Keywords: Gum Arabic; Deforestation; Entry and Exit; Real options Drought; Socio-economic, Oligopoly; Interdependent markets; Stackelberg.The gum arabic belt inSudanoffered in the past an example of how environmental conservation and economic development could be achieved simultaneously as it generates a number of private and social benefits to gum producers and the country as a whole. The most important benefits from the gum based system are income from the gum harvest to the poor farmers and combating large scale desertification in the Sudan-Sahel zone. Over the last few decades, however, the gum belt suffered from increased degradation, gum production decreased andSudanlost its near monopoly position in the gum export market. The main purpose of this study is to obtain a better understanding of the factors underlying the deforestation of the gum belt and the decline in gum production inSudanduring recent years.Two important gum arabic producing acacias are found in the gum belt: Acaciasenegal that produces high quality gum and Acacia seyal that produces low quality gum. The analysis in this study focuses mainly on Acaciasenegal and Acacia senegal -based agroforestry system in Kordofan region - a major gum production area inSudan. Various methodological approaches including theoretical and empirical analysis are employed in the study. A micro econometrics technique is used to identify the effect of socio-economic factors assumed to influence the disadoption of gum production. The study merges the real options approach with agroforestry to analyze farmers' investment decision in the choice between three different land use systems (gum agroforestry, gum forestry and agriculture). Moreover a theoretical scheme of Stackelberg model (non-cooperative oligopoly model) is deployed to analyze the competition in the gum export market for high and low quality gum between the (leader)Sudanand the followers (ChadandNigeria). It attempts to investigate the effects of market interventions-such as international subsidies on gum market equilibrium and leader's (Sudan's) long run performance of profits from the gum export.The micro-econometric approach used to analyze the determinants of farmers' disadoption of gum production shows that factors which affect the opportunity cost of labor and income from annual crops tend to influence the observed variation in the behavior of adoption practices in gum production. Income from annual crops has a positive effect on continuous adoption of gum agroforestry. This specific result suggests that gum arabic and other agricultural crops (except groundnut because of overlap in harvest time) do not compete but rather complement one another in the household farming economy. Policy measures that aim to improve agricultural production in the region will induce farmers to settle in their village and reduce the seasonal labor migration trend which in turn will increase the availability of labor for gum production.The theoretical framework developed using a real options approach aimed to analyze the economic incentives for entry (planting gum tree) and exit (abandoning gum forest) in the gum arabic agroforestry.Monte Carlosimulation shows that higher economic benefit is observed from agricultural production than the gum production. Results also suggest that an increase of about nine to ten times on the average opportunity costs of labor is necessary in order for farmers to further abandon gum arabic production and neglect the gum forest.As for the expansion (plantation) of gum forest we analyzed two options: converting idle land into gum forest and converting agricultural land into gum forest. Results show that the incremental average annual benefits of gum agroforestry or forestry systems are above the critical values for converting idle land to a gum arabic forest. This suggests that farmer's could expand gum forest. However, this is not observed, and we suggest two interpretations to explain the observed non-expansion of gum forest into idle lands: scarcity of labor and insecure property rights caused by political instability in the country which discourage long-term investments.Furthermore, the current incremental average annual benefits for converting agricultural land to gum arabic agroforestry (forestry) system are found to be below the calculated threshold values needed for the investment. Results suggest that an increase in the prices of gum arabic respectively of about 315 per cent and 775 percent is needed to induce a shift in land use system from continuous agricultural production to gum agroforestry or forestry land use systems respectively.The analysis of the competition in the gum export market between the three major gum exporters attempts to assess the best strategy forSudanto pursue in light of the recent changes in the gum market structure and the proposed donor policies of subsidizing gum production in Sub-Saharan Africa. The analysis is based on von Stackelberg model and investigates the effect of different subsidy scenarios. Our result shows that the proportionate increase inSudan's profit is higher when the leader (Sudan) uses a subsidy to promote high quality gum than when it uses the subsidy to promote the low quality gum. In the case of followers (Chad,Nigeria), however, the decision on which quality to promote appears to be sensitive to the levels of own and cross price elasticities. Moreover, the results suggest that it is in the advantage of Sudan, Chad and Nigeria to adopt an export coordination strategy with some side payments to be made by Sudan as compensation for Chad's and Nigeria's lost profits in case they agree to curtail their export of high quality gum.
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