From COVID-19 to forests: tracing the real-time linkages

Novel insights including from our recent article in Forest Policy and Economics further explore a new stage of COVID-19’s macroeconomic impact on global forests and deforestation.

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Photo: Pixabay.

By Sven Wunder and Sarah Feder

Originally posted on the EFI blog: https://blog.efi.int/from-covid-19-to-forests-tracing-the-real-time-linkages/

A complex tug-of-war

“A crisis like no other” is how Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), has characterized COVID-19. Arguably, the coronavirus represents the largest challenge to the world economy since WWII. In an earlier EFI blog, written right after the onset of the pandemic, one of us (Wunder) hypothesized about what this crisis could come to mean for global forests. Now, almost two turbulent years into the COVID-19 crisis, a more consolidated picture appears of its immediate and longer-term effects on the economy, and on how forests are used.

With some distance from the throes of the initial government responses and economic uncertainty, we took a closer look at the many causal factors and mechanisms acting between the Global North and South, and between pandemic shock, macroeconomics, land use, and forests. In our recent journal article, Coronavirus, macroeconomy, and forests: What likely impacts?, published in the October issue of Forest Policy and Economics, we sketched the expected impacts of the coronavirus outbreak on national economies and links between the Global North and South, and discussed the likely derived land-use and forest effects of the crisis, especially in the tropics and subtropics.

Yet, the nature of this crisis has proven to be complex, with three analytically distinct economic pathways: first, a supply-side production shock; second, a demand-side contraction of incomes, consumption and investments; and last but not least, an economic-stimulus response by governments and central banks. The balance between these partially opposed effects, dragging the economies into different directions, has been ever-changing throughout the last twenty months. Even since the closing deadline of our scientific article (end-June 2021), several momentous changes in global markets and policies have been unfolding. We may thus also still be in for more surprises about where COVID-19 and its derived effects come to lead the world economy. And these economic impacts are also bound to set the stage for forests worldwide.

We examined a multitude of contrary forces that are pushing and pulling on national incomes and commodity prices – supply-side shocks, demand-side deflation, and inflationary fiscal policy responses from governments – to gain insights into global forest outcomes from the COVID-19 crisis. While these insights primarily focus on deforestation dynamics in tropical countries, the Global North is inextricably linked to these processes through fluctuating commodity markets, and plays an important role in how these macroeconomic battles are ultimately resolved. In this blog, we showcase a few of these emblematic combats: tracing the fluctuations of the ‘big-four’ tropical forest-relevant commodities, the oscillations of lumber prices, a lasting crisis in the tourism sector, and impacts on environmental governance. Jointly, this allows us to see the contours of how the economic battlefield is juxtaposed on forested landscapes worldwide.  

Agribusiness commodity links

The Global North’s most significant link to deforestation in the South is through commodity trade: expansive agricultural exports from the Global South have especially hurt forest cover through land conversion for the so-called ‘big four’ commodities: cattle, oil palm, soy, and (from the forestry side) wood products (see below). Commodity prices are thus key incentives for land- and forest-use changes.

Past research solidly suggests that a strong global economic crisis will bring down most world-market commodity prices. Thus, incentives for new forestland conversion to croplands and pastures will also tend to decline. Through this channel, a global economic collapse from COVID-19 could also bring an “anthropause” to tropical forests, similar to what we have observed for global energy consumption and oil prices, which plummeted towards zero.  

The initial pandemic shock reality in February/March 2020 probably showed a balance between these two effects. Commodity prices indeed crashed and this partial effect also curbed forestland conversion. However, there was also a devaluation of currencies in exporting countries, which mitigated the decline for exporters in local currency terms. Some crisis-led return migration to rural forested areas, especially in Africa, may also have reinforced pressures. And, over time, many commodity prices turned around their downward trend, surpassing pre-COVID levels. The clearest net impact seems to be a marked increase in price fluctuations.

Lumber from bust to boom – and back?

The timber market is a particularly illustrating case. Prior to February 2020, world-market lumber prices had been rising by one-third between 2016-18, and again August 2019 to January 2020, arguably due to longer-term structural effects: climate change impacts on supplies, through wildfires and large-scale bark beetle attacks, and new bioeconomic sources of demand.

Under the COVID-19 pandemic shock of February/March 2020, forest industry especially in the Global North faced significant supply-side shocks, as early government lockdowns put restrictions on forest work, and on wood transport. The crisis sharply reduced urban construction, as most severe economic crises tend to do, so US random-length lumber future prices pulled back sharply to around US$250 in March 2020 – a level not seen since 2016. Yet, markets not only recovered (thanks to government stimulus), but boomed (thanks to demand for home offices and suburban living), as supplies could not keep up: from the March 2020 low to the May 2021 high, lumber prices thus skyrocketed sevenfold to around US$1750, being labeled “the hottest commodity on the planet”.

How could this happen? Notably, US sawmills had been affected by shutdown-induced labor shortages and transport bottlenecks, causing inflationary supply-shock effects. Yet, sawn log prices, i.e. prices paid to producers for their raw timber, lagged far behind this spectacular boom, indicating that supply-side shortages at the retail end, combined with strong speculative forces, drove this lumber boom, and probably sawmill windfall profits, into excesses. After May 2021, this bubble came to burst even quicker than it had built: from the top (May 2021), prices were slashed by two thirds to US$450 in just three months (August 2021); as we write (November 2021), lumber prices are meandering around US$600. In Europe, the price decline has been less dramatic so far than in the US.    

A demand shock for tourism

On the other hand, a showcase long-term victim of the COVID-19 crisis is the tourism sector. In 2019, tourism worldwide had generated 10.3% of global GDP, having for the ninth consecutive year grown quicker (3.5%) than the global economy (2.5%). The UN’s World Tourism Organization (UNWTO) estimated that international tourism generated some US$1.7 trillion in 2018. France, Spain, and USA were the top-visited destinations; the almost complete loss of these large foreign exchange inflows in highly visited areas throughout the crisis has shocked local and national economies. Meanwhile, from an ecosystem services perspective, recreational use of forests seems to have expanded across Europe during COVID-19, with increased visitors in urban-adjacent forested areas.

Highlights

  • The COVID-19 supply-side economic impacts were initially dwarfed by demand-side effects.
  • The demand-side deflationary bust was strong, but then counteracted by stimulus policies.
  • Global commodity, especially agricultural prices are key to determine tropical forest loss.
  • Forest loss-accelerating and -curbing COVID-19 impacts have during 2020 been globally just about balanced.
  • Large country-wise variations in forest outcomes depend on markets, incomes and policies.

Gian Maria Milesi Ferretti from the Brookings Institute predicts that, despite increasingly widespread vaccination in North America and Europe, international tourism will continue to lag severely behind its past trajectory. These long-term damages are particularly relevant for tourist-dependent areas in developing economies, which also face issues of vaccine inequity, and limited capacity for an aggressive fiscal stimulus for the industry: according to a report from UNTWO and UNCTAD, poor countries could be poised to lose as much as 1.4 trillion USD this year. International tourism, including nature- and forest-based ecotourism, are becoming a prominent losing sector in what shapes up to be part of the drive towards deglobalization.

Environmental governance under COVID

Many scholars have also posited a pandemic-caused collapse in environmental governance. Government lockdowns and eroding funding for environmental agencies and their forest monitoring and legal sanctioning, as well as successful lobbying for legal lenience from pressurized agribusiness producers, would jointly open the door to offenders, as logging bans and national parks would suffer neglect: “land grabbers don’t do home office” was a popular slogan termed in Brazil to describe this effect of rendering environmental enforcement policies ineffective. 

This argument has been strongly pushed in particular by environmental NGOs. An initial sharp rise in deforestation alerts seemed to support the idea that a decline in rules and governance under lockdowns enabled speculative land grabbing and opportunistic forest clearing by actors in the agribusiness sector.  But as we show in our article, some of these observed early spikes in deforestation alerts happened before lockdowns started in the country in question. Furthermore, a lot of the deforestation alerts – a rapid, but insecure indicator – were corrected later on in the consolidated forest cover data. On aggregate, tropical deforestation in 2020 rose marginally vis-à-vis 2019, but in fact most preexisting trends in particular tropical forest countries continued unabated.  

An economics textbook case turned upside down

While we do not yet seem to be out of the woods with respect to the global COVID-19 crisis, some interesting lessons have certainly emerged already. Economic theory and economic history had suggested that a pandemic crisis like COVID-19 would first cause a supply-side shock, as people get sick and/or are put under lockdown, and thus produce and transport less goods and services. As a result, their incomes and demand would then also decline, causing a deflationary spiral. Finally, governments would react with expansionary fiscal and/or monetary policies to somehow mitigate the pandemic-triggered economic crisis.

The COVID-19 screenplay proved to differ notably from that standard script. Initially, global supply chains seemed to compensate quite well for the COVID-induced production shortfall. Global demand indeed tanked as suspected, but more driven by waning expectations vis-à-vis future overall economic growth than falling incomes. By end-March 2020, we had seen strongly deflationary effects. Nevertheless, then governments brought on their heaviest artillery of stimulus responses, throwing all fiscal prudence into the wind: compared to GDP, the accumulated monetary amounts injected into national economies in the Global North by far exceed the stimulus in response to the 2007/08 global financial crisis, or the post-WWII Marshall Aid, for that matter.

This last element of policy response was clearly the most unconventional. The collective decision of embarking on an unprecedented positive economic shock therapy was taken by governments and central banks probably in recognition of the large pre-COVID-19 structural disequilibria of the world economy, with huge indebtedness and overvalued assets (see previous blog): economic policy has thus entered into unchartered territory — arguably an “everything-bubble” encompassing all main assets, being underwritten by central banks.

As Northern economies then reopened from lockdown, and demand picked up under heavy stimulus, we have found ourselves in a new situation: some sectors and agents, especially the wealthier ones, have received stimulus compensations exceeding their true COVID-induced losses, and thus have more money to spend than before the pandemic. Yet, production and value-chain shortfalls have now finally also kicked in as demand for commodities picks up – like with a sudden shortage of shipping containers in global trade. Labor shortages have intensified, as some migrant workers have stayed home, while other laid-off workers have preferred to leave the labor market, due to COVID-19 and related government regulations.

Economic outlook: between runaway inflation and tapering depression

Stagflation – the marriage of inflation and economic stagnation we experienced in the 1970s – has thus been outlined as a possible future scenario we might be steering towards. If so, continuously high commodity prices would thus also sustain high deforestation pressures. However, as the recent collapse in previously soaring lumber prices has shown above, this seems still too early to say — especially as tapering will set in where government stimulus will have to finally be reduced, and interest rates might need to be raised to mitigate inflation. This could trigger a severe hangover.     

In sum, some textbook economic crisis effects played out as expected, but their sequence and size were not without surprises: unprecedented stimulus packages in the Global North not only retracing crisis-induced losses, but in some markets over-compensating pandemic losses entirely triggering some late inflationary effects. For forests, in general, whatever trends dominated before the crisis – e.g. reduced deforestation in Indonesia, or expanded deforestation in Brazil – stayed largely on course.

Staying on course, however, in itself might be surprising: in a Mongabay blog reporting on our article, WRI’s Frances Seymour reflected that the observed 12% increase in tree cover loss in 2020 stands in contrast to contractions in the world economy. This suggests that “the various drivers that do lead to forest loss” are resilient to economic shocks, and Seymour shared her concerns that this would also be compounded by governments placing less priority on environmental issues while they struggle to recover economically from the pandemic.

The verdict is still pending where the world economy, and the world’s forests, will each be heading as a result of the pandemic. Whatever outcome occurs over the next years, it is likely to come with lots of spatial, and probably temporal variation. It will depend on pre-existing geographical differences in deforestation dynamics, how hard COVID-19 has hit, but also to what extent diverse stimulus policies have massaged the local economic and forest outcomes.

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