By Alejandro Nadal, Francisco Aguayo
In a recent essay, Dan Stiles tries to explain why he thinks legalizing international ivory trade would help elephants’ conservation. “With a legal raw ivory trade, elephants can thrive”, he says. If legal raw ivory can be provided in sufficient quantity at predictable times and an acceptable price, the incentive to buy high-risk illegal ivory will evaporate, concludes Mr. Stiles.
Debate around the policy response to the current poaching crisis has been polarized around the issue of market-based instruments, and as a result a lot of attention has focused on some form of regulated legal trade. Stiles’s newest proposal is yet another example of how market-based policies are recommended without any economic analysis.
We examine first the new version of Stiles’s proposal for legalizing international trade and establishing a high-end market model in China as a means to reduce illegal trade. Second, we analyze his assertion that speculative stockpiling is the core driver of elephant poaching.
I: Naivete of a Market-Based Narrative
The traditional storyline of pro-trade advocates for ivory has been that consumer prices will be pushed downward by a cheaper supply of legal raw ivory and that these low prices will depress profits, thereby eliminating the incentive for poaching. Thus the illegal ivory market will be outcompeted and put out of business by the use of market-based policies.
This narrative has two major flaws. On one hand, the notion that consumer prices will go down is, simply put, a wild guess, because virtually nothing is known about the market structure of ivory trade in China. On the other hand, the reduction in prices may trigger the expansion of demand (most likely amplified by lower laundering costs). Instead of reducing the problem, in both instances legal trade could easily lead to intensified poaching of wild elephants.
Stiles thinks he has found the answer to this conundrum. His policy proposal would combine low prices of raw ivory, high final consumer prices, and would bring current illegal operators (traders, processors, and retailers) into the legal market by providing them with licenses. This third component means that the policy objective is not to put the illegal trade out of business but to bring it into the legal market. That would mean adding the processing and marketing capabilities of the illegal market to the already existing registered market in China. In our view such an approach would lead to a catastrophic outcome.
According to Stiles, a stable international supply of ivory to China would provide raw material at lower costs to legal factories and outlets, outcompeting illegal suppliers and driving them out of the market. The legal segment of the trade, made up of registered and licensed factories and outlets, will cater to the high end of the market, producing and selling bigger and higher quality items at prices that only the richest customers can afford. In this manner demand will be kept under control as consumer prices become higher. According to Stiles, the demand for illegal ivory would drop, and the illegal market would be constrained to selling smaller items, like bracelets, chopsticks, and other trinkets—nevertheless requiring a source, and certain amounts, of raw ivory.
In order to keep a lid on demand growth, Stiles proposes that the low price of raw ivory should coexist with high final consumer prices. But he does not discuss the fact that this implies having very high profitability rates in the trade. Stiles appears to be unaware of the fact that this is exactly the opposite of what would be needed to discourage illegal trade and poaching. And as Adam Smith pointed out long ago, this high profit rate cannot remain a secret for any extended period and will attract new operators or firms striving to get into the trade. This is how competition works, and how it leads to market development and growth.
Stiles suggests that a “conservation tax” could be imposed on ivory products to keep prices high. This could of course reduce profitability, although the tax could be transmitted to final consumer prices. In any event, a tax of this sort would be accompanied by perverse incentives to evade it and would bring about new pressures to maintain illegal operations. Stiles does not discuss these implications.
Stiles says speculators have been stockpiling raw ivory during the past few years. As we show below, his distinction between “speculators” and agents operating in the ivory market is unclear and without support. This misleading distinction allows him to ignore the fact that in a legalized market stockpiles could be used to sustain price competition and thus thwart efforts to put out of business illegal operators.
In this context it is important to keep in mind another key problem that Stiles ignores: Supply sources for ivory are not under control today in Africa and will probably not be under any form of sufficient control any time soon. Thus the notion that supply by the Chinese government would be able to outcompete illegal sources is a tenuous, even disingenuous, proposition.
One could think that institutional barriers to entry (the registry and licensing system operated by the Chinese government) would prevent new operators from entering the highly profitable market that would ensue from the coexistence of cheap raw material and high final prices. In fact, Stiles has a very different idea: In his proposal, all the illegal factories and outlets that would like to partake in the legal trade would be allowed to enter it. This means the same criminals and networks that have been driving the illegal trade would be entrusted into the legal system.
Stiles proposes not only establishment of a legal trade but also inclusion of all the illegal operators. This is surprising. Normally pro-trade proposals aim at getting rid of, or subverting, the illegal trade. But not Mr. Stiles. In his carrot-and-stick scheme, illegal operators would be offered an annual quota of legal ivory at low cost, and the illegal factories and outlets in China would be transformed into legal entities. In other words, once these illegal firms registered and became part of the legal trade, they would add their processing capabilities and marketing networks to existing installed capacity. Equally important, the demand that is currently satisfied by illegal operators would now be sanctioned as legal.
Implementing this strategy would automatically translate into the expansion of existing installed capacity and of the market. This would modify the market’s structure, changing patterns of market power and channels of competition, creating new opportunities for scale and scope economies, and seriously affecting price formation processes. This formidable change would have quantitative and qualitative effects, and it has the potential to give new momentum to the future development of this market. More....