THE PERUVIAN AMAZON: DEVELOPMENT OF TROPICAL TIMBER RESOURCES BY
LOCAL COMMUNITIES


By
Douglas Southgate and 
Jorge Elgegren


Case Study No. 2, 8 pages, November, 1995


For more information or copies of this publication, contact:

Douglas Southgate, Professor
Department of Agricultural Economics
Ohio State University
Columbus, Ohio 43210-1099

Tel:  (614) 292-2432
Fax:  (614) 292-4749
Email: dsouthga@magnus.acs.ohio-state.edu

or

Jorge Elgegren
Calle 9 #120, LaFlorida
Rimac, Lima 25 Peru


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EPAT/MUCIA Research & Training
University of Wisconsin-Madison
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Tel:  (608) 263-4781
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Edited by Ellen Maurer
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* Some figures and/or tables included in the printed version of
this publication could not be included in this electronic
version.  If you need copies of these figures or tables, please
contact the author.  




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Case Study ISSN # 1072-9496



MESSAGE FROM USAID



This CASE STUDY is a product of the Environmental and Natural
Resources Policy and Training (EPAT) Project funded by the United
Stated International Development (USAID).  It is part of USAID's
effort to provide environmental policy information to
decisionmakers in developing countries.  The objective is to
encourage the adoption of economic policies to promote
sustainable use of natural resources and to enhance environmental
quality.

EPAT CASE STUDIES are written for development professionals and
policymakers in developing countries who are responsible for
establishing and implementing policies on the sustainable use of
natural resources and for civil servants, project officers, and
researchers who are directly involved in the implementation of
development activities.  This CASE STUDY describes the results of
a USAID-funded project in the Peruvian Amazon's Palcazu Valley
aimed at promoting local control of the development of tropical
timber resources.  Although the financial targets were not met
due largely to premature withdrawal of USAID support, several
policy lessons were learned.  The project illustrated that
sustainable timber production may be economically superior to
converting tropical forests into cropland and pasture. 
Policymakers need to be more aware of the economic feasibility of
alternative uses of tropical forest resources.

The contribution of USAID toward writing, printing, and
distributing this document is estimated to be $4,000.  Due to
financial limitations from USAID, this document is being
distributed on the Internet.  Copies are available from the
author.  The availability of this paper is being announced to
more than 2,000 policymakers and professionals in developing
countries.

David Hales                      William Sugrue
Deputy Assistant Administrator   Acting Director
Center for the Environment       Office of Environment and 
USAID/G/ENV                      Natural Resources
Washington, D.C. 20523           USAID/G/ENV/ENR
                                 Washington, D.C. 20523





ABOUT THE AUTHORS



Douglas Southgate is a professor at Ohio State University and
Jorge Elgegren recently completed his M.S. in environmental
economics at University College London.  Mr. Elgegren carried out
the research, on which this case study is based, while a student
at the Facultad Latinoamericana de Ciencias Sociales, in Quito,
Ecuador.  His advisor was Dr. Southgate, who held a Joint Career
Corps appointment with USAID at the time.





ACKNOWLEDGEMENTS



Field research for this paper was made possible by a small grant
from USAID's Environmental and Natural Resource Policy and
Training (EPAT) Project.  The authors benefited enormously from
the advice given by Antonio Brack-Egg (of the Tratado de
Cooperacion Amazonica), Howard Clark (formerly of USAID), and
Alonso Zarzar (of the Facultad Latinamericana de Ciencias
Sociales).  The authors are exclusively responsible for all
errors and omissions.  All views and opinions are theirs alone.






THE PERUVIAN AMAZON: DEVELOPMENT OF TROPICAL TIMBER RESOURCES BY
LOCAL COMMUNITIES



What are the challenges involved in applying the general
principle of local control over the development of tropical
timber resources?  Some answers to this question emerge from
studying a project, funded by the U.S. Agency for International
Development (USAID), that involved natural forest management on
indigenous lands in the Peruvian Amazon's Palcazu Valley.  A
financial analysis based on the results of recent harvests shows
that the project's actual performance, after USAID support ended,
has fallen well short of its projected potential [note 1].

Poor performance resulted from biased governmental policies and
the premature withdrawal of outside technical experts because of
guerilla activity of the Sendero Luminoso (Shining Path)
terrorists.  Aside from depending on policy reform, sustainable
forestry development can be promoted by linking forest dweller
communities with private sources of marketing, production, and
processing expertise.



Local Control


Effecting local control in ways that truly favor sustainable
development is easier said than done.  The World Bank, like other
donor agencies, supports projects only where there has been a
"clear definition of the roles and rights of...forest dwellers
(IBRD 1991: 66)."  But because of ignorance, desperation, or
greed, forest dwellers often sign contracts with loggers who
build skidder trails and roads and fell trees with little regard
for ecosystem recovery.

Even when local communities want to use and manage forests
wisely, the means to do so are often scarce.  Sustainable
development of timber resources requires the preparation and
application of environmentally-sound production and harvesting
plans.  Furthermore, marketing must be effective so that resource
owners receive full value for standing timber; otherwise,
conservation incentives are weak.  Although forest dwellers'
knowledge of their ecosystems is often intimate and
sophisticated, few of them have the technical, administrative,
and marketing skills needed for a successful market-based
forestry venture.  At the same time, local financial resources
are often insufficient to pay for roads, equipment, and mills.

In 1983, USAID launched a project in the Peruvian Amazon's
Palcazu Valley that addressed some of these obstructions to
locally-controlled development of tropical forests.  This Case
Study describes its basic elements and examines differences
between pre-implementation evaluations and actual financial
performance of the project.  Because of these differences, it is
no great surprise that local communities abandoned the venture a
few years after USAID ended support in 1989.  



Setting and Background


Located northeast of Lima, the Palcazu Valley is typical of the
western fringes of the Amazon Basin.  Rainfall in the Selva Alta
(high jungle) is heavy, averaging more than 6,000 mm a year. 
Except for narrow alluvial terraces alongside rivers descending
from the Andes Mountains, soils have a low pH and are infertile
and erodible.

For the most part, this environment is inhospitable to crop and
livestock production, other than the slash and burn farming that
has sustained indigenous populations for thousands of years. 
Nevertheless, agricultural colonization was the main thrust of
central government policy for the Peruvian Amazon for many years.

President Fernando Belaunde, who held office from 1963 to 1968,
was similar to other South American leaders of his time.  He
believed that if landless mountain and coastal peasants received
land in the "under-populated" Amazon, it would stimulate the
national economy and social conditions would improve (Belaunde
1965).

Belaunde returned to the presidency in 1980, replacing a military
dictatorship that had held power for more than a decade.  That
September, he announced plans for the Pichis-Palcazu Special
Project, which was to involve road construction, the
establishment of wood-processing and other industries, and the
settlement of 150,000 colonists in the Palcazu Valley and
adjacent lands.  Keen to support Peru's return to civilian
government, USAID promised funding and technical assistance.

From the outset, the project met with fierce opposition from
indigenous communities as well as anthropologists.  Richard Chase
Smith, who had worked for many years among the Palcazu Valley's
Yanesha (Amuesha) Indians, was particularly effective at
communicating the project's harmful social and environmental
effects to national and international audiences (Smith 1982).



The USAID Project


Responding to these criticisms and the findings of its own
consultants, USAID decided not to back colonization.  Instead, it
allotted $22 million, including $4 million for technical
assistance and project development, to the Central Selva Resource
Management Project.  The project would set up and manage a
protected reserve, develop and apply a system for sustainable
timber exploitation, promote environmentally-sound crop and
livestock production, and upgrade public health services.

People directly involved with the project's reserve management
and agricultural activities have written descriptions about its
implementation (Aguilar 1990, Staver 1990).  The following
discussion and analysis relate to the forestry component.

Timber resource development was innovative in at least three
respects.  First, it was to use novel production and harvesting
techniques developed at the Tropical Science Center in San Jose,
Costa Rica.  Second, the project would process various wood
products on-site.  Third, the local community would help with all
stages of the project, from planning through implementation.

Designing viable production and harvesting guidelines was
challenging because knowledge of Amazonian ecosystems was, and
continues to be, very limited.  Most of the available literature
consists of preliminary inventories of the region's enormous
biodiversity.  Very little research has addressed critical
ecosystem functions and linkages.  Accordingly, the interactions
of logging and other disturbances and their effects on different
habitats remain a matter of opinion.

Not being able to wait for a comprehensive scientific
understanding of flora and fauna in the Palcazu Valley, Tropical
Science Center consultants proposed that logging be done in
narrow strips, no wider than twice the height of the forest
canopy.  After clear-cutting the strips to remove all timber more
than two inches in diameter, trees would regenerate on their own.

Regeneration happens so rapidly that erosion would not be a great
concern; also, a considerable amount of vegetation would be left
in logging sites, providing soil protection.

There would be no replanting, and management would consist only
of periodic thinning.  Logging would occur on any particular
strip once every 40 years.  This means that loggers would harvest
strips making up 1/40 of a forested tract each year.  (The box on
this page shows a sample 30-year plan.)  The strips would not be
adjacent to one another but would instead be scattered throughout
the entire tract to promote regeneration (Hartshorn, Simeone, and
Tosi 1986; Tosi 1986).

The appeal of this scheme is that it imitates nature in Amazon
rainforests.  Especially along the lower slopes of the Andes,
storms, landslides, and tremors continuously open clearings. 
Seeds that have lain dormant under the canopy sprout to life. 
Other seeds are blown in by the wind and carried in by birds and
other animals.  New plants emerge very rapidly in these
clearings.  Any of the region's small abandoned fields or
pastures confirms that forest regeneration is a powerful process
in the western Amazon.  

The plan to extract all timber wider than two inches represented
a dramatic departure from standard practice in the Amazon Basin. 
Normally, loggers in eastern Peru cut down fewer than 10 mature
trees from a hectare of primary tropical forest.  Everything else
remains, frequently in a damaged state because of careless
felling and skidding practices.  Industry sources report that
regional extraction rates rarely exceed 15 meters cubed/ha.  The
sources also show that high-quality hardwoods, cut with chainsaws
into crudely dimensioned boards, make up most of the output.

This pattern of forest exploitation makes sense where logging,
transport, and processing costs are high.  Electricity, for
example, is much more expensive in eastern Peru than in other
parts of the country.  Since costly diesel-powered generators are
the primary energy source in the Amazon, electricity prices
average $0.20/kwh, compared to the national average of $0.05/kwh.

This means electricity payments can make up a fifth of wood
processing costs.

Despite adverse economic conditions, Tropical Science Center
personnel believed that investments in processing capacity were
important to make their production and harvesting scheme work. 
Accordingly, they installed a small mill to make various wood
products:  treated utility poles and fence posts, charcoal, and
the sawn lumber normally exported from the region (Simeone 1990).
The national electricity company contracted to buy the poles and
the Pichis-Palcazu Special Project agreed to purchase fence
posts.

Another distinction of the Central Selva Resource Management
Project forestry component was that it involved the close
cooperation of indigenous communities.  Administrators decided
early on not to involve colonists, who had converted most of
their respective holdings to pasture and cropland already and who
lacked the social cohesion of the Yanesha.  Work with that group
began with participatory land use capability assessments.  These
efforts led to the democratic adoption of plans to extract timber
from some forests and to dedicate other forests as reserves
(Simeone 1990). 

Local confidence in the Management Project's forestry activities
was strong in spite of linkages between the USAID project and the
governmental Pichis-Palcazu Special Project (which continued to
promote colonization in a limited way).  That strong confidence
was visible in the serious attempts made by the Yanesha Forestry
Cooperative, Ltd. to continue the Tropical Science Center system
after USAID support for field activities ended in 1989.  USAID's
withdrawal was a response to Shining Path guerilla activity near
the Palcazu Valley but not among the Yanesha.  In 1991, loggers
harvested five forest strips, averaging about a hectare each, and
sold sawn timber and other products.  



Financial Results


Reflecting on the forestry activities he carried out with the
Yanesha Forestry Cooperative, Simeone (1990) observed that many
years of outside technical assistance would be vital for
production, harvesting, milling, and marketing efforts to
succeed.  Poor performance of the system in the years immediately
following the end of USAID support proved this conclusion
correct.

Early evaluations of the forestry component had been encouraging.
Using USAID and other data, Elgegren (1993) estimated a base-case
rate of return on invested capital of 20%.  He also found that
profitability was especially sensitive to changes in output
prices and unit production costs.  However, variations in output
levels did not have as much of an impact on rate of return.

Profitability was reduced because USAID rules required the
purchase of American equipment that did not always suit the small
Palcazu Valley operation.  On the other hand, rate-of-return
estimates perhaps were too high.  They were based on the
assumption of a 40-year harvesting cycle, which might have proven
to be optimistic.

Evaluation of actual Forestry Cooperative performance, after
USAID-supported technical assistants left, shows that the project
did not meet expectations.  Elgegren (1993) visited the
cooperative twice in 1992 to collect data required for
evaluation.  Recorded in the cooperative archives were all
harvesting, processing, and marketing operations for 1991, when
the group used the Tropical Science Center harvesting system
without direct USAID support.  Elgegren also reviewed records
from the local office of the Peruvian national forestry service
and from a national environmental organization involved in the
project.  Interviews with loggers and wood-buyers in the region
provided additional data and insights.

Significantly, average revenues in 1991, $5,491.83/ha harvested,
were below costs of $5,614.89/ha for harvesting, skidding, and
manufacturing (Elgegren 1993), partly because of low prices.  On
average, hardwood boards, accounting for 40% of total production,
sold for $88.98/meters cubed locally and for $135.59/meters cubed
in Lima.  These prices were well below values at the Peruvian
border, which exceeded $500/meters cubed at the time (see the box
on this page).

There are several explanations for the low prices the cooperative
received for its timber.  Quality was uneven and marketing could
have been better.  For example, a United Kingdom buyer complained
that there was too much empty space in shipping containers.

In addition, public policy helped depress timber values. 
Throughout Latin America, discriminatory macroeconomic and trade
policies have weakened incentives to produce wood and other
primary commodities (Krueger, Schiff, and Valdes 1988).  By the
early 1990s, in contrast to other countries, Peru was not
regulating or taxing the export of unprocessed lumber.  However,
exporters had to deposit foreign currency earnings with the
Central Bank and then wait for several weeks for exchange into
Peruvian soles at rates set at the time of deposit.  During 1991,
when Peru suffered one of the highest rates of inflation in Latin
America, this arrangement amounted to a 14 to 68% tax on exports.
Businesses who sold wood overseas show that the deposit
obligation cut 1991 revenues 30 to 35%.

Depressed revenues also resulted from low production.  Experience
in the Shiringamazu Native Community, a member of the Forestry
Cooperative, is a good example.  In 1991, Tropical Science
Center-style recovery took place there on three strips, with a
combined area of 2.87 ha.  Overall yields, which approached 45
meters cubed/ha, were three times that of normal logging
practices.  However, most of the difference came from utility
poles, 55.40 meters cubed/ha, and fence posts, 188.85 meters
cubed/ha, manufactured from smaller timber.  Production of sawn
tropical hardwood only amounted to 18.68 meters cubed/ha
(Elgegren 1993).  Besides being only a small increase over
standard extraction techniques, the latter yield compared poorly
with standing timber suitable for milling.  It usually exceeds 50
meters cubed/ha in places like the Palcazu Valley.

Using the firm's data, and taking into account all capital,
operating, and maintenance expenses, Elgegren (1993) calculated
that losses from the traditional system would amount to just
$34.57/ha.

Apparently aware of the financial advantages of usual selective
extraction, the Forestry Cooperative applied standard practices
on some land at the same time that it harvested strips according
to Tropical Science Center guidelines.  For example, only 46% of
its timber for sawmilling actually came from strips.  The rest
was obtained using common logging techniques.

The latest news from the Palcazu Valley is that indigenous
communities are negotiating with local loggers to operate on
their lands.  Those communities' experiment with the Tropical
Science Center system has ended, at least for the time being.



Policy Lessons


Abandonment of the Central Selva Resource Management Project does
not mean that the efforts of USAID, its contractors, and the
Yanesha Forestry Cooperative were futile.  In particular, the
regeneration that is occurring on harvested strips suggests that
the Tropical Science Center production and extraction scheme has
promise.  The harvesting of smaller timber was less successful,
mostly because sales of utility poles to the national electricity
company and of fence posts to the Pichis-Palcazu Special Project
never fully materialized.  The most serious shortcoming of the
Management Project, though, was the low recovery of valuable
tropical hardwoods.

As in many other Latin American countries, resource owners'
reluctance to invest in methods to use a larger portion of their
timber has much to do with public policy.  If exporters could
choose when to convert their foreign earnings into domestic
currency, then domestic prices for lumber would not have been as
low and incentives to improve harvesting and processing
efficiencies would have been stronger.

The Tropical Science Center system would have been more
profitable than alternative land uses if wood values had not been
artificially depressed.  Suppose, for example, that payments
received by the Forestry Cooperative in 1991 had been 40% higher
($7,700 instead of $5,500/ha).  Without efficiency improvements
in timber extraction or milling, average annual income on a 40-ha
site, with a 40-year Tropical Science Center-style rotation,
would have been $52.50/ha (1/40 of the difference between $7,700
and $5,500).  At an interest rate of 10%, the present value of
maintaining this income level indefinitely is $525.  This amount
is about two-thirds greater than average farmland values in and
around the Palcazu Valley (Elgegren 1993).

We need to consider something else in an economic analysis of the
Tropical Science Center system.  Wild game is an important source
of protein for the Yanesha.  Their hunting success appears
greater, and animal populations increase, when there are periodic
small clearings such as the harvested strips.

Although the Tropical Science Center system seemed to have
considerable merit, it was difficult to apply without outside
technical assistance.  The 1991 forestry efforts in the Palcazu
Valley clearly shows that forest dwellers' willingness to use and
manage resources sustainably is not enough.  To receive full
market value for their timber, they require substantial help with
production, harvesting, marketing, and processing.

What is the most reliable source for outside help?  Latin
American timber owners cannot count on support for forestry
development from the public sector.  As the record of socialized
forestry in places like Honduras and Venezuela shows, governments
have experienced the same difficulty in developing natural
resources as they have in running airlines, steel mills, and
other enterprises.

Total dependence on development agencies is also not appropriate.
Few donor projects last as long as it takes for a tree to mature.
Unforeseen circumstances such as the guerilla activity of the
Shining Path terrorists can force a project's termination.  Even
so, it would have been noteworthy for the Central Selva Resource
Management Project to survive 15 years.  Unless development
agencies succeed in providing local communities with all the
capital and expertise required for sustainable forestry
development, involvement of the private sector is unavoidable.

Tapping into private firms' production, harvesting, processing
expertise, marketing contacts, and capital can be difficult. 
Even if public policies do not discriminate against the forestry
sector, a business will hesitate in becoming a partner with a
local community if the community is fragmented or unstable.

Some environmentalists also categorically oppose private sector
involvement in developing tropical timber resources.  Opposition
can spring from an unrealistic hope that they can permanently
halt logging or from a misunderstanding of how public policies
influence logging company decisions to manage renewable
resources.

Those concerned about the future of tropical forests in places
like the Peruvian Amazon should welcome initiatives like the
Central Selva Resource Management Project.  The project shows
that sustainable timber production may be economically superior
to converting tropical forests into cropland and pasture. 
However, timber production is viable only if it is possible to
eliminate government policies and public sector practices that
depress timber values.

Furthermore, we must find ways to involve the private sector in
sustainable forestry development through joint ventures that
serve the long-term interests of both companies and local
communities.  If we can harness private marketing, production,
and processing expertise, the profitability of ventures like that
in the Palcazu Valley should improve considerably.  Then
prospects for forest conservation will brighten in many parts of
the Amazon Basin.




NOTE



1. An earlier version of this paper was published in the
COMMONWEALTH FORESTRY REVIEW Vol. 74(2), 1995.  We are indebted
to the editor for permission to reproduce it here. 




REFERENCES



Aguilar, P.  1990.  "Environmental Conservation and the Palcazu
Project."  Tebiwa: THE JOURNAL OF THE IDAHO MUSEUM OF NATURAL
HISTORY 24:13-16.

Belaunde, F.  1965.  PERU'S OWN CONQUEST.  Lima, Peru: American
Studies Press.

Elgegren, J.  1993.  "Desarrollo Sustentable y Manejo de Bosques
Naturales en la Amazonia Peruana: Un Estudio Economico-Ambiental
del Sistema de Manejo Forestal en Fajas en el Valle del Palcazu."
M.S. thesis, Facultad Latinoamericana de Ciencias Sociales,
Quito, Ecuador.

Hartshorn, G., R. Simeone, and J. Tosi.  1986.  "Manejo para el
Rendimiento Sostenido de Bosques Naturales: Un Sinopsis del
Proyecto Desarrollo del Palcazu en la Selva Central de la
Amazonia Peruana."  Tropical Science Center, San Jose, Costa
Rica.

International Bank for Reconstruction and Development (IBRD). 
1991.  THE FORESTRY SECTOR: A WORLD BANK POLICY PAPER. 
Washington, D.C.

Krueger, A., M. Schiff, and A. Valdes.  1988.  "Agricultural
Incentives in Developing Countries: Measuring the Effect of
Sectoral and Economy-Wide Policies."  WORLD BANK ECONOMIC REVIEW
2:255-271.

Simeone, R.  1990.  "Land Use Planning and Forestry-Based
Economy: The Case of the Amuesha Forestry Cooperative."  TEBIWA: 
THE JOURNAL OF THE IDAHO MUSEUM OF NATURAL HISTORY 24:7-12.

Smith, R.  1982.  "The Dialectics of Domination in Peru: Native
Communities and the Myth of the Vast Amazonian Emptiness."
Cultural Survival, Occasional Paper 8.  Cambridge, Massachusetts.

Staver, C.  1990.  "Agricultural Projects among Native Peoples: 
Lessons from the Palcazu."  TEBIWA: THE JOURNAL OF THE IDAHO
MUSEUM OF NATURAL HISTORY 24:1-6.

Tosi, J.  1986.  "Natural Forest Management for the Sustained
Yield of Forest Products." Tropical Science Center, San Jose,
Costa Rica.