A fairly recent innovation in environmental policy--and one that is favored by a number of economists--payments for environmental services (PES) are beginning to be implemented in order to protect water sources in Latin America. In a typical scheme, compensation is given to people in the upper reaches of watersheds, who in return refrain from land uses that exacerbate flooding, seasonal water shortages, and other problems at lower elevations. The receptivity of rural households to PES varies considerably, depending much on individual circumstances and livelihood strategies. For people who engage only in subsistence farming, which was long the economic mainstay of the African, Asian, and Latin American countryside, giving up a few hectares that yield little output in exchange for an unvarying conservation payment can be appealing, even if that payment is modest.
In contrast, PES may be less attractive to rural dwellers with diverse sources of income. For example, numerous households in E1 Salvador have risen out of poverty by starting micro-enterprises, working in clothing factories, etc. Nevertheless, they do not abandon farming entirely. Since few of these households have savings accounts or deal in other ways with financial institutions, growing some of their own food is the way most of them deal with the downside risks of off-farm employment. Clearly, any payments directed toward households of this sort would need to reflect the de facto insurance value of resources needed for subsistence whenever there is a shortfall in off-farm earnings.
To clarify linkages between households' participation in PES initiatives and their livelihood strategies, we have carried out field research in a rural community in the Ecuadorian Andes, thanks to support provided by the US Agency for International Development and the US Department of Agriculture. Based on this research, we conclude that the poorest rural households depend heavily on subsistence farming and would also accept lower conservation payments than those demanded by other segments of the population, who have higher living standards because of off-farm work but who also deal with the risks of that work by growing some of their own food. If households that are non-diversified and poorer are actually paid less--as would make sense if environmental services are to be secured at least cost--then PES initiatives are not the best way to alleviate rural poverty, contrary to the claims of those who are enthusiastic about this approach to poverty reduction.
Conservation Payments and Risk-Aversion
Fluctuations in earnings have been shown to detract significantly from the well-being of low-income house-holds in the countryside, so a conservation payment that does not vary has obvious attractions. This is particularly true for people who are risk-averse and survive entirely on the food they produce. The minimum payment such people will accept in return for not cultivating a few hectares is directly related to the average value of the crops they expect to raise on that land--an average value that is quite modest on average. Actually, the minimum payment is less than the average value if output is variable (as it always is) and if the recipient is risk-averse, as rural households tend to be.
While much of the rural population in the developing world engages solely in subsistence farming, a large and growing segment has two or more sources of income and consequently tends to be less impoverished. The latter segment of the rural population predominates in many watersheds where conservation initiatives are being undertaken. These settings are not out of reach of cities and other market hubs, so opportunities exist to complement the production of one's own food with an alternative--such as earning wages or running a microenterprise.
Two observations can be made about these alternatives. One is fairly well known, which is that off-farm work usually pays better than subsistence production. …