Institutional Constraints and Deforestation: An Application to Mexico

1. INTRODUCTION In many tropical regions a key factor influencing deforestation is thought to be the lack of effective property rights and other institutional structures controlling access to and use of forests. (1) Where such institutions exist, they "limit" access to and conversion of forest land, thus acting as a deterrent to deforestation. In the absence of formal ownership rules, traditional common property regimes in some forested regions have also proven to be effective in controlling the "open access" deforestation problem (Gibson, 2001; Larson and Bromley, 1990; Richards, 1997). In short, formal and informal institutions can influence the process of forest loss by imposing increased costs of conversion on farmers who clear forest land. This article is concerned with analyzing the role of formal and informal institutions as constraints on the conversion of forest land to agriculture in developing countries. The perspective on institutions adopted here follows the approach of North (1990), who defines institutions as "humanly devised constraints that shape human interaction" and that "affect the performance of the economy by their effect on the costs of exchange and production." In analyzing the relation between institutional constraints and the amount of forest land converted for use by smallholders, this article makes several contributions. First, it demonstrates that if institutions raise the costs of land conversion, then it is possible to utilize an agricultural household model to formalize the resulting impacts on the amount of converted land used by all farming households. Moreover, the equilibrium level of land cleared will differ under conditions of no institutional constraints--that is, the pure open access situation--compared to c onditions where effective institutions exist to control land conversion. Because institutions raise the cost of land clearing, more land should be converted under pure open access. (2) This in turn implies that the existence of institutional constraints prevents the adjustment of the stock of converted land to the long-run equilibrium "desired" by agricultural households, which is the amount of land that could be cleared under open access. A dynamic panel analysis is therefore employed to test the hypothesis that the presence of institutions to control agricultural conversion can significantly affect deforestation. The model of land expansion is applied to the case of Mexico in the pre-NAFTA (North American Free Trade Agreement) reform era, 1960-85. During this period, the existence of ejido, or communal land ownership, for the vast majority of forest land meant that strong institutional controls may have restricted the rate of adjustment in the amount of new land converted and thus limited agricultural expansion (Sarukhan and Larson, 2001). The analysis also has direct relevance for the post-NAFTA period, particularly because the 1992 land reforms sanction changes in the traditional ejido land ownership structure. II. A PURE OPEN ACCESS MODEL OF FOREST LAND CONVERSION The following model of forest conversion is based on an approach similar to that of Cropper et al. (1999), Lopez (1997, 1998a), and Panayotou and Sungsuwan (1994). Assume that the economic behavior of all J rural smallholder households in the agricultural sector of a developing country can be summarized by the behavior of a representative jth household. Although the representative household is utility-maximizing, it is a price taker in both input and output markets. Farm and off-farm labor of the household are assumed to be perfect substitutes, such that the opportunity cost of the household's time (i.e., its wage rate) is exogenously determined. The household's behavior is therefore recursive in the sense that the production decisions are made first and then the consumption decisions (Singh et al., 1986). In any time period, t, let the profit function of the representative agricultural household's production decisions be defined as (1) max [pi](p,w,[w. …