Living Economics

Owners, Keepers?
Bohn & Deacon
Stronger property rights may reduce overexploitation of natural resources that require little upfront capital investment, but may lead to faster exploitation of resources that require substantial upfront capital investment.

Most economists think that weak property rights will lead to over-exploitation of natural resources. But not all natural resources are alike. For example, some natural resources require more capital-intensive techniques of extraction, while others require more labor-intensive techniques of extraction. Might the mode of extraction change how property rights affect the exploitation rate of natural resources?

In most developing countries, natural resources such as forests are generally owned by the state. But the ownership rights are poorly enforced due to lack of vigilance, funding shortage and weak courts. Weak ownership rights mean in effect open access to these resources. But these de facto access rights1 are not secure. Given the high risk of being denied the right to log in the future, loggers find it worth their while to cut trees at a very early age, rather than letting them mature before doing so. The low level of capital investment further abets such over-exploitation. Anyone with a saw can go and cut trees! The case of Amazon's deforestation is a classic example. With these resources, more secure access rights or private property rights would indeed slow down exploitation.

On the other hand, resources such as petroleum, which require large up-front investments to begin extraction and production, bring about the opposite outcome. Namely, insecure ownership slows the extraction of petroleum and presumably other capital-intensive resources as well. This logic is confirmed by empirical data too - a small increase in private ownership leads to a substantial rise in drilling activity.

Thus, making property rights more secure does not necessarily slow down the exploitation of all natural resources. It all depends on whether the discounted long-term gain of conservation is higher than the short-term gain of total liquidation. It also suggests to policy makers that financial aid in the fight against deforestation may have little impact unless accompanied by stronger property rights. This means that the trend towards stronger ownership rights – brought about by the spread of democracy and political stability – will have offsetting effects on the extraction rates of the world's natural resources. To Third World countries that are concerned about carbon emissions from deforestation and fossil fuel combustion, reduced ownership risk would thus result in a mixed blessing.

Note:
  1. De facto rights exist by custom or by default and cannot be easily taken away. But because of their uncertain legal status, they cannot be transferred or monetized. Therefore their money value is much less than their use value.
  2. De facto rights exist by custom or by default and cannot be easily taken away. But because of their uncertain legal status, they cannot be transferred or monetized. Therefore their money value is much less than their use value.
References:
  • Bohn H. and R T. Deacon. “Ownership Risk, Investment, and the Use of Natural Resources,” The American Economic Review, June 2000: 526-549.
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