Agricultural biodiversity, farm level technical efficiency and conservation benefits an empirical investigation

AGRICULTURAL BIODIVERSITY, FARM LEVEL TECHNICAL EFFICIENCY AND CONSERVATION BENEFITS: AN EMPIRICAL INVESTIGATION THIS DISSERTATION IS SUBMITTED TO THE FACULTY OF BUSINESS, QUEENSLAND UNI

AGRICULTURAL BIODIVERSITY, FARM LEVEL TECHNICAL EFFICIENCY AND CONSERVATION BENEFITS: AN EMPIRICAL INVESTIGATION

THIS DISSERTATION IS SUBMITTED TO THE FACULTY OF BUSINESS, QUEENSLAND UNIVERSITY OF TECHNOLOGY FOR THE DEGREE OF

Gardens Point Campus Brisbane, Australia

Statement of Original Authorship

The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made

………

K M R Karunarathna

21st May, 2012

This dissertation is dedicated to:

To my loving husband, Wasantha son, Kavindu and daughter, Disuni

To my mother, father and all who helped me to make it true

ACKNOWLEDGEMENTS

I greatly acknowledge the assistance I received from numerous individuals and institutions for completing this research Special thanks should go to my advisers, Professor Clevo Wilson and Professor Tim Robinson, for their constant support and guidance throughout my graduate program Their kindness, patience, and continual coaching are greatly appreciated They encouraged me to carry out this interesting dissertation research and for their invaluable advice, guidance, endless encouragement and untiring efforts to make it a success They provided a stimulating environment with productive discussion throughout the dissertation research that helped make me a better researcher I am grateful to them for their support and wisdom, and the kindhearted assistance extended to me throughout the study period

I am also thankful for the invaluable help and encouragement I received from my dissertation committee members Dr Mark McGovern, Dr Henri Burgers, Prof Tim Robinson and Prof Clevo Wilson I also would like to thank the panel members of

my PhD confirmation seminar, especially Dr Louisa Coglan, for her constructive comments

People who are living in Anuradhapura, Kurunegala and Ampara districts deserve

my thanks for their cooperation in the data gathering effort I greatly appreciate the help given by many individuals including enumerators and government officers during the data collection process I thank the University of Peradeniya for granting

me study leave, staff members in the Department of Economics and Statistics who encouraged me to pursue my postgraduate studies at the Queensland University of Technology in Australia

I must recognize the constant help given by my colleagues at the School of Economics and Finance, for their assistance and cooperation throughout the course

of study I am also thankful for the invaluable help and encouragement I received during my QUT life from Dr Tony Sahama in the faculty of IT I also should thank

to Dr Jeanette who helped me correct English in this dissertation I thank participants of local and international conferences for providing useful feedback and facilitating discussion on this work that I have presented to them I have benefited a lot from working with them

I gratefully acknowledge the role of Queensland University of Technology for

providing financial support for my graduate studies It is only with the help of QUT’s

IPRS scholarship, I was able to undertake this study in Australia I therefore acknowledge and thank QUT for awarding me this scholarship Further, I gratefully acknowledge the role of National Centre for Advanced Studies in Humanities and Social Sciences (NCAS) for providing financial support for my PhD research I am also thankful to Professor Tim Robinson, former head of the school, School of Economics and Finance, and all other administrative staff of the faculty of business for their invaluable service received during my study period at QUT

Last but not least I wish to express my deep gratitude to my husband, Wasantha for his understanding, patience and encouragement throughout my graduate studies I am indebted to my loving son, Kavindu and daughter, Disuni As I had to spend considerable time on this study, they missed their mum during the time in the first few years in their life Finally, I am deeply grateful to my beloved mother for her invaluable contribution throughout my life I also owe a debt of gratitude to my late

father I also acknowledge my brother, sisters and their families, for their unconditional love inspiration and encouragement throughout my life

TABLE OF CONTENTS

STATEMENT OF ORIGINAL AUTHORSHIP ……… ii

DEDICATION……… iii

ACKNOWLEDGEMENTS ……… iv

TABLE OF CONTENTS……….……… vii

LIST OF TABLES……….… xi

LIST OF FIGURES……… xii

LIST OF ABBRIVIATION……… xiii

ABSTRACT……….… xv

CHAPTER 1: INTRODUCTION……….……… 1

1.1 Overview ……….… …… 1

1.2 Motivation ……….……… 13

1.3 Expected contributions of the study……….…… 16

1.4 Structure of the thesis……….…….… 18

CHAPTER 2: STATUS AND TRENDS OF BIODIVERSITY IN SRI LANKA 20 2.1 Biodiversity wilderness area in the world……….… 20

2.2 Biodiversity in Sri Lanka ……….………….… 22

2.3 Present status and future challenges of biodiversity……….…… 26

2.4 Agricultural biodiversity in the country……….… 33

CHAPTER 3: DATA SOURCES AND DESCRIPTION……….……… 39

3.1 Introduction ……….….……… 39

3.2 Selecting appropriate sample size……….……… 40

3.3 Selecting respondents for the survey……… 44

3.4 Field survey and its content……… 47

3.5 Design choice experiment survey……… 49

CHAPTER 4: FARMERS’ VALUATION OF AGRICULTURAL

4.1 Introduction……… … … 57

4.2 Literature review on valuation of agricultural biodiversity……….… … 60

4.3 Random utility models……… … 64

4.4 Choice experiment method ……… … 70

4.5 Choice experiment design and model selection……… … 76

4.6 Empirical approach to choice experiments study……….… … 82

4.7 Socio-economic profile of sample respondents……… … 91

4.8 Data cording and estimation procedure……….… 94

4.9 Result of the conditional logit model (CLM)……….… 96

4.10 Result of the CLM including attributes and socioeconomic variables… 103 4.11 Result of the random parameter logit model……….… 108

4.12 Estimating welfare changes with changing attributes and their level… 110

4.13 Summary and key findings……… 116

CHAPTER 5: FACTORS INFLUENCING FARMERS’ DEMAND FOR AGRICULTURAL BIODIVERSITY 119 5.1 Introduction ……… … 119

5.2 Literature review on demand for agricultural biodiversity………… 121

5.3 Derivation of demand for agricultural biodiversity……… ……….… 128

5.4 Empirical model specification and relevant variables……….…….… 135

5.5 Theoretical approaches for the relevant models………… …….….… 143

5.5.1 Poisson regression model……… 144

5.5.2 Negative binomial (NB2) regression model……….… 148

5.5.3 Empirical tests for different count data models……… … 152

5.6 Socio-economic characteristics of the households……….… 155

5.7 Determinants of crops variety demand…….……….…… 158

5.8 Determinants of livestock variety demand.……….… 166

5.9 Summary and key findings ……… 169

CHAPTER 6: FARMERS’ PREFERENCES FOR DIFFERENT FARMING

6.1 Introduction……… … 173

6.2 Literature review on farmer’s preference for different farming systems 175 6.3 Methods of explaining farmer’s preferences……… 180

6.4 Factors influencing the selection of landrace cultivation……… …… 187

6.5 Factors influencing the selection of organic farming ……… 190

6.6 Farmers’ demand for mix farming system……… 194

6.7 Summary and key findings……….… 198

CHAPTER 7: AGRICULTURAL BIODIVERSITY AND FARM LEVEL EFFICIENCY 201 7.1 Introduction……… 201

7.2 Literature on agricultural biodiversity and farm level efficiency…… 204

7.3 Method of estimating farm level technical efficiency……… … 209

7.4 Empirical model of estimation……… 215

7.5 Estimates for parameters of stochastic frontier production function… 220

7.6 Estimating marginal productivity and input elasticity………….… … 226

7.7 Variations of technical efficiency……….……… 228

7.8 Results of the inefficiency model……… 233

7.9 Summary and key findings……….… 238

CHAPTER 8: CONCLUSIONS AND POLICY IMPLICATIONS……… 241

8.1 A summary of findings and discussion……….…… 241

8.2 Policy implications……….…… 247

8.3 Limitations of the study and further research……….……… 251

BIBLIOGRAPHY……… ………

255

APPENDIX A (1): Defining agricultural biodiversity 288

APPENDIX A (2): TEV of agricultural biodiversity on small-scale farms 289

APPENDIX A (3): Defining TEV of agricultural biodiversity on farms……….… 290

APPENDIX B: Number of described species in the World……….….… 291

APPENDIX C: Biodiversity wilderness areas in the world……….… 292

APPENDIX D (1): Topography in Sri Lanka……….… 293

APPENDIX D (2): Major climatic zones in Sri Lanka……… 294

APPENDIX E: Protected areas under department of wildlife in Sri Lanka…… … 295

APPENDIX F: List of protected areas of Sri Lanka……… 296

APPENDIX G: Map showing survey areas in Sri Lanka……… 297

APPENDIX H: Questionnaire used in the survey……… ………….…….… 298

APPENDIX I(1): A sample choice set is given to the respondent……….… 322

APPENDIX I(2): Description of 36 choice sets of the choice experiment……… 323

APPENDIX J: Descriptive statistics of the sample respondents.……….… 324

APPENDIX K: Zero inflated Poisson / negative binomial regression model….… 327

APPENDIX L: MLE of parameters and point estimates of TE……… … 330

APPENDIX M: Derivatives of elasticities using translog production function…… 335

APPENDIX N(1): List of crops varieties on small-scale farms……… 336

APPENDIX N(2): List of livestock breeds on small-scale farms……….… 337

LIST OF TABLES

Table 2.1: The list of recorded species in different taxonomic groups……… 27

Table 2.2: Estimated number of selected species ……… 29

Table 2.3: Natural ecosystem richness……… 32

Table 3.1: Estimating minimum sample size for each district……… 43

Table 3.2: Details of the survey areas……… 45

Table 4.1: Classifications of small-scale farm attributes in the CE survey…… 85

Table 4.2: Attributes and their levels……….… 87

Table 4.3: Example of a choice set……… … 89

Table 4.4: Individual attributes for the estimation of CL and RPL models… 90

Table 4.5: Regression results of the CL model ……….… 99

Table 4.6: Test of independence of irrelevance alternatives……… 102

Table 4.7: CL model including attributes and socioeconomic variables….… 107

Table 4.8: Regression results of the RPL model……… …….… 109

Table 4.9: Implicit price estimates for attributes……… ….… 111

Table 4.10: Estimates of WTA for various scenarios: Ampara……… … 113

Table 4.11: Estimates of WTA for various scenarios: Anuradhapura…… … 114

Table 4.12: Estimates of WTA for various scenarios: Kurunegala…… … … 114

Table 4.13: Simulation total welfare gains to the districts……….… … 115

Table 5.1: Definition of the agricultural biodiversity……… … … 135

Table 5.2: Definition of potential explanatory variables ……… 136

Table 5.3: Explanatory variables used in the demand model……… 142

Table 5.4: Summary of the econometric models to be used for the analysis… 143

Table 5.5: Poisson regression results for crops variety model……….… 161

Table 5.6: Poisson regression results for animal variety model………….…… 167

Table 6.1: Definition dependent variables in different models……….… 183

Table 6.2: Definition of potential explanatory variables ……… 184

Table 6.3: Explanatory variables and their expected signs……… 186

Table 6.4: Probit regression results for landrace production model……… … 189

Table 6.5: Probit regression results for organic production model……….…… 191

Table 6.6: Probit regression results for agro-diversity model……… 195

Table 7.1: ML estimates for parameters of the production function……….… 225

Table 7.2: Estimated elasticities and marginal productivity of each input…… 227 Table 7.3: Frequency and percentage distribution of the technical efficiencies 229 Table 7.4: Average TE, value of actual and potential output with land size… 231 Table 7.5: Average efficiency with farm type……… … 232 Table 7.6: ML estimates for parameters of the inefficiency model……….… 234

LIST OF ABBRIVIATION

ASC Alternative Specific Constant

BCAP Biodiversity Conservation Action Plan

CBD Conservation on Biological Diversity

CEM Choice Experiment Method

CVM Contingent Valuation Method

CL Conditional Logit

DSDs Divisional Secretary Divisions

DFC Department of Forest Conservation

EEZ Exclusive Economic Zone

EEPU Environmental Economic Policy Unit

FAO Food and Agriculture Organization

GDP Gross Domestic Production

GLR Generalised Likelihood Ratio

GM Genetically Modified

HYV High Yield Varieties

IBEC Biodiversity and Environmental Conservation IIA Independence of Irrelevant Alternatives IID Independently and Identically Distributed IFPRI International Food Policy Research Institute IUCN International Union for Conservation of Nature LKR Sri Lankan Rupees

MLE Maximum Likelihood Estimator

MNL Multinomial Logit

NBM Negative Binomial Model

NCS National Conservation Strategy

NEAP National Environmental Action Plan

NGOs Non Government Organizations

PGRC Plant Genetic Resource Centre

PM Poisson Model

RPL Random Parameter Logit

RUM Random Utility Models

TE Technical Efficiency

TEV Total Economic Values

TWTP Total Willingness to Pay

TWTA Total Willingness to Accept

ZIP Zero-inflated Poisson

ZINB Zero-inflated Negative Binomial

ABSTRACT

The issues involved in agricultural biodiversity are important and interesting areas for the application of economic theory However, very little theoretical and empirical work has been undertaken to understand the benefits of conserving agricultural biodiversity Accordingly, the main objectives of this PhD thesis are to: (1) Investigate farmers’ valuation of agricultural biodiversity; (2) Identify factors influencing farmers’ demand for agricultural biodiversity; (3) Examine farmers’ demand for biodiversity rich farming systems; (4) Investigate the relationship between agricultural biodiversity and farm level technical efficiency This PhD thesis investigates these issues by using primary data in small-scale farms, along with secondary data from Sri Lanka The overall findings of the thesis can be summarized as follows

Firstly, owing to educational and poverty issues of those being interviewed, some policy makers in developed countries question whether non-market valuation techniques such as Choice Experiment (CE) can be applied to developing countries such as Sri Lanka The CE study in this thesis indicates that carefully designed and pre-tested nonmarket valuation techniques can be applied in developing countries with a high level of reliability The CE findings support the priori assumption that small-scale farms and their multiple attributes contribute positively and significantly to the utility of farm families in Sri Lanka Farmers have strong positive attitudes towards increasing agricultural biodiversity in rural areas This suggests that these attitudes can be the basis on which appropriate policies can be introduced

to improve agricultural biodiversity

Secondly, the thesis identifies the factors which influence farmers’ demand for agricultural biodiversity and farmers’ demands on biodiversity rich farming systems As such they provide important tools for the implementation of policies designed to avoid the loss agricultural biodiversity which is shown to be a major impediment to agricultural growth and sustainable development in a number of developing countries The results illustrate that certain key household, market and other characteristics (such as agricultural subsidies, percentage of investment of owned money and farm size) are the major determinants of demand for agricultural biodiversity on small-scale farms The significant household characteristics that determine crop and livestock diversity include household member participation on the farm, off-farm income, shared labour, market price fluctuations and household wealth Furthermore, it is shown that all the included market characteristics as well as agricultural subsidies are also important determinants of agricultural biodiversity

Thirdly, it is found that when the efficiency of agricultural production is measured in practice, the role of agricultural biodiversity has rarely been investigated in the literature The results in the final section of the thesis show that crop diversity, livestock diversity and mix farming system are positively related to farm level technical efficiency In addition to these variables education level, number of separate plots, agricultural extension service, credit access, membership of farm organization and land ownerships are significant and direct policy relevant variables in the inefficiency model The results of the study therefore have important policy implications for conserving agricultural biodiversity in Sri Lanka

CHAPTER ONE

INTRODUCTION

1.1 Overview

and industrial products Agricultural biodiversity1 (see Appendix A.1 for more details) is

a sub-set of general biodiversity which is essential for global food production, livelihood security and sustainable agricultural development (Brookfield, 2001; Pascual and Perrings, 2007) Agricultural biodiversity includes all forms of life directly relevant to agricultural production In addition to providing direct benefits to farmers, agricultural biodiversity improves ecological processes by regulating climate, maintaining soil quality, providing protection from erosion, storing nutrients and breaking down pollution (Thrupp, 1988; FAO, 1999) Some societies also value biodiversity for cultural reasons as it maintains the aesthetic value of landscapes (Nagarajan et al., 2007)

Despite all these benefits previous experience has shown that population growth, inequity, inadequate economic policies and institutional systems have mainly contributed towards the increasing loss of agricultural biodiversity in the world (Ayyad, 2003; Ganesh and Bauer, 2006) Low levels of education and lack of integrated research

on natural ecosystems and their innumerable components may exaggerate the process,

1 FAO, (1999a) defined agricultural biodiversity as the variety and variability of animals, plants and micro-organisms that are used directly or indirectly for food and agriculture, including crops, livestock, forestry and fisheries It comprises of the diversity of genetic resources (varieties, breeds) used for food, fodder, fibre, fuel and pharmaceuticals It also includes the diversity of non-harvested varieties that support production (soil micro-organisms, predators, pollinators), and those in the wider environment that support agro-ecosystems (agricultural, pastoral, forest and aquatic) as well as the diversity of the agro- ecosystems

especially in developing countries While the loss of habitats may occur through clearing land for agriculture, specialisation of agricultural practices reduces farm level crops, genetic or livestock diversity (Swanson, 1999)

Neoclassical economic theory predicts that specialisation in one kind of variety or technology is the profit maximising solution for a farmer and that it is costly to maintain

a diverse portfolio of species, varieties and management systems due to several reasons These reasons include time and management intensity of diversity maintenance and high opportunity costs associated with not specialising in particular varieties with the highest current economic return (Brush et al., 1992; Smale et al., 2001; Gauchan and Smale, 2003) But in reality, it has been observed that contrary to economic theory, farmers, especially in developing countries often prefer to maintain a diverse portfolio of varieties and to continue employing traditional agricultural technologies, even when modern technologies and high yielding varieties (HYVs) are available to them Several explanations have been found for this persistence in management of agricultural

biodiversity on farms These include farmers’ attitudes towards risk (in yield, income,

price and consumption) and their need to compensate for market imperfections in satisfying household demands for diversity in consumption

Many farmers manage high levels of agricultural biodiversity on farms to keep options open for possible future benefits of diversity, such as being sources of new varieties Many farm families use agricultural biodiversity as a way of spreading out labour needs

to ensure that limited labour supplies are used more efficiently There are also cultural benefits (e.g cuisine, ritual, prestige, payment, gift, social ties) attached to agricultural

biodiversity Equally, agricultural biodiversity is found to have positive impacts on overall productivity and soil quality In recognition of agricultural biodiversity importance, international agreements such as the Convention of Biological Diversity (CBD) and the international institutes such as International Food Policy Research Institute (IFPRI) and Institute of Biodiversity and Environmental Conservation (IBEC) encourage the design of policies that convey economic incentives for farmers to conserve agricultural biodiversity (CBD, 2002) The number of economic studies that have attempted to explain the reasons for on farm conservation and the means by which this method of conservation can be strengthened, are however small compared to the magnitude of the problem of loss of agricultural biodiversity in farmers’ fields

throughout the world

Modern agricultural methods and technologies have brought spectacular increases in food production (Tilman et al., 2002), but not without high environmental costs Efforts

to boost food production, for example, through direct expansion of cropland and pastures, have negatively affected the capacity of ecosystems to support food production and to provide other essential services Food production will undoubtedly be affected by external factors such as climate change But the production and distribution of food itself

is also a major cause of climate change As food production becomes increasingly industrialised, with fewer niches available for varieties other than those targeted for production, a rapid decline in the diversity of varieties used has been observed These major changes in production have lead to simplified and less resilient agro-ecosystems, reducing not only the number of niches but also the range of products and their distribution over time and space (FAO, 1999b) There is ample research which indicates

that modern agricultural methods and technologies can generate large environmental and social costs A substantial contribution to sustaining agricultural biodiversity can therefore be made through continued support of producer organisations working with small-scale farm producer groups to conserve, develop and use sustainably food and agricultural genetic resources including plant, animal and aquatic

As mentioned above, agricultural biodiversity is eroding and resources available for conservation are limited, implying economic valuation (especially estimation of total economic value) can play an important role in ensuring an appropriate focus for conservation efforts (UNEP, 1995; Drucker et al., 2001) As Swanson et al (1997) state,

in order to design policies and programmes that both encourage maintenance of agricultural biodiversity on farm and ensure that economic and agricultural development occur, it is necessary to establish the value of what it is that needs to be conserved

The direct and indirect benefits of conserving farm level biodiversity can be numerous, especially in semi-subsistence economies The measurement of economic values of services provided by agricultural biodiversity can be done on the basis of total economic values (TEV) TEV consists of use and non-use values Diagrammatically, the TEV framework can be expressed as shown in Appendices A.1 and A.2 Benefits obtained by individuals using agricultural biodiversity are defined as use values Use values of agricultural biodiversity include, direct, indirect, portfolio values and option values2(Brown, 1990; Primack, 1993; Swanson, 1996; Evenson et al., 1998) On the other hand, bequest values, altruistic values, existence values and cultural values of agricultural

2

Option values can be placed under both use and non-use values It includes future direct and indirect use values

biodiversity are considered under non-use values (Krutilla, 1967; Brown, 1990; Primack, 1993; Evenson et al., 1998)

In this study, five indicators (components) are used to capture the use and non-use values of agricultural biodiversity They are: crop diversity (number of crops varieties that are grown on the farm), livestock diversity (number of livestock varieties on the farm), mixed farming systems (integration of crop varieties and livestock breeds), landrace cultivation (whether a farm contains crop varieties that have been passed down from the previous generation and/or has not been purchased from a commercial seed supplier) and organic production (when industrially produced and marketed chemical inputs are not used in farm production) Among these five indicators, the first two represent agricultural biodiversity while last three represent the different farming systems which help maintain biodiversity under rich farming practices More details about using these variables to capture farmers’ valuation of agricultural biodiversity are

found in studies conducted byBenin et al (2003), Benin et al (2004), Bellon (2004), Birol et al (2006), Nagarajan et al (2007), Birol et al (2008) and Hadgu et al (2009) It

is evident that economic values of conserving these components can only be calculated based on a comprehensive identification of the environmental and social values of the ecosystem services that they provide

Commercial direct use value of agricultural biodiversity can be a relatively small component of their total use value in agriculture (Drucker et al., 2005) Many values are not captured well in market prices and hence investments in conservation may not occur optimally (Swanson, 1996) This is one of the reasons why farmers’ activities gradually

reduce agricultural biodiversity Some of the other possible reasons why farmers may tend to destroy agricultural biodiversity can be explained as follows Firstly, most benefits of conserving agricultural biodiversity are long-term (and inter-generational) and not traded in the market For example, by cultivating different crops and livestock, soil fertility can be improved However, farmers may not take into account these long-term benefits Secondly, poor farmers with lower levels of education may not be aware about the total benefits of conserving agricultural biodiversity They may consider only the short-term direct use benefits and may select the specialisation of cash crops as a mean of increasing income in the short term However, single crops are more vulnerable

to the rapid spread of disease, this greatly heightens the vulnerability of resource-poor farmers Thirdly, sales promotion activities and credit facilities have promoted the cultivation of modern crop varieties using pesticides and chemical fertilisers Such a system can increase short-term yields while destroying the resilience of agro-ecosystems

in the long-term Fourthly, high discount rates will decrease the future value of agricultural biodiversity and provide some incentives to increase present consumption which in turn can increase the degradation of biodiversity These reasons show that as long as farmers underestimate the total benefits of conserving agricultural biodiversity, there will be simplified and less resilient agro-ecosystems, thus reducing the number of services provided by them in the long-run

Although much theoretical as well as empirical work has investigated various aspects of agricultural biodiversity there is still a considerable lack of understanding of what social benefits could be achieved from conserving agricultural biodiversity in developing countries Economics to some extent provides us with the analytical tools to assist in

guiding towards socially desirable outcomes However, little theoretical and empirical work has been undertaken in this area of research This means that there exists a gap in the theoretical and empirical literature, addressing practical issues utilising correct economic instruments in this area This thesis examines three main issues that arise in the area of agricultural biodiversity in the context of Sri Lanka The focus of the thesis allows for the study of direct and tangible issues facing policy makers After reviewing a large number of studies, existing models and empirical work, the shortcomings that exist

in their application are identified They are:

(1) Farmers’ valuation of agricultural biodiversity is not properly explained As a result

social welfare losses due to loss of agricultural biodiversity have not been adequately estimated It is evident that management of agricultural biodiversity requires measurement, and measures of diversity to some extent It is thus necessary to measure and disentangle some of the separate benefits of agricultural biodiversity in order to formulate appropriate policies However, many of the goods and services provided by different components of agricultural biodiversity are crucial, but not always quantifiable

in monetary terms Many of these goods and services are not traded in the market place and do not have an obvious price or commercial value The danger is that if these unpriced values are not included in the decision-making process, the final decision may favour outcomes which do have a commercial value and decision makers may not have full awareness of the consequences for biodiversity conservation Therefore, it is of paramount importance to understand the true value of agricultural biodiversity and to estimate the welfare change of the society with the change of agricultural biodiversity

The first section of this thesis attempts to capture farmers’ valuation of agricultural

biodiversity This objective will help to determine the economic value of conserving agricultural biodiversity to society

(2) Factors affecting the conservation of agricultural biodiversity are not adequately identified in the literature The literature shows that, despite the emphasis placed by policy decision-makers on increasing the conservation of biodiversity in small scale-farms3, it is increasingly becoming degraded in many agricultural areas (see, for example, Matson et al., 1997; Perrings, 2001; Brookfield et al., 2002; Mattison and Norris, 2005) Therefore, it is important to understand which factors are contributing to decreasing agricultural biodiversity in small-scale farms In the second section of this

thesis farmers’ demand for agricultural biodiversity and environmentally rich farming

systems such as organic farming and landrace cultivation are estimated This objective will help understand and identify factors influencing the degradation of agricultural biodiversity in small-scale farms

(3) No previous analysis has investigated the links between agricultural biodiversity and farm level technical efficiency Some studies reveal that crop diversity is positively related to agricultural productivity of small-scale farms (see, for example, Di Falco and Perrings, 2003) They also find that inter-species’ crop genetic diversity is positively

related to mean income and negatively related to the variance of income While increasing productivity on farms, diverse farming systems help farmers manage some

3 A scale farm is defined as any farm which is less than one hectare We only concentrate on scale farms in this study This is due to three reasons First, small-scale farms are the most common type

small-of farms in rural areas in Sri Lanka Second, maintaining diverse farming systems with the objective small-of acquiring family food consumption is a common characteristic of small-scale farms rather than large-scale farms Third, some indicators of agricultural biodiversity that we considered in this study such as animal diversity, landrace cultivation and organic production can commonly be seen in small-scale farms in the country

resources, such as labour, optimally It also helps to increase farm revenues by minimising market risks which is a common problem in developing countries For example, in a particular season prices of some crops or livestock can decrease while others can increase Therefore, maintaining more diverse farming systems help farmers manage unnecessary risks in the markets In the third section of this thesis we investigate the relationship between agricultural biodiversity and farm level efficiency.This type of study allows us to analyse the effects of agricultural biodiversity on farm level technical efficiency

The overall objective of this thesis is to address some of the issues related to the above mentioned three sections in the context of Sri Lanka’s agriculture Accordingly, the

thesis has three separate sections The structure of the three main sections and subsequent studies are summarised in Figure 1.1 The first section of the thesis analyses

farmers’ valuation of agricultural biodiversity The choice experiment (CE) method

which is one of the most widely used and a preferred technique is used for this purpose The results are then used to estimate the likely welfare gains under various hypothetical scenarios The results of the study will enable policy decision-makers to better understand the relevant issues and thereby take appropriate action to mitigate some of the adverse issues in this field

The second section of the thesis examines the demand for agricultural biodiversity in small-scale farms in Sri Lanka This section consists of two studies The first study

analyses farmers’ demand for crops and livestock varieties respectively while the second

study examines farmers’ demand for landrace cultivation, mixed farming and organic

farming systems This section attempts to identify the different market and non-market

Figure 1.1: Summary of the three main sections of the thesis

factors which are important for increasing agricultural biodiversity on small-scale farms

An agricultural farm household model is used for this purpose The motivations of the second section of this thesis are threefold Firstly, this study investigates whether farmers within a semi-subsistence economy allocate farm resources (e.g land or household time endowment) to the production of food crops and thus have higher levels

Agricultural Biodiversity

Demand Estimation Technical Efficiency Conservation Benefits

Agricultural Household Model

Agricultural biodiversity

Efficiency gains with AB

Primary data: Three districts Different

farming systems

of agricultural biodiversity, or to cash crops4, and have a subsequent loss of agricultural

biodiversity Secondly, the empirical research that has investigated farmers’ preferences

of environmentally friendly farming systems is limited in the literature (Van Dusen, 2000; Smale et al., 2001) Therefore, it is important to identify different factors which support an increase in landrace cultivation, mixed farming systems and organic farming systems Thirdly, a common finding of previous studies in this area shows that market development is one of the causes of agricultural biodiversity loss on farms in most developing countries (Smale et al., 2001) This study attempts to investigate this finding using semi-subsistence farm level data in Sri Lanka

The third section of the thesis investigates the relationship between agricultural biodiversity and farm level technical efficiency The stochastic production frontier approach is used to estimate farm level technical efficiency There is increasing evidence (Adams et al., 2004; Agrawal and Redford, 2006) to show that agricultural biodiversity conservation can in turn facilitate increasing productivity and farm level efficiency in small-scale farming However, the existing scientific knowledge regarding agricultural biodiversity and its link with farm level technical efficiency has not been fully examined The existing literature does not assess the value of ecosystem services to the poor and the implications of these links for development policy As a result, the need for proper estimation of costs and benefits of conserving agricultural biodiversity, as well as the demand for introducing appropriate policy regimes for managing them is increasing (Romstad et al., 2000)

4 Cash crops are those which are produced for the purpose of generating cash or money The products are therefore intended to be marketed for profit A specialized farming system is the mostly preferred farming system for the cultivation of cash crops

Among these sections, the first and the second sections deal with the important aspects

of conserving agricultural biodiversity while the third section investigates the relationship between agricultural biodiversity and farm level technical efficiency The implications of these findings will help illustrate the importance of conserving natural resources in agriculture This study will help implement policies to reduce degradation

of biodiversity that can be hypothesized to be increasingly posing a major impediment to agricultural growth and sustainable development in many developing countries Therefore, the findings of the study will provide useful policy implications

Sri Lanka is an ideal representative country for this type of study This is because the country, being largely agricultural, historically has had phases of agricultural policy development on the basis that development of agriculture would lead to the overall development of the nation and would thus help to eradicate poverty It has been later realized that the increasing efforts to raise agricultural growth has cost the country in terms of land as well as biodiversity degradation (Anon, 1999) Sri Lankan agriculture today has a dual structure consisting of large-scale, mechanised farms alongside semi-subsistence, small-scale farms managed with family labour and traditional practices These Sri Lankan small-scale farms5have a range of local varieties of trees, crops and livestock breeds, as well as soil micro-organisms

Agricultural scientists describe small-scale farms as micro-agro ecosystems that are rich

in several components of agricultural biodiversity Many expect that as a result of

5

Small-scale farms are semi-subsistence in nature and are the most common type of farms in rural area in Sri Lanka These farms are privately owned, labour intensive and has a traditional production system that maintains a high level of agricultural biodiversity in Sri Lanka

continued economic transition, the dual structure of Sri Lankan agriculture and the share

of home-produced food will eventually disappear So the private provision of public goods generated by small-scale farms management cannot be sustained in the long run.In addition to that, the disappearance of the rural-based multi-crops farming system has affected rural communities in Sri Lanka in many ways (Anon, 1999) Therefore, it is necessary to implements agri-environmental schemes to advance the use of specified farming methods in rural areas, but so far the role of small-scale farms within these schemes has not been elucidated This study identifies the least-cost options for including farming communities in Sri Lankan’s agri-environmental schemes, by

characterising those who value agricultural biodiversity in their small-scale farms most The motivations for undertaking this type of study are explained in the following section

1.2 Motivation

The overall aim of this study is to estimate the conservation benefits of agricultural biodiversity in small-scale farms with special reference to Sri Lanka The results of the study can be used to develop/implement economically profitable and environmentally feasible agro-ecosystems in any country It is clear that understanding these issues is crucial when formulating policies to upgrade livelihood of rural households and enhancing agricultural biodiversity A study of this nature also helps to develop a sustainable agricultural system that minimises the social cost of using natural resources Lack of sufficient incentives for managing farm level agricultural biodiversity could be one of the constraints in conserving biodiversity in most developing countries The first

aim of this thesis is to review the current state of knowledge associated with agricultural biodiversity and to identify gaps in our knowledge base in this area Secondly, appropriate economic methodologies are applied to analyse the three main research questions that have been highlighted in the introduction The overall objective of the thesis is to establish a case for increasing the sustainable use of agricultural biodiversity

in improving people’s well-being and food and nutrition security

Agricultural biodiversity provides a wide range of direct and indirect benefits to the farming community (see, Appendices A.2 and A.3 for more details) However, many human activities contribute to unprecedented rates of biodiversity loss, which threaten the stability and continuity of ecosystems as well as their provision of goods and services In this context, several studies have been conducted to identify the possible

monetary values based on farmers’ preference of agricultural biodiversity However,

most studies do not use a uniform, clear measurement framework that enables the exploration of the use of both market and non-market benefits Moreover, existing studies only analyse welfare changes without considering crop heterogeneity and regional heterogeneity simultaneously The first section of this research attempts to

identify farmers’ valuation of agricultural biodiversity using the choice experiment

technique This methodology helped estimate the welfare changes to society due to changes in agricultural biodiversity Heterogeneous farms from three districts in Sri Lanka were selected The implications of these findings will help illustrate the benefits

of conserving diverse farming systems in small-scale agriculture in developing countries

Although the contribution of small-scale farms to household survival in developing countries is very important, only a few studies are available in this field Moreover, existing studies have taken into account the market value of only crop or livestock diversity In this study, the demand for crop diversity, livestock diversity, mixed farming systems, landrace cultivation and organic production are estimated using farm household survey data This will help identify factors influencing the degradation of agricultural biodiversity The results will provide information for policy makers to implement a farming system that provides maximum benefits to themselves and society

The loss of biodiversity may impair ecosystem functions while decreasing farm level productivity A number of experimental studies have been performed or are emerging in this area (see, for example, Johnson et al., 1996) However, most of these studies are restricted to experimental work in the field of science rather than economic analysis In this context, the third section of this research attempts to investigate the relationship between agricultural biodiversity and efficiency To the best of my knowledge, no economics study has attempted to examine this relationship before The results will be a novel contribution to the existing literature In this study, it is expected to calculate farm level technical efficiency and investigate its links with important variables that are directly linked with agricultural biodiversity Stochastic production frontier method is used for this purpose The results will show a way of increasing farm level technical efficiency which is a major challenge in developing countries, including Sri Lanka

Rural people use and manage agricultural biodiversity in order to improve their livelihoods However, there is an increasing interest in the opportunities that

conservation in a broader production landscape could afford as a means to overcome poverty Much has been written on the loss of managed biodiversity under threats from commercial and intensified agricultural production However only a limited amount of work has been conducted on how farm households manage their resources so as to sustain and enhance them The overall findings of this study will help conserve the agricultural biodiversity in small-scale farms which can in turn help design poverty alleviation policies, especially in developing countries In the next section the expected contribution of this thesis will be explained

1.3 Expected contributions of the study

The strategic roles of agricultural biodiversity in food and nutritional security and income generation have been insufficiently documented and understood Systematic identification and investigation of such roles are needed to build on scattered research so far This in turn requires the development, testing and diffusion of tools, methodologies and strategies that strengthen the mutually reinforcing contribution of biodiversity to

livelihoods and livelihoods to biodiversity conservation Most of the world’s agricultural

biodiversity is found in small-scale agricultural areas in developing countries (Smale et al., 2001) Hence, an essential element of the research is to strengthen the benefits from agricultural biodiversity realised by communities in these areas The key hypothesis is that biodiversity, given certain interventions and support, can be used to improve nutrition and livelihood options, and in so doing creates incentives for the conservation

of its diversity in order to achieve a sustainable farming system

This research contributes to developing a biodiversity rich agricultural system across different ecological and socio-economic contexts It also evaluates the effects of

different farming systems (with different biodiversity levels) on farmers’ wellbeing In

the first section a stated preference method Choice modelling) is used to investigate

farmers’ preferences for biodiversity rich agricultural systems The second section of the

research attempts to identify the influencing factors for conserving agricultural biodiversity The third section contributes to the existing literature showing the agricultural biodiversity and its link with productivity and farm level efficiency which is

a missing part of the economics literature This will directly help make suitable policies

to implement most appropriate agricultural systems for small-scale farms In general, this study will show the importance of the conservation and sustainable use of agricultural biodiversity on farms

The overall policy goal of the study is to increase awareness and generate support for investment in conservation and development of agricultural biodiversity The research aims at sharing innovative ideas, research methods and findings in areas of agricultural biodiversity conservation to the existing literature It will provide an opportunity to make necessary policies that provide incentives to protect biodiversity at farm level that generate regional as well as global benefits in the future This research will also identify the weaknesses and the gaps that exist in this field It will help develop mechanisms, approaches and pathways for strengthening engagement on agricultural biodiversity for food and nutrition security and environment in the future This will include establishing

a platform for actions for supporting and strengthening research, development and policies in agricultural biodiversity

The overall findings of this PhD research will help implement policies to reduce degradation of biodiversity that is increasingly posing a major impediment to agricultural growth and sustainable development The research findings could also be used to develop/implement economically profitable and environmentally feasible agri-ecosystems in any country Understanding the benefits of conserving biodiversity and its variations are of paramount importance when designing policies in this field In general, the research contributes to the sustainable use of agricultural biodiversity to improve

farmers’ well-being For this purpose, we first attempt to explain some previous

economic models and identify the shortcomings of previous studies Then we apply appropriate economic models to analyse relevant issues mentioned above, which is an extension of the conventional work in this field In this context the results of the study help policy makers understand the real issues and come up with appropriate solutions The way of carrying out this task is explained in the next section

1.4 Structure of the thesis

This PhD research addresses issues related to agricultural biodiversity in small-scale farms which are extremely important in the context of conserving agricultural biodiversity as well as improving the livelihood of farmers in the agricultural sector in Sri Lanka The task of analysing these issues is accomplished in the following manner The thesis is presented in eight chapters This first chapter defines the research problem Chapter two provides background information on the present status of biodiversity in Sri Lanka, which includes: biodiversity wilderness area in the world; biodiversity in Sri Lanka; present status and trends of biodiversity and future challenges in agricultural

biodiversity In Chapter three the conduct of the survey, the data collection method and data sources are explained

Chapter four investigates farmers’ preferences for different attributes of agricultural

biodiversity It also analyses the welfare changes to society due to changes in agricultural biodiversity The fifth chapter estimates demand for agricultural biodiversity It attempts to identify the determinants of crop diversity and livestock diversity Chapter six focuses on the farmers’ preference for agricultural biodiversity

rich farming systems This chapter investigates the important factors for selecting mixed farming systems, landrace cultivation and organic production systems Chapter seven focuses on investigating the relationship between different variables that represent agricultural biodiversity and farm level technical efficiency

The final Chapter provides a brief summary of the thesis with a discussion of the results within a policy framework Particular attention is paid to highlighting the key findings and policy constraints This Chapter attempts to clearly define where the information gathered from this thesis fits within the larger social, political and economic discussions

on agricultural biodiversity loss, economic growth and policy failure It presents some concluding remarks, while highlighting obvious gaps in the literature The importance of the analysis undertaken in this study, along with the limitations and remaining future research areas, are also highlighted in the final Chapter

CHAPTER TWO

STATUS AND TRENDS OF BIODIVERSITY IN SRI LANKA

2.1 Biodiversity wilderness area: a global prospective

Biodiversity for food and agriculture includes the components of biological diversity that are essential for feeding human populations and improving the quality of life (Adams et al., 2004) It includes the variety and variability of ecosystems, animals, plants and micro-organisms at the genetic, species and ecosystem levels, which are necessary to sustain human life as well as the key functions of ecosystems Biodiversity

is usually explored at three levels; genetic diversity, species diversity and ecosystem diversity (Brock and Xepapadeas, 2003) Genetic diversity is the variety of genes within

a species Each species is made up of individuals that have their own particular genetic composition This means a species may have different populations, each having different genetic compositions To conserve genetic diversity, different populations of a species must be conserved Species diversity is the variety of species within a habitat or a region Species are grouped together into families according to shared characteristics The number of globally identified species under each category is given in Appendix B Ecosystem diversity is the variety of ecosystems in a given place An ecosystem is a community of organisms and their physical environment interacting together (Brookfield, 2001; Brock and Xepapadeas, 2003) An ecosystem can cover a large area, such as a whole forest, or a small area, such as an agricultural farm It is a community of organisms and their physical environment interacting together

Biodiversity is crucial to the maintenance of many ecosystem services such as regulation

of chemical composition of the atmosphere, food production, supply of raw materials,

water provision, nutrients’ recycling, biological control of populations of flora and

fauna, use of genetic resources and leisure activities (Brookfield and Stocking, 1999; Brookfield, 2001) Biodiversity continues to decrease at unprecedented rates as human development and expansion result in the fragmentation and loss of habitat for flora and fauna (Di Falco and Chavas, 2009) The loss of biodiversity is expected to continue at an unchanged increasing pace in the coming decades as well (Drucker et al., 2005) Key underlying drivers for the loss of biodiversity such as global population and economic activity are expected to keep on growing Between 2000 and 2050, the global population

is projected to grow by 50 per cent and the global economy to quadruple (Slingenberg et al., 2009) The need for food, fodder, energy and wood will unavoidably lead to a decrease in and unsustainable use of natural resources

Biodiversity is the basis of agriculture (see, Appendix A.1) As mentioned in the introduction, biodiversity is the origin of all species of crops and domesticated livestock and the variety within them It is also the foundation of ecosystem services essential to sustain agriculture and human well-being (Diwakar and Johnsen, 2009) Biodiversity and agriculture are strongly interrelated because while biodiversity is critical for agriculture, agriculture can also contribute to conservation and sustainable use of biodiversity (Brookfield, 2001) Indeed, sustainable agriculture both promotes and is enhanced by biodiversity Maintenance of this biodiversity is essential for the sustainable production of food and other agricultural products and the benefits these provide to humanity, including food security, nutrition and livelihoods As highlighted

by Slingenberg et al (2009) during the last decades, worldwide biodiversity has been lost at an unprecedented rate in all the ecosystems, including agro-ecosystems According to the FAO (1999), it is estimated that about three-quarters of the genetic diversity found in agricultural crops and livestock has been lost over the last century, and this genetic erosion will further continues in the future Therefore, understanding the important causes of agricultural biodiversity loss is important for conserving biodiversity in the world A map showing the biodiversity wilderness area in the world is given in Appendix C As can be seen, Sri Lanka is identified as a biodiversity wilderness area In this context, the next section provides a brief overview about the biodiversity in Sri Lanka

2.2 Biodiversity in Sri Lanka

Sri Lanka is an island with a total land area of 6,570,134 hectares, a coastline of 1,600

km and an Exclusive Economic Zone (EEZ) that extends up to 320 km beyond the coastline (Department of Census and Statistics in Sri Lanka, 2010) Total cultivated land and forest cover comprise 39 per cent and 24 per cent, respectively The country is one

of the smallest, but biologically diverse countries in Asia (Sanjeeva, 2003) Consequently it is recognized as a biodiversity hotspot of global and national importance It’s varied climate and topography conditions have given rise to rich species

diversity, believed to be the highest in Asia in terms of unit land area (Kotagama, 2002) Many of the species are endemic, a reflection of the island's separation from the Indian subcontinent This is especially relevant for mammals, amphibians, reptiles and flowering plants These species’ are distributed in a wide range of ecosystems which can

be broadly categorized into forest, grassland, aquatic, coastal, marine and cultivated (Ministry of Environment and Natural Resource in Sri Lanka, 2007) The diversity of ecosystems in the country has therefore resulted in a host of habitats, which contain high genetic diversity

In the broader context, biodiversity in Sri Lanka includes species diversity, genetic diversity and ecosystem diversity (Ministry of Environment and Natural Resources in Sri Lanka, 2007) An interesting feature of this species diversity is its high degree of endemism, which is observed in several taxonomic groups A large proportion of these endemic species is found in the wet zone in the south western region of the island Genetic diversity is another component of biodiversity that is important but not well investigated (Bellon, 2004) Almost all of the available information is confined only to economically important agricultural crops The Plant Genetic Resource Centre (PGRC)

at Gannuoruwa, Peradeniya, Sri Lanka has collected and preserved propagative material

of a large number of species from various agro-climatic zones of the country For example, the PGRC has germoplasm materials of 3,194 traditional varieties and cultivars, and 17 wild relatives of rice (Ministry of Environment and Natural Resources

mountain), dry mixed evergreen forests to dry thorn forests Grasslands are found in mountains and low country wetlands include a complex network of rivers and freshwater bodies Marine ecosystems include sea-grass beds, coral reefs, estuaries and lagoons and mangrove swamps Contemporary issues in relation to the diversity of valuable ecosystems are: deforestation, soil erosion, threatened wildlife populations (as a result of both poaching and urbanisation), coastal degradation from mining activities and increased pollution Most of these issues can be controlled by using appropriate policies The Environmental Economic Policy Unit (EEPU) in Sri Lanka is responsible for the

formulation and deployment of policy conserving and protecting Sri Lanka’s native

natural capital Although the EEPU is attempting to address these issues, the short term development goals that encourage economic growth over unsustainable resource use have generated a number of issues There are numerous policies, laws, action plans and

institutions involved in the conservation of Sri Lanka’s biodiversity Although most of

the laws relate directly or indirectly to biodiversity conservation, implementation has been sluggish (Sanjeeva, 2003) Therefore, adopting suitable policies focusing on rural communities, encompassing both economic development and ecological conservation efforts would aid Sri Lanka in retaining long-term value in its natural capital

There are many legislative enactments that deal with the protection of biological resources in the country In 1980, The National Environmental Act Constituted the Central Environmental authority and established a National Conservation Strategy (NCS) to protect biodiversity in the country In 1988, the NCS was adopted to deal with environmental degradation (Ministry of Environment and Natural Resource in Sri Lanka, 2007) In 1991, the National Environmental Action Plan (NEAP) was adopted

for a four year period Based on the outcomes of its implementation, it was revised in

1994, for the period 1995-98 Over the years these environmental policy frameworks have influenced and helped shape several sectoral and national development plans The National Conservation Strategy, the National Environmental Action Plan, the Forestry Sector Master Plan, the National Coastal Zone Management Plan, and Coastal 2000, are some of the policy documents that have addressed biodiversity conservation in the country (Ministry of Environment and Natural Resource in Sri Lanka, 2007)

The Sri Lanka Biodiversity Conservation Action Plan (BCAP) was adopted in 1998 The BCAP has identified four broad areas of ecosystem diversity, namely forests, wetlands, coastal and marine systems, and agricultural systems Under each ecosystem, the main issues have been identified and the recommended actions and the implementing institutions defined At the regional level, biodiversity action plans have been developed (Ministry of Environment and Natural Resource in Sri Lanka, 2007) The International Union for Conservation of Nature (IUCN) is currently working on developing a legal framework to safeguard traditional knowledge relating to the use of medicinal plants However, shortages of trained manpower and financial assistance, and weak legislation have affected the successful implementation of policies in this field As a result the

country’s biodiversity is continuing to decrease Therefore, studies in this area would

provide enormous benefits for conserving biodiversity in the future The next section provides details about the present status and future challenges of biodiversity in Sri Lanka