Fillable Printable Ninan IAAE 2009 Beijing Conference Paper

Ninan IAAE 2009 Beijing Conference Paper

SOCIAL COST-BENEFIT ANALYSIS OF SCIENTIFIC VERSUS

TRADITIONAL SHRIMP FARMING: A CASE STUDY FROM INDIA

Poulomi Bhattacharya

National Council of Applied Economic Research

New Delhi 110 002

INDIA

Email: bpo[email protected]

and

K N Ninan

Institute for Social and Economic Change

Bangalore 560 072

INDIA

Email: [email protected]

Contributed Paper Prepared for Presentation at the International Association of

Agricultural Economists’ 2009 Conference, Beijing, China, August 16-22, 2009.

copies of this document for non-commercial purposes by any means provided this

Abstract

This paper attempts a social cost-benefit analysis of scientific versus traditional shrimp

farming in West Bengal, India. Using primary data, the paper shows that although

intensive or scientific shrimp farming yields high returns as compared to traditional

shrimp farming, when the opportunity costs and environmental costs of shrimp farming

including disease risk are accounted for, scientific shrimp farming loses its advantage. In

fact sensitivity analysis shows that if expected benefits were to fall short by 15% and

costs rise by a similar proportion, scientific shrimp farmers report higher losses than

traditional shrimp farmers. But large traditional shrimp farmers continue to report

positive net returns. These results are also most pronounced for small and marginal

scientific shrimp farmers. Further if the probability of disease risk is also accounted for,

scientific shrimp farming reports significant losses whereas traditional shrimp farming in

most cases shows positive net returns. In the light of the high social and environmental

costs, and risks, this paper questions the rationale behind promoting intensive or scientific

shrimp farming, especially among small and marginal holdings as an income-generating

activity or poverty alleviation measure. It also suggests that policy makers need to factor

in sustainability concerns while formulating policies to promote intensive shrimp

farming.

Key Words: Shrimp Farming; Social Cost-Benefit Analysis; Net Present Value, Benefit-

Cost ratio; Environmental costs, Opportunity cost; Risk

JEL classification: Q22, Q51

Social Cost-Benefit Analysis of Scientific versus Traditional Shrimp Farming

A Case Study from India

Introduction

Shrimp has emerged as an important item in world seafood production and trade,

accounting for about 20 and 30 per cents respectively. Realising its potential for growth

and income, and especially in earning foreign exchange, many Asian countries such as

Taiwan, Indonesia, Thailand and India have promoted shrimp farming involving

intensive application of chemicals, fertilisers and artificial feeds to boost shrimp output.

Evidences from Thailand and India suggest that the net income from shrimp is more than

ten times that from paddy and groundnut (Cf. Flaherty and Vandergeest, 1999; Selvam

and Ramaswamy, 2001; Reddy et al, 2004). This, however, does not account for the

adverse social and environmental costs of shrimp farming such as the destruction of

mangroves, conversion of agricultural land into shrimp ponds, salinization of nearby

agricultural lands and aquifers, deterioration of quality of groundwater, irrigation and

drinking water in the vicinity of shrimp ponds, etc.(Primavera,1991;

Pillay,1992;Rajalakshmi,2002). Moreover, inappropriate and excessive use of chemicals,

fertilizers and feed makes the pond soil acidic and unsuitable for any further use

(agriculture/fisheries) at least in the short run. This leads to the problem of irreversibility

(Krutilla and Fisher, 1985) of environmental damage created by a particular economic

activity. The intensive use of such inputs also makes shrimp farming vulnerable to

disease outbreaks and financial risks as witnessed in the mid-nineties which led to a

slump in world shrimp production.

Unlike scientific shrimp farming which relies on chemicals, fertilizers and artificial

feeds to sustain shrimp production, traditional shrimp farming which relies on natural

feeds and other environmentally less harmful practices is assumed to be more sustainable

(Table 1). Studies that examine the comparative economics of different shrimp farming

systems have, however, focused exclusively on analysing their profitability, to the neglect

of their long term social and environmental consequences (Cf. Shang et al, 1998;

Usharani et al, 1993; Viswakumar, 1992; Jayaraman, 1994). This paper, therefore,

attempts a social cost-benefit analysis of scientific versus traditional shrimp farming in

West Bengal, India by accounting for the opportunity costs of shrimp farming in terms of

the foregone paddy benefits, environmental costs, and the probability of risks due to

diseases. Such analysis would also be helpful to address how far the extension of higher

intensity shrimp farming among the small-scale household level shrimp farmers is

justified from a long term perspective.

Objectives

In the light of the above the specific objectives of the study are as follows:

1. To analyse the comparative economics of scientific versus traditional shrimp

farming.

2. To attempt a social cost-benefit analysis of scientific versus traditional shrimp

farming both excluding and including the opportunity cost in terms of the

foregone paddy (rice) benefits as well as the cost of damages paid to farmers

adjoining shrimp farms due to the negative externalities caused by shrimp

farming.

3. To analyse the net benefits from scientific versus traditional shrimp farming after

accounting for the probability of disease and other risks.

Data and Approach

The study is based on an in-depth survey of 208 shrimp farmers, i.e.100 scientific and

108 traditional shrimp farmers from West Bengal, which accounts for major share of

shrimp area and output in India. Two districts, North 24 Parganas and East-Midnapur

where traditional and scientific shrimp farming are predominant, and one block from

each district, namely, Sandeshkhali –II and Khejuri were purposively selected for the

survey. From each block two village (Gram) panchayats have been selected randomly to

choose the households for the survey. Stratified random sampling method has been used

to select the shrimp farming households, covering different strata of holdings. The

reference year for the study is the shrimp culture year 2004-2005.

Table 1: Characteristics of Traditional and Scientific shrimp farming

Traditional shrimp farming Scientific shrimp farming

§ Fully tide fed

§ salinity varies according to monsoon regime

§ seed of mixed species from the adjoining

creeks and canals by auto stocking

§ Additional stocking of natural seeds

§ Dependence on natural food

§ Water intake and drainage managed through

sluice gates, depending on the tidal effects

§ Periodic harvesting during full and new moon

periods, collection at sluice gates by traps and

bag nets.

§ Ponds are manured and

fertilized, water filling and

exchange are done by

pumping

§ Selective stocking with

hatchery seeds @6 – 25 PL/m

.use of high nutritive feeds

§ Usage of aerators

§ Harvesting at the end of one

crop season, normally 120

days.

To undertake the social cost-benefit appraisal we have assumed a life span of 15

years. This is because in the study area the average age of a traditional shrimp farm

(Gheri) over which it yields satisfactory returns is 15 years. The adverse on-site and off-

site environmental consequences of shrimp farming depend upon the production system

adopted for shrimp culture. It is said that traditional shrimp culture causes lesser

degradation of the pond, and therefore shrimp can be cultured in the same piece of land

for a longer period of time. But the same cannot be said about scientific shrimp farming

which relies on artificial feeds and fertilisers that shrimp farmers tend to overuse

resulting in salinification of the shrimp pond, which makes the land unsuitable for shrimp

culture as well as agricultural use at least in the short run. However, as per local fisheries

experts the land used for shrimp culture in the study area can be reused for agriculture but

at reduced yields provided that it is kept fallow for two years and some land reclamation

cost is incurred. Alternatively scientific shrimp farming can be rotated with other low

yielding brackish water species such as tilapia. Keeping this in mind for our analysis we

have simulated two situations for scientific shrimp farming. In the first the shrimp

farmers are assumed to continue shrimp farming for the first five years

following which

in the sixth and seventh year the land has to be kept fallow. In order to revert back to

paddy production thereafter the farmer has to incur land reclamation costs such as filling

the excavated pond, applying lime and gypsum to nullify the effect of salinity, etc. From

the 8

to 15

years we assume that the farmer will resume paddy production but at a

reduced rate by 25%.

In the second situation scientific shrimp farming is rotated with

other fish culture such as tilapia as follows:

Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

S S AF S S AF AF S S AF AF S AF S AF

S: Shrimp farming, AF: Alternative fish culture

For assessing costs we have two sets of estimates – one accounting for only paid out costs and

the other all costs i.e. paid out costs plus the imputed value of owned inputs including family

labour. The conversion of agricultural lands or rice fields into shrimp farms has an opportunity

cost in terms of the foregone benefits from paddy. Besides as stated earlier, shrimp farming has

both on-site and off-site environmental costs. During the survey many paddy cultivators

having lands adjacent to shrimp ponds reported losses due to seepage of saline water into

their lands from adjoining shrimp ponds, especially in the case of scientific shrimp

farming. In the study area an internal compensation mechanism operates whereby the

shrimp farmers compensate the affected paddy cultivators either in cash or kind for the

environmental damages caused. Hence for our analysis we take note of the opportunity

costs (OCS) and compensation paid for environmental damage (CPA) caused by shrimp

farming. Thus for assessing benefits we consider three alternate scenarios: (1) excluding

both OCS and CPA, (2) including the opportunity cost of shrimp farming in terms of the

We have considered five years because, after five years of continuous shrimp farming majority of shrimp farmers have

stared incurring loss due to disease outbreaks if they continue to culture shrimp in the same land. The average age of

scientific shrimp farming depends on the extent of stocking density, water management practices, avoidance of anti-biotic

use etc. A well managed scientific shrimp ponds can give profit to the farmers for more than five years also. But in the

study area, the small sale farmers do not have enough training and resources for such pond management. Thus the

farmers get enough profit to continue shrimp culture only till five years if they continue to culture shrimp in the same land

without giving crop rotations.

A study by Selvam and Ramaswamy (2001) has estimated that the gross returns of shrimp farm affected paddy land is

25 % less than the normal paddy land, since similar reports are not available in our study area. We consider it as a proxy

for the estimated loss in paddy production in the shrimp affected area.

forgone benefits from paddy (OCS), but excluding CPA; and (3) including both OCS

and CPA.

To assess the economic viability of scientific versus traditional shrimp farming we have

used two measures, namely Net Present Value (NPV) and Benefit-Cost Ratio (BCR). The

costs and benefits are calculated on per acre basis and expressed in 2004-2005 prices. We

have used three alternate discount rates - 5, 8 and 10 per cents to check for the robustness

of our estimates

Apart from opportunity and environmental costs, shrimp farming is also exposed to high

financial and other risks. These may stem from a rise in input prices, or a decline of

shrimp prices in the international market, and the risk of disease outbreak. Hence, we

need to account for the possibility that expected benefits may not be realized or that costs

may rise. Thus as part of sensitivity analysis, we assume that costs may rise by 15 %, or

expected benefits may fall short by a similar proportion, and alternatively both a

reduction in expected benefits and a rise in costs by 15%. Furthermore, in order to

account for the risk of disease outbreak on shrimp output, we have also assessed the net

benefits from shrimp farming, using a disease-risk adjusted shrimp data series which is

derived as follows (see also footnote 3).

The expected disease-risk adjusted shrimp output of the i

shrimp farmer has been

calculated as

Yi (1-P

)

+ (1- a) Yi P

Where, Y

= shrimp output for the i

shrimp. P

is the probability of disease occurrence for the i

shrimp farmer. P

calculated as the number of times of disease occurrence in the past five years, if the shrimp farmer has experience of

shrimp culture equal to or greater than five years. In case of the shrimp farmer who has less experience in the shrimp

farming P

is calculated as the number of incidence of disease occurrence out of total years of farmers’ experience in

shrimp culture. Here, Where ‘a’ is the proportion of loss of total shrimp output due to disease. The value of ‘a’ could

not be estimated exactly due to lack of scientific data. As most of the scientific shrimp farmers are having a single crop

and a single harvest in a year, we consider a=1. This implies a complete loss of crop once the pond is affected by

disease. In the case of traditional farming there are multiple cropping and harvesting systems depending on the high

and low tide. Thus, even if one crop is affected by disease, a new crop cycle can be started in the next high tide after

disposing the disease affected shrimps and treating the pond water. So, in a year even if a shrimp farmer faces disease

outbreak, the entire yearly output would not be lost. It is assumed that a traditional shrimp farmer who has experienced

disease outbreak in a year loses 50% of the yearly shrimp output (a=0.5).

Comparative Economics of Traditional Vs. Scientific Shrimp Farming

Before attempting the social cost-benefit appraisal we may examine the comparative

economics of traditional versus scientific shrimp farming using a single year’s data. This

clearly shows that scientific shrimp farming is more profitable tha n traditional shrimp

farming (Table 2). The net income over total costs from scientific shrimp farming is

almost five times higher than from traditional shrimp farming taking all the farmers

together. The net income also varies positively with farm size in the case of both shrimp

farming systems. However, what is most significant to note is that while marginal

traditional shrimp farmers report profits even after all costs are reckoned, marginal

scientific shrimp farmers report negative returns.

Table 2: Costs and Returns from Traditional and Scientific Shrimp Farming across Shrimp

Farmer Categories (Rs. /acre)

Source: Primary survey.

Social Cost-Benefit Analysis

The NPVs and BCRs corresponding to the alternate scenarios depicted above are

presented in Tables 3, 4 and 5. Table 3 shows that excluding the opportunity cost of

shrimp farming in terms of the foregone paddy benefits (OCS) and the compensation paid

for environmental damage (CPA), the NPVs of scientific shrimp farming under the two

alternative scenarios, situations 1 and 2 are conspicuously higher than the same for

Traditional Shrimp Farming Scientific Shrimp Farming