(Reprinted from HKCER Letters, Vol.60, July/August 2000)
Property Rights in Marine Resources:
Some New Developments
Hannes H. Gissurarson
Tragedy of The Common
The seas cover seven-tenths of the face of the Earth. For mankind the important question as we face the new century is "How should we manage this enormous resource?"
Around the world we have a common problem of over-fishing, of over-utilization of what could be for many nations an important source of protein and food. Iceland also encountered this problem subsequent to the 1975 establishment of our 200-mile Exclusive Economic Zone (EEZ). As a nation of fisherman, Iceland was in a special position. We are the only developed nation in the world, more or less, dependent on fisheries. Seventy per cent of our commodity exports are from fisheries, and we have enormously fertile fishing grounds of herring, cod, haddock, and other species. Yet, soon after establishing the EEZ, we seriously encountered the problem of over-fishing. Herring stocks collapsed in the late 1960s. In 1981-83, the total catch of cod, our most valuable fish, dropped from 461,000 metric tons (MT) to 294,000 MT.
It was obvious, and marine biologists confirmed it, that the cod, the mainstay of our economy, was in great danger. Furthermore, economists observed that between 1945 and 1983 our fishing capital had increased by 1200%, the value of the catch had increased only by 300%. In other words, in 1983 our fishing capital was only one quarter as efficient as it was in 1945!
Following the extension of our EEZ, we had three detrimental phenomena at work: a decline of stocks, over-capitalization, and over-fishing. The problem of our fisheries was one of "common pool resources", one of "non-exclusive resources". This is known as "the tragedy of the common". We had a non-exclusive resource with open access. It was over-utilized because the user did not pay the costs of utilization. In the absence of property rights, nobody bore the responsibility for the utilization of stock. In such circumstances, nobody has a long term interest in maximizing value, and everybody rushes to fish as much as possible because if he does not do it, somebody else will. This is always the case with common pool resources.
In a nutshell, sixteen boats were harvesting the same catch as eight or even fewer boats. Eight boats would have made the most profitable utilization of the given fishing ground, but because there was open access, the number of boats multiplied and imposed costs on one another. In economic jargon, the problem was one of "externalities": the harmful effects that an act imposes on others.
There is a difference between the harmful effect of over-fishing and, for example, pollution. If I own a factory and dump my factory's waste into a river that you swim in, or that you drink from, the harmful effect is visible, and it will be stopped. It is a common resource problem. I dump my waste into the river because the river is not owned by anyone, and by polluting the river I receive benefits, but I incur no costs. Economists would argue that you should tackle this problem by developing property rights to the river. In such a case, somebody would be responsible for its use and could internalize the externalities. But here, the pollution destroys another person's amenity in the river so something is done about it.
Over-grazing is a different case. If you graze cows on a meadow which is common property then the costs of overgrazing will not be borne by those who make the decisions about grazing; users will invisibly continue to harm one another. Similarly, in the Icelandic fisheries over-fishing was a problem of vessel-owners harming one another because they did not have clear information about the costs of their activities. This analysis of the problem was much-discussed in Iceland in the late 1970s and early 1980s, when the harmful effects had become visible in the forms of over-capitalization and stock decline.
First Steps To A Solution
With regard to our EEZ, we realized that our first step in dealing with these problems must be to make the resource exclusive. For a few years we tried a kind of restriction different from the one we ultimately applied. Initially we tried to restrict output.
From 1977 to 1983 we restricted output in terms of "allowable-fishing-days". Instead of 365 fishing days, we would allow, say, 300 fishing days. When the total catch became too high we would reduce the number of "fishing days". We applied this system from 1977 to 1983. The number of fishing days went down year by year.
Obviously, this was not an economical way of restricting access. If you restrict access to 250 allowable-fishing-days two things will happen: firstly, the fleet will lie idle in port for more than a hundred days a year; its capital is put to no use. Secondly, when fishing is allowed people will rush to fish as much as possible. They will also continue to invest in fishing gear and fishing vessels until all profit has been destroyed. Thus excessive fishing and over-capitalization dissipate the possible rent from a very fertile resource.
In late 1983, we abandoned output restrictions and instead took to issuing Vessel-Catch-Quotas. For each year The Ministry of Fisheries set a Total Allowable Catch, say 250,000 MT. Individual vessel-catch-quotas were then issued to trawlers, boats and mid-sized vessels according to their catch history in the three years preceding the introduction of the system.
For example, if my trawler had harvested 1% of the total catch over the previous three years, I would then receive a quota of 1% of the Total Allowable Catch over the year 1984. This meant that in the year 1984, given that the total allowable catch was 250,000 MT, I could harvest 1% of it, 2,500 MT. In 1990, these quotas became transferable and the system became one based on Total Allowable Catches and individual transferable quotas. The Ministry of Fisheries, on the recommendation of marine biologists, sets the Total Allowable Catch in each commercially valuable species of fish in the Icelandic waters, and vessels receive individual quotas that they can either use or sell.
In a situation where sixteen boats were trying to harvest what eight boats could have harvested more profitably, making the quotas transferable enabled vessel owners to buy others out, thereby internalizing the externality. Inefficient quota-owners had an incentive to dispose their quotas, boats and gear to more efficient producers.
This is how we addressed the problem of overcapitalization and excessive fishing: by giving sixteen boats quotas that would be suitable for the full utilization of eight boats and allowed transfers in the hope that, sooner or later, the number of boats would be reduced to that number. This was the general idea of the Individual Transferable Quotas (ITQs).
But are ITQs "property rights"? Yes and no. Icelandic ITQs do have many features of property rights. Firstly, they are exclusive: only owners of ITQs may harvest in the Icelandic waters. Secondly, they are transferable: the more efficient will buy quotas from the less efficient; thus, market forces select who does the harvesting. Thirdly, ITQs are divisible. For example, I can decide to buy a 2,500 MT entitlement this year. Or I may choose to buy 200 more tons or sell 500 fewer tons. So, ITQs are totally divisible, which makes them flexible. Lastly, ITQs are also permanent. From 1990 the quotas were issued indefinitely. That was important. It meant fishermen had a vested interest in the long term maximization of the value of the resources.
We have long-term interest, divisibility, transferability, and exclusivity. All of these features contribute to the efficiency of property rights.
In the Icelandic case, the ITQs lack one or two features to make them fully efficient. One is that they are not really secure because there has been great resistance to defining and recognizing the ITQs as full property rights. Many critics in Iceland say the fishing grounds of Iceland should belong to the Icelandic nation as a whole, and we should not give a small group of people such an exclusive right. So, there is no real security of tenure for these rights. They might be taken away from the vessel owners, but that is unlikely as there are such strong interests attached to them. My main point about ITQs is that they are semi-property rights with many of the efficiency features of property rights.
As "property rights", ITQs have their own individual features. For a start, we might ask why the ITQs are not territorial, or why, as is done with land, we have not simply defined and enclosed this or that bit. One obvious reason is that fencing and branding are quite different in the sea. It is difficult to fence a large patch of the sea, and many fish stocks are migratory. In Iceland, the cod is basically found in well-defined local fishing grounds, but other fish swim in and out of Icelandic territorial waters. We found it more efficient to have a unified system rather than have territorial rights for some species and not for others. If you have in-shore fisheries like oyster, eel, lobster and shrimp, then you could have territorial rights. Such might simply be defined as the right to harvest as much as you wanted to within a given territory close to land. We could not do this; thus, ITQs are substitutes for such property rights.
Iceland and New Zealand are the only two countries with comprehensive ITQ systems, but they developed differently. Initially, New Zealand set their quotas in terms of tonnage wherein your right was to harvest, say, 2,500 MT a year indefinitely. In Iceland your right is to harvest a percentage of the Total Allowable Catch; it is a share quota and that makes it more efficient than a tonnage quota. A share quota ensures you have a vested interest in sensible fisheries management. It means you own 1% of the fish stock. Thus, you want to maximize its long-term profitability. However, if your quota simply entitles you to harvest 2,500 MT your only interest is in how to harvest it at the lowest cost. The two systems are very different, but New Zealand has now moved from a tonnage quota system to share quota system.
The Politics of Developing Property Rights
The development of property rights in fisheries may be compared with the development of common law property rights in a quite different area, but one with similar problems: radio frequencies. Let us say, I broadcast on FM 102. You do the same on 101.5 and disturb my broadcasts. In America in the 1920s, a system of property rights to the radio frequencies was slowly developing to solve this common-pool problem: the courts were recognizing "homesteading", a "first-come first-served" principle. Then, in 1928-29, Congress declared the radio spectrum public property. They took away the informal property rights that had been developing and gave out broadcasting licenses on a political basis. With regard to fishing rights, Iceland did not stop this evolution of property rights as a means of responding to a common pool problem.
The ITQ system began to operate in 1984, and essentially, it worked. In the herring fisheries the number of boats has fallen dramatically, while the catch has gone up. For cod and other ground fisheries the result is not as dramatic, but overall they have been rationalized. We now use less fishing capital to harvest each unit of value than sixteen years ago. Furthermore, the vessel owners are now great conservationists and fully support the Ministry of Fisheries in setting very cautious Total Allowable Catches. That is because they are beginning to regard themselves as owners of the resources: their mentality has changed from that of a hunter-and-gatherer to that of a farmer. So in the Icelandic fisheries, the value of fish stock, especially cod, has strengthened because of conservation and cautious management. In 1994-96, the Total Allowable Catch was just set at 155,000 MT, but now we are back to 250,000 MT, and in the future we may return to the historical high of 450,000 MT. Fish stocks are becoming stronger and fishing firms are more profitable. But what about the social and economic consequences?
There was a variety of fears attached to the advent of the ITQ system. There was a fear that the quotas would be transferred from the little fishing villages scattered around the country to the urban metropolis of Reykjavik, where around 70% of Icelanders live: that did not happen. If anything, there was a net transfer from the metropolitan area to the fishing villages.
A second fear over this introduction of property rights in fisheries, to this "enclosure" of marine resources, was that the ITQs would become concentrated in the hands of a few people. That has taken place, which is not surprising: that was the point of the exercise. You want to reduce the number of boats from sixteen to eight, and, as a result of buy-outs, the ten largest firms, which in 1984 held 24% of the quotas, now hold 37%. But many of these companies were formerly family-owned operations. They became public companies in order to raise funds to buy out quotas and now, as public companies, they have thousands of shareholders. So you can argue that the ITQs are now in the hands of more people than before.
We might ask why, if this system is so good, only two countries have adopted it! The answer is that it is very difficult to enclose such a resource in a peaceful manner. In Iceland there was huge opposition to the introduction of ITQs. The fishing villages closest to the fishing grounds wanted "output restriction"; they were closest to the fishing grounds so they would win any race to fish. Owners of small boats and part-timers, on the other hand, wanted "open access" and, as it turned out, there are still about 400 small boats exempt from the system. We are slowly integrating them, basically by bribing them into the system with quotas.
So to succeed in introducing ITQs you need a relatively homogenous environment, as in the herring fisheries where the ITQs were first adopted. We had boats of equal size and we simply allocated equally to each boat. In Iceland the negotiation costs were lessened by desperation; in the early 1980s people were quite concerned that the fish stock would collapse. This facilitated adoption of the system.
Auctioning Fishing Rights
Fifteen or sixteen years ago, the fisheries' problem in Iceland was losses. Now the problem is profits. Many people in Iceland are now saying, "Why should they enjoy this profit? Why were the quotas initially allocated to owners of fishing vessels? Why were they not auctioned off?" The ITQs were not auctioned off because the problem was that owners of fishing vessels were harming one another in the absence of property rights or restricted access. It would have been pointless to replace the harm they did to one another by over-capitalization with the harm done by government taxation.
The task at hand was to reduce the fishing fleet from sixteen to eight boats. What if we had done this through an auction? What of the eight boats which had to leave the industry? All their investments would have become worthless in a day! This would not have been a Pareto optimum, change of systems. When a system is Pareto optimum some or all are better off and none are worse off. No one was worse off by distributing quotas on the basis of catch history: neither those who sold their quotas and left the industry nor those who bought quotas and remained. But, in an auction, those who bid successfully would have been worse off; they would have had to pay the government for something they previously exploited free of charge. Those who were unsuccessful in the auction would lose all of their investment. Only the government would have been better off.
The ITQ Model
To sum up: fisheries management is a worldwide problem, especially in deep-sea fisheries harvested by a mechanized modern fleet. The ITQs, even if they are inferior to territorial rights, are the only way we can organize deep-sea fisheries in a tolerably efficient way. The Icelandic ITQ system certainly can be a model for such fisheries in other parts of the world.
Professor Hannes H. Gissurarson recently gave a luncheon address on the subject of "Property Rights In Marine Resources". A graduate of Oxford University, Professor of Politics at the University of Iceland and a Visiting Scholar at numerous universities including Stanford and UCLA, Professor Gissurarson also serves on the board of the Nordic Institute of Asian Studies. He was in Hong Kong to organize a conference on marine resources in the Asian region, a topic of local concern, as illustrated by China's current moratorium on fishing in the South China Sea. Here, as elsewhere, over-exploitation, illegal fishing, complex property rights problems, and a lack of clarity over international jurisdictions complicate the management of limited marine resources and typify the difficulties in structuring and enforcing marine property rights.
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