservation and its implication to Vietnam

VIETNAM NATIONAL UNIVERSITY FACULITY OF ECONOMIC --- YASUKATA FUKAHORI THE ROLE OF INTERNATIONAL AGREEMENTS IN ENVIRONMENTAL CONSERVATION AND ITS IMPLICATION TO VIETNAM Major: Politic

VIETNAM NATIONAL UNIVERSITY FACULITY OF ECONOMIC -

YASUKATA FUKAHORI

THE ROLE OF INTERNATIONAL AGREEMENTS IN

ENVIRONMENTAL CONSERVATION AND ITS IMPLICATION TO

VIETNAM

Major: Political Economy Code: 62.31.01.01

DOCTORAL PHILOSOPHY OF ECONOMICS

Advisor: 1 Associated Professor, Doctor Phi Manh Hong

2 Doctor Phung Xuan Nha

HaNoi, 2008

VIETNAM NATIONAL UNIVERSITY, HANOI

COLLEGE OF ECONOMIC -

YASUKATA FUKAHORI

THE ROLE OF INTERNATIONAL AGREEMENTS IN

ENVIRONMENTAL CONSERVATION AND ITS IMPLICATION TO

VIETNAM

Major: Political Economy Code: 62.31.01.01

DOCTORAL PHILOSOPHY OF ECONOMICS

Advisor: 1 Associated Professor, Doctor Phi Manh Hong

2 Doctor Phung Xuan Nha

HaNoi, 2008

CONTENTS

Page

Introduction ……… 1

Chapter I: Economic Theories Related to Environmental Conservation……… 14

1.1 Theories of Common Pool Resources ……… 14

1.2 Theories of Collective Actions and International Agreements ……… 23

1.3 Coase Theorem ……… 25

1.4 Game Theory ……….…… 26

1.5 Other Economic Theories ……….… 31

1.6 Application of Economic Theories to Environmental Conservation……… 36

1.6.1 Sustainability and Budget Line – Case Study for Forest Conservation…… 36

1.6.2 Game theory scenarios and possible contribution arrangements of international agreements ……….………

46 1.7 Summary of Results ……….…… 88

1.8 Recommendations ……….… 90

Chapter II: Environmental Conservation in Relation with Trade, ODA and Sustainable Development ……… ………

92 2.1 Trade Agreements and Environmental Issues ……… … 92

2.1.1 The New Politics of Trade ……… ……… 92

2.1.2 Trade under Commodity Agreements and Environmental Conservation… 96

2.1.3 WTO Dispute Settlement Mechanism and Environmental Conservation 100

2.2 Global Environmental Issues ……….……… 101

2.2.1 Issues and Problems related to Global Environmental Conservation……… 102

2.2.2 World Summit for Environment ……….……… 103

2.3 ODA and Environmental Issues ……… 106

2.3.1 Trade and ODA ……….……… 106

2.3.2 ODA and Environmental Issues ……….……… 107

2.3.3 Problem of International Aid ……….……… 107

2.3.4 Private Sector ……… 109

2.3.5 Transparency ……….……… 109

2.3.6 The Problem of Sovereignty and Economic Forces ……… 110

2.3.7 Capacity Building, Education, and International Treaties ………….…… 110

2.4 Sustainable Management of Environmental Natural Resources ……….… 111

2.4.1 Definitions of Sustainable Development ……… 111

2.4.2 Economic growth for local welfare and conservation - Sustainable Development

112 2.4.3 Problems Causing Sustainable Management ……… ……… 114

2.5 Environmental Conservation and International Agreement ……… 116

2.5.1 International Negotiation on Environmental Conservation ……… 116

2.5.2 Fund Raising under the Existing International Agreements ……… 117

2.5.3 ITTO and Forest Conservation ……… 118

2.5.4 Limit in conservation by an international agreement organization ………… 130

2.6 Experiences in Other Countries……… 132

2.6.1 Japan ……… 132

2.6.2 South Korea ……… 133

2.6.3 China ……… 133

Chapter III: Issues Related to Vietnam ……… 137

3.1 The New Trade Debate and Its Implication to Vietnam ……… 137

3.1.1 Vietnam’s New Membership of WTO ……… 137

3.1.2 New Politics of Trade and Vietnam ……… 138

3.1.3 CDM and Vietnam ……… 139

3.1.4 ODA and Environment/Trade Issues for Vietnam……… 141

3.2 Application of Economic Theory - Implication of ITTO Mechanisms to Vietnam - ………

142 3.2.1 Scenario 1 ……… 144

3.2.2 Scenario 2……… 151

3.2.3 Analysis of results ……… 156

3.2.4 Summary of Games ……… 157

3.3 Experiences in Other Countries for the comparison with Vietnam………… 160

3.2.1 Japan ……… 160

3.2.2 South Korea ……….…… 160

3.2.3 China ……… 160

3.2.4 Lessons from other countries ……… 161

LIST OF FIGURES, BOXES AND TABLES

Page

Chapter I: Economic Theories Related to Environmental Conservation 15

Figure 1.1 Supply=Demand Relation for Normal Private Goods 18

Figure 1.3 Total Cost and Total Revenue Relation (Private goods) 20 Figure 1.4 Marginal Cost and Average Revenue Relation (Private Goods) 20 Figure 1.5 Total Cost and Total Revenue Relation (Public Goods) 21 Figure 1.6 Marginal Cost and Average Revenue Relation (Public Goods) 21 Figure 1.7 Natural Resource Budget Line and Sustainable Level 23

Figure 1.10 Elasticity of Substitution (High Elasticity) 35

Figure 1.13 Long-term Tropical Forests Depletion Perspectives 38

Figure 1.15 The case sustainable level is much higher than present level 41 Figure 1.16 Contribution and Sustainable Level of Resource Depletion

Box 1.3 Same environmental value for both consumers and producers 53

Box 1.6 Contribution to the fund and Game Theory /Scenario 1b (Gv =

Box 1.7 Same environmental value for both consumers and producers 59

Figure 1.20 Contribution and Sustainable Level of Depletion (Case 4: Both

consumers and producers share responsibility)

63

Figure 1.23 Relation between contribution and Global Environmental

Box 1.14 Contribution to the fund and Game Theory /Scenario 3 (Gv =

Box 1.15 Same environmental value for both consumers and producers 76

Box 1.18 Contribution to the fund and Game Theory /Scenario 2b (Gv =

Box 1.19 Same environmental value for both consumers and producers 81

Box 1.22 Contribution to the fund and Game Theory /Scenario 3b (Gv =

Box 1.23 Same environmental value for both consumers and producers 85

Chapter II: Environmental Conservation and Trade ……… 92

Table 2.1 Developing Countries' Share in Total Exports of Selected 99 Table 2.2 Total forest area, related land area and population in 1995 120

Table 2.4 Current and projected consumption of forest products

Figure 3.1 Relation between the Bali Partnership Fund and Vietnam

Box 3.5 Contribution to the Bali Partnership Fund and Game Theory

/Scenario 2: Vietnam (GVv = Cp + Vp)&(Vv = GVv -Vp + Cp)

152

Box 3.6 Same environmental value for both Vietnam and consumers 153

Abbreviations

APEC Asia Pacific Economic Cooperation

ASEAN Association of East Asian Nations

ASEM Asia Europe Meeting

CEPT Common Effective Preferential Tariff

COP Conference of the Parties

CPRGS Comprehensive Poverty Reduction and Growth Strategy

FAO Food and Agriculture Organization

FCCC Framework Convention on the Climate Change

FTAA Free Trade Area of the Americas

GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade

GEF General Environmental Facilities

ICO International Coffee Organization

IMF International Monetary Fund

IPCC Inter-Governmental Panel on Climate Change

ITTA International Tropical Timber Agreement

ITTO International Tropical Timber Organization

MAI Multilateral Agreement on Investment

MDG Millennium Development Goals

MEA Multilateral Environment Agreement

MMT Methylcyclopentadienyl Manganese Tricarbonyl

NAFTA North American Free Trade Agreement

NGO Non-Governmental Organization

ODA Official Development Aid

OECD Organization for Economic Cooperation and Development PRSP Poverty Reduction Strategy Paper

UNCED United Nations Conference on Environment and Development UNDP United Nations Development Programme

UNEP United Nations Environmental Programme

USITC United States International Trade Commission

WCED World Commission on Environment and Development

WSSD World Summit on Sustainable Development

WTO Trade Organization

December 2007 INTRODUCTION

1 Necessity of the thesis topic

Reflecting the growing concerns of global community on rapid depletion of tropical forests, and responding to their determinations stated in Rio Declaration of

1992, governments and people of the global community reinforced their commitments

to environmental sustainable society for the offspring of all human beings Especially,

a number of new international agreements are created or renewed to include more environmental conservation oriented clauses Efforts being made under FCCC (Framework Convention on the Climate Change) and ITTA (International Tropical Timber Agreement) of 1994 are two of the examples Organizations such as APEC (Asia Pacific Economic Cooperation) or WTO (World Trade Organization) also increased concerns on environmental conservation by way of reorganizing trade related measures It is therefore imperative to study how these international organizations should achieve the sustainable development Particularly, it is important to study the relations between sustainable development and trade liberalization which these organizations promote in order to increase the economic benefits of global community including developing countries such as Vietnam

2 General Information on Thesis Study

(1) Previous Studies

The mechanisms or arrangements adopted by member countries of international agreements can be examined theoretically and scientifically by comparing them with previous economic theories such as those stated below In order to examine these theories, mathematical analysis will be employed as a core tool of methodology Particularly, the paper will try to come up with possible mathematical solutions that are

workable even under so-called “prisoners dilemma” under game theories

(a) Theories of Common Pool Resources

Since most of the environmental assets are common pool resources, the plight

of current tropical forests and each member country's decision making process may be examined in accordance with theories of common pool resources or public goods

(b) Theories of Collective Actions

Each member country's contribution to international organizations can be affected by the amount to be contributed from other member countries Hence, the mechanisms adopted by international agreements can be examined by the theories of collective actions

(c) Other economic theories

Other economic theories relevant to environmental assets, such as theory of monopolistic market, will also be introduced where necessary

In order to verify the adaptability of these theories, an international issue and a local issue will be examined First, WTO agreements and the Doha Development Agenda will be examined particularly in its relation with global environmental movements Secondly, the situation in Vietnam will be examined particularly in relation with environmental conservation efforts in Vietnam in a global context

There have been a number of studies which have led to the theories stated above, thereby making this thesis possible The following studies are just some of such examples „Governing the Commons‟ (Elinor Ostrom, 1990) and „Logic of Collective Action‟ (Olson, 1965) are the two most important studies which provides important theoretical basis of this thesis

(a) Environment White Paper of Japan (Ministry of Environment, 2002)

There are a number of documents that raise the concern on the global

environmental crisis This Environmental White Paper of Japan presents the facts about the state of the global environmental assets and the global efforts being taken to

address these problems This document, among many others, can be used as a

reference for us to know how the global community generally views the environmental degradation as a significant threat to the global community As a government

document, this book provides brief but very clear views on this point In addition to this Japanese official report, other official documents such as FAO Year Books, UNEP Annual Reports or ITTO Official Reports also provide the general views on the plight

of the global environmental assets

(b) Environmental Economics (B.C Field, 1993)

This is a textbook widely used for the study of environmental economics This book provides basic environmental economic theories and covers every aspect of environmental economic issues This textbook is useful in exploring proper ways of application of economic theories onto mechanisms adopted by international

agreements

(c) Environmental Economics and Policy (Tietenberg, 1994)

This is another book on environmental economics Although the contents and structure of this book is more or less similar to the book by B.C Field, this book helps deepen and broaden the understanding on environmental economics This textbook presents important analysis on international environmental economic problems,

especially the sustainable development issues, which are used as the theoretical basis in constructing theoretical approach in the proposed thesis

(d) Governing the Commons (Elinor Ostrom, 1990)

This article by Ostrom provides an important key to a break-through in the collective action problems Traditional game theories indicate that the rational

behavior by individuals tend to result in the most undesirable outcome This is

considered also true in international relations, especially when it comes to the allocation

of contribution Ostrom suggested in this Article that the desirable result can be achieved if proper communication is established prior to the games This suggestion would be explored in verifying that the proper discussion and negotiation under

international organizations can lead to a most desirable outcome for all or the majority

of their member countries

(e) The Logic of Collective Action (Olson, 1965)

Olson first introduced the concept of "collective action problem" in this 1965 article The inconsistency between individual and collective interests is explored in detail in this article Since the tropical timbers are considered as "global commons," this article provides theoretical background why the tropical forests face collective action problem and are doomed to be over-exploited Combined with other economic theories of public good and common pool resources (CPRs), this article by Olson

constitutes one of the backbones of the theoretical approach in environmental

economics

(f) Price Theory and Applications (Hirshleifer, 1992)

This is another textbook widely used for micro-economics This basic

textbook on basic economic theories presents very detailed explanation about market principles This book supports theoretical approaches employed in this article by way

of supplementing the environmental economic theories contained in the book by B.C Field and others Especially, this textbook provides useful theoretical analysis on characteristics of public goods

(g) Ecology (P Stiling, 1996)

This book introduces and explains the basic ecological functions Although ecological issues are not directly related to this article because it is basically focusing on the international economic issues, basic understanding on ecology is needed to realize the issues related to the global environmental assets

(h) WTO, after Seattle (Jefferey Schott, 2001)

WTO negotiations became paralyzed at its 3rd Ministerial Meeting held in Seattle in 1999 The negotiation to launch a new round was thwarted mainly because NGOs around the world objected the globalization of trade These NGOs are mostly environmental groups such as Green Peace and WWF which believe that trade

integration harm the global environment This book by a well-know scholar from

Institute of International Economics of the United States illustrates how the WTO negotiations are affected by environmental conservation movements

(2) International Relations Related to Environmental Economic Issues

As stated above, there is a growing global concern on the issue of the environmental conservation There are many reasons for the concern First of all, there is a fear that some of the precious environmental assets such as tropical forests may disappear totally in the future not very far from now if the depletion at the current very rapid rate continues Second, people on the earth are experiencing irregularity of the world climate and its catastrophic effects on the earth, i.e., floods, droughts, loss of low land areas, etc These natural disasters are being caused by the global warming and other serious degradation of global assets In Vietnam, there has been an initial notion of environmental hazard caused by industrialization Deforestation is one of the serious problems Vietnam is faced with

Clearly, the global environmental conservation has become an urgent task that the global community should address jointly Particularly, the relation between trade and environment has become a center of discussion for trade liberalization negotiations during the past few years Hence, it is felt urgent by the world community to reduce or stop depletion and degradation of the global environmental assets Many efforts are being made by individuals, governments, NGOs and international organizations including Green Peace and WWF International organizations and agreements are increasingly being designated to address this serious issue and can be considered as the most effective mechanisms to handle issues related to the conservation of environmental assets

The main question here is how effectively international agreements can handle this issue Particularly, efforts being made under WTO framework are of significant importance because the relations between trade and environment have become inseparable Vietnam is trying to be a member of WTO by the end of 2005 and the

implication of WTO agreements and the ongoing Doha Development Agenda negotiations needs to be examined

A detailed study on objectives of international agreements and their action plans may reveal how they are designed to protect the global environment and local environment in Vietnam

Under DDA, 142 member countries decided to include “environment” as one

of the negotiation agenda to be concluded EU and its member countries, particularly France, very strongly requested that the environmental protections must clearly be linked to the trade liberalization mechanism On the other hand, most developing countries opposed to even include it as a part of agenda at all As a result, environmental issues were agreed to be integrated under the new round negation of WTO but only partially DDA is only mandated to discuss the implication of current international environmental agreements to trade However, the future development of environmental negotiations still remains to be seen

Further, it would be very useful to introduce some leading present economic theories and analyze the international agreements in accordance with these theories

By adopting theoretical approaches, the role and limits of international agreements in the environmental conservation could become clear

There is no doubt that the global environmental conservation is an urgent and very important global issue today A lot of efforts are being made by the United Nations For example, UNCED of 1992 and its agenda 21 may be the most well-known achievement made by the UN Serious efforts are also being made by a number of other international organizations, governments, NGOs, and individuals

However, international agreements are in many cases established to serve this purpose intentionally by member governments Therefore, to conduct a research on international organizations and their roles in global environmental conservation would

be a important task The knowledge about the roles of international organization would

be a very important asset for those who are concerned about the global environmental

conservation

Moreover, it is of significance to study the implication of international agreements onto the environmental conservation in Vietnam, since Vietnam is rapidly integrated into the global community as a new member of WTO

There have been a number of studies related to the relations between trade and environment especially in the context of WTO Doha Round Negotiations There are also a number of studies related to other international agreements such as FTAA and US-Jordan FTA One of the best studies probably the “WTO after Seattle” by Jeffery Schott of which the review is stated below

However, there has been no publication analyzing the impact of trade agreements mathematically in terms of environmental conservation This thesis is, therefore, unique, original and very challenging in this aspect

3 Objectives of the Study

Thus, the purpose of this thesis is to examine how International Agreements envisage to contributing to conservation of the global environmental assets that are diminishing rapidly at an increasing rate In order to discuss this, first the general objectives and mechanisms of international agreements need to be introduced Then, currently available economic theories need to be applied with the purpose to verify the effective functions of international agreements in general in environmental conservation Such an examination would contribute to seeking the best policy alternatives to achieve sustainable global development and local development in a country such as Vietnam

It is of absolute importance that Vietnam is prepared for the possible consequences of environmental degradation and responsibilities under international agreements This thesis will introduce some of the possible alternative paths that Vietnam will need to take during its economic development process

4 Scope of the Study

(1) Scope of the Study

As for the scope of the study, it is necessary to study the relation between WTO and environmental issues Environmental negotiation is included in the current Doha Development Agenda (DDA) negotiations but to the minimum extent The proposed thesis will discuss how the environmental negotiations under DDA will affect the future global trade Secondly, as a supporting factual background to the DDA negotiations, the efforts that have been made by the international community to conserve global environmental assets need to be examined

The most important element in the Vietnamese context in the proposed thesis will be the Vietnam‟s accession to WTO which has taken effect as of January 11, 2007 First, the thesis will discuss the current situation of the multilateral and bilateral negotiations on Vietnam‟s possible accession to WTO Secondly, the implication of Vietnamese accession to WTO and its obligations related to environmental conservation will be examined

The detailed analysis of issues Vietnam is being faced with WTO accession, such as SEO reform and intellectual property rights, are also discussed in the Chapter 3

of the Thesis

(2) Limitation of the Study

However, there are a few limitations in writing the proposed thesis

Functions of international agreements can be analyzed separately by different economic theories However, it will be impossible to verify the whole functions of the agreements from pure economic theories International organizations are in many cases experimental and actual operating organizations Just as the real economy can not be fully explained by economic theories, economic theories will not be able to explain the overall roles of international agreements completely

Second, it will be very difficult to obtain all data and information which will be useful for writing the proposed thesis Especially, statistical data on the volume of production, export, import, consumption, depletion and plantation, etc., may not be accurate nor updated to be used as the basis of analysis Further, evaluation or judgment about the plight of environmental damages on the global environmental assets should always be subject to bias in selecting such data Needless to say, replies obtained from interviews will also be subject to bias

The relation between trade and environment is a new international issue Although significant amount of researches have been made during the past few years, there seems to have been no researches on the impact of environmental negotiations of WTO onto Vietnam This is understandable since Vietnam is not a member of WTO and Vietnam does not have serious environmental problems at this moment

However, it is said to be almost certain that Vietnam will go through the process of environmental degradation and the consideration and introduction of new measures to address such domestic environmental issues Vietnam has now become a member of WTO Vietnam now has to abide by all of the WTO agreements The future trade of Vietnam will have to take into consideration the environmental aspects under WTO agreement

This thesis, therefore, provides new elements for Vietnam with regard to its implication of trade under WTO obligations This may be the first attempt to analyze the impact of Vietnam‟s WTO membership in terms of the relations between trade and environment It is hoped, therefore, that this thesis becomes a part of guidance for Vietnam in adjusting its trade policies under WTO agreements

5 Method of Study

The final conclusion of the proposed thesis will be whether the mechanisms of international agreements are proved to be in line with economic theories Further, effectiveness of such mechanisms in environmental conservation will be examined by

applying Coase Theorem In the absence of an absolute authority in the international society that shall force the level of consumption of environmental resources, it should

be necessary to study if international organizations can regulate the policies of their member countries

In this thesis, the focus is set on the general mechanisms of international agreements This approach would make it clear how international agreements try to achieve sustainable management of the global environmental assets The mechanisms and arrangements adopted by a number of international agreements must be studied carefully in order to understand the effectiveness and impact of their projects in relation with the global environmental conservation

Second, the results obtained by the above studies are further examined with the relevant economic theories which are introduced in the Chapter 1 of the thesis By applying economic theories, the roles and mechanisms of international agreements in conservation of global environmental assets will become clearer

Third, the Vietnamese context is examined Vietnam has become a member

of WTO in January 2007 and its implication to environment needs to be assessed properly Apart from trade implications, Vietnam will have to take the path of balancing between industrialization and environmental degradation Japan suffered quite heavily from pollutions during the fast industrialization process during 60‟s and 70‟s Such experience of Japan needs to be properly introduced to Vietnam whose economy is experiencing a very fast economic growth

The methodology of the study will mainly be the researches based on the statistics and other public documents related the relation between environmental issues and international agreements, especially on trade Some of the evidences will be derived from interviews and the diplomatic experiences of the author of the thesis

6 New Contributions of the Study

(1) New findings related to theory

(a) A new economic equation to relate two levels of sustainable management of economic resource

This thesis introduces a new concept of combining two types of sustainable

management of natural resources in a single economic equation and also under a single diagram It has been known already that there are a number of definitions on

sustainable development, and particularly, the following two types are often used as the basic level of sustainable management In this thesis, one is represented as S which means the resource level where human beings and their economic activities are

sustained permanently by the consumption of resources The other one is represented

as OS which means that, regardless the human sustainability, the resource itself is completely renewable if consumption is under this original level of environmental amenity

The relation is established as:

C ≦ ΔOS*E + S therefore, E ≧ (C – S)/ΔOS1

This equation is innovative because it shows us the relation between S and OS in a single diagram which would help us to identify the point of two possible sustainable levels at the same time in a figure Particularly, it is innovative that the renewal rate of resource, i.e., ΔOS which represents the coefficient of the OS curve, is found to be a significant factor to see the degree of divergence between the two levels of

sustainability The Chapter 1.1 introduces a detailed analysis of this equation

(b) Introduction of two enforcement factors as the background of games to see the impact on the contribution trade-offs

The games under game theory normally end up with catastrophe because of

1 E stands for Environmental Amenity Likewise, C for Consumption, OS for Original Sustainability, S for

Sustainable Level for human activities ΔOS stands for marginal net consumption

„prisoners‟ dilemma.‟ Ostrom introduced a new concept to the game theory that the introduction of a new factor represented as „e‟ for the enforcement of cooperation will lead the game to a success This thesis adopted the „e‟ as a governing condition for all games to see the effect This thesis also introduces a new factor represented as „a‟ for the arbitration system The games that are assumed to be supported by this factor in the thesis are found to be more successful than normal cases

It is truly innovative to introduce these two factors together in games, because these two factors, i.e., „e‟ and „a,‟ respectively imply enforcement of penalties and the enforcement of self-arranged arbitration system or dispute settlement mechanisms, which should also guarantee the proper negotiation or consultation process and

maximum transparency of information

(2) New findings related to the application of theory

The games played with the above mentioned two factors under the principles of game theory turned out to be more successful than the cases without them This

outcome rightly confirms that the policy dialogue with information transparency and the proper system of arbitration or dispute settlement are crucially important for the negotiation under international organizations It is particularly innovative to note that these two factors should be introduced together to make negotiations even more

successful

(3) New findings as implication to Vietnam

As already stated above, Vietnam will face certain amount of pressure from

members of WTO to Vietnam‟s domestic environmental policy through trade measures

It would be possible that Vietnam will be sanctioned by WTO if Vietnam does not

abide by the requests from other international environmental organizations such as

ITTO, because the relation between WTO and other environmental organizations are now being negotiated under Doha Development Agenda

A number of games played in the thesis turned out to be failure for which

sanctions may be applied by the organization This implies that Vietnam may also be

sanctioned if the negotiation under international organizations fails

Then what Vietnam should do? This thesis tries to provide an answer to this question As general game theory tells us, it is not realistic to think that there would

be a system for any games to become successful Therefore, in some difficult cases, sanctions may of course be unavoidable This thesis, however, proves that the games become more likely to succeed when the fund or contribution is directly transferred from consuming member countries to Vietnam Coase theorem holds a crucial key for this to happen In other words, for certain environmental natural resources which Vietnam holds the complete property rights over the environmental quality of the

resources, such as tropical timbers, Vietnam would possibly request cash support from international organizations even without paying any contribution to the fund In order for this path to be taken by Vietnam, Vietnam needs to identify how much other

countries see the value of the environmental amenity would be If other countries or the global community in general see it large enough, the game may become successful and Vietnam would not be sanctioned even though Vietnam does not contribute to the fund The point is that Vietnam should obtain sufficient information about the

position of other counties and then negotiate for the possible fund transfer as a

compensation for not consuming or depleting certain resources which Vietnam holds property rights

Chapter I ECONOMIC THEORIES RELATED TO ENVIRONMENTAL

CONSERVATION

The environmental natural resources are not governed by the market principles Therefore, they are being depleted along with the development of global economy This thesis examines the economic mechanisms surrounding the environmental natural resources and economic theories that are generally acknowledged as the basic tools for the economic analysis of environmental conservation

1.1 Theories of common pool resources

Environmental quality is essentially a public good It is therefore imperative

to know the characteristics of public goods in order to understand environmental issues Public goods can be classified into a few more specific categories such as pure public goods, congestive goods and common pool resources (CPRs) CPRs are also sometimes called open access goods or common property resources General definition of public goods is that they are the goods that can be consumed by other people even if they are already consumed by one person This is distinctively different from private goods that can not be consumed by another person if once consumed by one person Examples of pure public goods are defense and radio broadcasting services If these services are once provided, everyone can enjoy the benefit For these services, quality of the services is not affected by the number of people who receive the services Examples of congestive goods are public roads and bridges These public goods are open to everyone but the number of people who can use the goods is not infinite The more people use the facilities, the more they become congested Efficiency of the services will decrease as they become congested; however, the amount of the goods is not affected Examples of CPRs are clean air,

water, ocean fisheries, forests, to mane only a few Under the present legal system, they are not generally considered as private goods Therefore, access and exploitation

of these goods are free to everyone They can be consumed as first comes first serves basis For these goods, as the number of people who consume these goods increase, the amount of the goods themselves decrease and the service quality may deteriorate CPRs can be further classified into renewable and non-renewable resources If the rate of consumption is faster than the rate of renewal, the goods will be all consumed up

in the end

Although CPRs can to some extent behave like private goods in accordance with economic theories, theory analysis of public goods fits more in understanding the characteristics of CPRs Therefore, it is required to introduce hereby the theory of public goods

Common Pool Resources (CPRs) are those that are not exclusively controlled

by a single agent [Tietenberg, p.38] The term "common-pool resource" also refers to

a natural or man-made resource system that is sufficiently large as to make it costly to exclude potential beneficiaries from obtaining benefits form its use [Ostrom, p.30] Access to a CPR can be limited to a single individual or firm or to multiple individuals

or teams of individuals who use the resource system at the same time

It is necessary to understand how CPRs are treated in the market because this is the starting point why environmental resources can not be left to the market forces for their own conservation Otherwise, no efforts would be needed by any international organizations

For normal private goods, the demand and supply function can be illustrated as shown

in the Figure 1.1 Here, the amount of supply is expected to grow as price of goods increases This is considered as a common characteristic of normal private goods However, for public goods, especially for CPRs, the amount of supply, accordingly the price as well, is not affected by demand changes As illustrated in the Figure 1.2, the amount of increase in the case of public goods tends to be greater than normal private goods as described in the Figure 1.1 Public goods are thus by definition free to be

exploited by anyone

S1 is the supply curve for a normal private good

Figure 1.1: Supply-Demand Relation for Normal Private Goods

S2 is the supply curve for common pool resources

Figure 1.1 and 1.2 show that Q‟‟>Q‟; therefore, CPRs are likely to be priced lower and exploited more than private goods

Figure 1.2: Supply-Demand Relation for CPRs

These supply and demand relations can also be illustrated as shown in Figure 1.3, 1.4, 1.5 and 1.6, using Total and Marginal Cost functions A total cost curve is

normally considered to rise steeply first, then increase slowly and then again rise

steeply The maximum profit is achieved where AR=MC; therefore, the quantity supplied to the market would be Q1 in the case of normal private goods as shown in the Figure 1.3 In the case of public goods, the amount supplied into the market is larger than that of private goods In the Figure 1.5, Q2 is the amount of supply The cost of purchasing environmental goods is small or almost nothing as they are CPRs; therefore, the total cost curve reflects only the cost of harvesting operation Thus, the public goods or CPRs are proved to be over-exploited than private goods, by MC and MR approach as well2

2

The relation Q2 > Q1 is clearly found by Figures 3-6 Also note that the relation P1 > P2 is established

TR=aQ The coefficient a is smaller in Figure 1.5 than Figure 1.3 because of the

characteristics of economic externality of CPRs

The implication of above tendencies of over-exploitation of public goods (CPRs) for the sustainable management of the resources can be illustrated as shown in the Figure 1.7 In this Figure 1.7, the vertical line S represents where the resource can

be managed to maintain the sustainable growth level If consumption level leaves the environmental amenity level to the right of S, the resource can be sustainably managed, and if consumption brings the amenity level down to the left of S, the resource size is not capable to support sustainable management the resources It should be noted that the word "sustainable" has not been clearly defined in the cases some of the CPRs such

as clean air Here, in order to understand easier the environmental concerns relating to such CPRs, S is considered to be the level where the resources can satisfy all environmental economic values Therefore, below this point the CPRs capacity to maintain global environmental values is not sufficient

Now, let us introduce a new line in the Figure 1.7 to identify the desired level

of consumption at which natural resources are completely and self-sufficiently

sustainable in their original net amount on an annual basis Here, it is named as the Original Sustainability Consumption (OS) line OS=0 line is the boundary within which the net consumption of CPRs is always zero or negative at the end of each year

In other words, the consumption is being offset annually by its natural reproduction below this line The resources will keep decreasing in amount above this level,

leading to the continuous shrink of the Production Possibility Curve (PPC) Thus, OS=0 line is a useful new tool to illustrate the level of „desirable consumption point.‟ This curve provides new concept with regard to the sustainable management In an absolute sense, the OS=0 is the true sustainable curve but that is not necessarily the case under consensus Sustainability is often set at the point where human being can

survive sustainably, which allows certain abundant natural resources to reduce its total amount Therefore, the introduction of the concept of OS=0 is truly innovative

because it illustrates the point of environmental sustainability and resource

sustainability at the same time in a figure

Introduction of a new equation

Further, there is a more important implication in this Figure 1.7 related to OS

Under the definition stated above, the slope of the OS curve is found to be equivalent to

the velocity of resource reproduction Hence, the following equations are defined as a

condition for sustainable management of renewable resources

C ≦ ΔOS*E + S therefore, E ≧ (C – S)/ΔOS

This new equation6 eloquently tells us the relations among the reproduction

velocity, sustainable level and consumption True sustainable management thus must

satisfy this equation In the Figure 1.7, the level of consumption which satisfies this

condition is below Q3

5

A is the original indifference curve when environmental amenity is considered as externality to its

economy A‟ is the optimal indifference curve that takes into account the value of environmental

amenity If the indifference curve touches the PPC (Production Possibility Curve) to the left of S line,

the resources can be managed sustainably This is endorsed by the relation d1 < S < d2 It is clear

that the resource sustainable point requires much less amount of resource consumption compared with

the case where sustainable management in a general sense is attained

6

In this equation, C stands for Consumption, E stands for Environmental Resources, S stands for

Sustainable Level, and OS stands for Original Sustainability

1.2 Theories of collective actions and International Agreements

It is generally understood that the negotiations at international organizations are explained by the economic theories of collective actions [Field, p.448-470] According to game theories, when there are gains to be made by defecting, rationale behavior by participants will result in the most undesirable outcome for all the participants This indeed seems to be true in the negotiation process of distribution of contribution among international organization related to natural resources Each member country always tries its best to make its own contribution as low as possible at the expenses of other members' contributions If so, no arrangements taken by international organizations can succeed

In addition to the problem of public goods as stated above, it is necessary to understand the collective action problem in order to fully realize the economic problems that tropical environmental natural resources are facing The collective action problem was first addressed by Olson (1965) in relation with the provision of public goods by organizations The essence of collective action problem lies in inconsistency between individual and collective interests It is usually explained by using game theory models as shown in Box 1.1

The economic theory of collective action is the study related to the provision of public goods through the collaboration of two of more individuals or organizations A vriety of forms can be considered based on the situations to which analysis is applied The theory is also concerned about the impact of externalities on the behavior of the individuals or groups A number of strategies can be considered under the theory with regard to the collaboration and behavior which can be best illustrated under the application of game theories

Basic Concept of Game Theory

Theory of Collective Actions is very often explained through game theories

In fact, game theories are the most plausible approach to explain the problems faced under the collective actions As it has been explained in the previous section, public

goods are free to be exploited by anyone once they are provided Therefore, it would

be beneficial, or economically profitable, not to contribute to the provision of these public goods but to free-ride on other countries This can be called the “free-ride strategy.” In the Box 1.1, left columns indicate economic values for a country A when

it contributes and right columns indicate the value when A free-rides Similarly, the upper columns indicate the value for a country B when it contributes and the lower columns indicate the values when B free-rides There are several game patterns but the game illustrated in the Box 1.1 is most commonly used In this game, the worst outcome is unavoidable if both countries adopt individually the best option that is to defect (free- ride)

Hence, collective action theory, by being illustrated by the above basic concept

of game theories, tells us that the desirable result will not be reached when individual participants try to maximize its own economic benefit This is considered particularly true for international community because there is no authority in the international community that can force its individual members to choose an option that can maximize the benefit for the overall community When a desirable result is obtained through collaboration, the game participants could have adopted the “collaboration strategy.” The collaboration strategy can be taken when certain conditions are provide

to avoid the free-ride strategies The main purpose of the game theory study is to find out the equilibrium points that can be achieved through collaboration strategies and the conditions which would make the strategy workable There are a variety of strategies that have been considered by the past economists For example, a game which could threaten the players for the expectation of worst scenarios is often called the “game of chicken.” “Prisoner‟s dilemma” is of course the base of the game of chicken “Zero sum” or “non-zero sum” games are another kinds of basic game formats It is easily envisaged that a free-ride game can be generally expected under a non-zero sum game

if the value of the game tends to a highly beneficial ones for all the participants with smaller differences of benefits among them On the other hand, if the difference of damages from the game is huge under a zero-sum game, the incentive to collaborate

would be larger than the above mentioned non-zero sum game With different angles

of games, other types of strategies can be considered Such games include

“simultaneous and sequential games,” “perfect information and imperfect information games,” “symmetric and asymmetric games,” to list only a few Thus, a variety of game types is possible depending on the conditions or situations set forth for a game Perhaps, one of the best known concepts of collective action is the Nash equilibrium Nash equilibrium is defined as “the point where no player can do better by unilaterally changing his or her strategy.” [Suziki, p.51] This thesis however does not have to employ Nash equilibrium or many other types of games because the decision making process of international organizations and member countries can be better explained through basic “prisoner‟s dilemma” type games when the amount of trade benefit and possible sanction are the only points in consideration for the countries in the open global community as assumed in this thesis

1.3 Coase Theorem

The Coase Theorem is generally defined as follows

“As long as property rights are well-defined and as long as payments among the parties are possible, the externalities will be taken into account by the parties and the optimal result will occur The party that gets the rights will be better off but the society will have achieved the best possible result.” Or more formally, “When the parties affected by externalities can negotiate costlessly with one another, an efficient outcome results no matter how the law assigns responsibility for damages.”

Coase theorem is important in a sense that the market can achieve equilibrium under certain condition for any kind of goods including environmental goods As the Coase theorem indicates, market economy will work properly if the property rights are properly defined, but under international laws it is often not possible

This is exactly the reason why international agreements are required International agreements can overcome this collective action problem by providing

necessary legal framework to which all member countries are requested to abide by Economic sanctions or other types of punishments can also be introduced to let the agreements work properly

However, the Coase Theorem has a problem in applying itself into the actual market economy, because the Coase Theorem is based on the assumption that there is

no transaction cost in the process of determining the efficient equilibrium among players which can be brought in under the properly assigned property rights In the real society, this never happens In the real society, even though the property rights are properly determined, it is often very difficult to identify them and to form consensus among the players about the exact implications of the property rights Courts are always very busy for the civil cases related to property rights Sometimes, the cost and time that are needed to win the cases are more than the benefit that the defendants

of the case can obtain In the case of international society, the transaction cost is probably many times higher that domestic cases in a country, because the laws which should form the basis of the property rights are different from country to country If the transaction cost is higher than the benefit at stake in the dispute, therefore, there would be no equilibrium in the international market The responsibility of the international agreement is, therefore, to clearly define the property rights with regard to the environmental goods which each organization is responsible for However, this is only the first step As stated above, what is crucially important is to reduce the transaction cost to a manageable and beneficial level to all parties concerned This would be possible if the organization is properly equipped with the mechanism to settle disputes by overriding the sovereign rights of member countries The World Trade Organization (WTO) is the only organization that is equipped with such a mechanism

as of today

1.4 Game Theory

As briefly mentioned in the above sections and illustrated in the Box 1.1, game

theory is a branch of applied mathematics that uses models to study interactions with formalized incentive structures ("games") It has applications in a variety of fields, including economics, international relations, biology, political science, and military strategy Game theory is related to the study of the predicted and actual behavior of individuals in games, as well as optimal strategies Seemingly different types of interactions can exhibit similar incentive structures, thus all exemplifying one particular game

The most well-known and basic game theory is called the prisoners‟ dilemma

In this game, the reasonable and profit-making behavior of players always results in catastrophe for all players The environmental values are generally considered to be trapped in this prisoners‟ dilemma Therefore, it is important to know the mechanism

of game theories and apply them to environmental goods with a view to preventing them from depletion in the international free market

There is a more advanced game theory related to the conservation of environmental goods, i.e., a cooperative game A cooperative game is characterized

by an enforceable contract and games under this co-operative theory give justifications

of plausible contracts The application of this theory to the international environmental goods is particularly important because it would be possible for a market

to achieve sustainable level of equilibrium if the rules of the market are based on this game The purpose of the thesis is to find out if an international agreement can provide conditions which will lead to plausible contracts among players of a market for environmental goods

The Figure 1.8 indicates the case when the country A damages the environmental quality of a certain domestic natural resource at the point d1 and international community wish to regulate the damage to be reduced to the level of d2

If property rights are properly defined to the global community, the damage level can decrease from d1 to d2 automatically but in the international society A is free to choose d1 as its best economically beneficial level because A has the absolute sovereign power

to decide the level of its economic activities

In other words, as Ostrom indicated in her 1990 article, collective action problem can be solved if proper negotiation or information exchange can be made before each participant to the game decides its own individual action In the case of Box 1.1, the right bottom is the outcome reached in the absence of international agreement, and the top left can be the outcome obtained under an international agreement

Box 1.1: International Agreement and Game Theory

IV is the result without an international agreement

I is the result with an international agreement

MDA is the Marginal Damage Curve for Country A

MDG is the Marginal Damage Curve for the Global Community

MAC is the Marginal Abatement Cost Curve which represents the cost to alleviate the environmental damage

The relation d1 > d2 illustrates that the global community sees the reduction of environmental damage more cost effectively because the damage reduction does not cause any negative impact to their economy On the other hand, the source country considers the cost of damage reduction higher because its domestic industries would be affected if the cause of the environmental damages is to be reduced