AGRICULTURAL BIODIVERSITY, FARM LEVEL TECHNICAL EFFICIENCY
AND CONSERVATION BENEFITS: AN EMPIRICAL INVESTIGATION

THIS DISSERTATION IS SUBMITTED TO THE FACULTY OF BUSINESS,
QUEENSLAND UNIVERSITY OF TECHNOLOGY FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY

MAY 2012

K.M.R. Karunarathna
B. A (Economics) Hons., University of Peradeniya, Sri Lanka
M.Sc. (Environmental Economics), University of Peradeniya, Sri Lanka

School of Economics and Finance
QUT Business School
Queensland University of Technology
Gardens Point Campus
Brisbane, Australia

i


Statement of Original Authorship

The work contained in this thesis has not been previously submitted to meet
requirements for an award at this or any other higher education institution. To the
best of my knowledge and belief, the thesis contains no material previously
published or written by another person except where due reference is made.

…………………………………….
K. M. R. Karunarathna

21st May, 2012

ii


This dissertation is dedicated to:

To my loving husband, Wasantha son, Kavindu and daughter, Disuni
To my mother, father and all who helped me to make it true

iii


ACKNOWLEDGEMENTS

I greatly acknowledge the assistance I received from numerous individuals and
institutions for completing this research. Special thanks should go to my advisers,
Professor Clevo Wilson and Professor Tim Robinson, for their constant support and
guidance throughout my graduate program. Their kindness, patience, and continual
coaching are greatly appreciated. They encouraged me to carry out this interesting
dissertation research

and

for their

invaluable advice,

guidance, endless


encouragement and untiring efforts to make it a success. They provided a stimulating
environment with productive discussion throughout the dissertation research that
helped make me a better researcher. I am grateful to them for their support and
wisdom, and the kindhearted assistance extended to me throughout the study period.
I am also thankful for the invaluable help and encouragement I received from my
dissertation committee members Dr. Mark McGovern, Dr. Henri Burgers, Prof. Tim
Robinson and Prof. Clevo Wilson. I also would like to thank the panel members of
my PhD confirmation seminar, especially Dr. Louisa Coglan, for her constructive
comments.

People who are living in Anuradhapura, Kurunegala and Ampara districts deserve
my thanks for their cooperation in the data gathering effort. I greatly appreciate the
help given by many individuals including enumerators and government officers
during the data collection process. I thank the University of Peradeniya for granting
me study leave, staff members in the Department of Economics and Statistics who
encouraged me to pursue my postgraduate studies at the Queensland University of
Technology in Australia.

iv


I must recognize the constant help given by my colleagues at the School of
Economics and Finance, for their assistance and cooperation throughout the course
of study. I am also thankful for the invaluable help and encouragement I received
during my QUT life from Dr. Tony Sahama in the faculty of IT. I also should thank
to Dr. Jeanette who helped me correct English in this dissertation. I thank
participants of local and international conferences for providing useful feedback and
facilitating discussion on this work that I have presented to them. I have benefited a
lot from working with them.


I gratefully acknowledge the role of Queensland University of Technology for
providing financial support for my graduate studies. It is only with the help of QUT’s
IPRS scholarship, I was able to undertake this study in Australia. I therefore
acknowledge and thank QUT for awarding me this scholarship. Further, I gratefully
acknowledge the role of National Centre for Advanced Studies in Humanities and
Social Sciences (NCAS) for providing financial support for my PhD research. I am
also thankful to Professor Tim Robinson, former head of the school, School of
Economics and Finance, and all other administrative staff of the faculty of business
for their invaluable service received during my study period at QUT.

Last but not least I wish to express my deep gratitude to my husband, Wasantha for
his understanding, patience and encouragement throughout my graduate studies. I am
indebted to my loving son, Kavindu and daughter, Disuni. As I had to spend
considerable time on this study, they missed their mum during the time in the first
few years in their life. Finally, I am deeply grateful to my beloved mother for her
invaluable contribution throughout my life. I also owe a debt of gratitude to my late

v


father. I also acknowledge my brother, sisters and their families, for their
unconditional love inspiration and encouragement throughout my life.

vi


TABLE OF CONTENTS

STATEMENT OF ORIGINAL AUTHORSHIP ……………………………


ii

DEDICATION……………………………………………………………….

iii

ACKNOWLEDGEMENTS ………………………………………………....

iv

TABLE OF CONTENTS…………………………………………….………

vii

LIST OF TABLES……………………………………………………….…..

xi

LIST OF FIGURES………………………………………………………….

xii

LIST OF ABBRIVIATION………………………………………………….

xiii

ABSTRACT……………………………………………………………….…

xv


CHAPTER 1: INTRODUCTION……………………………………….……….

1

1.1 Overview …………………………………………………….…..…….

1

1.2 Motivation …………………………………………………….……….

13

1.3 Expected contributions of the study…………………………….……...

16

1.4 Structure of the thesis………………………………………….…….…

18

CHAPTER 2: STATUS AND TRENDS OF BIODIVERSITY IN SRI LANKA

20

2.1 Biodiversity wilderness area in the world………………………….…..

20

2.2 Biodiversity in Sri Lanka ……………………………….………….….


22

2.3 Present status and future challenges of biodiversity…………….……..

26

2.4 Agricultural biodiversity in the country…………………………….….

33

CHAPTER 3: DATA SOURCES AND DESCRIPTION……………….………..

39

3.1 Introduction ……………………………………………….….………...

39

3.2 Selecting appropriate sample size…………………………….………...

40

3.3 Selecting respondents for the survey……………………………………

44

3.4 Field survey and its content…………………………………………….

47


3.5 Design choice experiment survey………………………………………

49

vii


CHAPTER 4: FARMERS’ VALUATION OF AGRICULTURAL
BIODIVERSITY

57

4.1 Introduction………………………………………………………..…..…

57

4.2 Literature review on valuation of agricultural biodiversity……….…...…

60

4.3 Random utility models………………………………………………...…

64

4.4 Choice experiment method …………………………………………....…

70

4.5 Choice experiment design and model selection……………………..…....


76

4.6 Empirical approach to choice experiments study……………….…....…..

82

4.7 Socio-economic profile of sample respondents……………………....…..

91

4.8 Data cording and estimation procedure……………………………….…..

94

4.9 Result of the conditional logit model (CLM)………………………….….

96

4.10 Result of the CLM including attributes and socioeconomic variables….

103

4.11 Result of the random parameter logit model………………………….… 108
4.12 Estimating welfare changes with changing attributes and their level…...

110

4.13 Summary and key findings……………………………………………… 116


CHAPTER 5: FACTORS INFLUENCING FARMERS’ DEMAND FOR
AGRICULTURAL BIODIVERSITY

119

5.1 Introduction ………………………………………………………..…..

119

5.2 Literature review on demand for agricultural biodiversity…………......

121

5.3 Derivation of demand for agricultural biodiversity………..……….…..

128

5.4 Empirical model specification and relevant variables……….…….…..

135

5.5 Theoretical approaches for the relevant models…………..…….….…..

143

5.5.1 Poisson regression model…………………………………….....

144

5.5.2 Negative binomial (NB2) regression model………………….…


148

5.5.3. Empirical tests for different count data models……………...…

152

5.6 Socio-economic characteristics of the households………………….…

155

5.7 Determinants of crops variety demand…….…………………….……

158

5.8 Determinants of livestock variety demand.……………………….…..

166

5.9 Summary and key findings ……………………………………………

169

viii


CHAPTER 6: FARMERS’ PREFERENCES FOR DIFFERENT FARMING
173

SYSTEMS

6.1 Introduction………………………………………………………...….

173

6.2 Literature review on farmer’s preference for different farming systems

175

6.3 Methods of explaining farmer’s preferences…………………………..

180

6.4 Factors influencing the selection of landrace cultivation………..…….

187

6.5 Factors influencing the selection of organic farming ………………….

190

6.6 Farmers’ demand for mix farming system……………………………..

194

6.7 Summary and key findings……………………………………….…...

198

CHAPTER 7: AGRICULTURAL BIODIVERSITY AND FARM LEVEL
201


EFFICIENCY
7.1 Introduction……………………………………………………………

201

7.2 Literature on agricultural biodiversity and farm level efficiency……...

204

7.3 Method of estimating farm level technical efficiency……………..…..

209

7.4 Empirical model of estimation…………………………………………

215

7.5 Estimates for parameters of stochastic frontier production function…..

220

7.6 Estimating marginal productivity and input elasticity………….…...…

226

7.7 Variations of technical efficiency………………………….………......

228


7.8 Results of the inefficiency model……………………………………...

233

7.9 Summary and key findings………………………………………….…

238

CHAPTER 8: CONCLUSIONS AND POLICY IMPLICATIONS……………

241

8.1 A summary of findings and discussion………………………….…….

241

8.2 Policy implications……………………………………………….……

247

8.3 Limitations of the study and further research………………….………

251

BIBLIOGRAPHY……………………..………………………………………...

255

ix



APPENDIX A (1): Defining agricultural biodiversity..............................................

288

APPENDIX A (2): TEV of agricultural biodiversity on small-scale farms..............

289

APPENDIX A (3): Defining TEV of agricultural biodiversity on farms……….…

290

APPENDIX B: Number of described species in the World………………….….…

291

APPENDIX C: Biodiversity wilderness areas in the world…………………….….

292

APPENDIX D (1): Topography in Sri Lanka………………………………….…..

293

APPENDIX D (2): Major climatic zones in Sri Lanka………………………….....

294

APPENDIX E: Protected areas under department of wildlife in Sri Lanka……..…


295

APPENDIX F: List of protected areas of Sri Lanka…………………………….....

296

APPENDIX G: Map showing survey areas in Sri Lanka………………………......

297

APPENDIX H: Questionnaire used in the survey……………..………….…….….. 298
APPENDIX I(1): A sample choice set is given to the respondent…………….…..

322

APPENDIX I(2): Description of 36 choice sets of the choice experiment………... 323
APPENDIX J: Descriptive statistics of the sample respondents.……………….…

324

APPENDIX K: Zero inflated Poisson / negative binomial regression model….…..

327

APPENDIX L: MLE of parameters and point estimates of TE………………....…

330

APPENDIX M: Derivatives of elasticities using translog production function……


335

APPENDIX N(1): List of crops varieties on small-scale farms……………………

336

APPENDIX N(2): List of livestock breeds on small-scale farms……………….…. 337

x


LIST OF TABLES
Tables

Page

Table 2.1: The list of recorded species in different taxonomic groups………...

27

Table 2.2: Estimated number of selected species ……………………………..

29

Table 2.3: Natural ecosystem richness…………………………………...........

32

Table 3.1: Estimating minimum sample size for each district………………....


43

Table 3.2: Details of the survey areas……………………………………….....

45

Table 4.1: Classifications of small-scale farm attributes in the CE survey……

85

Table 4.2: Attributes and their levels……………………………………….….

87

Table 4.3: Example of a choice set………………………………………....….

89

Table 4.4: Individual attributes for the estimation of CL and RPL models…....

90

Table 4.5: Regression results of the CL model ………………………….….....

99

Table 4.6: Test of independence of irrelevance alternatives…………………...

102


Table 4.7: CL model including attributes and socioeconomic variables….…...

107

Table 4.8: Regression results of the RPL model……………………..…….….

109

Table 4.9: Implicit price estimates for attributes………………………...….…

111

Table 4.10: Estimates of WTA for various scenarios: Ampara……………..…

113

Table 4.11: Estimates of WTA for various scenarios: Anuradhapura……..…..

114

Table 4.12: Estimates of WTA for various scenarios: Kurunegala……..…..…

114

Table 4.13: Simulation total welfare gains to the districts…………….…....…

115

Table 5.1: Definition of the agricultural biodiversity…………………..…...…


135

Table 5.2: Definition of potential explanatory variables ……………………...

136

Table 5.3: Explanatory variables used in the demand model………………….

142

Table 5.4: Summary of the econometric models to be used for the analysis…..

143

Table 5.5: Poisson regression results for crops variety model…………….…..

161

Table 5.6: Poisson regression results for animal variety model………….……

167

Table 6.1: Definition dependent variables in different models…………….…..

183

Table 6.2: Definition of potential explanatory variables ……………………...

184


Table 6.3: Explanatory variables and their expected signs…………………….

186

Table 6.4: Probit regression results for landrace production model………..….

189

Table 6.5: Probit regression results for organic production model……….……

191

Table 6.6: Probit regression results for agro-diversity model………………….

195

Table 7.1: ML estimates for parameters of the production function……….….

225

xi


Table 7.2: Estimated elasticities and marginal productivity of each input…….

227

Table 7.3: Frequency and percentage distribution of the technical efficiencies.


229

Table 7.4: Average TE, value of actual and potential output with land size…..

231

Table 7.5: Average efficiency with farm type……………………………...….

232

Table 7.6: ML estimates for parameters of the inefficiency model……….…...

234

LIST OF FIGURES
Figures

Page

Figure 1.1: Summary of the three main sections of the thesis……………..

10

Figure 7.1: Stochastic frontier production function………………………..

211

xii



LIST OF ABBRIVIATION

ASC

Alternative Specific Constant

BCAP

Biodiversity Conservation Action Plan

CBD

Conservation on Biological Diversity

CS

Compensating Surplus

CEM

Choice Experiment Method

CVM

Contingent Valuation Method

CL

Conditional Logit


DSDs

Divisional Secretary Divisions

DFC

Department of Forest Conservation

EEZ

Exclusive Economic Zone

EEPU

Environmental Economic Policy Unit

EU

European Union

FAO

Food and Agriculture Organization

GDP

Gross Domestic Production

GLR


Generalised Likelihood Ratio

GM

Genetically Modified

HYV

High Yield Varieties

IBEC

Biodiversity and Environmental Conservation

IIA

Independence of Irrelevant Alternatives

IID

Independently and Identically Distributed

IFPRI

International Food Policy Research Institute

IUCN

International Union for Conservation of Nature


LKR

Sri Lankan Rupees

MLE

Maximum Likelihood Estimator

MNL

Multinomial Logit

NB

Negative Binomial

NBM

Negative Binomial Model

NCS

National Conservation Strategy

NEAP

National Environmental Action Plan

NGOs


Non Government Organizations

PGRC

Plant Genetic Resource Centre
xiii


PM

Poisson Model

RPL

Random Parameter Logit

RUM

Random Utility Models

TE

Technical Efficiency

TEV

Total Economic Values

TWTP


Total Willingness to Pay

TWTA

Total Willingness to Accept

UK

United Kingdom

USD

US Dollars

VC

Variance-covariance

WTA

Willingness to Accept

WTP

Willingness to Pay

ZIP

Zero-inflated Poisson


ZINB

Zero-inflated Negative Binomial

xiv


ABSTRACT
The issues involved in agricultural biodiversity are important and interesting areas for the
application of economic theory. However, very little theoretical and empirical work has been
undertaken to understand the benefits of conserving agricultural biodiversity. Accordingly,
the main objectives of this PhD thesis are to: (1) Investigate farmers’ valuation of
agricultural biodiversity; (2) Identify factors influencing farmers’ demand for agricultural
biodiversity; (3) Examine farmers’ demand for biodiversity rich farming systems; (4)
Investigate the relationship between agricultural biodiversity and farm level technical
efficiency. This PhD thesis investigates these issues by using primary data in small-scale
farms, along with secondary data from Sri Lanka. The overall findings of the thesis can be
summarized as follows.
Firstly, owing to educational and poverty issues of those being interviewed, some policy
makers in developed countries question whether non-market valuation techniques such as
Choice Experiment (CE) can be applied to developing countries such as Sri Lanka. The CE
study in this thesis indicates that carefully designed and pre-tested nonmarket valuation
techniques can be applied in developing countries with a high level of reliability. The CE
findings support the priori assumption that small-scale farms and their multiple attributes
contribute positively and significantly to the utility of farm families in Sri Lanka. Farmers
have strong positive attitudes towards increasing agricultural biodiversity in rural areas. This
suggests that these attitudes can be the basis on which appropriate policies can be introduced
to improve agricultural biodiversity.
Secondly, the thesis identifies the factors which influence farmers’ demand for agricultural
biodiversity and farmers’ demands on biodiversity rich farming systems. As such they

provide important tools for the implementation of policies designed to avoid the loss
agricultural biodiversity which is shown to be a major impediment to agricultural growth and
sustainable development in a number of developing countries. The results illustrate that
certain key household, market and other characteristics (such as agricultural subsidies,
percentage of investment of owned money and farm size) are the major determinants of
demand for agricultural biodiversity on small-scale farms. The significant household
characteristics that determine crop and livestock diversity include household member
participation on the farm, off-farm income, shared labour, market price fluctuations and
household wealth. Furthermore, it is shown that all the included market characteristics as
well as agricultural subsidies are also important determinants of agricultural biodiversity.
Thirdly, it is found that when the efficiency of agricultural production is measured in
practice, the role of agricultural biodiversity has rarely been investigated in the literature.
The results in the final section of the thesis show that crop diversity, livestock diversity and
mix farming system are positively related to farm level technical efficiency. In addition to
these variables education level, number of separate plots, agricultural extension service,
credit access, membership of farm organization and land ownerships are significant and
direct policy relevant variables in the inefficiency model. The results of the study therefore
have important policy implications for conserving agricultural biodiversity in Sri Lanka.

xv


CHAPTER ONE

INTRODUCTION

1.1 Overview

Biological diversity provides all of mankind’s food requirements, numerous medicines
and industrial products. Agricultural biodiversity1 (see Appendix A.1 for more details) is

a sub-set of general biodiversity which is essential for global food production, livelihood
security and sustainable agricultural development (Brookfield, 2001; Pascual and
Perrings, 2007). Agricultural biodiversity includes all forms of life directly relevant to
agricultural production. In addition to providing direct benefits to farmers, agricultural
biodiversity improves ecological processes by regulating climate, maintaining soil
quality, providing protection from erosion, storing nutrients and breaking down
pollution (Thrupp, 1988; FAO, 1999). Some societies also value biodiversity for cultural
reasons as it maintains the aesthetic value of landscapes (Nagarajan et al., 2007).

Despite all these benefits previous experience has shown that population growth,
inequity, inadequate economic policies and institutional systems have mainly
contributed towards the increasing loss of agricultural biodiversity in the world (Ayyad,
2003; Ganesh and Bauer, 2006). Low levels of education and lack of integrated research
on natural ecosystems and their innumerable components may exaggerate the process,
1

FAO, (1999a) defined agricultural biodiversity as the variety and variability of animals, plants and
micro-organisms that are used directly or indirectly for food and agriculture, including crops, livestock,
forestry and fisheries. It comprises of the diversity of genetic resources (varieties, breeds) used for food,
fodder, fibre, fuel and pharmaceuticals. It also includes the diversity of non-harvested varieties that
support production (soil micro-organisms, predators, pollinators), and those in the wider environment that
support agro-ecosystems (agricultural, pastoral, forest and aquatic) as well as the diversity of the agroecosystems.

1


especially in developing countries. While the loss of habitats may occur through clearing
land for agriculture, specialisation of agricultural practices reduces farm level crops,
genetic or livestock diversity (Swanson, 1999).


Neoclassical economic theory predicts that specialisation in one kind of variety or
technology is the profit maximising solution for a farmer and that it is costly to maintain
a diverse portfolio of species, varieties and management systems due to several reasons.
These reasons include time and management intensity of diversity maintenance and high
opportunity costs associated with not specialising in particular varieties with the highest
current economic return (Brush et al., 1992; Smale et al., 2001; Gauchan and Smale,
2003). But in reality, it has been observed that contrary to economic theory, farmers,
especially in developing countries often prefer to maintain a diverse portfolio of
varieties and to continue employing traditional agricultural technologies, even when
modern technologies and high yielding varieties (HYVs) are available to them. Several
explanations have been found for this persistence in management of agricultural
biodiversity on farms. These include farmers’ attitudes towards risk (in yield, income,
price and consumption) and their need to compensate for market imperfections in
satisfying household demands for diversity in consumption.

Many farmers manage high levels of agricultural biodiversity on farms to keep options
open for possible future benefits of diversity, such as being sources of new varieties.
Many farm families use agricultural biodiversity as a way of spreading out labour needs
to ensure that limited labour supplies are used more efficiently. There are also cultural
benefits (e.g. cuisine, ritual, prestige, payment, gift, social ties) attached to agricultural
2


biodiversity. Equally, agricultural biodiversity is found to have positive impacts on
overall productivity and soil quality. In recognition of agricultural biodiversity
importance, international agreements such as the Convention of Biological Diversity
(CBD) and the international institutes such as International Food Policy Research
Institute (IFPRI) and Institute of Biodiversity and Environmental Conservation (IBEC)
encourage the design of policies that convey economic incentives for farmers to
conserve agricultural biodiversity (CBD, 2002). The number of economic studies that

have attempted to explain the reasons for on farm conservation and the means by which
this method of conservation can be strengthened, are however small compared to the
magnitude of the problem of loss of agricultural biodiversity in farmers’ fields
throughout the world.

Modern agricultural methods and technologies have brought spectacular increases in
food production (Tilman et al., 2002), but not without high environmental costs. Efforts
to boost food production, for example, through direct expansion of cropland and
pastures, have negatively affected the capacity of ecosystems to support food production
and to provide other essential services. Food production will undoubtedly be affected by
external factors such as climate change. But the production and distribution of food itself
is also a major cause of climate change. As food production becomes increasingly
industrialised, with fewer niches available for varieties other than those targeted for
production, a rapid decline in the diversity of varieties used has been observed. These
major changes in production have lead to simplified and less resilient agro-ecosystems,
reducing not only the number of niches but also the range of products and their
distribution over time and space (FAO, 1999b). There is ample research which indicates
3


that modern agricultural methods and technologies can generate large environmental and
social costs. A substantial contribution to sustaining agricultural biodiversity can
therefore be made through continued support of producer organisations working with
small-scale farm producer groups to conserve, develop and use sustainably food and
agricultural genetic resources including plant, animal and aquatic.

As mentioned above, agricultural biodiversity is eroding and resources available for
conservation are limited, implying economic valuation (especially estimation of total
economic value) can play an important role in ensuring an appropriate focus for
conservation efforts (UNEP, 1995; Drucker et al., 2001). As Swanson et al. (1997) state,

in order to design policies and programmes that both encourage maintenance of
agricultural biodiversity on farm and ensure that economic and agricultural development
occur, it is necessary to establish the value of what it is that needs to be conserved.

The direct and indirect benefits of conserving farm level biodiversity can be numerous,
especially in semi-subsistence economies. The measurement of economic values of
services provided by agricultural biodiversity can be done on the basis of total economic
values (TEV). TEV consists of use and non-use values. Diagrammatically, the TEV
framework can be expressed as shown in Appendices A.1 and A.2. Benefits obtained by
individuals using agricultural biodiversity are defined as use values. Use values of
agricultural biodiversity include, direct, indirect, portfolio values and option values2
(Brown, 1990; Primack, 1993; Swanson, 1996; Evenson et al., 1998). On the other hand,
bequest values, altruistic values, existence values and cultural values of agricultural
2

Option values can be placed under both use and non-use values. It includes future direct and indirect use
values.

4


biodiversity are considered under non-use values (Krutilla, 1967; Brown, 1990; Primack,
1993; Evenson et al., 1998).

In this study, five indicators (components) are used to capture the use and non-use
values of agricultural biodiversity. They are: crop diversity (number of crops varieties
that are grown on the farm), livestock diversity (number of livestock varieties on the
farm), mixed farming systems (integration of crop varieties and livestock breeds),
landrace cultivation (whether a farm contains crop varieties that have been passed down
from the previous generation and/or has not been purchased from a commercial seed

supplier) and organic production (when industrially produced and marketed chemical
inputs are not used in farm production). Among these five indicators, the first two
represent agricultural biodiversity while last three represent the different farming
systems which help maintain biodiversity under rich farming practices. More details
about using these variables to capture farmers’ valuation of agricultural biodiversity are
found in studies conducted byBenin et al. (2003), Benin et al. (2004), Bellon (2004),
Birol et al. (2006), Nagarajan et al. (2007), Birol et al. (2008) and Hadgu et al. (2009). It
is evident that economic values of conserving these components can only be calculated
based on a comprehensive identification of the environmental and social values of the
ecosystem services that they provide.

Commercial direct use value of agricultural biodiversity can be a relatively small
component of their total use value in agriculture (Drucker et al., 2005). Many values are
not captured well in market prices and hence investments in conservation may not occur
optimally (Swanson, 1996). This is one of the reasons why farmers’ activities gradually
5


reduce agricultural biodiversity. Some of the other possible reasons why farmers may
tend to destroy agricultural biodiversity can be explained as follows. Firstly, most
benefits of conserving agricultural biodiversity are long-term (and inter-generational)
and not traded in the market. For example, by cultivating different crops and livestock,
soil fertility can be improved. However, farmers may not take into account these longterm benefits. Secondly, poor farmers with lower levels of education may not be aware
about the total benefits of conserving agricultural biodiversity. They may consider only
the short-term direct use benefits and may select the specialisation of cash crops as a
mean of increasing income in the short term. However, single crops are more vulnerable
to the rapid spread of disease, this greatly heightens the vulnerability of resource-poor
farmers. Thirdly, sales promotion activities and credit facilities have promoted the
cultivation of modern crop varieties using pesticides and chemical fertilisers. Such a
system can increase short-term yields while destroying the resilience of agro-ecosystems

in the long-term. Fourthly, high discount rates will decrease the future value of
agricultural biodiversity and provide some incentives to increase present consumption
which in turn can increase the degradation of biodiversity. These reasons show that as
long as farmers underestimate the total benefits of conserving agricultural biodiversity,
there will be simplified and less resilient agro-ecosystems, thus reducing the number of
services provided by them in the long-run.

Although much theoretical as well as empirical work has investigated various aspects of
agricultural biodiversity there is still a considerable lack of understanding of what social
benefits could be achieved from conserving agricultural biodiversity in developing
countries. Economics to some extent provides us with the analytical tools to assist in
6


guiding towards socially desirable outcomes. However, little theoretical and empirical
work has been undertaken in this area of research. This means that there exists a gap in
the theoretical and empirical literature, addressing practical issues utilising correct
economic instruments in this area. This thesis examines three main issues that arise in
the area of agricultural biodiversity in the context of Sri Lanka. The focus of the thesis
allows for the study of direct and tangible issues facing policy makers. After reviewing a
large number of studies, existing models and empirical work, the shortcomings that exist
in their application are identified. They are:

(1) Farmers’ valuation of agricultural biodiversity is not properly explained. As a result
social welfare losses due to loss of agricultural biodiversity have not been adequately
estimated. It is evident that management of agricultural biodiversity requires
measurement, and measures of diversity to some extent. It is thus necessary to measure
and disentangle some of the separate benefits of agricultural biodiversity in order to
formulate appropriate policies. However, many of the goods and services provided by
different components of agricultural biodiversity are crucial, but not always quantifiable

in monetary terms. Many of these goods and services are not traded in the market place
and do not have an obvious price or commercial value. The danger is that if these
unpriced values are not included in the decision-making process, the final decision may
favour outcomes which do have a commercial value and decision makers may not have
full awareness of the consequences for biodiversity conservation. Therefore, it is of
paramount importance to understand the true value of agricultural biodiversity and to
estimate the welfare change of the society with the change of agricultural biodiversity.
The first section of this thesis attempts to capture farmers’ valuation of agricultural
7


biodiversity. This objective will help to determine the economic value of conserving
agricultural biodiversity to society.

(2) Factors affecting the conservation of agricultural biodiversity are not adequately
identified in the literature. The literature shows that, despite the emphasis placed by
policy decision-makers on increasing the conservation of biodiversity in small scalefarms3, it is increasingly becoming degraded in many agricultural areas (see, for
example, Matson et al., 1997; Perrings, 2001; Brookfield et al., 2002; Mattison and
Norris, 2005). Therefore, it is important to understand which factors are contributing to
decreasing agricultural biodiversity in small-scale farms. In the second section of this
thesis farmers’ demand for agricultural biodiversity and environmentally rich farming
systems such as organic farming and landrace cultivation are estimated. This objective
will help understand and identify factors influencing the degradation of agricultural
biodiversity in small-scale farms.

(3) No previous analysis has investigated the links between agricultural biodiversity and
farm level technical efficiency. Some studies reveal that crop diversity is positively
related to agricultural productivity of small-scale farms (see, for example, Di Falco and
Perrings, 2003). They also find that inter-species’ crop genetic diversity is positively
related to mean income and negatively related to the variance of income. While

increasing productivity on farms, diverse farming systems help farmers manage some
3

A small-scale farm is defined as any farm which is less than one hectare. We only concentrate on smallscale farms in this study. This is due to three reasons. First, small-scale farms are the most common type
of farms in rural areas in Sri Lanka. Second, maintaining diverse farming systems with the objective of
acquiring family food consumption is a common characteristic of small-scale farms rather than large-scale
farms. Third, some indicators of agricultural biodiversity that we considered in this study such as animal
diversity, landrace cultivation and organic production can commonly be seen in small-scale farms in the
country.

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resources, such as labour, optimally. It also helps to increase farm revenues by
minimising market risks which is a common problem in developing countries. For
example, in a particular season prices of some crops or livestock can decrease while
others can increase. Therefore, maintaining more diverse farming systems help farmers
manage unnecessary risks in the markets. In the third section of this thesis we investigate
the relationship between agricultural biodiversity and farm level efficiency.This type of
study allows us to analyse the effects of agricultural biodiversity on farm level technical
efficiency.

The overall objective of this thesis is to address some of the issues related to the above
mentioned three sections in the context of Sri Lanka’s agriculture. Accordingly, the
thesis has three separate sections. The structure of the three main sections and
subsequent studies are summarised in Figure 1.1. The first section of the thesis analyses
farmers’ valuation of agricultural biodiversity. The choice experiment (CE) method
which is one of the most widely used and a preferred technique is used for this purpose.
The results are then used to estimate the likely welfare gains under various hypothetical
scenarios. The results of the study will enable policy decision-makers to better

understand the relevant issues and thereby take appropriate action to mitigate some of
the adverse issues in this field.

The second section of the thesis examines the demand for agricultural biodiversity in
small-scale farms in Sri Lanka. This section consists of two studies. The first study
analyses farmers’ demand for crops and livestock varieties respectively while the second

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study examines farmers’ demand for landrace cultivation, mixed farming and organic
farming systems. This section attempts to identify the different market and non-market

Agricultural Biodiversity

Conservation Benefits

Demand Estimation

Technical Efficiency

Choice Experiment
Approach

Agricultural
Household Model

Stochastic Production
Frontier Approach


Welfare change
estimation

Primary data:
Three districts

Agricultural
biodiversity

Different
farming systems

Primary data:
Three districts

Efficiency gains
with AB

Primary data:
Three districts

Figure 1.1: Summary of the three main sections of the thesis

factors which are important for increasing agricultural biodiversity on small-scale farms.
An agricultural farm household model is used for this purpose. The motivations of the
second section of this thesis are threefold. Firstly, this study investigates whether
farmers within a semi-subsistence economy allocate farm resources (e.g. land or
household time endowment) to the production of food crops and thus have higher levels

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