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Discount rate and harvest policy

implications for Baltic forestry

Brukas, Vilis and Thorsen, Bo Jellesmark and Helles, Finn and Tarp, Peter (2001). Discount rate and harvest policy. Forest policy and economics. 2:2001:2, 143-156
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Official URL: http://dx.doi.org/10.1016/S1389-9341(01)00050-8

Abstract

The free market economy, to which East European countries are increasingly being exposed, implies that classical budgeting techniques in the form of the Faustmann approach present themselves as the tools of choice for forest investment analysis. One implication is that the choice of a proper discount rate (r) must be made as part of the basis for formulating a harvest policy. The paper discusses this choice in the light of practice as well as theory, and, using Lithuania as a case, examines the potential economic and political impact of softening the current restrictions on forest management. A review of the debate on discounting in forestry is provided. A statistical analysis of the relation between reported rs and internal rates of return (IRR) from numerous studies on forestry investments reveals a strong correlation between r and IRR. Possible explanations are provided. Analysis reveals that application of any positive r will significantly change forestry practice in Lithuania. Setting r = 3 per cent, slow growing species are to be replaced by fast growing species, and rotation periods should be substantially shortened. The standing volume of (over-) mature forests is about 160 million m3, as compared with the currently harvestable volume of about 40 million m3 according to the minimum allowable rotation age. The macroeconomic perspectives of cashing some of the mature forest for the small transition economy are discussed, taking into account the effects of externalities of forests. Consequently we suggest an alternative formulation of the normal forest. Finally, based on these considerations, a real r of 0-2 per cent is suggested for State forestry in Lithuania. A post-tax r of 2 per cent is advocated for private forestry, with potential project specific deviations downward to 0 or upward to 4 per cent. It is stressed that discount rate is viewed as one of important decision parameters and due regard should be given to non-timber forest outputs, social and institutional settings and other factors.

Authors/Creators:Brukas, Vilis and Thorsen, Bo Jellesmark and Helles, Finn and Tarp, Peter
Title:Discount rate and harvest policy
Subtitle:implications for Baltic forestry
Series/Journal:Forest policy and economics (1389-9341)
Year of publishing :2001
Volume:2
Number:2001:2
Page range:143-156
Publisher:Elsevier
ISSN:1389-9341
Language:English
Publication Type:Journal article
Refereed:Yes
Full Text Status:Public
Subjects:Obsolete subject words > FORESTRY, AGRICULTURAL SCIENCES and LANDSCAPE PLANNING > Area economics > Forest economics
Keywords:transition economy, Lithuanian forestry, stakeholders, economic analysis, discounting
URN:NBN:urn:nbn:se:slu:epsilon-2-115
Permanent URL:
http://urn.kb.se/resolve?urn=urn:nbn:se:slu:epsilon-2-115
ID Code:4045
Department:(S) > Southern Swedish Forest Research Centre
Deposited By: Vilis Brukas
Deposited On:22 Oct 2009 00:00
Metadata Last Modified:02 Dec 2014 10:27

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