The economics of terraces in the Peruvian Andes : an application of sensitivity analysis in an integrated assessment model

Abstract

Land degradation is a global constraint to economic development in countries such as Peru that have a complex topography where soil erosion is an important problem. Governmental and private institutions are promoting adoption of soil conservation practices such as construction of slow formation terraces, yet they lack accurate estimates of the private and social benefits and costs of these investments. The objective of this thesis is to provide a better understanding of the economics of terrace investments by (1) developing a method to conduct a sensitivity analysis of an integrated assessment model designed for the agricultural production systems in Peru, and (2) conducting an economic analysis of the effects of terraces on productivity and their economic implications. The Tradeoff Analysis software was used to implement an integrated assessment model and to conduct a sensitivity analysis of terrace investments in a watershed in northern Peru. Key parameters in the analysis are: erosion and terrace effects on productivity; interest rates; terrace maintenance and investment costs; and time to achieve terrace maturity. The analysis shows that the proportion of fields on which terraces are a profitable investment can be highly sensitive to key parameters, thus demonstrating the importance of sensitivity analysis to understand and interpret policy implications derived from integrated assessment models. The analysis also verifies the hypothesis that physical and economic heterogeneity are important determinants of terrace profitability. Terraces were found to be most profitable on more steeply sloped fields, implying that farmers have incentives to invest in terraces where both private and social returns are the highest.