Negative Externalities A Case Study From Bac Lieu - by Jake Brunner (IUCN)*

Economists often talk about “negative externalities”. These are costs that result from an activity or transaction and that affect an otherwise uninvolved party who does not choose to incur those costs. On a recent visit to a coastal district in Bac Lieu Province, it became clear what this means in practice. The visit was organized by GIZ staff running the project Adaption to Climate Change through the Promotion of Biodiversity in Bac Lieu Province.

Tran Manh Tinh has a long-term lease on a 2-hectare integrated mangrove-shrimp farm just outside the dike. He’s been farming there for 12 years. Every day, he pumps water into the ponds at high tide and traps shrimp as they flow out the ponds at low tide. It’s a highly natural system that’s also known as sylvo-aquaculture. GIZ is promoting this model because it’s attractive from both an environmental and economic point of view.

Every year, Tinh’s farm produces 300-400 kg of shrimp and 500 kg of crab per hectare. Currently, he sells shrimp sized 30 pieces/kg at VDN200,000/kg (US$10/kg) and shrimp sized 20 pieces/kg at VND300,000/kg (US$15/kg). Pregnant crabs sell for VND200,000/kg and others for VND140,000/kg (US$7/kg). So gross income per hectare comes to about VND160,000,000 (US$8,000) of which just over half comes from shrimp. Tinh also stocks fish such as sea bass and mud skipper. He doesn’t have a contract with a processor so he sells his shrimp to middlemen who sell them in the local market.

Since Tinh’s input costs are relatively low, his farm provides a substantial profit and unlike the intensive shrimp farms nearby (which are easily recognized because the complete absence of mangroves and the presence of large fans that aerate the water) he hasn’t suffered any significant crop losses from disease. Tinh’s biggest problem, he told us, was dirty water from the intensive farms (which are inside the dike) that causes occasional but (thanks to the low stocking density and daily water exchange) short-lived disease outbreaks. Since he’s downstream of the intensive farms and has no other water supply, he’s trapped. This is a good example of a negative externality. Tinh bears the costs (in terms of lost production and increased use of probiotics and lime) of the dirty water released by the intensive farms but doesn’t benefit from the shrimp that they produce. (It also stops Tinh getting his shrimp certified as organic.) Despite these problems, Tinh said that he isn’t interested in intensive shrimp farming because his model is “sustainable, stable, and low risk.”

The next famer we visited, Lai Vai Quang, manages one of the very few integrated mangrove-shrimp farm inside the dike. His farm covers four hectares and like Tien’s about half is covered by mangroves. As a local government official, Quang knows a lot about the local shrimp industry. He told us that the integrated mangrove-shrimp farms makes 50% more profit per hectare than intensive farms and that only seven of the 95 intensive farms were profitable. According to Quang, while in a good year an intensive shrimp farmer can make “billions of dong”, the input costs are high and there is a very high risk of complete crop failure.

So if integrated mangrove-shrimp farming is (apparently) much more profitable than intensive farming, why aren’t farmers converting their intensive farms into mangrove-shrimp farms? One reason, Quang told us, is that the local government has no policy to support mangrove-shrimp farming and converting from an intensive farm implies a significant cost in terms of foregone revenue bearing in mind it that it takes several years for mangroves to reach maturity.

But another reason (which we didn’t discuss with Tinh and Quang), is that intensive farms aren’t owned by the farmers but by businessmen who may be insensitive to crop losses because they have alternative income sources. They are attracted by the huge profits that can be earned in a good year and aren’t concerned about losing money in bad years. Simply put, the businessmen can afford to gamble. For small farmers, on the other hand, serial crop losses can mean bankruptcy.

Whether or not this explanation is true requires additional research. But what is unarguably true is that by releasing dirty water into the water supply of mangrove-shrimp farmers downstream, the intensive farmers are not paying the full cost of their operations. If they had to install and operate waste water treatment plants, an expensive undertaking, would intensive farming still be viable or would they shift to mangrove-shrimp farming? At present, the small-scale farmers downstream are effectively subsidizing the businessmen upstream.

An important role of government is to make sure that businesses “internalizes their negative externalities” by, for example, enforcing pollution control regulations. But if, say, government is a beneficiary of a business, it may be reluctant to do so. Bac Lieu wouldn’t be first place where such conflicts of interest are an invisible barrier to more environmentally sustainable business.

*The views expressed here are solely those of the author in his private capacity and do not necessarily represent the views of IUCN.