The role of international agreements in environmental conservation and its implication to vietnam

LIST OF FIGURES, BOXES AND TABLESPage Chapter I: Economic Theories Related to Environmental Conservation Figure 1.1.. Relation between the Bali Partnership Fund and Vietnam Scenario 1 GV

VIETNAM NATIONAL UNIVERSITY FACULITY OF ECONOMIC -

DOCTORAL PHILOSOPHY OF ECONOMICS

Advisor: 1 Associated Professor, Doctor Phi Manh Hong

HaNoi, 2008

VIETNAM NATIONAL UNIVERSITY, HANOI

COLLEGE OF ECONOMIC -

DOCTORAL PHILOSOPHY OF ECONOMICS

Advisor: 1 Associated Professor, Doctor Phi Manh Hong

HaNoi, 2008

Page

Introduction ……… 1

Chapter I: Economic Theories Related to Environmental Conservation………. 14

1.1 Theories of Common Pool Resources ……… 14

1.2 Theories of Collective Actions and International Agreements ……… 23

1.3 Coase Theorem ……… 25

1.4 Game Theory ……….…… 26

1.5 Other Economic Theories ……….… 31

1.6 Application of Economic Theories to Environmental Conservation……… 36

1.6.1 Sustainability and Budget Line – Case Study for Forest Conservation…… 36

1.6.2 Game theory scenarios and possible contribution arrangements of 46 international agreements ……….………

1.7 Summary of Results ……….…… 88

1.8 Recommendations ……….… 90

Chapter II: Environmental Conservation in Relation with Trade, ODA and 92 Sustainable Development ……… ……….

2.1 Trade Agreements and Environmental Issues ……… … 92

2.1.1 The New Politics of Trade ……… ……… 92

2.1.2 Trade under Commodity Agreements and Environmental Conservation… 96

2.1.3 WTO Dispute Settlement Mechanism and Environmental Conservation 100

2.2 Global Environmental Issues ……….……… 101

2.2.1 Issues and Problems related to Global Environmental Conservation……… 102

2.2.2 World Summit for Environment ……….……… 103

2.3 ODA and Environmental Issues ……… 106

2.3.1 Trade and ODA ……….……… 106

2.3.2 ODA and Environmental Issues ……….……… 107

2.3.3 Problem of International Aid ……….……… 107

2.3.4 Private Sector ……… 109

2.3.5 Transparency ……….……… 109

2.3.6 The Problem of Sovereignty and Economic Forces ……… 110

2.3.7 Capacity Building, Education, and International Treaties ………….…… 110

2.4 Sustainable Management of Environmental Natural Resources ……….… 111

2.4.1 Definitions of Sustainable Development ……… 111

2.4.2 Economic growth for local welfare and conservation - Sustainable 112 Development

2.4.3 Problems Causing Sustainable Management ……… ……… 114

2.5 Environmental Conservation and International Agreement ……… 116

2.5.1 International Negotiation on Environmental Conservation ……… 116

2.5.2 Fund Raising under the Existing International Agreements ……… 117

2.5.3 ITTO and Forest Conservation ……… 118

2.5.4 Limit in conservation by an international agreement organization ………… 130

2.6 Experiences in Other Countries……… 132

2.6.1 Japan ……… 132

2.6.2 South Korea ……… 133

2.6.3 China ……… 133

Chapter III: Issues Related to Vietnam ………. 137

3.1 The New Trade Debate and Its Implication to Vietnam ……… 137

3.1.1 Vietnam’s New Membership of WTO ……… 137

3.1.2 New Politics of Trade and Vietnam ……… 138

3.1.3 CDM and Vietnam ……… 139

3.1.4 ODA and Environment/Trade Issues for Vietnam……… 141

3.2 Application of Economic Theory - Implication of ITTO Mechanisms to 142 Vietnam - ………

3.2.1 Scenario 1 ……… 144

3.2.2 Scenario 2……… 151

3.2.3 Analysis of results ……… 156

3.2.4 Summary of Games ……… 157

3.3 Experiences in Other Countries for the comparison with Vietnam………… 160

3.2.1 Japan ……… 160

3.2.2 South Korea ……….…… 160

3.2.3 China ……… 160

3.2.4 Lessons from other countries ……… 161

LIST OF FIGURES, BOXES AND TABLES

Page

Chapter I: Economic Theories Related to Environmental Conservation

Figure 1.1 Supply=Demand Relation for Normal Private Goods

Figure 1.2 Supply=Demand Relation for Public Goods

Figure 1.3 Total Cost and Total Revenue Relation (Private goods)

Figure 1.4 Marginal Cost and Average Revenue Relation (Private Goods)

Figure 1.5 Total Cost and Total Revenue Relation (Public Goods)

Figure 1.6 Marginal Cost and Average Revenue Relation (Public Goods)

Figure 1.7 Natural Resource Budget Line and Sustainable Level

Box 1.1 International Agreement and Game Theory

Figure 1.8 Contribution and Depletion Relation

Figure 1.9 Export Quota Allocation and Market

Figure 1.10 Elasticity of Substitution (High Elasticity)

Figure 1.11 Elasticity of Substitution (Low Elasticity)

Figure 1.12 Current and Possible Future Budget Lines

Figure 1.13 Long-term Tropical Forests Depletion Perspectives

Figure 1.14 The case sustainable level is set at 2000

Figure 1.15 The case sustainable level is much higher than present level

Figure 1.16 Contribution and Sustainable Level of Resource Depletion

(Case 1)Figure 1.17 Contribution and Sustainable Level of Resource Depletion

(Case 2)Figure 1.18 Contribution and Sustainable Level of Resource Depletion

(Case 3)Figure 1.19 Relation between Fund and Global Environmental Value

/ Scenario 1 (Gv = 2*(Cp + Pp) - 1500)Box 1.2 Contribution to the Fund and Game Theory /Scenario 1 (Gv =

2(Cp + Pp) - 1500)

15181820202121232930343535373841414444454849

Box 1.3 Same environmental value for both consumers and producers

Box 1.4 No environmental value for producers

Box 1.5 Half environmental value for producers

Box 1.6 Contribution to the fund and Game Theory /Scenario 1b (Gv

= 2(Cp + Pp) - 1500)&(Pv = Gv - Pp + Cp)Box 1.7 Same environmental value for both consumers and producers

Box 1.8 No environmental value for producers

Box 1.9 Half environmental value for producers

Figure 1.20 Contribution and Sustainable Level of Depletion (Case 4: Both

consumers and producers share responsibility)Figure 1.21 Budget Line of the Fund

Figure 1.22 Budget Line Shift by Producers' Efforts

Figure 1.23 Relation between contribution and Global Environmental

Value /Scenario 2 (Gv = Cp + Pp)Figure 1.24 Relation between contribution and Global Environmental

Value /Scenario 3 (Gv = Cp + Pp -1500)Box 1.10 Contribution to the fund and Game Theory /Scenario 2 (Gv

= Cp + Pp)Box 1.11 Same environmental value for both consumers and producers

Box 1.12 No environmental value for producers

Box 1.13 Half environmental value for producers

Box 1.14 Contribution to the fund and Game Theory /Scenario 3 (Gv

= Cp + Pp -1500)Box 1.15 Same environmental value for both consumers and producers

Box 1.16 No environmental value for producers

Box 1.17 Half environmental value for producers

Box 1.18 Contribution to the fund and Game Theory /Scenario 2b (Gv

= Cp + Pp)&(Pv = Gv -Pp + Cp)Box 1.19 Same environmental value for both consumers and producers

Box 1.20 No environmental value for producers

Box 1.21 Half environmental value for producers

535455575960616366666869717273747576777880818283

Box 1.22 Contribution to the fund and Game Theory /Scenario 3b (Gv

= Cp + Pp -1500)&(Pv = Gv - Pp + Cp)Box 1.23 Same environmental value for both consumers and producers

Box 1.24 No environmental value for producers

Box 1.25 Half environmental value for producers

Chapter II: Environmental Conservation and Trade ……….

Developing Countries' Share in Total Exports of Selected Total forest area, related land area and population in 1995 Forest cover change for developing countries

Current and projected consumption of forest products 2010)

(1990-Natural forest and Net Plantations in developing countriesForest cover state and change by ecological zone for tropicalcountries

Chapter III: Issues Related to Vietnam ……….

Relation between the Bali Partnership Fund and Vietnam Scenario 1 (GVv = Cp + Vp)

Contribution to the Bali Partnership Fund and GameTheory / Scenario 1: Vietam (GVv = Cp + Vp)

Same environmental value for both Vietnam and consumers No environmental value for Vietnam Half environmental value for Vietnam

Contribution to the Bali Partnership Fund and GameTheory /Scenario 2: Vietnam (GVv = Cp + Vp)&(Vv = GVv-Vp + Cp)

Same environmental value for both Vietnam and consumers No environmental value for Vietnam No environmental value for Vietnam

848586879299120123124125126132146147148149150152

153154155

Association of East Asian NationsAsia Europe Meeting

Bilateral Trade AgreementClean Development MechanismCommon Effective Preferential TariffConference of the Parties

Common Pool ResourceComprehensive Poverty Reduction and Growth StrategyDoha Development Agenda

Dispute Settlement BoardFood and Agriculture OrganizationFramework Convention on the Climate ChangeFree Trade Agreement

Free Trade Area of the AmericasGeneral Agreement on Trade in ServicesGeneral Agreement on Tariffs and TradeGeneral Environmental Facilities

Green House GasInternational Coffee OrganizationInternational Monetary FundInter-Governmental Panel on Climate ChangeInternational Tropical Timber AgreementInternational Tropical Timber OrganizationMultilateral Agreement on InvestmentMillennium Development GoalsMultilateral Environment Agreement

MMTNAFTANGOODAOECDPRSPSOETEDTPAUNUNCEDUNDPUNEPUSITCWB

Methylcyclopentadienyl Manganese TricarbonylNorth American Free Trade Agreement

Non-Governmental Organization

December 2007 INTRODUCTION

1 Necessity of the thesis topic

Reflecting the growing concerns of global community on rapid depletion oftropical forests, and responding to their determinations stated in Rio Declaration of

1992, governments and people of the global community reinforced their commitments

to environmental sustainable society for the offspring of all human beings Especially, anumber of new international agreements are created or renewed to include moreenvironmental conservation oriented clauses Efforts being made under FCCC(Framework Convention on the Climate Change) and ITTA (International TropicalTimber Agreement) of 1994 are two of the examples Organizations such as APEC(Asia Pacific Economic Cooperation) or WTO (World Trade Organization) alsoincreased concerns on environmental conservation by way of reorganizing trade relatedmeasures It is therefore imperative to study how these international organizationsshould achieve the sustainable development Particularly, it is important to study therelations between sustainable development and trade liberalization which theseorganizations promote in order to increase the economic benefits of global communityincluding developing countries such as Vietnam

2 General Information on Thesis Study

(1) Previous Studies

The mechanisms or arrangements adopted by member countries ofinternational agreements can be examined theoretically and scientifically by comparingthem with previous economic theories such as those stated below In order to examinethese theories, mathematical analysis will be employed as a core tool of methodology.Particularly, the paper will try to come up with possible mathematical solutions that are

workable even under so-called “prisoners dilemma” under game theories.

(a) Theories of Common Pool Resources

Since most of the environmental assets are common pool resources, the plight

of current tropical forests and each member country's decision making process may beexamined in accordance with theories of common pool resources or public goods

(b) Theories of Collective Actions

Each member country's contribution to international organizations can beaffected by the amount to be contributed from other member countries Hence, themechanisms adopted by international agreements can be examined by the theories

of collective actions

(c) Other economic theories

Other economic theories relevant to environmental assets, such as theory

of monopolistic market, will also be introduced where necessary

In order to verify the adaptability of these theories, an international issue and alocal issue will be examined First, WTO agreements and the Doha DevelopmentAgenda will be examined particularly in its relation with global environmentalmovements Secondly, the situation in Vietnam will be examined particularly inrelation with environmental conservation efforts in Vietnam in a global context

There have been a number of studies which have led to the theories stated above, thereby making this thesis possible The following studies are just some of such examples „Governing the Commons‟ (Elinor Ostrom, 1990) and

„Logic of Collective Action‟ (Olson, 1965) are the two most important studies which provides important theoretical basis of this thesis

(a) Environment White Paper of Japan (Ministry of Environment, 2002) There are a number of documents that raise the concern on the global

environmental crisis This Environmental White Paper of Japan presents the facts about the state of the global environmental assets and the global efforts being taken to

address these problems This document, among many others, can be used as a reference for us to know how the global community generally views the

environmental degradation as a significant threat to the global community As a government document, this book provides brief but very clear views on this point

In addition to this Japanese official report, other official documents such as FAO Year Books, UNEP Annual Reports or ITTO Official Reports also provide the general views on the plight of the global environmental assets

(b) Environmental Economics (B.C Field, 1993)

This is a textbook widely used for the study of environmental economics This book provides basic environmental economic theories and covers every aspect

of environmental economic issues This textbook is useful in exploring proper ways

of application of economic theories onto mechanisms adopted by international agreements

(c) Environmental Economics and Policy (Tietenberg, 1994)

This is another book on environmental economics Although the contents and structure of this book is more or less similar to the book by B.C Field, this book helps deepen and broaden the understanding on environmental economics This textbook presents important analysis on international environmental economicproblems, especially the sustainable development issues, which are used as the theoretical basis in constructing theoretical approach in the proposed thesis

(d) Governing the Commons (Elinor Ostrom, 1990)

This article by Ostrom provides an important key to a break-through in the collective action problems Traditional game theories indicate that the rational behavior

by individuals tend to result in the most undesirable outcome This is considered also true in international relations, especially when it comes to the allocation of

contribution Ostrom suggested in this Article that the desirable result can be achieved

if proper communication is established prior to the games This suggestion would be explored in verifying that the proper discussion and negotiation under international organizations can lead to a most desirable outcome for all or the majority

of their member countries.

(e) The Logic of Collective Action (Olson, 1965)

Olson first introduced the concept of "collective action problem" in this

1965 article The inconsistency between individual and collective interests is

explored in detail in this article Since the tropical timbers are considered as

"global commons," this article provides theoretical background why the tropical forests face collective action problem and are doomed to be over-exploited

Combined with other economic theories of public good and common pool

resources (CPRs), this article by Olson constitutes one of the backbones of the theoretical approach in environmental economics

(f) Price Theory and Applications (Hirshleifer, 1992)

This is another textbook widely used for micro-economics This basic

textbook on basic economic theories presents very detailed explanation about market principles This book supports theoretical approaches employed in this article by way of supplementing the environmental economic theories contained in the book by B.C Field and others Especially, this textbook provides useful

theoretical analysis on characteristics of public goods

(h) WTO, after Seattle (Jefferey Schott, 2001)

WTO negotiations became paralyzed at its 3rd Ministerial Meeting held in Seattle in 1999 The negotiation to launch a new round was thwarted mainly because NGOs around the world objected the globalization of trade These NGOs are mostly environmental groups such as Green Peace and WWF which believe that trade

integration harm the global environment This book by a well-know scholar from

Institute of International Economics of the United States illustrates how the

WTO negotiations are affected by environmental conservation movements

(2) International Relations Related to Environmental Economic Issues

As stated above, there is a growing global concern on the issue of theenvironmental conservation There are many reasons for the concern First of all,there is a fear that some of the precious environmental assets such as tropical forestsmay disappear totally in the future not very far from now if the depletion at thecurrent very rapid rate continues Second, people on the earth are experiencingirregularity of the world climate and its catastrophic effects on the earth, i.e., floods,droughts, loss of low land areas, etc These natural disasters are being caused by theglobal warming and other serious degradation of global assets In Vietnam, therehas been an initial notion of environmental hazard caused by industrialization.Deforestation is one of the serious problems Vietnam is faced with

Clearly, the global environmental conservation has become an urgent task thatthe global community should address jointly Particularly, the relation between tradeand environment has become a center of discussion for trade liberalization negotiationsduring the past few years Hence, it is felt urgent by the world community to reduce

or stop depletion and degradation of the global environmental assets Many effortsare being made by individuals, governments, NGOs and international organizationsincluding Green Peace and WWF International organizations and agreements areincreasingly being designated to address this serious issue and can be considered asthe most effective mechanisms to handle issues related to the conservation ofenvironmental assets

The main question here is how effectively international agreements can handlethis issue Particularly, efforts being made under WTO framework are of significantimportance because the relations between trade and environment have becomeinseparable Vietnam is trying to be a member of WTO by the end of 2005 and the

implication of WTO agreements and the ongoing Doha Development Agendanegotiations needs to be examined.

A detailed study on objectives of international agreements and their actionplans may reveal how they are designed to protect the global environment and localenvironment in Vietnam

Under DDA, 142 member countries decided to include “environment” asone of the negotiation agenda to be concluded EU and its member countries,particularly France, very strongly requested that the environmental protections mustclearly be linked to the trade liberalization mechanism On the other hand, mostdeveloping countries opposed to even include it as a part of agenda at all As aresult, environmental issues were agreed to be integrated under the new roundnegation of WTO but only partially DDA is only mandated to discuss theimplication of current international environmental agreements to trade However,the future development of environmental negotiations still remains to be seen

Further, it would be very useful to introduce some leading present economictheories and analyze the international agreements in accordance with these theories

By adopting theoretical approaches, the role and limits of international agreements

in the environmental conservation could become clear

There is no doubt that the global environmental conservation is an urgentand very important global issue today A lot of efforts are being made by the UnitedNations For example, UNCED of 1992 and its agenda 21 may be the most well-known achievement made by the UN Serious efforts are also being made by anumber of other international organizations, governments, NGOs, and individuals

However, international agreements are in many cases established to serve thispurpose intentionally by member governments Therefore, to conduct a research oninternational organizations and their roles in global environmental conservation would

be a important task The knowledge about the roles of international organization would

be a very important asset for those who are concerned about the global environmental

Moreover, it is of significance to study the implication of internationalagreements onto the environmental conservation in Vietnam, since Vietnam israpidly integrated into the global community as a new member of WTO

There have been a number of studies related to the relations between tradeand environment especially in the context of WTO Doha Round Negotiations Thereare also a number of studies related to other international agreements such as FTAAand US-Jordan FTA One of the best studies probably the “WTO after Seattle” byJeffery Schott of which the review is stated below

However, there has been no publication analyzing the impact of tradeagreements mathematically in terms of environmental conservation This thesis is,therefore, unique, original and very challenging in this aspect

3 Objectives of the Study

Thus, the purpose of this thesis is to examine how International Agreementsenvisage to contributing to conservation of the global environmental assets that arediminishing rapidly at an increasing rate In order to discuss this, first the general objectivesand mechanisms of international agreements need to be introduced Then, currentlyavailable economic theories need to be applied with the purpose to verify the effectivefunctions of international agreements in general in environmental conservation Such anexamination would contribute to seeking the best policy alternatives to achieve sustainableglobal development and local development in a country such as Vietnam

It is of absolute importance that Vietnam is prepared for the possibleconsequences of environmental degradation and responsibilities under internationalagreements This thesis will introduce some of the possible alternative paths thatVietnam will need to take during its economic development process

4 Scope of the Study

(1) Scope of the Study

As for the scope of the study, it is necessary to study the relation betweenWTO and environmental issues Environmental negotiation is included in thecurrent Doha Development Agenda (DDA) negotiations but to the minimum extent.The proposed thesis will discuss how the environmental negotiations under DDAwill affect the future global trade Secondly, as a supporting factual background tothe DDA negotiations, the efforts that have been made by the internationalcommunity to conserve global environmental assets need to be examined

The most important element in the Vietnamese context in the proposedthesis will be the Vietnam‟s accession to WTO which has taken effect as of January

11, 2007 First, the thesis will discuss the current situation of the multilateral andbilateral negotiations on Vietnam‟s possible accession to WTO Secondly, theimplication of Vietnamese accession to WTO and its obligations related toenvironmental conservation will be examined

The detailed analysis of issues Vietnam is being faced with WTO accession,such as SEO reform and intellectual property rights, are also discussed in theChapter 3 of the Thesis

(2) Limitation of the Study

However, there are a few limitations in writing the proposed thesis

Functions of international agreements can be analyzed separately by differenteconomic theories However, it will be impossible to verify the whole functions of theagreements from pure economic theories International organizations are in many casesexperimental and actual operating organizations Just as the real economy can not befully explained by economic theories, economic theories will not be able to explain theoverall roles of international agreements completely

Second, it will be very difficult to obtain all data and information which will

be useful for writing the proposed thesis Especially, statistical data on the volume

of production, export, import, consumption, depletion and plantation, etc., may not

be accurate nor updated to be used as the basis of analysis Further, evaluation orjudgment about the plight of environmental damages on the global environmentalassets should always be subject to bias in selecting such data Needless to say,replies obtained from interviews will also be subject to bias

The relation between trade and environment is a new international issue.Although significant amount of researches have been made during the past few years,there seems to have been no researches on the impact of environmental negotiations ofWTO onto Vietnam This is understandable since Vietnam is not a member of WTOand Vietnam does not have serious environmental problems at this moment

However, it is said to be almost certain that Vietnam will go through theprocess of environmental degradation and the consideration and introduction of newmeasures to address such domestic environmental issues Vietnam has now become

a member of WTO Vietnam now has to abide by all of the WTO agreements Thefuture trade of Vietnam will have to take into consideration the environmentalaspects under WTO agreement

This thesis, therefore, provides new elements for Vietnam with regard to itsimplication of trade under WTO obligations This may be the first attempt toanalyze the impact of Vietnam‟s WTO membership in terms of the relationsbetween trade and environment It is hoped, therefore, that this thesis becomes apart of guidance for Vietnam in adjusting its trade policies under WTO agreements

5 Method of Study

The final conclusion of the proposed thesis will be whether the mechanisms ofinternational agreements are proved to be in line with economic theories Further,effectiveness of such mechanisms in environmental conservation will be examined by

applying Coase Theorem In the absence of an absolute authority in the internationalsociety that shall force the level of consumption of environmental resources, itshould be necessary to study if international organizations can regulate the policies

of their member countries

In this thesis, the focus is set on the general mechanisms of internationalagreements This approach would make it clear how international agreements try toachieve sustainable management of the global environmental assets Themechanisms and arrangements adopted by a number of international agreementsmust be studied carefully in order to understand the effectiveness and impact oftheir projects in relation with the global environmental conservation

Second, the results obtained by the above studies are further examined withthe relevant economic theories which are introduced in the Chapter 1 of the thesis

By applying economic theories, the roles and mechanisms of internationalagreements in conservation of global environmental assets will become clearer

Third, the Vietnamese context is examined Vietnam has become a member

of WTO in January 2007 and its implication to environment needs to be assessedproperly Apart from trade implications, Vietnam will have to take the path ofbalancing between industrialization and environmental degradation Japan sufferedquite heavily from pollutions during the fast industrialization process during 60‟sand 70‟s Such experience of Japan needs to be properly introduced to Vietnamwhose economy is experiencing a very fast economic growth

The methodology of the study will mainly be the researches based on thestatistics and other public documents related the relation between environmental issuesand international agreements, especially on trade Some of the evidences will bederived from interviews and the diplomatic experiences of the author of the thesis

6 New Contributions of the Study

(1) New findings related to theory

(a) A new economic equation to relate two levels of sustainable management of economic resource

This thesis introduces a new concept of combining two types of sustainable management of natural resources in a single economic equation and also under a single diagram It has been known already that there are a number of definitions on sustainable development, and particularly, the following two types are often used

as the basic level of sustainable management In this thesis, one is represented as S which means the resource level where human beings and their economic activities are sustained permanently by the consumption of resources The other one is

represented as OS which means that, regardless the human sustainability, the resource itself is completely renewable if consumption is under this original level

of environmental amenity

The relation is established as:

C ≦ OS*E + S therefore, E ≧ (C – S)/ΔOSOS1

This equation is innovative because it shows us the relation between S and OS in a single diagram which would help us to identify the point of two possible sustainable levels at the same time in a figure Particularly, it is innovative that the renewal rate of resource, i.e., OS which represents the coefficient of the OS curve, is found to be a significant factor to see the degree of divergence between the two levels of

sustainability The Chapter 1.1 introduces a detailed analysis of this equation

(b) Introduction of two enforcement factors as the background of games to see the impact on the contribution trade-offs

The games under game theory normally end up with catastrophe because of

1 E stands for Environmental Amenity Likewise, C for Consumption, OS for Original Sustainability, S for Sustainable Level for human activities OS stands for marginal net consumption.

„prisoners‟ dilemma.‟ Ostrom introduced a new concept to the game theory that the introduction of a new factor represented as „e‟ for the enforcement of cooperation will lead the game to a success This thesis adopted the „e‟ as a governing condition for all games to see the effect This thesis also introduces a new factor represented as „a‟ for the arbitration system The games that are assumed to be supported by this factor in thethesis are found to be more successful than normal cases.

It is truly innovative to introduce these two factors together in games, because these two factors, i.e., „e‟ and „a,‟ respectively imply enforcement of penalties and the enforcement of self-arranged arbitration system or dispute

settlement mechanisms, which should also guarantee the proper negotiation or consultation process and maximum transparency of information

(2) New findings related to the application of theory

The games played with the above mentioned two factors under the principles

of game theory turned out to be more successful than the cases without them This outcome rightly confirms that the policy dialogue with information transparency and the proper system of arbitration or dispute settlement are crucially important for the negotiation under international organizations It is particularly innovative tonote that these two factors should be introduced together to make negotiations even more successful

(3) New findings as implication to Vietnam

As already stated above, Vietnam will face certain amount of pressure frommembers of WTO to Vietnam‟s domestic environmental policy through trade measures

It would be possible that Vietnam will be sanctioned by WTO if Vietnam does notabide by the requests from other international environmental organizations such asITTO, because the relation between WTO and other environmental organizations arenow being negotiated under Doha Development Agenda

A number of games played in the thesis turned out to be failure for which

sanctions may be applied by the organization This implies that Vietnam may also be

sanctioned if the negotiation under international organizations fails.

Then what Vietnam should do? This thesis tries to provide an answer to this question As general game theory tells us, it is not realistic to think that there would

be a system for any games to become successful Therefore, in some difficult cases, sanctions may of course be unavoidable This thesis, however, proves that the games become more likely to succeed when the fund or contribution is directly transferred from consuming member countries to Vietnam Coase theorem holds a crucial key for this to happen In other words, for certain environmental natural resources which Vietnam holds the complete property rights over the environmentalquality of the resources, such as tropical timbers, Vietnam would possibly request cash support from international organizations even without paying any contribution

to the fund In order for this path to be taken by Vietnam, Vietnam needs to identifyhow much other countries see the value of the environmental amenity would be If other countries or the global community in general see it large enough, the game may become successful and Vietnam would not be sanctioned even though Vietnamdoes not contribute to the fund The point is that Vietnam should obtain sufficient information about the position of other counties and then negotiate for the possible fund transfer as a compensation for not consuming or depleting certain resources which Vietnam holds property rights

Chapter I ECONOMIC THEORIES RELATED TO ENVIRONMENTAL

CONSERVATION

The environmental natural resources are not governed by the market principles.Therefore, they are being depleted along with the development of global economy Thisthesis examines the economic mechanisms surrounding the environmental naturalresources and economic theories that are generally acknowledged as the basic tools forthe economic analysis of environmental conservation

1.1 Theories of common pool resources

Environmental quality is essentially a public good It is therefore imperative toknow the characteristics of public goods in order to understand environmental issues.Public goods can be classified into a few more specific categories such as pure publicgoods, congestive goods and common pool resources (CPRs) CPRs are also sometimescalled open access goods or common property resources General definition of publicgoods is that they are the goods that can be consumed by other people even if they arealready consumed by one person This is distinctively different from private goods thatcan not be consumed by another person if once consumed by one person Examples ofpure public goods are defense and radio broadcasting services If these services areonce provided, everyone can enjoy the benefit For these services, quality of theservices is not affected by the number of people who receive the services Examples ofcongestive goods are public roads and bridges These public goods are open toeveryone but the number of people who can use the goods is not infinite The morepeople use the facilities, the more they become congested Efficiency of the serviceswill decrease as they become congested; however, the amount of the goods is notaffected Examples of CPRs are clean air,

water, ocean fisheries, forests, to mane only a few Under the present legal system,they are not generally considered as private goods Therefore, access andexploitation of these goods are free to everyone They can be consumed as firstcomes first serves basis For these goods, as the number of people who consumethese goods increase, the amount of the goods themselves decrease and the servicequality may deteriorate CPRs can be further classified into renewable and non-renewable resources If the rate of consumption is faster than the rate of renewal, thegoods will be all consumed up in the end.

Although CPRs can to some extent behave like private goods in accordancewith economic theories, theory analysis of public goods fits more in understandingthe characteristics of CPRs Therefore, it is required to introduce hereby the theory

of public goods

Common Pool Resources (CPRs) are those that are not exclusively controlled

by a single agent [Tietenberg, p.38] The term "common-pool resource" also refers to anatural or man-made resource system that is sufficiently large as to make it costly toexclude potential beneficiaries from obtaining benefits form its use [Ostrom, p.30].Access to a CPR can be limited to a single individual or firm or to multiple individuals

or teams of individuals who use the resource system at the same time

It is necessary to understand how CPRs are treated in the market becausethis is the starting point why environmental resources can not be left to the marketforces for their own conservation Otherwise, no efforts would be needed by anyinternational organizations

For normal private goods, the demand and supply function can be illustrated as shown in the Figure 1.1 Here, the amount of supply is expected to grow as price of goods

increases This is considered as a common characteristic of normal private goods

However, for public goods, especially for CPRs, the amount of supply, accordingly the price as well, is not affected by demand changes As illustrated in the Figure 1.2, the amount of increase in the case of public goods tends to be greater than normal private goods as described in the Figure 1.1 Public goods are thus by definition free to be

exploited by anyone.

S1 is the supply curve for a normal private good.

Figure 1.1: Supply-Demand Relation for Normal Private Goods

S2 is the supply curve for common pool resources

Figure 1.1 and 1.2 show that Q‟‟>Q‟; therefore, CPRs are likely to be priced

lower and exploited more than private goods

Figure 1.2: Supply-Demand Relation for CPRs

These supply and demand relations can also be illustrated as shown in Figure 1.3, 1.4, 1.5 and 1.6, using Total and Marginal Cost functions A total cost curve is normally considered to rise steeply first, then increase slowly and then again rise steeply The maximum profit is achieved where AR=MC; therefore, the quantity supplied to the market would be Q1 in the case of normal private goods as shown in the Figure 1.3 In the case of public goods, the amount supplied into the market is larger than that of private goods In the Figure 1.5, Q2 is the amount of supply The cost of purchasing environmental goods is small or almost nothing as they are CPRs;therefore, the total cost curve reflects only the cost of harvesting operation Thus, thepublic goods or CPRs are proved to be over-exploited than private goods, by MC and MR approach as well2.

2 The relation Q2 > Q1 is clearly found by Figures 3-6 Also note that the relation P1 > P2

is established

Figure 1.4: Marginal Cost and Average Revenue Relation (Private Goods)

3 TR=Total Revenue, P=Price, TC=Total Cost, AC=Average Cost, AR=Average Revenue,MC=Marginal Cost

Figure 1.6: Marginal Cost and Average Revenue Relation (Public Goods)

4 TR=aQ The coefficient a is smaller in Figure 1.5 than Figure 1.3 because of the

characteristics of economic externality of CPRs

The implication of above tendencies of over-exploitation of public goods(CPRs) for the sustainable management of the resources can be illustrated as shown inthe Figure 1.7 In this Figure 1.7, the vertical line S represents where the resource can

be managed to maintain the sustainable growth level If consumption level leaves theenvironmental amenity level to the right of S, the resource can be sustainably managed,and if consumption brings the amenity level down to the left of S, the resource size isnot capable to support sustainable management the resources It should be noted thatthe word "sustainable" has not been clearly defined in the cases some of the CPRs such

as clean air Here, in order to understand easier the environmental concerns relating tosuch CPRs, S is considered to be the level where the resources can satisfy allenvironmental economic values Therefore, below this point the CPRs capacity tomaintain global environmental values is not sufficient

Now, let us introduce a new line in the Figure 1.7 to identify the desired level of consumption at which natural resources are completely and self-sufficientlysustainable in their original net amount on an annual basis Here, it is named as the Original Sustainability Consumption (OS) line OS=0 line is the boundary within which the net consumption of CPRs is always zero or negative at the end of each year In other words, the consumption is being offset annually by its natural

reproduction below this line The resources will keep decreasing in amount above this level, leading to the continuous shrink of the Production Possibility Curve (PPC) Thus, OS=0 line is a useful new tool to illustrate the level of „desirable consumption point.‟ This curve provides new concept with regard to the sustainablemanagement In an absolute sense, the OS=0 is the true sustainable curve but that is not necessarily the case under consensus Sustainability is often set at the point where human being can survive sustainably, which allows certain abundant natural resources to reduce its total amount Therefore, the introduction of the concept of OS=0 is truly innovative because it illustrates the point of environmental

sustainability and resource sustainability at the same time in a figure

Sustainable Boundary(S)

Consumption

PPCQ2

Figure 1.7: Natural Resource Budget Line and Sustainable Level 5

Introduction of a new equation

Further, there is a more important implication in this Figure 1.7 related to

OS Under the definition stated above, the slope of the OS curve is found to be

equivalent to the velocity of resource reproduction Hence, the following equations

are defined as a condition for sustainable management of renewable resources

C ≦ OS*E + S therefore, E ≧ (C – S)/ΔOSOSThis new equation6 eloquently tells us the relations among the reproduction velocity, sustainable level and consumption True sustainable

management thus must satisfy this equation In the Figure 1.7, the level of

consumption which satisfies this condition is below Q3

5 A is the original indifference curve when environmental amenity is considered as externality to its

economy A‟ is the optimal indifference curve that takes into account the value of environmental amenity If

the indifference curve touches the PPC (Production Possibility Curve) to the left of S line, the resources can be

managed sustainably This is endorsed by the relation d1 < S < d2 It is clear that the resource sustainable point

requires much less amount of resource consumption compared with the case where sustainable management in

a general sense is attained.

6 In this equation, C stands for Consumption, E stands for Environmental Resources, S stands for

Sustainable Level, and OS stands for Original Sustainability.

1.2 Theories of collective actions and International Agreements

It is generally understood that the negotiations at international organizationsare explained by the economic theories of collective actions [Field, p.448-470].According to game theories, when there are gains to be made by defecting, rationalebehavior by participants will result in the most undesirable outcome for all theparticipants This indeed seems to be true in the negotiation process of distribution

of contribution among international organization related to natural resources Eachmember country always tries its best to make its own contribution as low as possible

at the expenses of other members' contributions If so, no arrangements taken byinternational organizations can succeed

In addition to the problem of public goods as stated above, it is necessary tounderstand the collective action problem in order to fully realize the economicproblems that tropical environmental natural resources are facing The collectiveaction problem was first addressed by Olson (1965) in relation with the provision ofpublic goods by organizations The essence of collective action problem lies ininconsistency between individual and collective interests It is usually explained byusing game theory models as shown in Box 1.1

The economic theory of collective action is the study related to theprovision of public goods through the collaboration of two of more individuals ororganizations A vriety of forms can be considered based on the situations to whichanalysis is applied The theory is also concerned about the impact of externalities onthe behavior of the individuals or groups A number of strategies can be consideredunder the theory with regard to the collaboration and behavior which can be bestillustrated under the application of game theories

Basic Concept of Game Theory

Theory of Collective Actions is very often explained through game theories

In fact, game theories are the most plausible approach to explain the problems facedunder the collective actions As it has been explained in the previous section, public

goods are free to be exploited by anyone once they are provided Therefore, itwould be beneficial, or economically profitable, not to contribute to the provision ofthese public goods but to free-ride on other countries This can be called the “free-ride strategy.” In the Box 1.1, left columns indicate economic values for a country Awhen it contributes and right columns indicate the value when A free-rides.Similarly, the upper columns indicate the value for a country B when it contributesand the lower columns indicate the values when B free-rides There are severalgame patterns but the game illustrated in the Box 1.1 is most commonly used Inthis game, the worst outcome is unavoidable if both countries adopt individually thebest option that is to defect (free- ride).

Hence, collective action theory, by being illustrated by the above basic concept

of game theories, tells us that the desirable result will not be reached when individualparticipants try to maximize its own economic benefit This is considered particularlytrue for international community because there is no authority in the internationalcommunity that can force its individual members to choose an option that canmaximize the benefit for the overall community When a desirable result is obtainedthrough collaboration, the game participants could have adopted the “collaborationstrategy.” The collaboration strategy can be taken when certain conditions are provide

to avoid the free-ride strategies The main purpose of the game theory study is to findout the equilibrium points that can be achieved through collaboration strategies and theconditions which would make the strategy workable There are a variety of strategiesthat have been considered by the past economists For example, a game which couldthreaten the players for the expectation of worst scenarios is often called the “game ofchicken.” “Prisoner‟s dilemma” is of course the base of the game of chicken “Zerosum” or “non-zero sum” games are another kinds of basic game formats It is easilyenvisaged that a free-ride game can be generally expected under a non-zero sum game

if the value of the game tends to a highly beneficial ones for all the participants withsmaller differences of benefits among them On the other hand, if the difference ofdamages from the game is huge under a zero-sum game, the incentive to collaborate

would be larger than the above mentioned non-zero sum game With differentangles of games, other types of strategies can be considered Such games include

“simultaneous and sequential games,” “perfect information and imperfectinformation games,” “symmetric and asymmetric games,” to list only a few Thus, avariety of game types is possible depending on the conditions or situations set forthfor a game Perhaps, one of the best known concepts of collective action is the Nashequilibrium Nash equilibrium is defined as “the point where no player can do better

by unilaterally changing his or her strategy.” [Suziki, p.51] This thesis howeverdoes not have to employ Nash equilibrium or many other types of games becausethe decision making process of international organizations and member countriescan be better explained through basic “prisoner‟s dilemma” type games when theamount of trade benefit and possible sanction are the only points in considerationfor the countries in the open global community as assumed in this thesis

1.3 Coase Theorem

The Coase Theorem is generally defined as follows

“As long as property rights are well-defined and as long as payments amongthe parties are possible, the externalities will be taken into account by the partiesand the optimal result will occur The party that gets the rights will be better off butthe society will have achieved the best possible result.” Or more formally, “Whenthe parties affected by externalities can negotiate costlessly with one another, anefficient outcome results no matter how the law assigns responsibility for damages.”

Coase theorem is important in a sense that the market can achieve equilibriumunder certain condition for any kind of goods including environmental goods As theCoase theorem indicates, market economy will work properly if the property rights areproperly defined, but under international laws it is often not possible

This is exactly the reason why international agreements are required.International agreements can overcome this collective action problem by providing