Property Rights and Collective Action in Natural Resources with Application to Mexico Lecture 1: Introduction to the political economy of natural resources Lecture 2: Theories of collective action, cooperation, and common property Lecture 3: Principal-agent analysis and institutional organization Lecture 4: Incomplete contracts with application to Mexico Lecture 5: A political economy model Lecture 6: Power and the distribution of benefits with application to Mexico Lecture 7: Problems with empirical measurement with application to Mexico Lecture 8: Beyond economics: An interdisciplinary perspective

Outline Types of goods: common pool resources Tragedy of Commons Prisoner’s Dilemma Collective action (Ostrom 1990) Mexican forestry policy Profile of Mexican community forestry

Models of natural resource problems Tragedy of commons Prisoners’ Dilemma Olson’s Logic of Collective Action (1965)

Who will provide, use and maintain resource? Depends on “type” of good: – Is the good excludable? – Is the good rival?

THE DIFFERENT KINDS OF GOODS Excludability –a person can be prevented from using it. Rivalry in consumption –one person’s use diminishes other people’s use.

Common Resources Tend to be: –Rival –Nonexclusive –Examples: Fisheries Water routes The environment

The Free Rider Arises from the exclusion problem. A free-rider is a person who receives the benefit of a good but avoids paying for it. Each person hopes other will pay for it.

Tragedy of the Commons The free rider problem with common resources Common resources tend to be used excessively when individuals are not charged for their usage.

Tragedy of the Commons The parable (Hardin 1968): –A herdsman puts his animals on the pasture he uses in common with other herdsmen. Even though signs exist of pasture degradation with overstocking, it is “rational” for each herdsman to add more animals because he gains full benefits of each extra animal while sharing costs of overgrazing with other herdsmen. ….. “Freedom in the commons brings ruin to all.”

Free Rider Problem and Common Pool Resources Will anyone have adequate incentive to restrain themselves in the appropriation and provision of common pool resources?

The Prisoners’ Dilemma Bonnie’ s Decision Confess Bonnie gets 8 years Clyde gets 8 years Bonnie gets 20 years Clyde goes free Bonnie goes free Clyde gets 20 years gets 1 yearBonnie Clyde gets 1 year Remain Silent Remain Silent Clyde’s Decision

A Common-Resource Game Exxon’s Decision Drill Two Wells Drill Two Wells Exxon gets $4 million profit Chevron gets $4 million profit Chevron gets $6 million profit Exxon gets $3 million profit Chevron gets $3 million profit Exxon gets $6 million profit Chevron gets $5 million profit Exxon gets $5 million profit Drill One Well Drill One Well Chevron’s Decision

Prisoner’s Dilemma Shows how cooperation breaks down Noncooperation is dominant strategy Cannot get to Pareto optimal outcome Premises: Narrow view of individuals – one-shot game Depends on uncertainty regarding others’ actions

Olson’s Logic of Collective Action (1965) Groups do not just form: Unless the number of individuals is quite small or unless there is coercion or some special device to make individuals act in their common interest, rational, self- interested individuals will not act to achieve their common or group interests.”

Olson’s Logic of Collective Action (1965) Premise: –Free rider –Inability to exclude How form groups: –Individual incentives –Smaller or medium “sized” groups have it easier –External actor like an entrepreneur –Something else

Ostrom’s revolution (1990) How explain institutions that exist (informal and formal rules, customs, norms, laws) that govern common pool resources Open access versus common property Property implies an institution has been created Not PD game or TOC Collective action problem: How, when, why institutions emerge and evolve to govern common pool resources?

3 puzzles for collective action 1.Supply of institutions –How overcome free rider problem? 2.Credible commitments –How believe that rules will be followed in LR? 3.Mutual monitoring –Cost to monitors, so will they report?

Classical means of collective action: (a) Theory of firm –Entrepreneur realizes an opportunity (supply) –Negotiates contracts with others (supply) –Individuals induced to participate (credible commitments) –Entrepreneur makes a take-it-or-leave-it offer (credible commitments) –Keeps residual profits/losses (supply, credible commitments) –Entrepreneur monitors performance and can fire agents (monitor) 1. Supply of institutions 2. Credible commitments 3. Mutual monitoring

Classical means of collective action: (b) Theory of state –Political entrepreneur (supply) –Ruler gets monopoly on protection and use of force –Everyone protected (credible commitment) –People give taxes, labor, resources or else are sanctioned (monitoring, credible commitment) –Ruler gains residuals (credible commitment, supply) 1.Supply of institutions 2.Credible commitments 3.Mutual monitoring

Classical Solutions for Common Resource Problems Property rights (Privatization) –Create a “private” property right for a group –Ex.: Water markets, carbon markets, PES Regulation (“Leviathan”) –Ex.: Fisheries

Alternative assumptions Think “collective action”: What if all principals and no agents? Alternative assumptions: –Not a PD game Appropriation (flow) and provision (stock) problem More complex games Assurance, repeated games under uncertainty, establish trust, and sense of community where players signal intention to cooperate  cooperative equilibrium. No one model of collective action –Multiple scales and levels of analysis Beyond operational rules Collective action and constitutional rules Technology and institutions change

Collective Action Problem How, when, why institutions emerge and evolve to govern common pool resources?

What look for? Characteristics of resource and users Example of coding forms: –Appropriation resource –Location –Operational level –Appropriation subgroups –Operational rules –Organizational inventory –Organizational structure and process –Inter-organizational level

Determinants of collective action (from most to least important) Shared fear of damage if did nothing together “We are in it together”: most are affected in similar way “Been here and going to stay here”: most have low discount rate “Cheap”: Low costs of information, transformation, enforcement “We can talk”: social capital, reciprocity, trust Small and stable group

Application to Mexican Forestry! What mean by collective action in forestry in Mexico? How did this come about? What are main challenges?

Core Community Governance

Vertical Integration Profile: Semarnat Permit Data (~2004) StateNo current production Stumpage Contracting Roundwood SalesLumber or Secondary processing Total CAMPECHE QUINTANA ROO CHIAPAS GUERRERO PUEBLA JALISCO OAXACA CHIHUAHUA MICHOACAN DURANGO Total % of total (1578)21%41%28%10%100%

Sample Community Forest Characteristics StateTotal forest (ha) % of total sample area Avg. ha. forest # c’s with forest 25 th percentile 50 th percentile 75 th percentile Max PUEBLA MICHOACAN JALISCO GUERRERO CHIAPAS QUINTANA ROO OAXACA NA CAMPECHE DURANGO CHIHUAHUA Total

Colonial period Spanish displaced people by rewarding people with land grants. Timber for mining, ship building, fuel to urban areas. Poor forest regulation Independence 1821 but no major forestry departments created. Post-1821 problem: how get investors if land communal and not in land market? Answer: privatize and expropriate from church and indigenous sectors.

Colonial period Railroads grew a lot. Land survey companies eventually owned ¼ of national territory Lands concessioned Indians lost 90% of their land. Most law favored investors Little law regulated forest. Deforestation blamed on Indians

: property but no rights, power 1930: 920k ha of forest in ejidos 1940: 6800k (Cárdenas) 1926 law: introduced parks, bans, some regulation, the permit process, but little changed Rentismo become entrenched in a negative way, based on unequal partners, conflict and low prices. No money for enforcement, no money to communities Quevedo blamed deforestation on Indians and companies; pushed forest conservation above all else; created forestry schools and forestry society; wanted public control.

: Concessions granted Many small private logging companies, very inefficient, local leaders manipulated 1956: damage assessed by government offices but concluded that there was underproduction due to the inefficiency and lack of planning. Solution: bans in some places, concessions in others. Concessions: import substitution, UIEF

: Little change Bans ineffective; experts recommended rational production 1960 law: allowed “participatory associations” -- association between a buyer and a seller, i.e. the community and some company, to harvest. Still no money to support program or ministry Foresters like police, and lots of corruption Campesinos marginalized Concessions same as rentismo Corps in ag ministry argued for grassroots forestry development Some attempt to create community businesses through INI and ejido credit bank; top down effort that did not have widespread success.

: Community forestry Puebla forestry plan grouped communities and small owners; gave training, slow process of organizationally development and did “better” Other success: Plan Piloto in QR: End of concessions 1986 law: no more concessions, permits to owners, community businesses recognized; first law to have as purpose the welfare of communities. By 1992 about 40% of commercial production from communities

How is Mexican community forestry collective action? Eventual devolution of rights and abilities over time: –Community rights strengthened –Access to and participation in market increased Decisionmaking in community: –Collective decisions to invest and manage –Individual decisions to “cooperate” with rules and support enterprise –Embedded within agrarian community system

Community Forestry Governance with Specialization

How 1992 reforms changed forestry Privatization of individually-used ag land possible Cannot privatize land classified as forest. Procede titling program Mobility w.r.t. ejidatario rights. Can form a SPR for work groups. Plantations a more distinct possibility because allows consolidation of some lands. Privatized STFs

Major challenges Managerial expertise Technical expertise

State Programs PRONARE: reforestation PROCYMAF: institutional capacity, technical assistance PRODEFOR: About 6500 projects funded, about 4000 of those for management, mainly thinnings, fire prevention, and management plans PSAH: ecosystem services outside of forestry sector

Questions for Mexican Community Forestry Policy What is role of “community” in future of Mexican policy? In forestry policy? Eventual privatization? More forests to state control/ownership of forest? Communities as stewards of forests or economic actors?

Conclusions New institutional economics Common pool resources as a collective action problem Mexican community forestry –Actor in market –Role in management of forests –Based on local governance Next lectures: –Application to Mexican community forestry: how is it like a firm? How is it not? –Incorporating power and influence

Other games Repeated PD game Assurance Tit for tat

Assurance Game Bonnie’ s Decision Confess Bonnie gets 8 years Clyde gets 8 years Bonnie gets 20 years Clyde gets 5 years Bonnie gets 5 years Clyde gets 20 years gets 1 yearBonnie Clyde gets 1 year Remain Silent Remain Silent Clyde’s Decision