Trade Liberalization and Land Use Changes: Explaining the Expansion of Afforested Land in Chile

Abstract

Abstract Trade policy reforms are expected to affect land use patterns in developing countries. Most of the research has focused on explaining deforestation or the economic and environmental consequences of plantation subsidies. This article examines the change in economic incentives resulting from trade reforms implemented in Chile since the mid-1970s for land conversion to forest plantations. The removal of the log export ban and the general import duties reduction affected forestry and land-competing agriculture both directly and indirectly through the depreciation of the real exchange rate. Counterfactual roundwood relative prices were obtained by estimating a generalized Leontief demand function for the domestic processing industry, and the “omega” coefficient used in the analysis of agricultural trade reforms. The effects on the economic incentives for land conversion were measured as the land rent changes under forestry and under competing agricultural use that resulted from counterfactual policy scenarios. The results show the critical role of trade liberalization policies in creating the necessary economic incentives for the private participation in the expansion of forest plantations in Chile. The direct effect from the removal of the log export ban was estimated to be larger than the indirect effect of the general import duty reductions.