Forests in Development - the World Bank Role                        o
By Montague Yudelman DFC., BSc., Phd.
Introduction                                                        U   J'-A115
This presentation is about the World Bank and investment in forestry.
The first part describes the World Bank and the evolution of its lending program
for agricultural and rural development - including forestry - until it is now
the largest single source of external financing for this purpose. Last year 40%
of all Bank lending, some $3.2 billion, was for agriculture and rural development.
In the past five years the Bank has invested $10 billion in rural projects
valued at more than $24 billion, or a total investment somewhere in the neigh-
borhood of 20 to 25% of all public-sector investment in agriculture in the
developing countries. The second part touches on the differences in approach
to forest development and utilization in developed-and developing countries.
The third part gives a description of some Bank investments to indicate the
range and scope of our approach to forest development and describes the change
in Bank policy on forestry to meet the changing needs of developing countries.
The World Bank Group
The World Bank Group consists of three entities. The first is the
World Bank, formally known as the International Bank for Reconstruction and
Development, founded in 1945. The Bank is an intergovernmental agency which is
owned by its 132 members; its management is accountable to a permanent Board
of Directors who pass judgement on all investments and whose votes are weighted
in line with the capital subscribed by the governments they represent. (Canada
controls 3.8% of the vote). The Bank raises the funds it lends on world finacial
markets primarily by selling its bonds; it finances its administration out of
profits. The Bank lends to member governments for financially viable projects
that facilitate development for a 15-20 year term, with a grace period of 3-5 years
at an interest rate of around 7.5%. The Bank has never had a default; last
year it loaned $6 billion for 137 operations.


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The International Development Association (IDA) is the second element
of the Bank Group. IDA was established in 1960 to help the poorest countries
in the world, many of whom were having problems servicing their debts, because
of high interest rates and falling commodity prices. IDA is financed by grants
from its richer member countries. IDA is in a position to lend on very soft
terms. IDA makes credits on a 50 year basis with a .ten year grace period and
a three-quarter percent service charge. The last tranche of IDA - IDA V - was
for $4.5 billion over three years; the present tranche is for $7.5 billion for
the period of 1978 to 1981 or $2.5 billion a year. (Canada contributed $62 million
to IDA). Last year IDA made credits of $2.1 billion for a total of 99       projects,
with nearly all the funds going to South Asia and Subsaharan Africa. I should
stress that all projects financed by IDA must meet the same stringent standards
of economic and financial viability as do those financed by the Bank.
The third member of the World Bank Group is the International Finance
Corporation (IFC). The IFC provides equity capital and participates in joint
ventures in developing countries. The IFC works with the private sector and
loaned $228 million in the last fiscal year.
The evolution of the Bank's program for agricultural and rural
development mirrors much of the thinking about economic development over the
past 30 years. Initially the Bank did not lend for agricultural development
or forestry. This was in keeping with the view of most economists at that time
that lack of demand was the factor constraining agricultural development. With
plenty of land and labor increasing agricultural production was no problem, what
was needed was investment in the non-agricultural sector which would generate
the demand which in turn would induce increased output.


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After more than a decade of operation the Bank made its first investments
for agriculture in developing countries; these were
primarily for irrigation - a relatively easy means of transferring tchnology
and capital. However, in the early 1960s economists begn to emphasize the
importance of agricultural development as an essential part of the process of
balanced economic development, and began to stress the importance of raising
rates of investment in agriculture as a means of increasing supplies. At the
same time international agricultural scientists working in Mexico and the
Phillipines developed new high yielding varieties of wheat and rice seeds;
these provided a vehicle for increasing yields and productivity when they were
combined with fertilizer and controlled water supplies, so helping to convince
the sceptics that modest on-farm investments could help increase production of
these food grains. Bank lending for agriculture expanded rapidly with the Bank
lending heavily for infrastructure and on-farm improvement. The proportion of
lending for agriculture also rose sharply.
The next phase in the evolution of Bank lending followed several
publicly supported analyses of the impact of aid on economic development.    The
first analysis was undertaken at the Bank's behest by the Pearson Commission;
it was supported by subsequent studies by the Bank's staff, and by the staff of
the United Nati6ns, trying to measure the impact of the U.N.'s first development
decade - the 1960s. These studies indicated that there had been economic
growth - per capita gross national product had risen significantly in most
countries - but the numbers of poor appeared to have increased substantially,
especially in the rural areas; clearly very large numbers were not enjoying
any of the benefits of economic growth.   Consequently it was deemed necessary


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to have a strategy of development that would apread these benefits more
widely. The strategy that evolved was one whereby investments were oriented
directly toward low income groups - the rural poor. As a result in the last
five years more than half of the vastly expanded volume of loans for agriculture
and rural development have been intended to raise the productivity of low income
groups in the rural areas - mostly small farmers who have been given access to
seed, fertilizer, credit, storage and marketing facilities. Many loans have
been for irrigation, tubewells and low-lift pumps as well as for small-scale
surface irrigation. Some of the loans were also for forestry projects intended
to help raise the incomes of low-income groups for many of the people who live
in forests are notoriously poor.
Forests in Developing Countries
Forests cover one-third of the world's land area. We are all aware
of the economic importance of forests in providing the resource base for a
$115 billion global industry. Even more vital than the use of trees as a
renewable natural resource, is their ecological role. They are essential to
the minantenace of productive watersheds, protecting soils from erosion and
preventing excessive flooding or the silting of waterways. .This is widely
recognised in the developed or industralized countries, which contain
roughly half the world's total forest area, and which tend to have policies
that manage forest resources for multiple uses. Important scientific advances
have been applied to forestry in the areas of pest control, genetic improvement,
harvesting techniques and a better understanding of the ecosystem in which
forests exist. For these reasons, timber yields on commercial stands have been


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increased greatly through modern silvacultural inputs, millions of acres of
top soils have been protected and the recreational use of forest areas has
increased. Most important, the aggregate harvesting of trees is well below
an "allowable cut", meaning that the total forest inventory is increasing.
The situation in the forests contained in the non-industrialised
developing countries is fundamentally different. Perhaps this difference is
best illustrated by looking at the end use of forests in the developing countries.
There, wood resources are consumed primarily as an energy source, providing
upwards of 1.5 billion people with the means to keep warm and cook their meals.
Eighty-four percent of all wood harvested in developing countries is used this
way, generating roughly one quarter of total LDC energy.    In the developed
countries less than 10% of total wood is used as fuelwood, providing only
one percent of total energy. In rural areas of the developing countries fuelwood
as a means of energy is often almost total. About 85% of total non-commercial
energy, excepting human and animal, comes from wood. Where it is not used,
animal dung and crop residues used as energy sources are estimated to be the
equivalent of 29% of the energy used in wood burning. Fuelwood is generally
collected directly by the consumer, which limits the "drain -area" to a walking
distance of about 15 Kms. radius from the homestead. Since there are few
controls, with little reforestation or forest management, this places great
strains on local forest reserves, with scavenging for wood creating virtual
desert conditions in parts of West Bengal and Central India. Around Niamey,
the capital of the African country of Niger which is located in the Sahel,
desert conditions exist for up to 70 Kms around the city largely because of
totally destructive 'clearcutting' to provide firewood.


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Forests also play a vital role in preserving the environment in
the developing countries, and where the land's protective covering of trees
has been denuded this has had dire results. Destruction of forests
contributed substantially to the desertification in many part4 of the Middle
East, Central Spain and the Western coast of South America. This same pr cess
is now at work inthe Sahel. The recent flooding in South Asin, estimated to
have taken a thousand lives, is partly the result of deforestation. Even
more alarming than these specific illustrations of what happens when forests
are misused, is the fact that overall the tropical forests are being consumed
much more quickly than they are regenerating. The Food and Agriculture
Organization of the United Nations (FAO) has estimated that roughly 6,000 miles
of forest (an area equivalent to one-third of the State of Nova Scotia) are
destroyed each year. We estimated in the course of preparing the Bank's
Forestry Sector Policy Paper that at the present rate of encroachment and
desctruction, the tropical forests of the developing world could, in theory,
disappear within about 60 years, unless steps are taken to protect remaining
resources, increase the efficiency of existing consumption and initiate
reforestation programs on a massive scale.
It is against this background of a deteriorating ecology as well as
the spread of rural poverty that the World Bank has been evolving a new policy
on forestry.


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Bank Lending for Forestry
Bank lending for forestry has changed in line with the evolution of
lending for the rural sector. In the earlier years the bulk of Bank lending
for forestry was for gzowth per se and was primarily for industrial forestry
projects with four pulp and paper projects accounting for 85% of total Bank
lending in this sector. However in line with the change in emphasis, and
recognising the urgency for arresting further declines in soil productivity,
improving water control and general environmental conditions, the Bank expanded
its lending program; the focus shifting to helping the small wood producer
who is dependent on wood for fuel and income in the context of rural development.
To explain how the Bank's strategy in forestry development works
in practice, I would like to outline some of the new projects which we have
designed and financed in conjunction with member governments. My first example
is that of Turkey. A country with a temperate climate and relatively far along
the path of economic development, Turkey's forest sector faces serious challenges.
The Bank initiated a comprehensive review of land use policies in 1973, discovering
that the cultivation pattern of total arable lands should be changed to increase
output, and that about 4 million hectares of land should be retained under
forest area.   After productive discussions with the government on overall land
use and domestic economic policies (which we call the Bank's "teconomic dialogue"
with borrowing countries), Turkey instituted important changes. As part of the
effort, the Bank supported a seven year integrated forestry development project
in Northern Turkey, commiting $86 million out of a total cost of $915 million.
The project will cover some 100,000 sq Kms, an area including about 9,000 forest


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villages with a population of five million, most of whom have extremely low
incomes. The project's major emphasis will be on increasing the road network
with the construction of 26,000 Kms of roads in the next seven years to enable
more intensive utilization of natural forests. The project will create
165,000 new jobs, keep 3,500 small sawmills operating and provide revenues to
support a program of forest village improvement which will increase farm output
in areas adjacent to forest villages.   This latter component, based on an
initiative taken by the Government's Ministry of Forestry, is a deliberate
attempt through project design to encourage closer integration between forestry
and agriculture and to provide small farmers living in the forest villages with
improved local fodder supplies as an alternative to continued overgrazing of
forest lands.
Another interesting project is the second loan we have made to assist
smallholder tree farming in the Philippines. Six years ago, we made the first
loan of $.2 million on an experimental basis to see if it was possible to provide
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technical services to small farmers engaged in wood production. The success
of this program, similar to land owner assistance programs in the southeastern
U.S.A. which are financed by private forest productcompanies exceeded our
expectations. It led to a second credit of $8 million which finances half the
total cost of involving some 7,000 smallholders and 28,000 ha of land which will
produce fuelwood, charcoal, leafmeal (for cattle feed), and wood chips for
particle board production - also an 8,000 ha plantation of fast growing pulpwood
trees. The return on investment of this project will be in the neighborhood
of 25% - which compares nicely to the average rate of return of 9% for North
American forest product companies.


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The Bank has taken on a somewhat different role in Nepal, where
the conditions make environmental forestry imperative. In the past decade
a quarter of this country's forests have been destroyed. If present trends
continue, the Himalayan ranges in Nepal will be totally denuded within 25 years.
Over half the total soil erosiQn in this huge watershed is man-made and the
rate of erosion is sureto increase unless corrective action is taken. River
beds flowing from catchment areas are rising at the extraordinary rate of
15-30 cm a year. The impact of chronic flooding problems in eastern India
and Bangladesh is immense, affecting hundreds of millions of small farmers
and landless laborers.
The forests which have been consumed for fuel provide 87% of Nepal's
energy. The only alternative energy source at present is animal fodder and
dung. When dung and other wastes are not recycled into the soil to increase
nutrient levels, food production suffers seriously. If current trends continue, then
by 1995 dung and residue energy use could result in the loss of 1 million tons
of grain production annually in Nepal - a quarter of total production. On a
global basis, this diversion of animal dung to burning has been estimated to
result in the loss of 20 million tons of gTain production -. enough to feed
100 million people. The Bank, along with other international agencies, has
helped the Nepalese government understand the nature of the problem it faces.
Targets have been established for future afforestation programs needed to
support fuelwood production and the Bank is currently assisting in formulation
of a project which will initiate a large reforestation program in the Hill
Districts to be closely associated with ongoing rural development projects.


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Another project under preparation which will help meet the
ecological requimnents in this region is located in Bangladesh, It is
proposed to plant mangroves along the southern coastal fringe of the Bay of
Bengal to protect the rural population and agricultural crops from the
disastrous effects of periodic flooding, cyclones and tidal bores.
In India, a recently appraised project aims, through a combination
of improved range and crop management and animal husbandry, soil conservation,
and reforestation works, to rehabilitate one of the main water catchment basins
of the Western Himalayas. This will be the first phase of a major catchment
protection program designed in the longer term to reduce the risk of catastrophic
floods such as those which occurred earlier this year.
The crisis faced by the Sahelian countries has received great attention.
The causes of the crisis are, perhaps, not as well known, but it seems certain
that the destruction of the forests of the Central Highlands of Ethiopia and
savannah woodlands of the countries in the Sahel Zone through over-grazing
have been major contributing factors leading to increased desertification
in this part of West Africa. The Bank has already taken steps, along with
other donor agencies, to reverse the ecological degradation*in this region.
A credit to Niger to assist it to develop its diminished forest resources while
protecting its environment was made this year and more are in the pipeline for
Mali, Upper Volta and other Sahelian zone countries. As part of a credit to
Chad, fragile savannah woodlands will be better managed and protected through
rotational grazing schemes and construction of tree nurseries. As is true with
many African nations, the most important component of the Bank's work in the
Sahel is institution building. The first step towards creating the framework


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and know-how to use good forest management to help solve the Sahel's ecological
problems has been made. This will allow future aid flows to be used effectively.
The Bank has also continued its work in support of ecologically sound
logging industries that meet growing world demand for tropical hardwoods. This
is an important element in the economic wellbeing of many forest surplus countries
of the developing world. The Bank is assisting these countries in managing
their resources for maximum gain, introducing harvesting patterns that ensure
a sustained yield from the tropical forests. The Bank has also rendered
assistance to governments of countries where the utilization of forest resources
is largely in the hands of foreign contractors and multi-national companies.
For example, the Bank is helping the West African forest surplus countries to
develop timber allocation policies which will result in their realizing greater
returns from existing commercial forestry activities - a sector which presently
accounts for up to 50% of total export earnings in some instances. In Guyana,
a country with a huge under-utilized resource base of natural tropical hardwood
that will rot if it is not harvested, the Bank has recently financed construction
of a major $30 million forest industries complex with special emphasis on trying
to broaden the range of tropical hardwood species to be marketed in the U.S.A.
Europe and elsewhere.
In additon to the expanding market for logs and other wood products,
there remains an important potential for increased pulp production. The
difficulties in harvesting natural tropical rain forests, given the incredible
variety in natural vegetation,are great, but Brazil, Chile and other countries
have demonstrated that it is possible to develop privately financed fast growing
pulpwood plantations, pulp, paper and lumber industries. The IFC has assisted
A1


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in the equity capitalization of new private companies taking advantage of
commercial opportunities with developing country forests. It has provided
the technical know-how needed to ensure that these ventures prove profitable
to entrepreneurs and the countries where they operate. In the past 10 years
IFC has made some 26 investments in pulp, paper and wood products ventures,
and committed approximately $150 million for projects with a total cost of
$680 million. Several investments were small and made in pilot projects.
Others were in plywood, sawn lumber, fiberboard, box board, etc. The bulk of
the ventures were in pulp and paper which had combined planned capacity totalling
almost a million MT a year of new output (equal to 30% of total developing
world production in 1975).
Constraints to Forestry Lending
Naturally, the rapid escalation of Bank forestry lending activity
which we are now undertaking has brought the Bank face-to-face with a number
of constraints to expanding lending for forestry. There are many, but I will
mention only one maiv issue here, namely an increasing realization within the
Bank that forestry development cannot be viewed in isolation. The needs of
rural people, particularly those living in remote areas, include roads, water
supplies, health clinics, schools, improved seed, fertilizers, access to credit
and agricultural extension services and, frequently, such developments will
appear to them as matters of higher p,Ciority than longer term afforestation
or soil conservation programs. In short,  ural forestry programs will be most
likely to succeed in areas where an integrated approach is being taken to
rural development, where needed goods and services are being supplied and
where forestry is included as part of an overall development package.


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Appreciation of this fact has affected Bank forestry project work
in three main ways. First, as an integral part of forestry project preparation
and appraisal activity, we have found it increasingly necessary to include
sociological studies at the village level to ascertain the people's own
priorities for development and to examine ways and means of motivating their
interest in rural afforestation schemes. Secondly, it has affected forestry
project design. The range of components in Bank financed forestry projects
has been expanded to include components which will give small farmers a
viable alternative to continued over-grazing and destruction of forestry
resources. These include, for example, financing of agricultural inputs,
credit and extension services for increasing production of on-farm fodder
supplies so providing an alternative source of income to those derived from
destroying forests; in addition the introduction of innovative wood-saving
technology such as more efficient wood-burning stoves and alternative rural
energy systems such as biogas, solar energy, small scale hydro-electric or
wind-powered generators, can help lead to significant savings in wood usage and
so ease the pressure for development of new forestry resources. Thirdly it
has affected the organization of forestry activities within,the Bank by
pointing up the need for closer integration of work between the Bank's forestry
specialists and those experts working on other aspects of rural development.
An indication of how these conclusions have influenced Bank forestry
lending can be gained by reference to the fact that in addition to 16 "forestry"
projects so far financed by the Bank, we have also, during the last three years,
included significant forestry components in some 20 agriculture or rural
development projects.


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Looking Ahead
The growth potential of the tropical forests may sound incredible
to North American foresters: 20 to 30 cubic meters of wood growth per annum
compared with an average of 3-5 cubic meters in interior Canada and 5-8 meters
in the Pacific Northwest coastal areas. The growing cycle for a hardwood pulp
tree is six years, for a Caribbean pine, it is 12 years. Consequently, I
believe the developing world has great potential as a source of industrial
forest products. Despite the obvious technical problems - similar to those
raised by 1920s experts, who said that a pulp and paper industry would never
develop in the Southern U.S.A. (which is today the center of U.S. production
and the world's lowest cost producer for many types of paper products) -
we can expect further growth in this sector which will benefit the world economy,
those developing countries and the poor, under-employed inhabitants of forestry
areas.
Looking ahead, we are aiming to increase World Bank lending to
forestry five-fold over the next five year period and to reach a total of half
a billion dollars by 1983. Most of the money will be spent as part of broad
based rural agricultural development projects containing money for other sectors.
The Bank plans to help in further development of integrated and sustainable
forestry programs in some 40-50 developing countries by 1983. Priority will
be given to:
Environmental forestry - with protection of forests located in
watersheds, sand dune stabilization in arid areas; forest
inventories for future utilization; and land use and soil surveys
as a prerequisite for balanced agricultural settlement in tropical
regions.


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Rural development forestry - establishment of village woodlots
containing species suitable for fuelwood; fruit fodder fibre;
poles and timber production; and creating new employment opportunities
in smallscale wood using industries in rural areas.
Institution building - training; education; research on
tropical forestry (which is decades behind similar efforts
on the temperate coniferous forests of the industralized countries);
and extension services that enable new techniques to be effectively
applied in the field.
Industrial forest projects - continuing support for industrial
forestry and export programs in the developing world including
joint efforts with the private sector, provided such efforts are
consistent with economic and social priorities of developing countries.
The examples I have cited earlier should give some indication of the
work we are engaged in at the World Bank. The development of the tropical forests
of the world is a vitally important concern, one which affects the wellbeing of
at least one billion people. The major use of these forests is at present
for fuel, a necessity, given endemic poverty and the limited supply of alter-
natives which do not cut into food production, and the Bank will give high
priority to reforestation programs using fuelwood species. At the same time
the Bank will continue its work in environmental forestry, through capital
investments, technical assistance, research, institution building and innovative
pilot projects. We will also stand ready to participate when the private sector


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is willing to take on the major responsibility for using forest resources
productively in developing regions. The Bank's role is important, but not
central. The countries themselves must attack the crisis in their rural
areas before they become socially and environmentally unmanageable. We can
assist forestry officials and others who recognise the importance of this
sector, but in the final analysis the responsibility lies with the countries
themselves.
November 13, 1978