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You are here: Home / Signals — well-being and the environment / Signals 2012 / Articles / Getting the price ‘right’?

Getting the price ‘right’?

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Many developing country economies are centred on exploiting natural resources to lift their populations out of poverty, potentially damaging the natural systems they depend on. Short-term solutions often undermine the population’s well-being in the long-term. Can governments help the markets set the ‘right’ price for nature’s services and influence economic choices? Here is a closer look at what water use in cotton production means for Burkina Faso.
Shopping trolleys

Shopping trolleys  Image © Shutterstock

99 % of the world’s cotton farmers live in the developing world. That means that the pesticides are applied in fields where illiteracy is high and safety awareness is low, putting both the environment and lives at risk.

Steve Trent, Director of Environmental Justice Foundation

Globally, more than a billion people live in ‘extreme poverty’, according to the World Bank definition of surviving on less than USD 1.25 a day. And although the proportion of the world population living in poverty has fallen dramatically during the last 30 years, a substantial number of countries - many of them in Africa - have struggled to make progress. 

In these countries, economic activity is often centred on exploiting natural resources - through farming, forestry, mining and so on. As a result, efforts to boost economic growth to meet the needs of fast growing populations can put ecosystems under considerable strain.

In many cases, resources, such as cotton, are cultivated or extracted in developing countries and exported to richer regions such as Europe. This reality gives consumers in the industrialised world an important role: potentially helping to lift the ‘bottom billion’ out of poverty; potentially undermining their chances by damaging the natural systems that they depend on.

‘White gold’

Copyright: ShutterstockIn Burkina Faso - an arid, landlocked and very poor country on the Sahara’s southern fringe - cotton is big business. It’s enormous business, in fact. Having increased output rapidly in recent years, Burkina Faso is now Africa’s largest cotton producer. ‘White gold’, as it’s known in the region, accounted for as much as 85 % of Burkina’s export revenues in 2007 and 12 % of economic output.

Crucially, earnings from cotton are widely dispersed. The sector employs 15–20 % of the workforce, providing direct incomes to 1.5–2 million people. And as a key driver of economic growth in the last decade it has generated tax revenues that can fund improvements in areas such as health and education. 

For the people of Burkina Faso, the benefits of cultivating cotton are clear. The costs are often less obvious.

A quarter of inhabitants lack access to safe drinking water. More than 80 % are subsistence farmers, relying on water to meet their basic needs for food and shelter. And according to the WMO, annual demand on water resources exceeds availability by 10–22 %. 

In this context, the huge increase in cotton production in recent years looks risky. Cotton is a thirsty crop — it requires irrigation during drier months and consumes much more water than other widely cultivated crops.

Assigning water to cotton production implies diverting water from other possible uses. Most of the harvest is exported, meaning that large amounts of water are used to satisfy the demands of consumers overseas. This process is known as exporting ‘virtual water’.

Half of Burkina Faso’s cotton is exported to China where it is sold to local spinning factories and from there to garment manufacturers serving global markets. At the end of the supply chain, consumers of cotton products effectively import substantial volumes of water — sometimes from much drier parts of the world. In the case of cotton, one study has found that 84 % of Europe’s water footprint lies outside Europe.

For dry countries like Burkina Faso, it’s normally preferable to import water intensive products, not export them. After all, exporting ‘virtual water’ can mean that there’s not enough left for local people and ecosystems. That said, the only way to judge whether it’s a good idea for Burkina Faso to use water to cultivate cotton is by evaluating the full costs and benefits compared to other uses. By itself, the virtual water concept can’t tell us how best to manage water, even if it does convey very useful information about the impacts of our production and consumption choices.

Water concepts in brief

Water footprints and virtual water are concepts that help us understand the amount of water we consume. 

A water footprint is the volume of freshwater used to produce the goods and services consumed by an individual or community or produced by a business. It consists of three components. The blue water footprint is the volume of surface water and groundwater used to produce goods and services. The green water footprint is the amount of rainwater used in production. And the grey water footprint is the volume of water polluted by the production. 

Any exported good or service also implies exporting ‘virtual water’ - the water used in producing the good or service in question. Virtual water exports happen when a good or service is consumed outside the boundaries of the catchment area where the water was extracted. 

For importing countries or areas, importing ‘virtual water’ enables domestic water resources to be used for other purposes, which can be very useful for water scarce countries. Unfortunately, many countries exporting virtual water are actually water scarce but have sunny climates, which suits agricultural production. In these water scarce countries, exporting virtual water puts extra strains on water resources and often imposes social and economic costs because insufficient water is available for other activities and needs.

Source: Water Footprint Network

More pollution, less forest

Water consumption isn’t the only worry associated with cotton production in Burkina Faso. Cultivating cotton normally involves heavy use of pesticides. Indeed, cotton accounts for a remarkable 16 % of world pesticide use, despite covering just 3 % of cultivated land globally.

The impacts can be severe for local people and ecosystems. But since the individuals applying the pesticides don’t feel all these effects and may not even be aware of them all, they won’t reflect them fully in their decision making. For this reason, it can be important to educate and inform local growers about pesticides and their effects.

Water isn’t the only resource being used. Another crucial one is land. As in most places, in Burkina Faso land can be used in numerous different ways. Do the Burkinabe gain most welfare from converting land to cotton production?

Copyright: IHH Humanitarian Relief Foundation/TurkeyAt just eight years old, Modachirou Inoussa already helped his parents in the cotton fields. On 29 July 2000 Modachirou had worked hard and ran back to the house feeling thirsty. On his way, he found an empty container, and scooped some water to drink from a ditch. That evening he did not return home. A village search found his body next to the empty Callisulfan bottle.

Endosulfan poisoning in West Africa, reported by PAN UK (2006)

Good for one might not be good for all

This question isn’t an idle one. Burkina Faso’s forest area declined by 18 % in the period 1990–2010, partly driven by expanding agriculture, and the rate of loss is accelerating. A private owner of forest in Burkina Faso may prefer to cultivate cotton because it’s more profitable for him or her to sell the wood (or use it as fuel) and cultivate the land, rather than preserve the forest. But this may not necessarily be the best outcome for Burkina Faso — its people and its ecosystems.

Copyright: Pawel KazmierczykForests provide humans — near and far — with a lot more benefits than just the value of the timber. They supply a habitat for biodiversity, prevent soil erosion, absorb carbon dioxide, provide recreation opportunities and so on. If society as a whole were deciding how to use the land — and could make its decision based on a full assessment of the costs and benefits of the different options — it would probably not exhaust all the land and water just for cotton production.

This difference between the benefits and costs facing individuals and those facing society is a crucial issue. 

In answering key questions — how much water to use in producing cotton, how much pesticides, how much land — farmers across the world takes decisions based on the relative costs and benefits. But whereas the farmer can capture the full gains of selling the cotton, he or she usually doesn’t bear all the costs. The expense of purchasing pesticides, for example, is often dwarfed by the health impacts of pesticide use. So costs are passed on to other people, including future generations.

Problems arise because, much like the rest of us, the farmer is making most decisions based on his own self interest. And this distortion is passed on via global markets. The prices paid by traders, clothes manufacturers and, ultimately, consumers misrepresent the cost and benefits involved in using resources and producing goods. 

This is a serious problem. In most of the world, markets and prices are used to guide our decision making, so if prices give us a misleading picture of the impacts of production and consumption then we’ll make bad decisions. History tells us that markets can be a very effective mechanism to guide our decisions about resource use and production and maximise prosperity. But when the prices are wrong, markets fail.

When markets fail: corrections and constraints

Copyright: ShutterstockWhat can we do about it? To some extent governments can take steps to correct market failures. They can impose regulations and taxes on using water and pesticides so that farmers use less or find less harmful alternatives. Conversely, they can organise payments to forest owners to reflect the benefits that forests supply to society nationally and internationally — and thereby provide an alternative source of revenues. The key lies in aligning the incentives of the individual with those of society as a whole.

It’s also important to provide information to consumers to complement the information carried in prices. In many countries we see ever more labels informing us about how goods are produced, along with campaigns by interest groups to increase awareness and understanding of these issues. Many of us would be willing to pay more or consume less if we understood the impacts of our choices. 

In some instances, governments need to go beyond correcting the market and actually constrain its role in allocating resources. Humans and ecosystems alike need water to survive and prosper. Indeed, many would argue that people have a right to sufficient water for drinking, food, sanitation and a healthy environment. Governments may therefore have a duty to ensure that their needs are met before using the market to share out the rest.

Back in Burkina Faso, the government and international partners have focused on meeting the basic need for access to safe drinking water. Although this is not yet a reality for a quarter of inhabitants, the situation today constitutes a huge improvement on 20 years ago, when 60 % lacked such access.

Changing incentives 

Globally, efforts are under way to correct and constrain open markets, while exploiting their many benefits. Right now, however, market prices often give misleading information — and the result is bad decisions by producers and consumers alike.

If markets were working properly and prices reflected the full costs and benefits of our actions, would Burkina Faso produce cotton? 

Although it is hard to know for sure, it seems very likely that it would. For a very poor, landlocked, resource poor country like Burkina Faso, there are no easy routes to prosperity. The cotton sector at least offers considerable earnings, potentially providing a platform for economic development and improved living standards.

But continuing to produce cotton does not have to mean continuing to use water and pesticide intensive production techniques. Or continuing to reduce forest areas. Alternatives methods, such as organic cotton production, can lower water use and exclude pesticide use altogether. The direct costs of cultivating organic cotton are greater — meaning that the prices that consumers face for cotton products are higher — but they are more than offset by the reduction in indirect costs imposed on cotton growers and their communities.

You choose

Copyright: ThinkstockCertainly, policymakers have a role to play in helping markets to function properly, so that price signals provide incentives for sustainable decision making. But it’s not just up to policymakers — informed citizens can also make a difference. 

Global supply chains mean that the decisions of manufacturers, retailers and consumers in Europe can significantly impact the wellbeing of people in lands as far away as Burkina Faso. Such impacts can include generating employment and earnings, but they can also include over exploiting limited water resources and poisoning local people and ecosystems. 

Ultimately, consumers have the power to decide. Just as policymakers can guide our consumption by influencing prices, consumers can send signals to producers by demanding sustainably grown cotton. It’s a point worth reflecting on the next time you go to buy a pair of jeans.

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