The Efficiency of Rights Based F

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					 The Efficiency of Rights Based
Fisheries Management Schemes
  and the Quest for Resiliency
                       Gordon Munro
   University of British Columbia, Vancouver Canada;
              University of Portsmouth, UK
     Conference on Efficient Fisheries Management: Fishing Rights and Flexibility
                                     August 2009
• Need for improved efficiency in management of world
  capture fisheries made starkly evident by World
  Bank/FAO report, The Sunken Billions (SB)

• Capture fishery resources properly viewed as “natural”
  capital assets – SB estimates overall rate of return on
  these assets to be- 0%!

   – if these natural” capital assets are to yield anything like their
     economic potential, massive resource investment program
     required - like any other investment program must take place
     under high degree of uncertainty
   – the OECD program on the Economics of Rebuilding Fisheries
     Efficiency and Resiliency
• Given irreducible uncertainty in
  fisheries management, no
  management scheme, which lacks
  resiliency, can truly claim to be
• Properly speaking, we should
  examine efficiency/resilience of
  fishery management schemes from
  both an intra-EEZ and an
  international perspective
   – time and length constraints force me to
     confine myself to intra-EEZ
     management issues
   The Advance of Fishing Rights
   Based Management Schemes
• Has been steady advance in acceptance of
  fishing rights based management schemes –
  ITQs in particular
• BUT these schemes have recently come under
  vigorous (vitriolic) attack
  – I regard the attacks as a rearguard action, but they
    are damaging nonetheless
• We have no choice, but to review rights based
  fisheries management schemes, in comparison
  with the alternatives
“The Dubious Contrivance of 1954”
• I discuss two such attacks in the paper, the most
  powerful of which is that of Daniel Bromley in June 2009
  issue of Fisheries
• While Bromley does, of course, attack ITQs, his most
  serious attack is on the whole of modern fisheries
  economics – going right back to H. Scott Gordon’s
  famous 1954 article.
       • Bionomic Equilibrium not really all that bad, it is claimed
• If Bromley is right, analysis underlying SB report thrown
  into question – claimed rent loss of US$50 billion per
  year, deeply suspect
   – I have a lengthy digression in paper on modern fisheries
     economics and Bromley – Scott Gordon vindicated
Goals of Fisheries Management
• Our first task is to settle on (national) goals of
  management – Conference organizers put forward
  several, possibly conflicting, goals:
   – (i) maximizing resource rent; (ii) ensuring resource sustainability;
     (iii) maximizing employment in fisheries; (iv) other

• Argue that we should focus on (i), with resource rent
  broadly defined and to be maximized through time

   – no conflict with (ii), fish stocks natural capital, after all;
   – (iii) based on bad economics – e.g. achieving full employment a
     macro, not micro, problem ,also hint of “lump of labour” fallacy;
   – (iv) can deal with many, if definition of resource rent is broad
  Importance of Resource Rent
• Emphasis on resource rent often seen as faintly
  crass – But World Bank (2005):
     • significance of natural capital to real asset portfolios of
       developing countries – critical importance of resource rent to
       development prospects of these countries
• Necessity of resource rent being sustainable
  through time. Sounds banal, but:
  – rebuilding of fishery resources – suppose that rent
    generation is only temporary. Temporary nature of
    rent generation can be destructive to resource
    rebuilding program
     • reasons set out in Technical Appendix to paper
• Efficiency – a simple working definition
   A Brief Review of How We Got
           Where We Are
• We all know why capture fishery resources
  historically were quintessential “common pool”
  resources – cost in establishing effective
  property rights, private or public
• But extensive fishery management relatively
  recent -end of World War II
• Until well into 20th century ,“common pool”
  nature of resources did not seem to matter that
  much – capture fishery resources inexhaustible
  – “free” capital –protected by economics
  – Thomas Huxley – 1880s
          Coming of the EEZs
• Falling harvesting costs robbed fishery
  resources of their economic protection
  – “free” capital turned into scarce capital
• Initial post WW II ocean fisheries management –
  top down through international bodies
• Coastal state (CS) dissatisfaction with
  international resource management, ultimately
  led to EEZ regime.
• Most CS resource managers are called upon,
  within EEZ, to: (i) implement rent generating
  management regimes; (ii) engage in fishery
  resource investment program
World Exclusive Economic Zones

         Land   EEZ   High Seas
       Two Propositions and An
• Proposition 1:intra-EEZ fishery resources
  property of the coastal state
     • qualification for shared stocks
• Proposition 2: those resources remain
  state property, regardless of resource
  management regime
• Admission: my comments will have a
  strong Canadian focus –
     • but will argue that Canadian experience anything
       but unique
    Intra-EEZ Fishery Management
•          On basis of history, I list four possible
    i.       catch/effort taxes alone
    ii.      TACs, or equivalent, no controls over fleet size,
             other than some gear restrictions –Regulated
             Open Access
    iii.     Limited entry, with Olympics style TACs
    iv.      Limited entry plus fishing rights based scheme
             (e.g. ITQs)

    I do not put MPAs in my option list, because I refuse to
          believe that they can be used alone- useful
          auxiliary to other management regimes
   Intra-EEZ Fishery Management
           Regimes, cont.
• i - so little used, of no interest
      • can, of course, have taxes applied in combination with other
• ii, iii, iv represent a process of evolution
• Option ii – Regulated Open Access –
  inadequacies now very well known, and easy
  for economists to explain – assume, like Scott
  Gordon, highly competitive fishing industry – no
  strategic interaction among fishers to worry
   – while inadequacies well known, find that Bromley
     article has actually succeeded in renewing interest in
     Option ii among non-economists!
        Limited Entry Schemes
• Under limited entry schemes (iii and iv), fishers are
  limited in number, by definition- strategic interaction
  among fishers inescapable – need to bring to bear
  theory of strategic interaction, better known as theory of

• Think of game between resource managers and fishers,
  but also sub-game among fishers
   – theoretical foundation - Lone Kronbak and Marko Lindroos, 2006

• Characterize resource managers- fishers game in terms
  of so called Principal-Agent (PA) analysis
      • PA relationship can be seen as a leader-follower game
Principal-Agent Analysis Reviewed
• Principal wishes certain tasks to be undertaken,
  which it cannot do itself, and acquires services
  of agent(s).
• Principal chooses incentive scheme (e.g. set of
  regulations) applied to agent(s).
• First best conditions- principal, at minimal cost,
  contractually and enforceably specifies actions
  of agent(s), while maximizing its (principal’s) net
  economic returns
  Second Best and Incentive Gaps
• In real world, principal finds it too costly to force agents
  to act like robots –agents have some freedom of choice
  – principal searches for optimal incentive scheme, in
  light of these facts – a second best.
   – inability of principal to monitor agents perfectly, the key to PA
• Concept of “incentive gap” –difference between actual
  net economic return to principal, under second best
  conditions, and what it would enjoy under first best
• We turn now to a Canadian case study to illustrate game
  theory at work under Options (iii) and (iv) - report for
  Canadian Department of Fisheries and Oceans (DFO),
  to be published (eventually)
      A Canadian Case Study
• Case study – three groundfish fisheries off
  British Columbia (B.C.):
     • Pacific halibut
     • sablefish (blackcod)
     • groundfish trawl – 55 species
  – for certain historical reasons, none of the 3 subject to
    significant resource overexploitation
  – all 3 put under Option (iii) management regimes
    (limited entry + Olympics style TAC), after Canada
    implemented EEZs in late 1970s
     • most fisheries economists cheered
  Option (iii) Management Regime
• In all 3 cases control over fleet size excellent, but
  fisheries ended up as economic shambles –groundfish
  trawl fishery had to be closed in1995 – why?

• We know all about fishers’ perverse incentives and
  “capital stuffing”, but this is not sufficient.
      • would expect some “slippage”, but not the mess that emerged –

• Key lay with fisher sub-games. Under Option (iii)
  regimes, fisher sub-games were competitive by definition
  – no basis for cooperation – turned out to be textbook
  examples of Prisoner’s Dilemma game. Any fisher
  refusing to attempt to circumvent regulations and
  compete certain to see share of TAC reduced.
 Link to Principal Agent Analysis
• From perspective of resource
  managers, as Principal, Option
  (iii) management regime, led to
  yawning, unsustainable,
  incentive gap

• Can conjecture that resource rent
  from the three fisheries (as seen
  from national perspective) was

• In terms of our working definition
  of “efficiency”, results were a
Shift to Rights Based Management
• The resource manager, DFO, moved to ITQ
  management in all 3 fisheries - out of desperation
• Question: did move to Option (iv) management remove
  strategic interaction among fishers? – in the case of the
  3 fisheries NO! Conclusions:
   – move to Option (iv) management would yield improvement
     (reduce incentive gap), if and only if, it turned competitive fisher
     sub-games into cooperative games

   – ITQs only one of several ways of establishing cooperative fisher
     game – other rights based management schemes - TURFs,
     fisher cooperatives etc.
      British Columbia Sablefish
• B.C. sablefish fishery provides very clear
  – small fishery – 48 vessels –high valued
    species –landings approx. € 20 million per
  – Option (iii) management regime -1980-90 –
    economic disaster, as exemplified by sharp
    decline in season length
  – Dramatic improvement after ITQ introduction
B.C. Sablefish Fishery Season
      Length: 1981-2005

 Season Length (days)

                              1981   1986   1991     1996   2001
   Sablefish Cooperative Game
• Fishers have coalesced through Canadian Sablefish
  Association (CSA). A CSA quote:
              » “wasteful practices by one fisherman that potentially affects the
                overall health of the sablefish resource will have a direct negative
                impact on other sablefish fishermen” – strategic interaction
                glaringly obvious

• Incentives for cooperation – concept of Cooperative
  Surplus – importance of tradability of IQs and IQ market
   – CSA contributes about Can.$1.2 million each year to research
     and enforcement
   – strong hints that sablefish cooperative game becoming self-
   – if PA incentive gap not completely closed, greatly reduced.
        Rebuilding Fish Stocks
• Most CS resource managers face problem of
  rebuilding fish stocks
• Repeat argument about need for sustainable
  positive resource rent, if resource investment to
   – Option (iii) schemes - threat of rent destroying fisher
• Question: who is to bear the cost of resource
  investment? If fisher to bear all, or part, term of
  fishing rights specified by principal critical for
  obvious reasons
 Managing Through Uncertainty
• Resources have to managed through time. First
  question – how far into the future do we have to
  make projections? –seemingly into the far
  distant future
  – but investment economics tells us not all that far -
    ”myopic decision rules” - so long as there are no
    severe constraints on harvest/effort controls –
    justification to be found in Technical Appendix
  – all of this leads into the question of flexibility/resilience
    A Fundamental Risk Mitigation
         Rule from Finance
• A fundamental rule from finance for mitigating risk, and
  achieving resilience, is to “hedge your bets” through
  portfolio diversification.

• Some of us argued for MPAs on a portfolio diversification
  basis – hedge against shocks and management errors

• In 2001, a group of prominent marine biologists, Hilborn,
  Rosenberg and others, took the diversification argument
  an important step further –forcing fishers to specialize
  grave error – should allow them to fish many different
  species – but uncertain on means of bringing this about
 A Canadian Example of What Not
             To Do
• Famous case of Northern Cod. Fishers highly
  specialized – expanded Canadian offshore fleet.
• Realization in mid-80s that resource size
  overestimated – sharp harvest reductions called
  for – intense resistance from industry – no
• Implementation of the 50% rule – result disaster
  – offshore fleet IQed, so IQs , in of and by
  themselves, provide no protection against the
Newfoundland Northern Cod
       1850 - 2000
        Accommodating Harvest
• Can rights based management schemes allow
  for harvest diversification?
• In 1998, a group of distinguished pro-ITQ
  economists published an article on feasibility of
  ITQ schemes in multispecies fisheries -
  conclusions decidedly pessimistic- too
• If these conclusions are correct, then the
  usefulness of ITQs in ensuring resiliency
  severely limited –and from we said earlier,
  implies that the “efficiency” of ITQs much
Pessimistic Conclusions of 1998
• BUT –the pessimistic 1998 conclusions of the
  pro-ITQ economists are exactly wrong!
• The evidence comes from British Columbia (BC)
  groundfish fisheries –groundfish trawl in
  – 55 different species
• Recall that, under Option (iii) management,
  fishery closed in 1995. Re-opened in 1997 under
  ITQs. Licensed fishers given quotas for all of 55
  species -resource managers hoped for the best.
 B.C. Groundfish Trawl Fishery
• Groundfish trawl IQs transferable from
  beginning. Sophisticated market emerged.
• Fishers act like the rational portfolio holders that
  they are, with some specializing, adjusting quota
  portfolio accordingly through the market
• After this experience, two of the authors of
  the1998 article recanted, and now argue that
  ITQs come into their own in multispecies
    An Integrated ITQ Scheme
• Success with B.C. groundfish trawl ITQ scheme
  led in 2006 to the next logical step – integration
  of groundfish trawl,B.C sablefish and B.C.
  Pacific halibut ITQ schemes
   – under previous management scheme, a halibut fisher,
     with say a rockfish bycatch, had to discard rockfish.
     Under new scheme, fisher must keep rockfish and
     obtain quota to cover it through the market.
   – integrated scheme appears to be working well, but
     evidence only anecdotal at this stage.
      ITQs and Harvest Portfolio
• The B.C. groundfish trawl ITQ scheme
  was born almost out of desperation –no
  indication that the architects of the scheme
  had harvest portfolio diversification in mind
• The Law of Unintended Consequences,
  working in a benign fashion
• No reason whatsoever why the Canadian
  experience cannot be replicated
        An Optimal ITQ Area
• Two questions now arise, with the first being,
  how far can harvest portfolio diversification go
  through ITQs? B.C. example, diversification is
  within groundfish species –could it be extended
  to cover groundfish and non-groundfish
  species? How much is too much?
• Canadian Nobel Laureate in Economics, Robert
  Mundell, famous for concept of “optimal currency
  area” –a fisheries equivalent – Optimal ITQ Area
Diversification and Non-ITQ Rights
          Based Schemes
• Second question – to what extent can non- ITQ
  rights based schemes – e.g. TURFs, fisher
  cooperatives –facilitate harvest portfolio
  – Unclear - obvious convergence among rights based
    schemes – should be considerable scope.
  – On the other hand, in B.C. scheme, sophisticated
    market mechanism is critical for making harvest
    diversification work. How are harvest portfolios to be
    adjusted in TURFs, for example?
            Distributional Issues
• Have to this point talked about rent generation –
  appropriate –no rent, nothing to distribute

• But distributional issues have to be faced- provide
  enemies of ITQs, and other rights based schemes, with
  avenue of attack.

• In addition to Bromley, another recent article gaining
  wide readership, by Evelyn Pinkerton and Danielle
  Edwards, excoriates B.C. halibut ITQ scheme, on
  grounds that a “lucky few” enjoying much of rent, while
  contributing next to nothing.
   – Bromley’s attack also gives much weight to distributional
                  Achilles Heel
• While economists can reject analysis of the
  Pinkertons, Edwards and Bromleys, the fact is
  that these articles do have carry political weight
  – resource rent distribution our Achilles Heel –
• We have to address the distributional issues
  head on –in particular, division of rent between
  the public and private interests –or suffer the
      • the proposed IFQ scheme for the Washington/Oregon
        groundfish fishery
Analyzing Rent Distribution Issues
• If we meet the rent distributional issue head on,
  how do we deal with the key question of the
  extent to which resource rent can be captured
  for public purse, without undermining forces that
  align incentives of fishers with those of society?

• I have no immediate answer, but I do know that
  this is the type of question goes to the very heart
  of classical Principal-Agent analysis
          A Few Conclusions
• In the presentation, we have restricted ourselves
  to intra-EEZ management
• With regards to goals of management, argued
  that maximization through time of resource rent,
  broadly defined, provide adequate focus
• Fishing rights based management schemes
  finding increasing acceptance
  But subject to attack – have to
  compare with alternatives
          Conclusions cont.
• Maintain that review and comparison
  should be done within principal-
  agent/game theory framework
  – no difficulty in concluding that Option (iv)
    schemes are superior in relative terms. Option
    (iii) much worse than heretofore realized –
    fisheries economists have understated value
    of rights based fisheries management
      A Few More Conclusions
• With respect to risk mitigation, gave emphasis to harvest
  portfolio diversification - was believed that ITQs unable
  to accommodate such diversification – this belief is
  fundamentally wrong! –reverse is the case

• Questions: (i) how far can such diversification go through
  ITQs? (ii) can other forms of rights based management
  also accommodate the same diversification?

• Distributional issues remains our Achilles Heel, and must
  be met head on by us – otherwise we provide an
  avenue of attack for those who would send fisheries
  management hurtling backwards
Thank you for your