This study is an investigation of the process of land conversion from forest to agricultural production, and assessing the factors affecting the process. We also analyze the conditions that would ultimately lead to the EKC type of relationship between deforestation and societal income in an economy.Land Economics/Use,

Bhattarai, Madhusudan

Hammig, Michael D.

Paudel, Krishna P.

English

Research Papers in Economics

Agricultural and Forest Landuse Changes, and the Environmental Kuznets Curve 
for Deforestation: An Intertemporal Dynamic Equilibrium. 
 
 
Dr. Madhu S. Bhattarai, Kathmandu, Nepal 
Phone: 977-1-4770181 
Email: m.bhattarai@cgiar.org 
 
Michael D. Hammig 
Professor and Chair 
Department of Applied Economics and Statistics 
220 Barre Hall 
Clemson University 
Clemson, SC 29634 
Phone: (864) 656 3225 
Fax: (864) 656 5776 
mhammig@clemson.edu 
 
Krishna P. Paudel
2, Assistant Professor 
Department of Agricultural Economics and Agribusiness 
225 Agricultural Administration Building 
Louisiana State University Agricultural Center 
Baton Rouge, LA 70803 
Phone:  (225) 578-7363 
Fax: (225) 578-2716 
Email: kpaudel@agcenter.lsu.edu 
 
Selected paper prepared for presentation at the American Agricultural 
Economics Association annual meeting, Denver, Colorado, August 1-4, 2004 
 
 
 
© 2004 by Madhu Bhattarai, Michel Hammig, and Krishna P. Paudel. All rights reserved. Readers may 
make verbatim copies of this document for noncommercial purposes by any means provided this copyright 
notice appears on all such copies 
                                                                 
2  Corresponding Author  
 
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Agricultural and Forest Landuse Changes, and the Environmental Kuznets Curve 
for Deforestation: An Intertemporal Dynamic Equilibrium. 
 
Abstract:  
 
This study is an investigation of the process of land conversion from forest to agricultural 
production, and assessing the factors affecting the process. We also analyze the 
conditions that would ultimately lead to the EKC type of relationship between 
deforestation and societal income in an economy.  
 
  
 
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 Agricultural and Forest Landuse Changes, and the Environmental Kuznets Curve 
for Deforestation: An Intertemporal Dynamic Equilibrium 
 
This study examines relationship between agricultural productivity growth and forest 
land cover change in an isolated economy, and then it evaluates factors affecting the 
emergence of Environmental Kuznets Curve (EKC) relationship for tropical deforestation 
in the economy.  The EKC framework of analysis is a recent development in the literature 
of environmental economics, which hypothesizes existence of an inverse U-shaped 
relationship between indicators of environmental deterioration and societal income level, 
or economic development level.  Unlike EKC analyses for air and water pollution, where 
income and environmental pollutant levels are related, the case of deforestation is 
different because deforestation is often the result of a specific investment decision and 
demand for land for the agricultural production and to meet the other basic needs of the 
society; thereby a normal path of deforestation is also considered as a precursor of 
development and a natural growth path for society.  
The EKC hypothesis posits a relationship that environmental quality will 
deteriorate during the early stages of economic development, but when societal income 
reaches a certain level the rate of environmental quality decline will slow.  This 
phenomenon has been empirically verified for several environmental quality indicators 
including deforestation; but mostly using statistical analysis across countries.  The 
theoretical foundation of the EKC in general, and for EKC for deforestation in particular, 
is still very weak. In fact, theoretical underpinnings of an EKC relationship for 
deforestation are not fully explored in the past studies. Recognizing this limitation in the 
literature, by using a dynamic optimization framework, this paper derives conditions for  
 
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optimum land use decisions and an understanding of deforestation EKC, with a focus on 
the linkage between changes on agricultural and forest uses of land. 
For a long time, the relationship between economic growth and its impacts on 
environmental quality is a controversial public policy issue (see Bhattarai, 2000).  In 
addition, the tropical deforestation process as such is a complex topic influenced by 
dynamic forces of institutional, structural and policy factors, so the relationship between 
agricultural development (productivity and/or farm income growth) and tropical 
development. In an economy, the relationship between agricultural productivity and 
forestland use change is shaped by long-run development process. Therefore, a dynamic 
intertemporal equilibrium framework of analysis is adopted in this study to quantify the 
impacts of policy variables and structural factors on the tropical deforestation and/or 
tropical forest land use changes.  
Whether the process of tropical deforestation can be considered as an economic 
problem at all is a debatable issue. Likewise, is there an optimal level of deforestation in 
any economy at any time?  The past studies on these issues provide mixed results. Not 
only forestry contributes on national income, the present forest protection (destruction) is 
in fact an end result of an overall economic development process in a nation. In other 
words, the current pace of loss of tropical forest is closely linked to the past development 
process and the institutional and structural factors in the tropics (Walker, 1993). 
Therefore, the forest conversion process is an outcome of economic decision making of a 
rational agent (the frontier small holder farmer, the logging industry, or the state agency 
as such).  Economic incentives (full opportunity costs) faced by farmers (or the state) to a 
large extent can be explained by simple economic analysis. This paper is an attempt to  
 
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explore the economic behavior of society for land use decision for forest protection 
versus agricultural production. 
Most of the available literature on the topic of economics of deforestation, or 
EKC for deforestation, are empirical analysis using cross-country (or country specific) 
case study. But, the theoretical process of deforestation and generic factors affecting and 
process of tropical deforestation applicable to a wider regions are still very limited. 
Recently, several cross-country scale of studies have reported an evidence of EKC 
relationship for tropical deforestation process (see, Bhattarai and Hammig, 2001, 2004). 
Unlike those empirical studies, we explore here the underlying theoretical relationship for 
emergence of an EKC relationship for deforestation. This is done using the dynamic 
intertemporal equilibrium model, and extending the model we also evaluate the impact of 
change on productivity of labor, capital and land on level of deforestation. 
More specifically, this paper examines factors affecting land use decisions and 
derives conditions for optimum allocation of agricultural and forestland in an economy. 
Then, we evaluate the relationship between agricultural development and forest area 
changes, and the conditions that would lead to emergence of an Environmental Kuznets 
Curve (EKC) for deforestation.  This is done using a dynamic intertemporal equilibrium 
framework and an aggregate social welfare maximization approach of analysis. 
 
Hypothesis  
We test the following two hypotheses in this study using the concept of 
intertemporal equilibrium.  
  
 
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Hypothesis 1:  The tropical deforestation will be higher during the initial phase of 
development, but ultimately it starts to decrease over time and when societal income, 
and in turn, the preference change at a certain level of threshold development level 
leading to EKC for deforestation in the economy.  
Hypothesis 2: Agricultural technology advance will reduce pressure on the forest 
sector thereby reducing the deforestation level. 
 
Objectives and scope of the study 
The major objective of the study is to examine the relationship between agricultural 
productivity growth and forest land use change in an economy and the factors affecting 
the process. The specific objectives of this study are:   
 
1)   To develop a theoretical framework to analyze deforestation decisions in an 
economy depicting the intertemporal behavior of the society;  
 2)   To evaluate the impact of key economic and policy factors affecting the 
optimum forestland use decision;   
3)   To assess and evaluate the conditions under which an environmental 
Kuznets curve for deforestation will emerge in an economy;  
4)   To derive the steady state equilibrium of land conversion from forest to 
agriculture as agriculture intensification increases over time; and  
5)   To identify the levels of income and agricultural productivity associated 
with the turning point of the deforestation EKC and to suggest policy 
implications.  
 
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Significance 
By exploring the relationship between tropical deforestation and agricultural 
development using a consistent framework of economic analysis, this study attempts to 
fill a gap in the literature of economics of deforestation, specifically related to the EKC 
for deforestation. The results from this exercise will provide better understanding on the 
process of tropical deforestation and factors affecting it, in turn improved policy inputs 
and policy recommendations on tropical deforestation like major controversial global 
environmental public policy issue. The results also provide answers to questions like: can 
we halt the deforestation process worldwide by focusing on agricultural development and 
income growth from farming?  If so, what are the required levels of income and 
agricultural growth, and other policy instruments?  
The major implications from EKC studies for environmental policy are 
restructuring of growth and development policy programs, and to move the economy to a 
sustainable development path by tunneling it through the potential EKC (see, Panayotou, 
1997; and Yandle, et al., 2004).  By moving the economy under the ecological threshold 
limits, by induced policy tunneling effects, or flattening the EKC path in the economic 
development process, we can avoid any of such potential ecological catastrophic 
circumstances, but allowing to have sustainable growth and development in the society. 
Thus, the improved understanding on the reasoning for emergences of EKC, including 
the theoretical reasoning and factors affecting the process, has huge implications in the 
development economics, and policy prescriptions forwarded for the global environmental 
programs.   
  
 
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Literature  
The topic of economic growth and environmental quality, or pollution, was much-
discussed public policy issues during the early 1970s. However, the issue of the EKC 
relationship appeared in the literature mostly in the early 1990s during the policy debates 
on the environmental impacts of the North American Free Trade Agreement (NAFTA).  
Grossman and Kruger’s (1991) study was one of the first empirical studies on the topic, 
followed by over 100 other published studies on the topic (for a recent review on the past 
EKC studies, see Yandle, et al. 2004).  No doubt, because of the huge public policy 
implication of the findings, the issue of economic growth and environmental quality is 
controversial.  The issue is further complicated due to huge variation of the type and 
definition of indicators of environmental quality and variation of measurement criteria 
adopted across countries. 
Considering a vast and growing literature on the topic of EKC, and the limited 
scope of this study, we only summarize the past studies having theoretical distinctive 
concept developed, or a unique significance to the EKC for deforestation topic relation to 
the topic of the paper. For other numerical studies on EKC for deforestation see; 
Pinayotou, 2000; Bhattarai and Hammig, 2001; and Yanlde, et al., 2004. And for 
discussions and review on past theoretical EKC studies, see Bhattarai, 2000.   
One of the explanations given for the emergence of an EKC is that environmental 
quality is a luxury good, and therefore, demand for environmental quality increases as 
societal income rises, or its demand is felt only when societal income reaches a certain 
critical level (Antle and Heidebrink, 1995; Rutan, 1971). In fact, Lopez (1994) concept of  
“non-homothetic preferences” at high income levels is also consistent with the  
 
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assumption of environmental goods as luxury goods discussed earlier.  When the income 
elasticity of demand for environmental quality is higher than one then preferences are no 
longer homogenous in the society, which means also that societal preferences would 
change when income increases to a certain level.  In fact, the assumption of homothetic 
preference is consistent only with unitary income elasticity of demand.  
Likewise, Munasinghe (1999) explored the theoretical basis for the EKC 
relationship based upon simple economic intuition of an agent’s profit maximization 
behavior, i.e., the agent (or firm) maximizes the net benefits from investment. The basic 
intuition of Munasinghe’s (1999) paper is that the slope of curve representing an agent’s 
willingness to pay for environment quality (MBE), and marginal cost of environmental 
protection (MCE) will change when income rises to a certain level.  Unlike the other 
studies, Munasinghe derived the EKC condition from a more commonly adopted 
methodology of net benefits (after deduction of costs) maximization and budget 
constraint set up in economics. 
Using dynamic optimization techniques, Vogel (1999) explored the conditions for 
emergence of EKC relationship in an economy and factors affecting it and theoretical 
implications under alternative scenarios. Like Antle and Heidebrink (1995) and Martinez 
(1995), he also came to the conclusion that because of hierarchical demand systems 
society during the early stage of development would give higher priority to more 
immediate needs such as food, clothing, shelter, and general material well-being.  But, as 
the economy grows, environmental quality becomes scarce due to increased consump-
tion, and therefore relatively more valuable than other material goods.  That is, MBE 
increasingly becomes greater than MCE as income rises to a certain level, which leads to  
 
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the emergence of an EKC relationship between environmental degradation and income. 
In summing up, in the past studies on EKC, there is no unique theoretical explanation for 
that is plausible for explaining the EKC for environmental quality. 
 
EKC for Deforestation and forest land use change 
Using the large set of cross-country level data set, Shafik and Bandhopadhyay (1992) 
first reported that there is a bell shaped relationship between income and annual 
percentage change in forest and the total deforestation level (changes in forest area 
between 1961 to 1986).  In fact, long before the Shafik and Bandhyopadhya (1992) and 
Grossman and Kruger (1991) empirical studies on the EKC, Samuelson had asserted the 
notion of the EKC relationship in forestry in 1976, but in different tone.  He stated,  
Once a society achieves certain average levels of well-being and afflu-
ence, it is reasonable to suppose that citizens will democratically decide to 
forgo some calories and marginal private consumption enjoyments in 
favor of helping to preserve certain forms of life threatened by extinction.  
It is well known that clear cutting forests is one way of altering the 
Darwinian environment. … It is part of the political decision-making 
process to decide at which sustained level … to be permitted to flourish. 
(Samuelson, 1976, p. 486). 
In fact, the conceptual reasoning on presence or absence of a Kuznetian functional 
relationship between income and forest cover or deforestation trend over time is not 
clear-cut in the literature.  The present empirical evidence is mixed, and it varies 
depending upon the sets of countries and time period selected for the study.  In summing 
up, in terms of theoretical reasoning, not all contemporary economists have unanimous  
 
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viewpoints for the possibility of an EKC relationship for forest cover (see discussions in, 
Arrow et al., 1995; Stern et al, 1996; Ekins, 1997).  
 
Conclusion    
This study hypothesizes that deforestation behaves as a normal good in the lower 
stages of development.  Initially agricultural extensification happens at the cost of 
deforestation. However, as the economy develops the pressure for deforestation decreases 
because of the contribution of agricultural intenstification on agricultural productivity.  
Further, people start realizing the environmental services provided by the forestland 
thereby stopping the deforestation and instead producing intensively in the already 
cultivated land. We assume that this societal transformation process is influenced by 
improvement in the agricultural technology and economic development; and thereby, the 
deforestation process is endogenously determined in the economy.   
The steady state results of this study suggest that the optimum land use decision is 
affected by the discount rate, land productivity, rate of return on capital, society’s 
preferences over consumption of outputs from farming versus outputs produced from 
forest land.  The results from the comparative statistics analysis reveal that there would 
be an EKC for deforestation in an economy, as illustrated by past studies of cross-country 
empirical analyses, when the land productivity and the preference (i.e., income elasticity) 
of the environmental services from forest land reach a critical level.  Our numerical 
simulation exercises also empirically validate the steady state conditions derived from the 
intertemporal model.  From the simulation exercise, we provide the insight on the 
conditions under which the EKC for deforestation will emerge in the economy.   
 
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Unlike past studies on the EKC for deforestation, this study attempts to test for a 
Kuznetian type of relationship for deforestation using the basic structures of the economy 
and adopting the intertemporal dynamic equilibrium framework of analysis.  The results 
from this study suggest that the process of agricultural development and the rate of 
change in agricultural productivity (and rate of return on capital) are the key factors 
leading to the deforestation EKC in an economy, and not population pressure and other 
structural factors as noted in past studies.  

AGRICULTURAL AND FOREST LANDUSE CHANGES, AND THE ENVIRONMENTAL KUZNETS CURVE FOR DEFORESTATION: AN INTERTEMPORAL DYNAMIC EQUILIBRIUM

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