On the Economics of Multifunctionality and Sustainability of Agricultural … · 2015-06-30 · On...
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On the Economics of Multifunctionality and Sustainability
of Agricultural Systems
Werner Hediger Agricultural and Food Economics, Swiss Federal Institute of Technology, Zurich, Switzerland
October 2004
Abstract:
Despite agreement about the existence of multiple benefits of agriculture to society, there is
disagreement when it comes to policy implications. This can be explained by different
national characteristics and positions in agricultural trade, as well as by differences in
epistemological foundations libertarian and utilitarian moral philosophy upon which different
approaches of “multifunctionality” are based. In contrast, sustainable development involves a
broader and more complex ethic integrating multiple societal objectives and system
requirements. From a welfare economic perspective this results in a more comprehensive
approach than the traditional Paretean one which is exclusively based on individual value
judgements. Building on a comparison of these two approaches, it shows that the concepts of
multifunctionality and sustainability are not mutually exclusive. Rather, adequate
compensation of the non-market benefits of a multifunctional agriculture and promotion of
efficient resource allocation is a prerequisite for sustainable development.
Keywords: Multifunctionality, sustainability, agriculture, rural development, externalities,
welfare economics, moral philosophy, libertarian, utilitarian, sustainable
development, WTO, OECD, FAO.
JEL classification: B00, F02, Q01, Q10, Q18.
Multifunctionality and Sustainability 2
1 Introduction
Multifunctionality and sustainability are key concepts in the current debate about agricultural
policy reforms in many countries and on international platforms. Both concepts have
originally been formulated in a context of forestry, recognising the vulnerability of forest
ecosystems and the multiple benefits that can be sustained through adequate resource
management (Hasel, 1971), and been addressed in various forms in the resource economics
literature (e.g. Ciriacy-Wantrup, 1952; Solow, 1974; Hartwick, 1978; Hartman, 1976; Bowes
and Krutilla, 1989). Moreover, in recent years, the concepts of sustainability and
multifunctionality have also been translated into more general policy principles.
First, the concept of sustainable development has been established in Agenda 21 by the
plenary of the United Nations Conference on Environment and Development (UNCED) in
Rio de Janeiro, 1992, as the guiding policy principle for social and economic development.
Moreover, Agenda 21 aims at integrating sustainable development considerations with
agricultural policy analysis and planning, and calls for reviewing agricultural policy in the
light of the multifunctional aspect of agriculture, particularly with regard to food security and
sustainable development (Chapter 14 of Agenda 21). However, UN documents remain vague
with respect to the definition and operational content of both principles.
Second, the concept of multifunctionality emerged as an argument for including “non-trade
concerns” in the negotiations of the World Trade Organization (WTO) on agriculture.1 It
accounts for the fact that agriculture is an economic activity that, beyond its primary function
of supplying food and fibre, provides various non-market benefits to society. These comprise
a wide range of environmental benefits, such as
• recreational amenities and aesthetic values of the rural landscape,
• non-use values of biodiversity and habitat protection,
• intrinsic values of ecosystem and watershed functions,
socio-economic benefits, like
• food security, food safety, and animal welfare,
• rural employment and the viability of rural areas, as well as
• cultural heritage.
1 The term appears in Article 20(c) of the Uruguay Round Agreement on Agriculture (URAA), where WTO members have agreed that, in negotiating the continuation of the agricultural policy reform process after 1999, ‘non-trade concerns’ will be taken into account (Anderson, 2000: 476).
Multifunctionality and Sustainability 3
Altogether, this characterises the multifunctional nature of agriculture. It embraces a set of
non-market benefits that constitute potential sources of market failure and provides a
theoretical argument for government intervention.2 Nonetheless, there is disagreement about
the justification of government support to farmers and the choice of policy instruments. In
particular, the issues of rural employment and food security, as well as the question about
non-agricultural provision of rural amenities are controversially discussed (cf. Anderson,
2000; Bohman et al., 1999; Brunstad et al., 1995, 1999; Hodge, 1991; OECD, 2001, 2003;
Vatn, 2002).
Despite this controversy, the concept of multifunctionality has been adopted as a policy
principle by OECD Agriculture Ministers in 1998. It “recognises that beyond its primary
function of supplying food and fibre, agricultural activity can also shape the landscape,
provide environmental benefits such as land conservation, the sustainable management of
renewable natural resources and the preservation of biodiversity, and contribute to the socio-
economic viability of many rural areas” (OECD, 2001: 5). This can also be referred to as the
total economic value of agriculture, an environmental economic concept which applies to the
whole class of values that have a basis in human preferences, and integrates direct and
indirect use values, option values, existence values, and bequest values—including such
functions as economic security and community integrity (cf. Pearce and Turner, 1990).
From an economic perspective, these values must be taken into consideration by the decision
makers in order to achieve an economically efficient and socially optimal allocation of scarce
resources. However, this does not necessarily comply with the requirements of sustainable
development. The latter is a normative principle that calls for maintaining some suitably
defined aggregate of capital intact over time (Solow, 1974; Hartwick, 1978; Daly, 1991;
Pearce et al., 1994; Neumayer, 1999), and requires satisfaction of basic human needs and
compliance with some thresholds of ecosystem resilience (WCED, 1987; Khan, 1995;
Moffatt, 1996). To fully capture these values, a sustainability-based principle is required
which integrates values based on aggregate individual preferences with social, ecological and
economic system requirements of sustainability, and which anticipates potentially irreversible
changes at the levels of criticality that confine the opportunity space for sustainable
development (Hediger, 2000).
2 Earlier publications that are relevant in this context—but not using the term “multifunctionality”—are Gardner (1977) who identified at least four joint benefits of preserving agricultural land, and Bromley and Hodge (1990) who used the term “countryside and community attributes” in their analysis of alternative property rights regimes.
Multifunctionality and Sustainability 4
Building on this background, the aim of the present article is twofold. First, it aims at
explaining from an economic point of view the differences that appear when it comes to the
issue of policy implication. Second, it aims at clarifying on a theoretical basis the relationship
between the concepts of multifunctionality and sustainability of agricultural systems. To this
end, the paper is organised as follows.
First, different positions and views about the role of agriculture (multifunctionality, non-trade
concerns, and agriculture’s evolving role in the development process) are investigated in
Section 2 with respect to their epistemological foundations in different strands of humanist
moral philosophy. Then, a conceptual framework of integrating various concerns of
sustainability and development is presented in Section 3. Together with the framework of
Paretean welfare economics, this constitutes the analytical framework for investigating the
welfare relevance of the multiple functions and roles of agriculture and the relationship
between the concepts of multifunctionality and sustainability in Section 4. Finally, Section 5
concludes.
2 Epistemological foundations of different approaches
Despite consensus about the existence of multiple benefits of agriculture to society, there is
disagreement when it comes to policy implications. This can be explained by different
national characteristics and different positions in agricultural trade, as well as by different
views of multifunctionality and non-trade concerns.
The economic analysis of Peterson et al. (2002) predicts that small countries with non-market
outputs from agriculture support a positive land subsidy, which, regardless of amenity
benefits, is needed to correct for the distortions created by pollution-control policies. In
addition, Peterson et al. conclude that subsidies are most likely to be supported by
economically large, densely populated importing nations, while subsidies are most likely to be
opposed by sparsely populated exporters. In addition, Blanford et al. (2003) emphasise that
the public in wealthy countries is becoming increasingly aware of the non-commodity outputs
and attributes associated with agriculture, and that this may rapidly overtake food as the key
concern. They conclude that “it is possible to address important nontrade concerns in ways
that are consistent with the further liberalization of agricultural trade in the GATT/WTO
framework” (Blanford et al., 2003: 672). However, this is complicated by differing views of
multifunctionality and the ambiguity and lack of precision in the multifunctionality debate,
which continues to be an obstacle in WTO negotiations (Paarlberg et al., 2002).
Multifunctionality and Sustainability 5
Yet, the divergence in the debate on multifunctionality and the inclusion of non-trade
concerns in international negotiations is also a consequence of epistemological differences.
For Simpson and Schoenbaum (2003: 402), “the problem of incorporating non-trade concerns
into agricultural negotiations is their vagueness, largely because of the wide variety of
concerns that cut across so many different countries.” Moreover, they emphasise that this
vagueness3 “forces widely dispersed countries or groups of countries to prepare issues, target
desired outcomes, and prepare and execute strategies to come up against a well-supported,
established organisation (WTO) in one city (Geneva) in which the agreement underlying
current rules and quantitative levels (URAA) is accepted as the floor or minimum of trade
liberalisation.” In other words, this problem is partly related to the degree of organisation and
political power. But, it also relies on different foundations upon which the concept of
multifunctionality, as advocated by the OECD, and the inclusion of non-trade concerns in the
WTO framework are based. As summarised in Table 1, the different positions taken by the
OECD and WTO cannot be solely be explained with differences in terminology. Rather, they
are based on different ethical foundations that are related to the schools of utilitarian and
libertarian moral philosophy, respectively.4
2.1 The positions of WTO and OECD from a moral-philosophic perspective
The fundamental difference between these two distinct schools of humanist ethics is the
consideration of consequences and outcomes of economic activity and policy intervention. On
the one hand, libertarians are entirely opposed to concepts of justice based on consequences
or outcome. Rather, the central axiom of libertarianism is the fundamental inviolability of
individual rights, which “asserts the primacy of processes, procedures and mechanisms for
ensuring that fundamental liberties and rights of individual human beings are respected and
sustained” (Perman et al., 2003: 81). From this point of view, fairness or justice requires
freedom of individual choice and guaranty of property rights. Government action should be
limited to the establishment and maintenance of the institutions required to support free
contract and exchange.
On the other hand, utilitarism is a consequentialist philosophy which is based on the ethical
premise that “the consequences and outcomes of an action determine the moral worth of the
3 Emphasis added. 4 See For an overview of moral philosophies and ethical foundations for environmental economics, see Perman et al. (2002, ch. 4). For further readings in the context of environmental conservation and sustainable development, see Tisdell (1991) and Moffatt (1996).
Multifunctionality and Sustainability 6
action” (Perman et al., 2003: 82). It involves two facets of concern: (a) the satisfaction of
individual preferences, or how an individual derives pleasure and happiness; and (b) the
linkage between the individuals’ utilities and social well-being, or social welfare. Hence,
utilitarian moral philosophies are closely related to modern welfare economics that is likewise
concerned with issues of efficiency and equity. In this sense, utilitarian economists think
about public policy and government intervention in terms of correcting market failures (e.g.
due to externalities) in order to reduce or eliminate inefficiency in allocation, and with respect
to analysing measures intended to redistribute income or wealth so as to support some concept
of fairness or distributive justice that aim at maximising social well-being.
Table 1: The epistemological anchoring of different views of “multifunctionality”
Organisation: WTO OECD FAO
Terminology: Non-trade concerns Multifunctionality Roles of agriculture
• Establishment of a fair and market-oriented trading system
• Establishment of policy principles to achieve multiple objectives in the most cost-effective manner
• Guidance to policy decisions for improved development strategies
• Justification of policy measures
• Definition of common rules and criteria for market access and trade liberalisation
• Definition of efficient policy measures
• Verification and validation of conclusions with regard to policy reforms
• Comprehensive policy analysis
• Assessment of the role of agriculture at different states of development
Main objectives and main themes:
• Free choice and market access
• Elimination / reduction of trade distortions
• Economic efficiency (cost effectiveness)
• Joint production, externalities and public good aspects
• Information and tools for guiding policy
• SARD: Sustainable agricultural and rural development
Guiding principles: Emphasis on procedures, mechanisms and rules
Emphasis on outcome and characteristics
Primarily descriptive, but policy-oriented
Foundation in moral philosophy: Libertarianism Utilitarism “Ethics of sustainable
development”
Building on this background, we can classify the positions of the WTO and OECD in the
multifunctionality debate as libertarian and utilitarian, respectively.
Multifunctionality and Sustainability 7
On the one side, the WTO’s long-term objective, as stated in Article 20 of the Uruguay Round
Agreement on Agriculture (URAA) and in Article 13 of the WTO Ministerial Declaration
from the Doha Conference, is “to establish a fair and market-oriented trading system through
a programme of fundamental reform encompassing strengthened rules and specific
commitments on support and protection in order to correct and prevent restrictions in world
agricultural markets” (cf. Simpson and Schoenbaum, 2003: 401). This is clearly focused on
rule setting an maintaining the mechanisms that assert free trade and market access.
On the other side, the OECD approach is outcome oriented, regarding multifunctionality as “a
characteristic of the production process that can have implications for achieving multiple
societal goals” (OECD, 2001: 6). It devotes explicit consideration to the production
relationships underlying the multiple outputs of agriculture (jointness in production), and to
the externality and public good aspects of these outputs. From a welfare economic
perspective, the latter are generally considered as sources of market failure, and therefore may
constitute an argument for targeted government intervention, saying that (OECD, 2001: 9)
“The policy context for the work on multifunctionality is provided by Member countries’ commitments to further progressive reductions in domestic agricultural support and border protection, and a shift away from policy measures that encourage higher levels of food production and input use, towards measures that are less distorting of markets and trade. At the same time, there is a growing awareness of the positive and negative non-commodity outputs of agriculture among rural and urban citizens, and governments are increasingly looking for ways to ensure that the non-commodity outputs of agriculture correspond in quantity, composition and quality to those demanded by society.”
This involves the welfare economic objective of reducing market failure and trade distortions,
and selection of the most adequate policy instruments (OECD, 2001: 10)
“The challenge for the work on multifunctionality is to test the validity of the standard policy recommendation against the additional aspects introduced by multifunctionality: the simultaneous consideration of the various positive and negative effects of agriculture, and their joint production, externality and public good aspects. The eventual goal is to establish principles of good policy practice that permit the achievement of multiple food and non-food objectives in the most cost-effective manner, taking into account the direct and indirect costs of international spillover effects.”
In contrast to the libertarian position of the WTO, the OECD is not primarily focused on
rules, procedures and mechanisms. Rather, with the emphasis on positive and negative effects
(consequences or outcomes) of agriculture, the OECD approach fits within the tradition of
utilitarian welfare economics.
Multifunctionality and Sustainability 8
The question remains whether and to what extent the multifunctional characteristic of
agriculture justifies government intervention. This is addressed in the next section. But first,
we look at an additional approach to understanding the multifunctional role of agriculture.
2.2 The FAO approach to the roles of agriculture and sustainable development
Besides the WTO and OECD, a third position in the international policy debate on the
multiple benefits from agriculture is taken by the United Nations Food and Agricultural
Organization (FAO) which puts emphasis on “the roles of agriculture” (ROA), rather than
using terms like multifunctionality and non-trade concerns. The objective of the ROA project5
is to “provide policy-makers with specific insights, tools and information with which to
analyse the roles of agriculture and the related policy implications in order to pursue
sustainable agricultural and rural development (SARD).” The project aims at assessing the
importance and roles of agriculture in different contexts of development and to better answer
policy-relevant questions for developing countries.
As a primarily descriptive approach, FAO approach cannot be attributed to any particular
school of ethics. However, given its pursuit of sustainable development, it implies a
normative concept which involves social choice about issues of intra- and intergenerational
equity, and a value principle that gives explicit weight to critical levels of basic needs and
ecosystem integrity (WCED, 1987; Hediger, 1997, 1999). Moreover, it engages a concept
which is widely used to defend greater bureaucratic intervention and protectionist trade
policies (Beckerman, 2003). Correspondingly, the position of the FAO does not fit within the
tradition of conventional humanist and naturalist moral philosophies (cf. Perman et al., 2003:
79 ff.). Rather, it is based on a broader and more complex ethical position of sustainable
development which integrates concerns about equity (fairness) within and between
generations, the satisfaction of human needs and aspirations for a better life, as well as moral
imperatives for resource and ecosystem protection (WCED, 1987; Norton, 1992, 2003;
Toman, 1992). This involves societal value judgements that determine the levels of safeguard
as an integrated part of public decision making and the formation of social values. Moreover,
sustainable development is a principle which involves “care of posterity” (Perman et al.,
2003: 2) and, by definition, requires avoiding wasteful uses of scarce resources. It must
satisfy requirements of intergenerational efficiency and equity (Page, 1997), while avoiding
dictatorship of both the present and the future (Chichilnisky, 1997). From this point of view,
5 FAO: Roles of Agriculture Project (ROA). The Socio-Economic Analysis and Policy Implications of the Roles of Agriculture in Developing Countries (http://www.fao.org/es/ESA/Roa/default .htm, 17.10.04 20:30 GMT+2).
Multifunctionality and Sustainability 9
the concept of sustainable development, and thus the approach of the FAO to the roles of
agriculture are based on an ethical position that integrates and extends utilitarian and
naturalist moral philosophy into an “ethics of sustainable development”.
3 Concepts of sustainability and sustainable development
Sustainable development is a normative concept which involves trade-offs among various
objectives and which satisfies the requirements of sustaining the integrity and viability of the
overall system. Sustainable development implies the ethical imperative of equity within and
between generations which goes beyond the mere satisfaction of basic human needs. It aims
at socio-economic prosperity and environmental integrity. It does not imply a fixed state of
harmony which can be defined by a set of stationary-state criteria of sustainability. Rather
sustainable development is a process of change that respects the integrity of the overall
system. According to the WCED (1987: 46), it is defined as “a process of change in which the
exploitation of resources, the direction of investments, the orientation of technological
development, and institutional change are all in harmony and enhance both current and future
potential to meet human needs and aspirations.” This involves a continuous process of
evaluating trade-offs among the various objectives of society—that are usually classified into
social, ecological and economic—, and taking into account boundaries of the social utility
space beyond which these trade-offs are not defined.
As advocated by the WCED (1987), sustainable development requires that the goals of
economic and social development must be defined in terms of sustainability. This has resulted
in different notions of sustainability that are based on different conceptions of capital,
different models and value judgements (cf. Daly, 1991; Common and Perrings, 1992; Pearce
et al., 1994; Pezzey, 1997; Hediger, 1999; Neumayer, 1999; Perman et al., 2003). They
mainly reflect partial and ideological views on the environment and economic development,
while the social dimension and basic human needs are frequently neglected in ecological and
economic concepts of sustainability. Hence, conventional models and notions of sustainability
are not sufficient to comprehensively addressing the core idea of sustainable development as
an integrative principle of evaluating trade-offs across various societal objectives (cf. Barbier,
1987; Munasinghe, 1993; Khan, 1995).
On the objective side, we can integrate the various issues of sustainable development into a
social welfare function which is based on an aggregate of individual preferences with respect
to the current state of development of economy, society and the environment (Hediger, 2000).
Multifunctionality and Sustainability 10
In an aggregate form, we can formally represent social welfare U as a weighted sum of
individual:6
∑=
α=N
iiii SQMyuU
1),,,(
This implies that, for each individual (i = 1,…,N), utility ui is defined as an increasing
function of individual income yi, macro-economic performance M, environmental quality Q,
and social capital S.7 In addition, the individual utility weights αi are fundamental for
determining a social optimum that integrates economic efficiency and social equity
requirements. They constitute a normative element which may be expressed in democratic
decision processes, empirical investigations, or group decisions in a participatory approach.
Building on this formal approach, different terms of sustainability can be identified (Hediger,
2000), and investigated from a welfare economic perspective. First, weak sustainability
proves to be the most comprehensive concept which entails ecological, economic and social
principles of strong sustainability as special cases. It implies trade-offs and requires that the
total value of social welfare should be non-declining over time (dU/dt ≥ 0). Second, it shows
that weak sustainability is not sufficient for sustainable development. Rather, from an equity
point of view, Pareto improvement and thus effective compensation of losers in the process of
change may also be necessary for sustainable development (dui/dt ≥ 0, for all i). In addition,
special attention must be devoted to critical levels of resilience and basic needs, since they
cannot be traded-off against other concerns without threatening survival viability of the
overall system.
Altogether, this results in a welfare economic approach that is based on a differentiated
concept of capital and integrates them with a set of minimum system requirements of
sustainability into “sustainability-based social value function” (Hediger, 1999, 2000).
< Figure 1 about here >
As illustrated in Figure 1, total capital is considered as an aggregate of overlapping
compartments of economic, natural and social capital, that are defined as follows:
6 This is broader in conception than the view of the OECD (2001) that merely regards sustainability as a resource-oriented concept, a position which has been taken by the IUCN (1980) in their formulation of a World Conservation Strategy. This is much narrower in scope than the conception of sustainable development that has been provided by WCED (1987), which involves a subtle but extremely important transformation of the ecologically based concept of physical sustainability and nature conservation to the context of social and economic development (Adams, 1990; Hediger, 1997). 7 A definition of different components of capital is given below.
Multifunctionality and Sustainability 11
- Economic capital (K) is defined as an economy’s generalised productive capacity; this is,
the potential to generate income (Y). It consists of manufactured capital, immaterial assets,
and natural resources that are harvested or developed for use in economic transformation
processes, and also determines the macro-economic performance (M).
- Natural capital is defined as the natural resource base of a geographic area. It consists of
ecosystem capital and stocks of non-renewable resources.
- Ecological capital, or ecosystem capital (Q), consists of the stocks of renewable resources
(both used and non-used in economic processes), semi-natural and natural land, as well as
ecological factors that are essential for the functioning of ecosystems. It determines the
overall quality of the environment in an area.
- Social capital (S) refers to a society’s capability to deal with social, economic and
environmental problems, and to be active in shaping the development of the overall
system (cf. Berkes and Folke, 1994).
In addition, the “sustainability-based social value function” anticipates potentially irreversible
changes at the boundaries of the opportunity space for sustainable development. The later are
the critical limits beyond which the functioning and viability of the overall system would be
endangered. These limits are defined in terms of
- thresholds of ecosystem resilience (critical ecological capital),
- minimum income to satisfy basic human needs (poverty line),
- a minimum level of cohesion (critical social capital) beyond which the social system risks
collapse, and
- maximum levels of unemployment and inflation above which the socio-economic system
may abruptly change.
In total, this provides the conceptual and analytical framework of an integrated method and
implicit balance across different approaches. It gives priority to aggregate preference
maximisation for marginal changes within the opportunity space for sustainable development,
as defined above. In contrast, more conservative approaches, such as the safe-minimum
standards of conservation (Ciriacy-Wantrup, 1952; Bishop, 1968; Farmer and Randall, 1998),
will be dominant if the system moves toward any boundary of the sustainability space. In
addition, it must be emphasised that sustainable development can only be realised within the
boundaries of the opportunity space which is confined by the above limits of criticality. “If
these conditions are not satisfied, an adjustment process is required before sustainable
Multifunctionality and Sustainability 12
development can be feasible. In other words, priority must be given to a transition process for
initial states outside the sustainable development region” (Hediger, 2000: 491). This may
involve structural changes, especially with regard to manufactured capital, knowledge
accumulation and social organisation.
Finally, we have to remind that economic efficiency—the avoidance of wasteful uses of
scarce resources—is a necessary condition for sustainable development as well as for
maximising social welfare. This particularly implies the requirement of internalising external
costs and benefits and correcting other sources of market failure. However, the question
remains about the relationship between multifunctionality and sustainability.
4 Multifunctionality, social welfare and sustainable development
According to the working definition proposed by the OECD (2001), multifunctionality is a
characteristic of agricultural production processes that can have implications for achieving
multiple societal goals. The latter are, as presented in the previous section, the most suitably
addressed in form of a social welfare function which allows for evaluating trade-offs across
the various issues of concern. This indicates a common ground of the concepts of
multifunctionality and sustainable development in the body of welfare economics. Hence, the
key issue appears to be the welfare relevance of the multiple functions and roles of
agriculture. These shall be investigated from a traditional Paretean perspective of economic
efficiency, as well as from a broader system perspective of sustainable development. To this
end, we recall the multiple functions and benefits provided by agriculture to society, that have
been listed in Section 1.
First, agriculture does not only result in social benefits from the production of food and fibre,
whose marginal values are in principle reflected in market prices. It modifies the natural
environment for the purpose of enhancing the flow of food and fibre from land resources to
society (Miranowski and Cochran, 1993). This results, on the one side, in non-marketed
benefits from the environment such as amenity and recreational values of cultural landscapes.
On the other side, agricultural practices are, in many places, also source of negative impacts
upon society and the environment. In middle and high latitudes, major environmental
problems caused by agriculture are loss of biodiversity and natural habitats, impacts of crop-
protection chemicals, air, water and soil pollution, as well as soil erosion (Mannion, 1995).
From a welfare economic point of view, these effects are referred to as positive and negative
externalities, respectively, that are Pareto relevant whenever some individual’s utility or
production relationships include real (non-monetary) variables, whose values are chosen by
Multifunctionality and Sustainability 13
others without adequate compensation between the victims and beneficiaries of these effects
(Baumol and Oates, 1988).
Classical examples of positive externalities from agriculture to society are the recreational,
amenity and aesthetic values of the rural landscape. Classical examples of negative
externalities are rural water pollution and odour from manure storage and application. Based
on a static framework, the presence of these effects can be used to justify subsidies to farmers
for the provision of positive externalities, but at the same time calls for charging them a fee to
internalise the external costs of their activity.
In a dynamic context, which is particularly relevant for the evaluation from a sustainable
development perspective, the classification into positive and negative externalities and the
related flows of payment between society and farmers is no longer straightforward. Apart of
so-called flow externalities (the above case), one must also take into account the related effect
on environmental quality (ecological capital).8 In the latter case, the sign may change,
depending on the dynamic effect upon the overall quality of the environment. To judge the
overall effect, one must also take into account intrinsic values of ecosystem and watershed
functions that are essential for determining the total economic value (cf. Pearce and Turner,
1990; Munasinghe, 1993). Besides the economic valuation, this requires an improved
understanding of ecosystem dynamics that play an important role in the formation and
regeneration of ecological capital (so-called functional benefits). In addition, the orientation
of payments may change with the assignment of property rights and definition of reference
levels against which deviations are to be penalised or rewarded (Bromley, 2000).9
Table 2 gives an overview of the various non-food benefits of agriculture in relation to their
relevance from both a Paretean as well as sustainability perspective. In addition, it indicates
additional effects on the economy that are usually not considered as welfare relevant. For
instance, the degradation of soil quality has on-site effects on future production and farm
income. Hence, it is primarily a problem of intertemporal resource management, while off-
farm effects include consequences of sedimentation and surface water pollution (cf. Hediger,
2003).
8 Following the definition in Section 3, we can use environmental quality and ecological capital as synonyms. 9 This also explains the ambiguous sign of the Pareto-relevant externalities with regard to biodiversity and habitat protection, which cannot be judged without an adequate reference level (cf. Table 2).
Multifunctionality and Sustainability 14
Table 2: Welfare relevance of multifunctional benefits from agriculture
Pareto-relevant
externalities
other economic functions and
spill-over effects
relevance for sustainable
development
environmental benefits:
• rural landscape positive
impact on ecological capital
• biodiversity and habitats positive / negative impact on
ecological capital
• ecosystem and watershed functions: functional benefits impact on
ecological capital
- rural water quality negative
impact on ecological capital
- gaseous emissions negative impact on
ecological capital
- soil quality production benefits; intertemporal efficiency
impact on ecological capital
socio-economic benefits:
• food security
household income, production capacities, functioning markets
economic capital; basic needs
• food safety public health → social capital
• animal welfare positive / negative
demand for certain attributes (goods/production);
public good aspect of information (e.g. labels) welfare of non-
human beings (?)
• rural employment labour market; migration
economic stability; social capital
• viability of rural areas
• cultural heritage
spill-over effects (functional benefits)
impact on social capital
While the treatment of environmental effects of agricultural activity is quite clear from a
welfare economic point of view, the analysis is much more complicated when it comes to the
so-called socio-economic benefits of agriculture. This may partly explain why these issues are
subject to controversy in discussions about multifunctionality and non-trade concerns.
Multifunctionality and Sustainability 15
As Table 2 shows, these effect my not in general be judged as welfare relevant from a
Paretean point of view. Given the debate and concern expressed in various countries, animal
welfare may constitute the only case of a Pareto-relevant externality in this category. In this
case, a clear point of reference might be required to judge on whether a farmer’s behaviour is
to be considered positive or negative.10 However, government intervention is not necessarily
required to internalise externalities that are related to animal welfare. Presuming consumers’
willingness-to-pay for certain attributes of food products and production processes, the quality
benefits from food safety and animal welfare could in principle be internalised through
market prices. This however requires adequate information, for instance in from of labels, that
can be established through quality control and arbitrage between producers and consumers,
and result in adequate price differentiation in food markets.
Food security is a major issue that is subject to disagreement, and which needs to be treated
differently for industrialised and developing countries. In the latter, food security—that is, a
country’s capacity to ensure that everyone always has access to the minimum supply of basic
food necessary for survival—is a fundamental concern and essential for sustainable
development. It requires a certain level of household income, adequate production capacities,
and well-functioning markets for food products.
In contrast, in higher developed countries, the concern is poverty alleviation and the
satisfaction of basic needs. Rather, the concern is related the risk of an extreme embargo
which would make a country, over a certain period, fully reliable on domestic food
production. Anderson (2000) argues that in such a case consumers could change their diet to
avoid excessive caloric shortfalls. In addition, he points out that “in an extreme embargo
situation fuel and chemical imports also would halt, so overall domestic food production
could shrink significantly given the role of such products in providing energy, fertilizer and
pesticide inputs for agriculture” (Anderson, 2000: 483). Moreover, he argues that “the skills
of the farmers, having used input-intensive techniques for decades, would be debased in such
an input-deprived environment.” Correspondingly, diversification and investment in
knowledge to produce with less input-intensive techniques seem to constitute an important
strategy for sustainable development and insurance against national food shortenings. In this
10 The treatment of animal welfare would be even more problematic from a welfare economic and sustainability point of view, if it should come to an inclusion of non-human beings in the overall value function that is required for evaluating trade-offs. In this case, the scope of analysis and decision making would clearly go beyond social welfare. Otherwise, minimum conditions of animal welfare could be included in the sense of a Paretean constraint imposed on human activity.
Multifunctionality and Sustainability 16
case, the role of government would be in subsidising agricultural research and education that
both are public goods.
Given the declining role of agriculture in rural employment and population, its contribution to
social welfare in developed countries is highly questionable. In this context, the labour market
and migration to other sectors and urban areas have and will continue to play an important
role. With respect to sustainable development, the crucial issue in this context is the loss of
social capital (including human capital, social cohesion and safety nets) as a consequence of
migration to other areas. In a dynamic world, this can also have negative effects on the local
labour market and overall production capacity of rural areas, as well as on their viability
which together with the cultural heritage is an asset of tourism in such areas. Thus, population
decline in rural areas has negative effects on both economic and social capital. Hence,
changes in rural employment and the viability of rural areas in industrialised must be
evaluated from an integrated sustainability perspective of territorial development, rather than
restricted to the roles of agriculture.
Altogether, it shows that agriculture’s contributions to society might be valued differently in a
welfare economic framework of sustainable development, than from a traditional Paretean
perspective. This implies that multifunctionality and sustainability are not mutually exclusive
concepts. Rather, the elimination of market failures that are related to agricultural activities is
a prerequisite for sustainable development.
5 Conclusion
Despite general agreement about the existence of multiple benefits of agriculture to society,
there is disagreement when it comes to policy implications. This can partly be explained with
different national characteristics and positions in agricultural trade. From a conceptual point
of view even more important is the difference in epistemological foundations upon which the
different positions of the WTO, OECD and FAO are based.
With the objective of establishing a fair and market-oriented trading system, and the emphasis
on the importance of common rules and criteria for market access and trade liberalisation, the
WTO framework for the inclusion of non-trade concerns clearly belongs to the school of
libertarianism. In contrast, the OECD approach to the multifunctionality of agriculture which
aims at establishing policy principles to achieve multiple objectives in the most cost-effective
manner, is clearly outcome oriented, and thus utilitarian. Finally, the FAO approach to the
Roles of Agriculture project seems to be purely descriptive at first sight. However, aiming at
Multifunctionality and Sustainability 17
policy guidance to pursue sustainable agricultural and rural development (SARD), it is also
normative and implies an ethical framework which is broader in scope and conception than
traditional humanist and naturalist moral philosophies. This can be referred to as an “ethics of
sustainable development”.
The latter is a normative concept that involves concerns of equity within and between
generations, satisfaction of human needs and aspirations for a better life, as well as moral
imperatives for resource and ecosystem protection. Moreover, as a continuous process of
change, it also implies a continuous evaluation of trade-offs among different societal
objectives. Formally, this is the most usefully integrated in the framework of a welfare
economic approach that is based on a differentiated concept of capital and integrates them
with a set of minimum system requirements of sustainability. Altogether, this provides a
welfare economic framework which is broader in conception than the traditional Paretean
approach which is exclusively based on individual preferences.
Using both approaches, we can conclude that only environmental effects and animal welfare
can be considered as Pareto-relevant externalities that justify government intervention from a
traditional welfare economic perspective that solely aims at achieving efficiency in resource
allocation. In contrast, from a sustainable development point of view, welfare relevance is
given whenever an activity alters the value of economic, ecological or social capital. Apart of
Pareto-relevant externalities, this involves functional benefits and other impacts upon the
overall system that are not reflected in market prices or institutional arrangements.
Correspondingly, agriculture’s contributions to society might be valued differently in a
welfare economic framework of sustainable development, than from a traditional Paretean
perspective. The former implies changes of total capital and their valuation from a social
perspective that involves information about individual preferences as well as overall system
requirements. Hence, the elimination of market failures is necessary but not sufficient in
pursuing sustainable development. In other words, adequate compensation of the non-market
benefits of a multifunctional agriculture and promotion of efficient resource allocation is a
prerequisite for sustainable development. This implies a shift of paradigm from agricultural
support to territorial development and from production to outcome and value orientation.
Multifunctionality and Sustainability 18
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Multifunctionality and Sustainability 22
Renewable resources
&
ecologicalprocesses
Immaterialassets: - human capital - technology - social organization - etc.
Manufacturedcapital(K)
Socialcapital (S)
Macro-economicstability (M)
Income Y= ( )f Φ
Figure 1: The composition of total capital