Tatiana Brown
EKHK31
August 2013
Policy and RegulationEffects on the Timber Market:
A Case Study of Ghana
Based on the timber export sector of Ghana,and in particular, export to the EuropeanUnion.
Lund University
Department of Economic History
Examiner: Prof. Benny Carlson
Supervisor: Erik Green
Table of Contents
1.Introduction
1.1Objective
1.2Previous Research
1.3Theory
1.4Hypothesis
2.Method
2.1Approach
2.2Data
2.3Variables
2.4Classification
3.Historical Background of Ghana
3.1Post-Independence
3.21980, the Economic Recovery Program and the World Bank Timber Rehabilitation
3.31990
4. Regulation and Policy changes and their effects on the export of timber
3.1 Regulation and Policy Change by Ghana
3.3.1Forest Policy
3.3.2Bans
3.3.3Ghana Investment Code 1985
3.3.4TIDD
3.3.5ERP years
5. Regulation and Policy changes(EU/ECC)
5.1 Regulation and Policy Changes by the EU
5.1.1 The International Tropical Timber Agreement 1983
5.1.2 The International Tropical Timber Council
5.1.3 Eco Labeling
5.1.4 The UK Timber Procurement Policy
5.1.5 The FSC
5.1.6The ERP revisited
5.1.7 FLEGT and VAP’s
6. Empirical Findings
6.1 African Timber Production and Export
6.1.1 Export and Value
6.1.2 Exports of Timber from Africa to Europe
6.2 The Impact and Effects of Regulation and Policy by EU on the Production and Export of Timber.
6.3 The Increase of Exports after Ghanaian Regulation and Policy Changes
7. Analytical Discussion
8. Bibliography
8.1 Literature and Articles
8.2 Other Literature
- Introduction
1.1 Objective
This study analyzes the economic effects of environmental regulation. More specifically I will analyze the economic impact ofenvironmental regulations of the European Community on Ghana’s timber export sector. As with many developing countries, Ghana relies heavily on the extraction of its natural resources, such as minerals, forests, and agricultural land to meet its economic growth and other social development objectives.[1]
Tropical forests are rapidly disappearing as tropical countries develop the value-added sectors of their forest industries.[2]Recently, the study of economics has been swayed to take into consideration environmental factors, as well as the growing impact of the European Union Market. Deforestation is the main cause for environmental debate today. The problems and impacts surrounding illegal logging and the export thereof have amplified, causing an increase in regulation from the importing countries. The pressures of environmental sustainability come from both the importing countries as well as the EU itself. These pressures are having great effects on the timber production companies, with the majority situated in economically unstable and export-dependent countries. For over 40 years, Ghana as well as other African countries have exported their timber primarily to European countries, resulting in a good source of income for the Ghanaian economy. The European Community and the European Union have implemented regulations and policies for the sustainability of forests, controlling the types andamount of timber exported and in turn the price of timber.
Since 1981, the annual rate of deforestation in Ghana has been two percent per year or 750 hectares each year.[3] Since 1994, the export quantity of roundwood andindustrial tropical roundwood has decreased dramatically. Why has Ghana’s timber export declined since 1990? In order to answer this question, this thesis will use empirical evidence that suggests European regulation implementation affects the quantity of timber exported to Europe.
To understand the effects, one must analyze the historical data up until 2012 and see where patterns and trends have occurred in line with changes of regulations. I have used Ghana as a case study to show more specific data and as an example of how Europe can mildly control timber export from developing countries. Ghana is also a good example of a developing country not reliable on oil export and, more importantly, reliable on timber export.Furthermore, in 2009 Ghana was the first African country to sign a voluntary partnership agreement (FLEGT) with the EU to export only legally harvested timber to Europe. With this as an example of timber regulation with Africa, I decided to focus on Ghana and analyze its exporting history with Europe.
The European member states during 1970 to 2012 have been chosen in this thesis since they are one of the biggest importers of timber in the world, particularly from African developing countries. Ghana is a perfect example of a primarily export-based economic community. It has also been the largest exporter of timber and tropical hardwood to Europe, until recent years.
Furthermore Ghana is a country in Africa which shows reliable data in relation to oil export, which could affect both the data collected as well as the economy in itself. Despite oil being discovered in 1970’s, it was insignificant to the economy up until 2009.
1.2 Previous Research:
I have looked at Ghana as a whole, involving political, social and economic circumstances pre-independence and post-independence. This is to give my research and understanding of Ghana a broader scale and not just to focus on the export sector.
1.3Theory
According to Stigler, the Theory of Economic Regulation states that a regulator faces special interest pressure from producers and electoral pressure from consumers. [4] Furthermore, he suggests that there are two ways to help a producer; via a direct subsidy or via protectionism. Regulators favor a protectionist method of limited entry to the market. Therefore protective regulations like tariffs, licensing, fees and other economic instruments are used. He also suggests that within this theory, regulators receive the gains, despite the producers assuming it is to their advantage.This is contrary to my thesis.
The purpose of discussing this theory is to show the different perspectives on regulation. In this case, regulation is causing a negative impact on the economy of Ghana and reducing its export of timber. I will show that EU regulation is reducing the amount of timber export from Ghana and through this regulation protectionism on the timber market occurs.
Strategic theories of protection argue that countries strategically alter trade flows in order to gain some kind of market advantage. Magee, Brock and Young (1989) suggest a hypothesis that protection is targeted towards disadvantaged groups.[5]In general, an increase in a country’s terms of trade causes the equilibrium of protection to rise and the export subsidy to fall.[6]It has been claimed, for example, that trade between two countries with different levels of environmental regulations will lead to the low regulation country specializing in pollution intensive production.[7]
The effects of regulations and the impact of regulators can have a negative impact on economies and markets, especially when considering environmental policies.The intention of an environmental policy or regulation is to ensure the sustainability of a resource, not encourage more production of the resource. The Austrian School of thought has supported the idea that regulations are problematic and that regulations will have unintended consequences.[8]Regulations, as I suggest in this thesis, are restricting the export of timber out of Ghana. Cordato even writes in notion of using Austrian theory in environmental economics.[9]
In my thesis I will also use economic theory to show how the demand of a commodity reacts to its price. According to economic theory, if the price or value of a commodity increases the demand for the commodity will decrease.
1.4Hypothesis
For this thesis I will attempt to show that the export of timber is affected by the regulations and policies by Europe through empirical evidence, using economic theory as my foundation for research, and tying links with the Austrian school of thought. When the regulations and policies are implemented the data will show an increase in the price of timber and a decrease in the amount exported. The regulations and policy changes are therefore variables. The value of production and export of timber are the initial factors.
The Ghanaian economy is dependent on its timber export sector. This analysis will therefore show the production, price and export of timber before European regulations were implemented, showing low timber prices, and large export quantities. Then the analysis will show the production, price and export of timber after European regulations were implemented, showing higher timber prices and smaller export quantities.
Regulations implemented by the Ghanaian governments and Forestry Departments described in this analysiswillshow how, on the other hand, local government regulations have increased timber export quantities, reduced the prices of timber and in turn encouraged economic growth.
2. Method
2.1 Approach
The approach in this thesis is to firstly understand the timber market in Africa and thereon the timber market of Ghana, together with an overview of the Ghanaian economy from post-independence to today. Thereafter I have focused on the regulations and policies implemented by firstly the Ghanaian government, and secondly by the European Community. With this analysis of the regulations covered I attempt to show the patterns of timber export after the regulations or policies have been implemented or changed, with the use of diagrams taken from databases, literature analysis and an interview from a large timber company in Ghana.
To gain an understanding of the economic patternsand of timber export to Europe and to show the decrease in timber export from Ghana I have used three different ways of collecting information.
2.2 Data
Within my empirical findings, my primaryquantitative data is collected from statistical databases such as World Bank and FAOSTAT Forestry, the Forestry Commission of Ghana, as well as the European Commission for facts on regulations and policies on timber import. Reliable articles and literature have allowed me to attain historical data since it is difficult to find within databases, especially in terms of demand for wood products, where little to none has been documented. Quantitative datahas been displayed in diagrams to show patterns of timber value and timber export. This method of approach has also been useful by allowing me to specify different species of timber. Using economic theory to interpret my empirical findings I can show how the price of timber correlates to the export of timber. The period of 1961 to 2012 has been selected for the understanding of timber export as a whole; however the period of 1990 to 2012 has been selected when discussing the effects of EU regulations and policy changes since the majority of changes occurred during this time, as well as the period of 1980 to 2012 when discussing the effects of Ghanaian regulations and policy changes. Furthermore it allows the reader to be capable of analyzing the difference between timber value and export before and after these changes.
Secondary data has been carefully selected from literature, the majority of which is qualitative data in consistency with policy and regulation implementation, as well as showing their effects.
After showing the collection of data and empirical findings, I will show that my hypothesis is satisfied through my analytical discussion.
2.3 Variables
The changing factors in this thesis are the regulations implemented. I have used those by the Ghanaian government and those by the EU to show the contrary effects of regulations implemented.
There are several variables which could have had an effect on the result but have been ignoredin this thesis: 1) the global competitive market, with several other countries producing much larger quantities of timber for export, for example China, 2) Employment withinthe timber sector in Ghana, which could have an effect on the timber output and hence export. Furthermore employment within timber firms could be dependent on outside factors such as wages set by locals, private owners or the government or geographical location of timber firms throughout the period 1970 to today. This is covered in more advanced research, for example by Owusu 2001. The employment of expatriate staff, however, is mentioned later under The effects of the ERP. 3) Consumption of wood products within the EU. There is very little research on how the consumption of wood products is linked to deforestation, even less so when there are so many other factors involved in the consumption. In 2008, the European Commission tried to address this lack of information.[10] The Environment Council, the European Parliament and the Economic and Social Committee have since then urged support for a study in the relationship between consumption and deforestation. Lastly 4) technological change or shift in consumer patterns. The rising use of replacement products such as plastic, have changed the way the consumer buys wood products.
2.4 Classification
The European Economic Community will be called as such in this analysis between the period of 1980 and 1990. Any discussion on the European Community thereafter will be referred to as the European Union.This is due to the constant changing number of European member states throughout the period of 1960 to 1990, and thereafter. The countries which were included in the ECC during this time have beenthe six founding nations (Belgium, France, Italy, Luxembourg, the Netherlands and Western Germany), 1960’s joining members(Denmark, Ireland and the United Kingdom), 1970’s joining members (Greece) and the joining members of the 1980’s (Portugal, Spain and Turkey).
All African countries used in the first part of the study apply apart from Algeria, Libya, Egypt, Nigeria, Gabon, Congo and Angola. These countries have had oil as their largest export income between 1970 and now, and are omitted since agricultural produce are not their largest source of export income in comparison to countries such as Ghana.
In this report it is critical to determine the types of wood to be used in the analysis. About 90% of Ghana’s exported timber products are sawnwood, veneer and plywood. These will be referred to as tropical timber products. Tropical timber is defined in the International Tropical Timber Agreement (1994) as non-coniferous tropical wood for industrial uses, which grows or is produced in the countries situated between the Tropic of Cancer and the Tropic of Capricorn. The term covers logs, sawnwood, veneer sheets and plywood. Plywood which includes in some measure conifer trees of tropical origin shall also be covered by the definition.[11]Tropical plywood is often a mix of tropical woods and is much more attractive for consumers since it isdenser and more weather resistant than indigenous wood or the structure of wood from moderate climates. Roundwood is compiled of sawlogs and veneer logs and in this analysis I have used roundwood as the subject for data when applying sawnwood andveneer sheets. However, I have applied sawnwood and veneer sheets separately in a few diagrams to show more specific export and value data. Within the EU, supplies of wood-based raw materials of adequate quality can be imported at competitive prices and the EU is a net importer of these products - the two main types of such imports comprise roundwood as well as pulpwood.[12]
- Historical Background of Ghana
3.1 Post - Independence
Ghana has for many years been a promising African country, however since becoming an independent country from being a British colony in 1957 Ghana experienced many difficulties in trying to maintain its economic growth. Cocoa production, its main export and largest export earnerin the mid 1960’s, collapsed due to high foreign debt and competitive markets, similarly to timber production.
An important pillar of the timber industry in Ghana was the start of the TIDD (Timber Industry Development Division), which originates from a variety of attempts during the 1960’s to manage Ghana’s timber resource. These ideals cumulated in the establishment of the Ghana Timber Marketing Board (GTMB) in 1963 to regulate the export of timber and wood products.[13]
This accumulating foreign debt decreased log production with a decline of 66% between 1970 and 1981.[14] At the same time, the government invested heavily in infrastructure in the industrial sector in order to allow Ghana to reach a stage of industrialization. By 1971 there was an attempt to devalue the Ghanaian Cedi currency, however this did not occur until 1983, and so the Cedi remained high.
3.2 1980, the Economic Recovery Program (ERP) and the World Bank Timber Rehabilitation
In 1980 Ghana’s GDP was at US$ 25.956 billion compared to its current US$ 40.71 billion (2012).[15] In 1985, GDP fell dramatically to US$ 8.046 billion.[16] Exports fell from US$ 130 million in 1973 to US$ 15 million in 1983. This fall continued to 1986. In 1984 the World Bank announced that it would institute an ERP. This was largely aimed at benefitting the export sector, boost the economy and furthermore reduce foreign debt in the long term. Thereafter, Ghana showed steady growth. Export volumes of goods only (% change) for Ghana in 1980 were -14.8%.[17] Not only did the World Bank encourage stability but also encouraged reforms to enable steadier trade through reduced import duties and taxes on trades. The reforms also allowed farmers to keep a larger amount of their foreign exchange earnings that previously in an attempt to encourage saw mills and exporters to keep supply unchanged. In 1989, the Export Development and Investment Fund established. The World Bank also enabled a timber rehabilitation credit to Ghana for US$ 24 million to ensure that the exports of timber kept at a steady pace, after seeing the importance of the timber export sector for Ghana. After this, log production rose 65% between 1984 and 1987. Export revenues increased shockingly 665% between 1983 and 1988. All looked promising for Ghana after the World Bank initiated the ERP. However, shortly after this, by 1988, Ghana saw decreasing export revenue, decreasing log production, and a turn of events politically.
The ERP would ensure that production and export would increase, with heavy investments in machinery and the industrial sector, however the rise of this foreign debt in turn would later decrease the timber production and export. Not only did the policies attached to the ERP increase the external debts, but also increase inflation rates. Since the ERP projects were foreign investments, the Ghanaian government repeatedly devalued the country’s currency to raise producer prices for exports and to encourage production, but devaluation also led to price rises on all other goods as well.[18] Export volumes of goods only (% change) for Ghana in 1985 were 35.107% in comparison to 22.495%in 1990.[19]. The export value of timber, along with this decreasing export revenue, plummeted the years prior to the ERP and steadily rose in the years after (see diagram 2).