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The purpose of this chapter is to show how double dividends could be obtained from using market instruments to tax water use in a developing country. The double dividends are namely environmental (water conservation) on the one hand, and poverty reduction dividends on the other. We apply a water tax on selected industries in South Africa to reduce demand for water, and then transfer the revenue from this tax to the poor to achieve reduction in absolute levels of poverty.
South Africa is classified as a semi-arid country. Precipitation has been fluctuating over the years with an average of 500 mm per annum, well below the world average of about 860 mm (DWAF 2002). The total flow of all the rivers in the country combined amounts to approximately 49 200 million m³ per year, while the National Water Resource Strategy estimated the total water requirement for the year 2000 at 13 280 million m3 per year, excluding environmental requirements. In addition, South Africa is poorly endowed in groundwater as most of the country is underlain by hard rock formations that do not contain any major groundwater aquifers (DWAF 2002).
While currently only about 24% of rural people have access to water on site, additional sources of water supply are environmentally, financially and politically hard to develop. At the same time, unemployment in rural areas of South Africa is extremely high, which results in severe poverty conditions in these areas.
With a population of 34 million and an extremely high reliance on charcoal, Tanzania is a classic example of the social and environmental risks faced by many developing countries. About 85% of the total urban population uses charcoal for household cooking and energy provision for small and medium enterprises (Sawe 2004). In 1992 the total amount of charcoal consumed nationwide was estimated to be about 1.2 million tons (Sawe 2004). In 2002, the charcoal business generated revenues of more than 200 billion TShs (US$ 200 million), with more than 70 000 people from rural and urban areas employed in the industry (TaTEDO 2002b). Dar es Salaam, Tanzania’s largest city, accounts for more than 50% of all charcoal consumed in the country.
The charcoal sector is far from sustainable. The forest resources that the industry is relying on are disappearing rapidly and the productivity of the sector has not seen any improvement either. The charcoal sector in Tanzania is operating economically, socially and environmentally in a suboptimal manner. However, solutions that safeguard the charcoal sector’s future are not straightforward.
After the collapse of communist rule in Mongolia in 1991, the demise of the livestock collectives resulted in private (household-based) livestock ownership and unclear range management institutions. Between 1991 and 1998 the livestock sector rapidly expanded, partly assisted by relatively good weather conditions, and partly by many new entrants in the livestock economy as a result of de-industrialization of the urban economy. In 1990 Mongolia had 25.9 million domesticated animals. In 1998 this number had grown to 32.9 million, an increase of 27%.
Between 1990 and 1998 the weather conditions were indeed rather favourable. Compared to the 1980s rainfall was higher, and winters were less severe (Batjargal et al. 2000). The carrying capacity of the Mongolian grazing lands improved, and the growing livestock population could, on average, be accommodated by these improved grazing conditions. However, changes in livestock mobility and range management styles, as well as unclear grazing institutions under privatized livestock regimes, already created carrying-capacity tensions in some areas. Where water wells were no longer maintained, some grazing areas were abandoned, resulting in condensed grazing in other areas.
Few fathers will hesitate to chop down a tree if this helps to pay for the education of their children, even though they know that this might hurt them in the long run. Neither is it much of a choice when existing plots of farmland become unproductive, and a farmer can either let his family go hungry, or create a new plot by burning down a patch of forest. Considering these ‘choices’, it is no surprise that the forest and farming practices of the poor forest and mountain communities have been the main causes of forest depletion in the Philippines.
The Philippine forests are home to a large, marginalized sector of society composed of both migrant and indigenous dwellers. They constitute about 20 million or 25% of the total population and are generally considered the poorest of the poor. The relationship between poverty and forest degradation is not always the same and there are some poor forest communities that invest considerable time and resources in sustainable forest management practices while trying to meet their basic needs. In many cases, however, these communities’ dependence on the forests results in the degradation of the resources they need for their livelihood and survival.
Amongst the most striking empirical relationships uncovered over the last ten to fifteen years has been the negative causal link between several measures of resource dependence and economic development. Resource-based economic development has not proven to be a great success amongst developing nations; as a matter of fact, poor nations deprived of minerals, fertile land and forests performed better compared to their resource-rich counterparts. Recent empirical evidence and theoretical work provide strong support to a resource curse hypothesis; i.e. natural wealth tends to retard rather than promote economic growth (Auty 1994, Gylfason 2000, 2001a,b, Leite and Weidmann 1999, Papyrakis and Gerlagh 2004, Rodriguez and Sachs 1999, Sachs and Warner 1995 1997, 1999a,b, 2001). The most prominent example is certainly the Organization of the Petroleum Exporting Countries (OPEC) with a disappointing annual growth rate of –1.3% on average between 1965 and 1998 despite the significant injections of petrodollars into their local economies from the oil extractive industries (Gylfason 2001a). The expectations of many early development economists (Nurkse 1953, Rostow 1960, Watkins 1963) that resource endowments could potentially support economic expansion by attracting funds from foreign creditors, channelling the primary sector rents into productive investment and escaping ‘poverty traps’ proved to be unrealistic. Similarly, any positive linkages between resource abundance and economic prosperity observed during the origins of the industrial revolution in Great Britain, Germany and the United States or more recently in countries such as Botswana, Norway and Iceland appear to be exceptional cases rather than belonging to a general applicable rule (Sachs and Warner 1995, Wright 1990).
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