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On the Economics of Multifunctionality and Sustainability

of Agricultural Systems

Werner Hediger Agricultural and Food Economics, Swiss Federal Institute of Technology, Zurich, Switzerland

October 2004

Abstract:

Despite agreement about the existence of multiple benefits of agriculture to society, there is

disagreement when it comes to policy implications. This can be explained by different

national characteristics and positions in agricultural trade, as well as by differences in

epistemological foundations libertarian and utilitarian moral philosophy upon which different

approaches of “multifunctionality” are based. In contrast, sustainable development involves a

broader and more complex ethic integrating multiple societal objectives and system

requirements. From a welfare economic perspective this results in a more comprehensive

approach than the traditional Paretean one which is exclusively based on individual value

judgements. Building on a comparison of these two approaches, it shows that the concepts of

multifunctionality and sustainability are not mutually exclusive. Rather, adequate

compensation of the non-market benefits of a multifunctional agriculture and promotion of

efficient resource allocation is a prerequisite for sustainable development.

Keywords: Multifunctionality, sustainability, agriculture, rural development, externalities,

welfare economics, moral philosophy, libertarian, utilitarian, sustainable

development, WTO, OECD, FAO.

JEL classification: B00, F02, Q01, Q10, Q18.

Multifunctionality and Sustainability 2

1 Introduction

Multifunctionality and sustainability are key concepts in the current debate about agricultural

policy reforms in many countries and on international platforms. Both concepts have

originally been formulated in a context of forestry, recognising the vulnerability of forest

ecosystems and the multiple benefits that can be sustained through adequate resource

management (Hasel, 1971), and been addressed in various forms in the resource economics

literature (e.g. Ciriacy-Wantrup, 1952; Solow, 1974; Hartwick, 1978; Hartman, 1976; Bowes

and Krutilla, 1989). Moreover, in recent years, the concepts of sustainability and

multifunctionality have also been translated into more general policy principles.

First, the concept of sustainable development has been established in Agenda 21 by the

plenary of the United Nations Conference on Environment and Development (UNCED) in

Rio de Janeiro, 1992, as the guiding policy principle for social and economic development.

Moreover, Agenda 21 aims at integrating sustainable development considerations with

agricultural policy analysis and planning, and calls for reviewing agricultural policy in the

light of the multifunctional aspect of agriculture, particularly with regard to food security and

sustainable development (Chapter 14 of Agenda 21). However, UN documents remain vague

with respect to the definition and operational content of both principles.

Second, the concept of multifunctionality emerged as an argument for including “non-trade

concerns” in the negotiations of the World Trade Organization (WTO) on agriculture.1 It

accounts for the fact that agriculture is an economic activity that, beyond its primary function

of supplying food and fibre, provides various non-market benefits to society. These comprise

a wide range of environmental benefits, such as

• recreational amenities and aesthetic values of the rural landscape,

• non-use values of biodiversity and habitat protection,

• intrinsic values of ecosystem and watershed functions,

socio-economic benefits, like

• food security, food safety, and animal welfare,

• rural employment and the viability of rural areas, as well as

• cultural heritage.

1 The term appears in Article 20(c) of the Uruguay Round Agreement on Agriculture (URAA), where WTO members have agreed that, in negotiating the continuation of the agricultural policy reform process after 1999, ‘non-trade concerns’ will be taken into account (Anderson, 2000: 476).


Altogether, this characterises the multifunctional nature of agriculture. It embraces a set of

non-market benefits that constitute potential sources of market failure and provides a

theoretical argument for government intervention.2 Nonetheless, there is disagreement about

the justification of government support to farmers and the choice of policy instruments. In

particular, the issues of rural employment and food security, as well as the question about

non-agricultural provision of rural amenities are controversially discussed (cf. Anderson,

2000; Bohman et al., 1999; Brunstad et al., 1995, 1999; Hodge, 1991; OECD, 2001, 2003;

Vatn, 2002).

Despite this controversy, the concept of multifunctionality has been adopted as a policy

principle by OECD Agriculture Ministers in 1998. It “recognises that beyond its primary

function of supplying food and fibre, agricultural activity can also shape the landscape,

provide environmental benefits such as land conservation, the sustainable management of

renewable natural resources and the preservation of biodiversity, and contribute to the socio-

economic viability of many rural areas” (OECD, 2001: 5). This can also be referred to as the

total economic value of agriculture, an environmental economic concept which applies to the

whole class of values that have a basis in human preferences, and integrates direct and

indirect use values, option values, existence values, and bequest values—including such

functions as economic security and community integrity (cf. Pearce and Turner, 1990).

From an economic perspective, these values must be taken into consideration by the decision

makers in order to achieve an economically efficient and socially optimal allocation of scarce

resources. However, this does not necessarily comply with the requirements of sustainable

development. The latter is a normative principle that calls for maintaining some suitably

defined aggregate of capital intact over time (Solow, 1974; Hartwick, 1978; Daly, 1991;

Pearce et al., 1994; Neumayer, 1999), and requires satisfaction of basic human needs and

compliance with some thresholds of ecosystem resilience (WCED, 1987; Khan, 1995;

Moffatt, 1996). To fully capture these values, a sustainability-based principle is required

which integrates values based on aggregate individual preferences with social, ecological and

economic system requirements of sustainability, and which anticipates potentially irreversible

changes at the levels of criticality that confine the opportunity space for sustainable

development (Hediger, 2000).

2 Earlier publications that are relevant in this context—but not using the term “multifunctionality”—are Gardner (1977) who identified at least four joint benefits of preserving agricultural land, and Bromley and Hodge (1990) who used the term “countryside and community attributes” in their analysis of alternative property rights regimes.


Building on this background, the aim of the present article is twofold. First, it aims at

explaining from an economic point of view the differences that appear when it comes to the

issue of policy implication. Second, it aims at clarifying on a theoretical basis the relationship

between the concepts of multifunctionality and sustainability of agricultural systems. To this

end, the paper is organised as follows.

First, different positions and views about the role of agriculture (multifunctionality, non-trade

concerns, and agriculture’s evolving role in the development process) are investigated in

Section 2 with respect to their epistemological foundations in different strands of humanist

moral philosophy. Then, a conceptual framework of integrating various concerns of

sustainability and development is presented in Section 3. Together with the framework of

Paretean welfare economics, this constitutes the analytical framework for investigating the

welfare relevance of the multiple functions and roles of agriculture and the relationship

between the concepts of multifunctionality and sustainability in Section 4. Finally, Section 5

concludes.

2 Epistemological foundations of different approaches

Despite consensus about the existence of multiple benefits of agriculture to society, there is

disagreement when it comes to policy implications. This can be explained by different

national characteristics and different positions in agricultural trade, as well as by different

views of multifunctionality and non-trade concerns.

The economic analysis of Peterson et al. (2002) predicts that small countries with non-market

outputs from agriculture support a positive land subsidy, which, regardless of amenity

benefits, is needed to correct for the distortions created by pollution-control policies. In

addition, Peterson et al. conclude that subsidies are most likely to be supported by

economically large, densely populated importing nations, while subsidies are most likely to be

opposed by sparsely populated exporters. In addition, Blanford et al. (2003) emphasise that

the public in wealthy countries is becoming increasingly aware of the non-commodity outputs

and attributes associated with agriculture, and that this may rapidly overtake food as the key

concern. They conclude that “it is possible to address important nontrade concerns in ways

that are consistent with the further liberalization of agricultural trade in the GATT/WTO

framework” (Blanford et al., 2003: 672). However, this is complicated by differing views of

multifunctionality and the ambiguity and lack of precision in the multifunctionality debate,

which continues to be an obstacle in WTO negotiations (Paarlberg et al., 2002).


Yet, the divergence in the debate on multifunctionality and the inclusion of non-trade

concerns in international negotiations is also a consequence of epistemological differences.

For Simpson and Schoenbaum (2003: 402), “the problem of incorporating non-trade concerns

into agricultural negotiations is their vagueness, largely because of the wide variety of

concerns that cut across so many different countries.” Moreover, they emphasise that this

vagueness3 “forces widely dispersed countries or groups of countries to prepare issues, target

desired outcomes, and prepare and execute strategies to come up against a well-supported,

established organisation (WTO) in one city (Geneva) in which the agreement underlying

current rules and quantitative levels (URAA) is accepted as the floor or minimum of trade

liberalisation.” In other words, this problem is partly related to the degree of organisation and

political power. But, it also relies on different foundations upon which the concept of

multifunctionality, as advocated by the OECD, and the inclusion of non-trade concerns in the

WTO framework are based. As summarised in Table 1, the different positions taken by the

OECD and WTO cannot be solely be explained with differences in terminology. Rather, they

are based on different ethical foundations that are related to the schools of utilitarian and

libertarian moral philosophy, respectively.4

2.1 The positions of WTO and OECD from a moral-philosophic perspective

The fundamental difference between these two distinct schools of humanist ethics is the

consideration of consequences and outcomes of economic activity and policy intervention. On

the one hand, libertarians are entirely opposed to concepts of justice based on consequences

or outcome. Rather, the central axiom of libertarianism is the fundamental inviolability of

individual rights, which “asserts the primacy of processes, procedures and mechanisms for

ensuring that fundamental liberties and rights of individual human beings are respected and

sustained” (Perman et al., 2003: 81). From this point of view, fairness or justice requires

freedom of individual choice and guaranty of property rights. Government action should be

limited to the establishment and maintenance of the institutions required to support free

contract and exchange.

On the other hand, utilitarism is a consequentialist philosophy which is based on the ethical

premise that “the consequences and outcomes of an action determine the moral worth of the

3 Emphasis added. 4 See For an overview of moral philosophies and ethical foundations for environmental economics, see Perman et al. (2002, ch. 4). For further readings in the context of environmental conservation and sustainable development, see Tisdell (1991) and Moffatt (1996).


action” (Perman et al., 2003: 82). It involves two facets of concern: (a) the satisfaction of

individual preferences, or how an individual derives pleasure and happiness; and (b) the

linkage between the individuals’ utilities and social well-being, or social welfare. Hence,

utilitarian moral philosophies are closely related to modern welfare economics that is likewise

concerned with issues of efficiency and equity. In this sense, utilitarian economists think

about public policy and government intervention in terms of correcting market failures (e.g.

due to externalities) in order to reduce or eliminate inefficiency in allocation, and with respect

to analysing measures intended to redistribute income or wealth so as to support some concept

of fairness or distributive justice that aim at maximising social well-being.

Table 1: The epistemological anchoring of different views of “multifunctionality”

Organisation: WTO OECD FAO

Terminology: Non-trade concerns Multifunctionality Roles of agriculture

• Establishment of a fair and market-oriented trading system

• Establishment of policy principles to achieve multiple objectives in the most cost-effective manner

• Guidance to policy decisions for improved development strategies

• Justification of policy measures

• Definition of common rules and criteria for market access and trade liberalisation

• Definition of efficient policy measures

• Verification and validation of conclusions with regard to policy reforms

• Comprehensive policy analysis

• Assessment of the role of agriculture at different states of development

Main objectives and main themes:

• Free choice and market access

• Elimination / reduction of trade distortions

• Economic efficiency (cost effectiveness)

• Joint production, externalities and public good aspects

• Information and tools for guiding policy

• SARD: Sustainable agricultural and rural development

Guiding principles: Emphasis on procedures, mechanisms and rules

Emphasis on outcome and characteristics

Primarily descriptive, but policy-oriented

Foundation in moral philosophy: Libertarianism Utilitarism “Ethics of sustainable

development”

Building on this background, we can classify the positions of the WTO and OECD in the

multifunctionality debate as libertarian and utilitarian, respectively.


On the one side, the WTO’s long-term objective, as stated in Article 20 of the Uruguay Round

Agreement on Agriculture (URAA) and in Article 13 of the WTO Ministerial Declaration

from the Doha Conference, is “to establish a fair and market-oriented trading system through

a programme of fundamental reform encompassing strengthened rules and specific

commitments on support and protection in order to correct and prevent restrictions in world

agricultural markets” (cf. Simpson and Schoenbaum, 2003: 401). This is clearly focused on

rule setting an maintaining the mechanisms that assert free trade and market access.

On the other side, the OECD approach is outcome oriented, regarding multifunctionality as “a

characteristic of the production process that can have implications for achieving multiple

societal goals” (OECD, 2001: 6). It devotes explicit consideration to the production

relationships underlying the multiple outputs of agriculture (jointness in production), and to

the externality and public good aspects of these outputs. From a welfare economic

perspective, the latter are generally considered as sources of market failure, and therefore may

constitute an argument for targeted government intervention, saying that (OECD, 2001: 9)

“The policy context for the work on multifunctionality is provided by Member countries’ commitments to further progressive reductions in domestic agricultural support and border protection, and a shift away from policy measures that encourage higher levels of food production and input use, towards measures that are less distorting of markets and trade. At the same time, there is a growing awareness of the positive and negative non-commodity outputs of agriculture among rural and urban citizens, and governments are increasingly looking for ways to ensure that the non-commodity outputs of agriculture correspond in quantity, composition and quality to those demanded by society.”

This involves the welfare economic objective of reducing market failure and trade distortions,

and selection of the most adequate policy instruments (OECD, 2001: 10)

“The challenge for the work on multifunctionality is to test the validity of the standard policy recommendation against the additional aspects introduced by multifunctionality: the simultaneous consideration of the various positive and negative effects of agriculture, and their joint production, externality and public good aspects. The eventual goal is to establish principles of good policy practice that permit the achievement of multiple food and non-food objectives in the most cost-effective manner, taking into account the direct and indirect costs of international spillover effects.”

In contrast to the libertarian position of the WTO, the OECD is not primarily focused on

rules, procedures and mechanisms. Rather, with the emphasis on positive and negative effects

(consequences or outcomes) of agriculture, the OECD approach fits within the tradition of

utilitarian welfare economics.


The question remains whether and to what extent the multifunctional characteristic of

agriculture justifies government intervention. This is addressed in the next section. But first,

we look at an additional approach to understanding the multifunctional role of agriculture.

2.2 The FAO approach to the roles of agriculture and sustainable development

Besides the WTO and OECD, a third position in the international policy debate on the

multiple benefits from agriculture is taken by the United Nations Food and Agricultural

Organization (FAO) which puts emphasis on “the roles of agriculture” (ROA), rather than

using terms like multifunctionality and non-trade concerns. The objective of the ROA project5

is to “provide policy-makers with specific insights, tools and information with which to

analyse the roles of agriculture and the related policy implications in order to pursue

sustainable agricultural and rural development (SARD).” The project aims at assessing the

importance and roles of agriculture in different contexts of development and to better answer

policy-relevant questions for developing countries.

As a primarily descriptive approach, FAO approach cannot be attributed to any particular

school of ethics. However, given its pursuit of sustainable development, it implies a

normative concept which involves social choice about issues of intra- and intergenerational

equity, and a value principle that gives explicit weight to critical levels of basic needs and

ecosystem integrity (WCED, 1987; Hediger, 1997, 1999). Moreover, it engages a concept

which is widely used to defend greater bureaucratic intervention and protectionist trade

policies (Beckerman, 2003). Correspondingly, the position of the FAO does not fit within the

tradition of conventional humanist and naturalist moral philosophies (cf. Perman et al., 2003:

79 ff.). Rather, it is based on a broader and more complex ethical position of sustainable

development which integrates concerns about equity (fairness) within and between

generations, the satisfaction of human needs and aspirations for a better life, as well as moral

imperatives for resource and ecosystem protection (WCED, 1987; Norton, 1992, 2003;

Toman, 1992). This involves societal value judgements that determine the levels of safeguard

as an integrated part of public decision making and the formation of social values. Moreover,

sustainable development is a principle which involves “care of posterity” (Perman et al.,

2003: 2) and, by definition, requires avoiding wasteful uses of scarce resources. It must

satisfy requirements of intergenerational efficiency and equity (Page, 1997), while avoiding

dictatorship of both the present and the future (Chichilnisky, 1997). From this point of view,

5 FAO: Roles of Agriculture Project (ROA). The Socio-Economic Analysis and Policy Implications of the Roles of Agriculture in Developing Countries (http://www.fao.org/es/ESA/Roa/default .htm, 17.10.04 20:30 GMT+2).


the concept of sustainable development, and thus the approach of the FAO to the roles of

agriculture are based on an ethical position that integrates and extends utilitarian and

naturalist moral philosophy into an “ethics of sustainable development”.

3 Concepts of sustainability and sustainable development

Sustainable development is a normative concept which involves trade-offs among various

objectives and which satisfies the requirements of sustaining the integrity and viability of the

overall system. Sustainable development implies the ethical imperative of equity within and

between generations which goes beyond the mere satisfaction of basic human needs. It aims

at socio-economic prosperity and environmental integrity. It does not imply a fixed state of

harmony which can be defined by a set of stationary-state criteria of sustainability. Rather

sustainable development is a process of change that respects the integrity of the overall

system. According to the WCED (1987: 46), it is defined as “a process of change in which the

exploitation of resources, the direction of investments, the orientation of technological

development, and institutional change are all in harmony and enhance both current and future

potential to meet human needs and aspirations.” This involves a continuous process of

evaluating trade-offs among the various objectives of society—that are usually classified into

social, ecological and economic—, and taking into account boundaries of the social utility

space beyond which these trade-offs are not defined.

As advocated by the WCED (1987), sustainable development requires that the goals of

economic and social development must be defined in terms of sustainability. This has resulted

in different notions of sustainability that are based on different conceptions of capital,

different models and value judgements (cf. Daly, 1991; Common and Perrings, 1992; Pearce

et al., 1994; Pezzey, 1997; Hediger, 1999; Neumayer, 1999; Perman et al., 2003). They

mainly reflect partial and ideological views on the environment and economic development,

while the social dimension and basic human needs are frequently neglected in ecological and

economic concepts of sustainability. Hence, conventional models and notions of sustainability

are not sufficient to comprehensively addressing the core idea of sustainable development as

an integrative principle of evaluating trade-offs across various societal objectives (cf. Barbier,

1987; Munasinghe, 1993; Khan, 1995).

On the objective side, we can integrate the various issues of sustainable development into a

social welfare function which is based on an aggregate of individual preferences with respect

to the current state of development of economy, society and the environment (Hediger, 2000).


In an aggregate form, we can formally represent social welfare U as a weighted sum of

individual:6

∑=

α=N

iiii SQMyuU

1),,,(

This implies that, for each individual (i = 1,…,N), utility ui is defined as an increasing

function of individual income yi, macro-economic performance M, environmental quality Q,

and social capital S.7 In addition, the individual utility weights αi are fundamental for

determining a social optimum that integrates economic efficiency and social equity

requirements. They constitute a normative element which may be expressed in democratic

decision processes, empirical investigations, or group decisions in a participatory approach.

Building on this formal approach, different terms of sustainability can be identified (Hediger,

2000), and investigated from a welfare economic perspective. First, weak sustainability

proves to be the most comprehensive concept which entails ecological, economic and social

principles of strong sustainability as special cases. It implies trade-offs and requires that the

total value of social welfare should be non-declining over time (dU/dt ≥ 0). Second, it shows

that weak sustainability is not sufficient for sustainable development. Rather, from an equity

point of view, Pareto improvement and thus effective compensation of losers in the process of

change may also be necessary for sustainable development (dui/dt ≥ 0, for all i). In addition,

special attention must be devoted to critical levels of resilience and basic needs, since they

cannot be traded-off against other concerns without threatening survival viability of the

overall system.

Altogether, this results in a welfare economic approach that is based on a differentiated

concept of capital and integrates them with a set of minimum system requirements of

sustainability into “sustainability-based social value function” (Hediger, 1999, 2000).

< Figure 1 about here >

As illustrated in Figure 1, total capital is considered as an aggregate of overlapping

compartments of economic, natural and social capital, that are defined as follows:

6 This is broader in conception than the view of the OECD (2001) that merely regards sustainability as a resource-oriented concept, a position which has been taken by the IUCN (1980) in their formulation of a World Conservation Strategy. This is much narrower in scope than the conception of sustainable development that has been provided by WCED (1987), which involves a subtle but extremely important transformation of the ecologically based concept of physical sustainability and nature conservation to the context of social and economic development (Adams, 1990; Hediger, 1997). 7 A definition of different components of capital is given below.


- Economic capital (K) is defined as an economy’s generalised productive capacity; this is,

the potential to generate income (Y). It consists of manufactured capital, immaterial assets,

and natural resources that are harvested or developed for use in economic transformation

processes, and also determines the macro-economic performance (M).

- Natural capital is defined as the natural resource base of a geographic area. It consists of

ecosystem capital and stocks of non-renewable resources.

- Ecological capital, or ecosystem capital (Q), consists of the stocks of renewable resources

(both used and non-used in economic processes), semi-natural and natural land, as well as

ecological factors that are essential for the functioning of ecosystems. It determines the

overall quality of the environment in an area.

- Social capital (S) refers to a society’s capability to deal with social, economic and

environmental problems, and to be active in shaping the development of the overall

system (cf. Berkes and Folke, 1994).

In addition, the “sustainability-based social value function” anticipates potentially irreversible

changes at the boundaries of the opportunity space for sustainable development. The later are

the critical limits beyond which the functioning and viability of the overall system would be

endangered. These limits are defined in terms of

- thresholds of ecosystem resilience (critical ecological capital),

- minimum income to satisfy basic human needs (poverty line),

- a minimum level of cohesion (critical social capital) beyond which the social system risks

collapse, and

- maximum levels of unemployment and inflation above which the socio-economic system

may abruptly change.

In total, this provides the conceptual and analytical framework of an integrated method and

implicit balance across different approaches. It gives priority to aggregate preference

maximisation for marginal changes within the opportunity space for sustainable development,

as defined above. In contrast, more conservative approaches, such as the safe-minimum

standards of conservation (Ciriacy-Wantrup, 1952; Bishop, 1968; Farmer and Randall, 1998),

will be dominant if the system moves toward any boundary of the sustainability space. In

addition, it must be emphasised that sustainable development can only be realised within the

boundaries of the opportunity space which is confined by the above limits of criticality. “If

these conditions are not satisfied, an adjustment process is required before sustainable


development can be feasible. In other words, priority must be given to a transition process for

initial states outside the sustainable development region” (Hediger, 2000: 491). This may

involve structural changes, especially with regard to manufactured capital, knowledge

accumulation and social organisation.

Finally, we have to remind that economic efficiency—the avoidance of wasteful uses of

scarce resources—is a necessary condition for sustainable development as well as for

maximising social welfare. This particularly implies the requirement of internalising external

costs and benefits and correcting other sources of market failure. However, the question

remains about the relationship between multifunctionality and sustainability.

4 Multifunctionality, social welfare and sustainable development

According to the working definition proposed by the OECD (2001), multifunctionality is a

characteristic of agricultural production processes that can have implications for achieving

multiple societal goals. The latter are, as presented in the previous section, the most suitably

addressed in form of a social welfare function which allows for evaluating trade-offs across

the various issues of concern. This indicates a common ground of the concepts of

multifunctionality and sustainable development in the body of welfare economics. Hence, the

key issue appears to be the welfare relevance of the multiple functions and roles of

agriculture. These shall be investigated from a traditional Paretean perspective of economic

efficiency, as well as from a broader system perspective of sustainable development. To this

end, we recall the multiple functions and benefits provided by agriculture to society, that have

been listed in Section 1.

First, agriculture does not only result in social benefits from the production of food and fibre,

whose marginal values are in principle reflected in market prices. It modifies the natural

environment for the purpose of enhancing the flow of food and fibre from land resources to

society (Miranowski and Cochran, 1993). This results, on the one side, in non-marketed

benefits from the environment such as amenity and recreational values of cultural landscapes.

On the other side, agricultural practices are, in many places, also source of negative impacts

upon society and the environment. In middle and high latitudes, major environmental

problems caused by agriculture are loss of biodiversity and natural habitats, impacts of crop-

protection chemicals, air, water and soil pollution, as well as soil erosion (Mannion, 1995).

From a welfare economic point of view, these effects are referred to as positive and negative

externalities, respectively, that are Pareto relevant whenever some individual’s utility or

production relationships include real (non-monetary) variables, whose values are chosen by


others without adequate compensation between the victims and beneficiaries of these effects

(Baumol and Oates, 1988).

Classical examples of positive externalities from agriculture to society are the recreational,

amenity and aesthetic values of the rural landscape. Classical examples of negative

externalities are rural water pollution and odour from manure storage and application. Based

on a static framework, the presence of these effects can be used to justify subsidies to farmers

for the provision of positive externalities, but at the same time calls for charging them a fee to

internalise the external costs of their activity.

In a dynamic context, which is particularly relevant for the evaluation from a sustainable

development perspective, the classification into positive and negative externalities and the

related flows of payment between society and farmers is no longer straightforward. Apart of

so-called flow externalities (the above case), one must also take into account the related effect

on environmental quality (ecological capital).8 In the latter case, the sign may change,

depending on the dynamic effect upon the overall quality of the environment. To judge the

overall effect, one must also take into account intrinsic values of ecosystem and watershed

functions that are essential for determining the total economic value (cf. Pearce and Turner,

1990; Munasinghe, 1993). Besides the economic valuation, this requires an improved

understanding of ecosystem dynamics that play an important role in the formation and

regeneration of ecological capital (so-called functional benefits). In addition, the orientation

of payments may change with the assignment of property rights and definition of reference

levels against which deviations are to be penalised or rewarded (Bromley, 2000).9

Table 2 gives an overview of the various non-food benefits of agriculture in relation to their

relevance from both a Paretean as well as sustainability perspective. In addition, it indicates

additional effects on the economy that are usually not considered as welfare relevant. For

instance, the degradation of soil quality has on-site effects on future production and farm

income. Hence, it is primarily a problem of intertemporal resource management, while off-

farm effects include consequences of sedimentation and surface water pollution (cf. Hediger,

2003).

8 Following the definition in Section 3, we can use environmental quality and ecological capital as synonyms. 9 This also explains the ambiguous sign of the Pareto-relevant externalities with regard to biodiversity and habitat protection, which cannot be judged without an adequate reference level (cf. Table 2).


Table 2: Welfare relevance of multifunctional benefits from agriculture

Pareto-relevant

externalities

other economic functions and

spill-over effects

relevance for sustainable

development

environmental benefits:

• rural landscape positive

impact on ecological capital

• biodiversity and habitats positive / negative impact on

ecological capital

• ecosystem and watershed functions: functional benefits impact on

ecological capital

- rural water quality negative


- gaseous emissions negative impact on

ecological capital

- soil quality production benefits; intertemporal efficiency


socio-economic benefits:

• food security

household income, production capacities, functioning markets

economic capital; basic needs

• food safety public health → social capital

• animal welfare positive / negative

demand for certain attributes (goods/production);

public good aspect of information (e.g. labels) welfare of non-

human beings (?)

• rural employment labour market; migration

economic stability; social capital

• viability of rural areas

• cultural heritage

spill-over effects (functional benefits)

impact on social capital

While the treatment of environmental effects of agricultural activity is quite clear from a

welfare economic point of view, the analysis is much more complicated when it comes to the

so-called socio-economic benefits of agriculture. This may partly explain why these issues are

subject to controversy in discussions about multifunctionality and non-trade concerns.


As Table 2 shows, these effect my not in general be judged as welfare relevant from a

Paretean point of view. Given the debate and concern expressed in various countries, animal

welfare may constitute the only case of a Pareto-relevant externality in this category. In this

case, a clear point of reference might be required to judge on whether a farmer’s behaviour is

to be considered positive or negative.10 However, government intervention is not necessarily

required to internalise externalities that are related to animal welfare. Presuming consumers’

willingness-to-pay for certain attributes of food products and production processes, the quality

benefits from food safety and animal welfare could in principle be internalised through

market prices. This however requires adequate information, for instance in from of labels, that

can be established through quality control and arbitrage between producers and consumers,

and result in adequate price differentiation in food markets.

Food security is a major issue that is subject to disagreement, and which needs to be treated

differently for industrialised and developing countries. In the latter, food security—that is, a

country’s capacity to ensure that everyone always has access to the minimum supply of basic

food necessary for survival—is a fundamental concern and essential for sustainable

development. It requires a certain level of household income, adequate production capacities,

and well-functioning markets for food products.

In contrast, in higher developed countries, the concern is poverty alleviation and the

satisfaction of basic needs. Rather, the concern is related the risk of an extreme embargo

which would make a country, over a certain period, fully reliable on domestic food

production. Anderson (2000) argues that in such a case consumers could change their diet to

avoid excessive caloric shortfalls. In addition, he points out that “in an extreme embargo

situation fuel and chemical imports also would halt, so overall domestic food production

could shrink significantly given the role of such products in providing energy, fertilizer and

pesticide inputs for agriculture” (Anderson, 2000: 483). Moreover, he argues that “the skills

of the farmers, having used input-intensive techniques for decades, would be debased in such

an input-deprived environment.” Correspondingly, diversification and investment in

knowledge to produce with less input-intensive techniques seem to constitute an important

strategy for sustainable development and insurance against national food shortenings. In this

10 The treatment of animal welfare would be even more problematic from a welfare economic and sustainability point of view, if it should come to an inclusion of non-human beings in the overall value function that is required for evaluating trade-offs. In this case, the scope of analysis and decision making would clearly go beyond social welfare. Otherwise, minimum conditions of animal welfare could be included in the sense of a Paretean constraint imposed on human activity.


case, the role of government would be in subsidising agricultural research and education that

both are public goods.

Given the declining role of agriculture in rural employment and population, its contribution to

social welfare in developed countries is highly questionable. In this context, the labour market

and migration to other sectors and urban areas have and will continue to play an important

role. With respect to sustainable development, the crucial issue in this context is the loss of

social capital (including human capital, social cohesion and safety nets) as a consequence of

migration to other areas. In a dynamic world, this can also have negative effects on the local

labour market and overall production capacity of rural areas, as well as on their viability

which together with the cultural heritage is an asset of tourism in such areas. Thus, population

decline in rural areas has negative effects on both economic and social capital. Hence,

changes in rural employment and the viability of rural areas in industrialised must be

evaluated from an integrated sustainability perspective of territorial development, rather than

restricted to the roles of agriculture.

Altogether, it shows that agriculture’s contributions to society might be valued differently in a

welfare economic framework of sustainable development, than from a traditional Paretean

perspective. This implies that multifunctionality and sustainability are not mutually exclusive

concepts. Rather, the elimination of market failures that are related to agricultural activities is

a prerequisite for sustainable development.

5 Conclusion

Despite general agreement about the existence of multiple benefits of agriculture to society,

there is disagreement when it comes to policy implications. This can partly be explained with

different national characteristics and positions in agricultural trade. From a conceptual point

of view even more important is the difference in epistemological foundations upon which the

different positions of the WTO, OECD and FAO are based.

With the objective of establishing a fair and market-oriented trading system, and the emphasis

on the importance of common rules and criteria for market access and trade liberalisation, the

WTO framework for the inclusion of non-trade concerns clearly belongs to the school of

libertarianism. In contrast, the OECD approach to the multifunctionality of agriculture which

aims at establishing policy principles to achieve multiple objectives in the most cost-effective

manner, is clearly outcome oriented, and thus utilitarian. Finally, the FAO approach to the

Roles of Agriculture project seems to be purely descriptive at first sight. However, aiming at


policy guidance to pursue sustainable agricultural and rural development (SARD), it is also

normative and implies an ethical framework which is broader in scope and conception than

traditional humanist and naturalist moral philosophies. This can be referred to as an “ethics of

sustainable development”.

The latter is a normative concept that involves concerns of equity within and between

generations, satisfaction of human needs and aspirations for a better life, as well as moral

imperatives for resource and ecosystem protection. Moreover, as a continuous process of

change, it also implies a continuous evaluation of trade-offs among different societal

objectives. Formally, this is the most usefully integrated in the framework of a welfare

economic approach that is based on a differentiated concept of capital and integrates them

with a set of minimum system requirements of sustainability. Altogether, this provides a

welfare economic framework which is broader in conception than the traditional Paretean

approach which is exclusively based on individual preferences.

Using both approaches, we can conclude that only environmental effects and animal welfare

can be considered as Pareto-relevant externalities that justify government intervention from a

traditional welfare economic perspective that solely aims at achieving efficiency in resource

allocation. In contrast, from a sustainable development point of view, welfare relevance is

given whenever an activity alters the value of economic, ecological or social capital. Apart of

Pareto-relevant externalities, this involves functional benefits and other impacts upon the

overall system that are not reflected in market prices or institutional arrangements.

Correspondingly, agriculture’s contributions to society might be valued differently in a

welfare economic framework of sustainable development, than from a traditional Paretean

perspective. The former implies changes of total capital and their valuation from a social

perspective that involves information about individual preferences as well as overall system

requirements. Hence, the elimination of market failures is necessary but not sufficient in

pursuing sustainable development. In other words, adequate compensation of the non-market

benefits of a multifunctional agriculture and promotion of efficient resource allocation is a

prerequisite for sustainable development. This implies a shift of paradigm from agricultural

support to territorial development and from production to outcome and value orientation.


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Renewable resources

&

ecologicalprocesses

Immaterialassets: - human capital - technology - social organization - etc.

Manufacturedcapital(K)

Socialcapital (S)

Macro-economicstability (M)

Income Y= ( )f Φ

Figure 1: The composition of total capital

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