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Around the world in recent years, there has been a clear movement towards fisheries management based on property rights. This trend mirrors the earlier development of the organization of economic activity on land. The spread of fisheries management based on individual transferable quotas (ITQs) is another stage in the historical expansion of property rights as a method of economic organization. Economic history informs us that the extension of rights to private property has generally been motivated by the desire to increase economic efficiency (North 1981), and private property is generally believed to be fundamental to the current high level of economic productivity on land (Hayek 1976; Buchanan 1975). As with property rights on land, the ITQ system may be expected to yield substantial economic benefits.[ITQs are, of course, imperfect property rights. An ITQ is a harvesting right and not property in the fish stock. They are, therefore, different from what we refer to as property rights to land. As pointed out by Hannesson (1994), ITQs are comparable to a right to extract a certain quantity of timber from a given forest or the right to harvest a certain number of deer from a given colony. Although this may give the necessary incentives to cut the timber and catch the deer in efficient ways, it may not be suitable for the optimal husbandry of the forest or the colony of deer. See also Edwards (1994) for a clear presentation on the different property rights arrangement.
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Iceland and New Zealand are the front-runners in this development. These countries were the first to introduce individual quotas (IQs) and individual transferable quotas (ITQs) in major ocean fisheries. In Iceland, IQs were introduced in the herring fishery in 1975. In 1979, these quotas were made transferable, creating a fully fledged ITQ system in that fishery. IQs and subsequently ITQs were introduced to other Icelandic fisheries during the 1980s. In New Zealand, ITQs were introduced in 1982 and seem, generally speaking, to have been successful (Arnason 1992a, 1996b).
The purpose of this paper is to look at the ITQ system as it developed in the Icelandic fisheries. IQs and subsequently ITQs were introduced into other Icelandic fisheries during the 1980s. Since 1991, all major fisheries within the Iceland's economic exclusive zone (EEZ) have been subject to a uniform system of ITQs with only minor exceptions. This chapter will describe the current structure of the system and evaluate its performance.

The Icelandic economy is heavily dependent on the fisheries. Exports of fish products account for around 80 percent of the commodity exports in Iceland and 50 percent of the foreign exchange earnings. The fishing industry's direct contribution to GDP is about 17 percent, but total contribution (direct and indirect) is estimated to be as high as 45 percent of GDP. In other words, without the fisheries Iceland's GDP would be only about 60 percent of the current GDP (Arnason 1995a: 85-86). The fishing industry's size relative to the whole economy means that any fisheries' policy has far-reaching implications. The fishing industry is a major determinant of personal incomes and income distribution and, in many parts of Iceland, the fishing industry is virtually the only basis for economic activity. Anything that affects the fishing industry, therefore, has a regional impact that often has very potent political repercussions. As a result, fisheries management is a major topic of public discussion and has great influence on the formulation of Iceland's economic and regional policy.
The most important of the Icelandic fisheries is the demersal or groundfish fishery, which harvests bottom-dwelling species. The demersal fishery currently generates over 80 percent of the total wetfish value (i.e., expressed in terms of the value of landed, unprocessed catch). The most important demersal species are cod (Gadus morhua, Gadidae), haddock (Melanogrammus aeglefinus, Gadidae), redfish (Sebastes sp., Scorpaenidae: mostly S. marinus and S. mentella), and saithe (Pollachius virens, Gadidae). Also important is the pelagic fishery, which harvests upper-sea species. The pelagic fishery, based upon capelin (Mallotus villosus, Osmeridae) and herring (Clupea harengus, Clupeidae), yields up to 10 percent of the total catch value. In addition to demersal and pelagic fisheries, fisheries harvesting crustaceans such as shrimp and lobster, and shellfish such as scallop are significant. A detailed numerical description of these fisheries and their relative importance is provided in table 1.

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The current fishing fleet measures about 129,000 gross registered tonnes (GRT) and consists of several vessel types. It is convenient to describe the fleet in the following four main categories.

These are large fishing vessels between 200 and 1200 GRT and 130 and 250 feet (40-75 m) in length. They are engaged in the demersal fisheries employing bottom and, occasionally, mid-water trawl. Some also are used in the deep-sea shrimp fishery. Due to their size, the deep-sea trawlers have a wide operating range and are able to exploit practically any fishing ground off Iceland as well as those in international waters. Each trip in domestic fishing grounds usually lasts for from 5 to 15 days. A number of the deep-sea trawlers have recently been turned into freezer trawlers. The fishing trip of a typical freezer trawler is from 20 to 30 days; it may be longer if the ship goes into distant waters.

These vessels-200 GRT and larger-are engaged primarily in the capelin fishery. Most also participate in other fisheries, particularly the deep-sea shrimp fishery and the herring fishery. The specialized purse-seiners usually follow the capelin schools over great distances and land their catches where it is most convenient.

The multipurpose vessels cover a wide size range, from 12 GRT to over 200 GRT. The typical multipurpose vessel is smaller than those previously discussed, the average size being just over 100 GRT. The multipurpose fleet tends not to specialize with respect to fishing gear or fishery. Most of the multipurpose fleet is designed to gillnet or longline although they are technically capable of employing trawl and purse-seine gear as well. The geographical range of the smaller multipurpose vessels is limited and they are normally confined to fishing trips of one to three days, exploiting grounds relatively close to their home port. The fishing trips of the larger vessels can last up to two weeks.

This class of fishing vessels covers numerous vessels of sizes up to 12 GRT, although most are under 10 GRT. These vessels are typically owner-operated and employed on a seasonal basis. This fleet employs handline, gillnet and longline gear. Depending on the gear and fishery, the size of the crew ranges from one to three people. The smaller of the part-time fleet-vessels under 10 GRT-were not subject to vessel-quota restrictions until 1991, so this component of the part-time fleet mushroomed in the preceding years (see figure 1). Vessels under 6 GRT are still allowed to opt for restricted catch days instead of quota restrictions.

Further details about the Icelandic fishing fleet are set out in table 2. As shown in that table, the average age of the fishing fleet is rather high. This is the effect of restrictive fishery-management measures and official efforts in recent years to halt new investment in the fishing fleet.

Until the extension of the fisheries jurisdiction to 200 miles in 1976, the Icelandic fisheries were international and common-property fisheries. Large foreign fishing fleets featured prominently on the fishing grounds, taking almost half of the demersal catch. The extension of fisheries jurisdiction to 200 miles all but eliminated foreign participation in the Icelandic fisheries. However, the initial management measures taken in the demersal fisheries following the extension of the fisheries jurisdiction were inadequate. These measures did not alter the common-property nature of these fisheries for domestic fishers, who were still forced to compete for shares in the catch. Not surprisingly, the development of the Icelandic fisheries after World War II closely followed the path predicted for common-property fisheries: investment of capital and effort became increasingly excessive in comparison with the reproductive capacity of the fish stocks. The postwar development of fishing capital and catch values before the introduction of the demersal vessel-quota system in 1984 are illustrated in figure 2.

The value of fishing capital employed in the Icelandic fisheries increased by over 1200 percent from 1945-1983; during the same period, real catch values increased by only 300 percent. Thus, the growth in fishing capital exceeded the increase in catch values by a factor of more than four, and, in 1983, the output-to-capital ratio in the Icelandic fisheries was less than one-third of the output-to-capital ratio in 1945 (see Arnason 1995a: 102-103).
This long-term decline in the economic performance of the Icelandic fisheries did not go unnoticed by the authorities, and, over the years, various measures were taken to reverse this trend. Before the extension of the exclusive zone to 200 miles in 1976, however, effective management of the fisheries-especially demersal fisheries-appeared impracticable due to the presence of large foreign fleets on the fishing grounds.
With the de facto recognition of the exclusive 200-mile zone in 1976, the situation changed dramatically. The Icelandic fisheries gradually came under increased management until, after 1991, there was a uniform ITQ system in practically all fisheries. The chronology of this development is summarized in table 3. A more detailed review of the evolution of the ITQ fisheries management system in individual Icelandic fisheries follows.

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Due to an alarming decline in the herring stocks, an overall quota was imposed on this fishery in 1969. Since this did not halt the decline in the stocks, a complete herring moratorium was introduced in 1972. In 1975, when fishing from the Icelandic herring stocks was partly resumed, it was obvious that the whole fleet could not participate. A system of individual vessel quotas with limited eligibility was introduced in 1975. Vessel quotas were small and issued on a year-to-year basis.[The quotas were not permanent, but determined annually by dividing the TAC by the total number of eligible vessels applying to participate in the fishery. ]
In 1979, spokesmen for the industry suggested fairly unrestricted transfers of quotas between vessels, which the Ministry of Fisheries permitted. [It had been observed that there were various methods for bypassing the non-transferability of the IQs (Arnason 1996). ]
The Fisheries Management Act of 1990 made the vessel-quota system in the herring fishery part of the general ITQ system.

The capelin fishery, which became big in the 1970s, was subjected to limited entry and individual vessel quotas for licence holders in 1980, when the stock was seriously threatened with overfishing. The arguments for introducing vessel quotas were the same as those in the herring fishery.[Owners of the bigger purse-seine vessels met in June 1980 and decided that they would ask the Ministry of Fisheries to limit entry into the capelin fishery and allot a TAC share to each licensed vessel. Only 52 vessels received licences. There had been 68 vessels engaged in the capelin fishery the year before. ]
The positive experience with the vessel-quota system in the herring fishery proved a convincing argument for adopting a similar system in the much more important capelin fishery. In 1986, in conjunction with an increasing transferability of demersal vessel quotas, capelin vessel quotas became partly transferable. The capelin vessel quota system became a part of the general ITQ system with the adoption of the Fisheries Management Act of 1990.

With the extension of Iceland's exclusive fishing zone to 200 miles in 1976, the major demersal fisheries were subject to overall catch quotas. The quotas recommended by the marine biologists soon proved quite restrictive, and difficult to uphold. As a result, individual effort restrictions, taking the form of limited fishing days for each vessel, were introduced in 1977. As new entry remained possible, however, and the demersal fleet continued to grow, the allowable fishing days had to be reduced each year.[In 1977, deep-sea trawlers were allowed to fish for cod 323 days a year. In 1981, they were allowed only 215 days a year. ]
It gradually became obvious that this system was economically wasteful.
In 1984, following a sharp drop in the demersal stock and catch levels, a system of individual vessel quotas was introduced.[On December 22, 1983, the parliament passed an amendment to the Fisheries Act of 1976 that gave the minister of Fisheries discretionary power to put a vessel-quota system in place. In the upper house of the parliament, the amendment received only the minimum majority necessary-11 of 20 MPs in support. At the annual meeting of the Fisheries Association of Iceland on December 2 and 3, after heated discussion, the members agreed to ask the Ministry of Fisheries to experiment with IQs for the demersal fisheries for one year in 1984. ]
Initially, regulations to this effect were issued for one year only. Due to the favourable results of the system, it was extended, though, in order to ensure sufficient support for the system, an important provision was added. Vessels were allowed to opt for effort restrictions instead of catch quotas. In 1988, the Icelandic parliament enacted general vessel-quota legislation that applied to all Icelandic fisheries and was effective between 1988 and 1990.[The Fisheries Management Act of 1988 became law on January 8, 1988. ]
This legislation retained the effort-quota option but made it less attractive. In 1990, the Icelandic parliament passed comprehensive ITQ legislation, the Fisheries Management Act, which abolished the effort-quota option and closed other loopholes in the previous legislation, especially in regards to the operation of vessels under 10 GRT. Moreover, it extended the ITQ system indefinitely, albeit with a stipulation for a revision in 1992.10.[The Fisheries Management Act of 1990 was amended in 1992 and 1994. Both amendments dealt with restricting temporary transfers of quotas and the latter extended the part-time fleet's exemption from the ITQ system. The Act was amended again in 1996. See below, pp. 47-48. ]

The inshore shrimp, lobster, and scallop fisheries are relatively recent additions to the Icelandic fisheries. These fisheries were developed largely during the 1960s and 1970s and, from the outset, have been subject to extensive management, primarily limited local entry and overall quotas. An overall TAC for the lobster fishery was set in 1973, with restrictions on the size of vessels and, in 1988, licensing and vessel quotas. New legislation regulating the processing and fishing of inshore shrimp and scallops was passed in 1975. This legislation gave the Ministry of Fisheries authority to issue quotas for shrimp and scallop to the processors. There are 7 inshore shrimp areas, each having regulations specific to it; two areas already had IQs in 1974. Recently, there has been a strong movement towards vessel quotas in these fisheries, and, in 1988, the deep-sea shrimp fishery was subject to vessel quotas. The management of shrimp and scallop fisheries became part of the general ITQ system with the Fisheries Management Act of 1990.

As may be inferred from this description, the course towards a complete ITQ fisheries management system in Iceland evolved more through trial and error than by design. In most countries-and Iceland is no exception-there is strong social opposition to radical changes in the institutional framework of production and employment. A great deal of this opposition derives not from rational arguments but rather from the desire to protect traditional values and vested interests. From a sociopolitical point of view, Iceland probably had to pass through an evolutionary process during which various management methods were tried in different fisheries. The knowledge and understanding gained from these experiments were crucial for the eventual acceptance of a more efficient ITQ system.
The key steps in the evolution of the ITQ system were taken in response to a crisis such as a sudden reduction in stock levels. Thus, individual vessel quotas were introduced in the herring fishery in 1975 following a disappearance of the herring stocks and a prolonged moratorium on herring catches. Similarly, vessel quotas in the capelin fishery and the ITQ system in the demersal fisheries were introduced in 1984 in response to the perceived danger of a collapse in the stock levels and a serious financial crisis in these fisheries.
This pattern reflects the reluctance of the fishing industry to accept changes in the traditional organization of the fisheries. Only when faced with a significant fall in income due to fish-stock reductions or a drop in the world market price for fish products have interest groups been willing to consider changes in the institutional framework of the fisheries.[That rule changes in the fisheries are always a response to a crisis, such as lower income for fishermen, fits nicely with Libecap (1989). One should bear in mind, though, that even if the adoption of an ITQ system is considered a radical rule change, it was not new to the Icelandic fisheries, as IQs already existed in the herring and capelin fisheries at this time. As early as 1981, the favourable experience of quotas in these fisheries had influenced many vessel owners that nothing short of an ITQ system was needed. Despite an increased catch of demersal species, the fishing industry was running at heavy losses in the period from 1981 to 1983. ]
The passing of the comprehensive ITQ fisheries management legislation in 1990 constitutes a break in this pattern. For the first time, the fishing industry agreed to a significant improvement in the fisheries management system without being threatened with the alternative of a financial disaster. This must be attributed to the potentially immense economic benefits of the vessel-quota system, which were now becoming apparent to most of the participants in the fisheries.

Although this system was instituted at different times and in different forms in the various fisheries, it was made uniform by the Fisheries Management Act of 1990. The fisheries management system is based on individual transferable quotas and is appropriately referred to as an ITQ system. The essential features of the current ITQ system are as follows: all fisheries are subject to vessel catch quotas; the quotas represent shares in the total allowable catch (TAC); the quotas are permanent, [It might be more accurate to say that ITQs are indefinite rather than permanent rights. Parliament can, in principle, decide to return to open-access fisheries. See Edwards (1994) for a clear presentation of property rights concepts. ]
perfectly divisible and, with some restrictions, freely transferable; they are issued subject to a small annual charge to cover enforcement costs. The ITQ system is fairly uniform across fisheries, although slight differences between fisheries exist, mostly for historical reasons.
The ITQ system was superimposed on an earlier management system designed mainly for the protection of juvenile fish. This system, involving certain restrictions on gear, area, and fish size, is still in place. The ITQ system has not replaced these components of the earlier fisheries management system.

The Ministry of Fisheries determines the total allowable catch (TAC) for each of the most important species in the fisheries. This decision is made on the basis of recommendations from the Marine Research Institute.[The Marine Research Institute (MRI) has its own vessels to study the state of the fish stocks. In addition, the Institute relies on information from the fishers. For example, there is the annual trawler-rally and the gillnetters-rally, in which a number of trawler and gillnet vessels is contracted by the MRI to harvest in particular areas at given dates and record all information (volume and composition of the catch, size and age of fish, etc.) about the catch. ]
Recently, the Ministry of Fisheries has followed the recommendations of the Marine Research Institute quite closely, except in the cod fishery (see figure 3).[The cod fishery plays a substantial role in the economy. Not surprisingly, successive governments have been reluctant to curtail cod TACs in accordance with the recommendations of the MRI. Only in the 1990s has the Ministry followed this advice and stood firm on that decision despite political pressure, even from within the government. In addition to the government fisheries researchers, the vessel owners association employs its own researchers. ]

Currently 13 species are subject to TACs and, as a consequence, to IQs.[They include 8 demersal species: cod, haddock, saithe, redfish, Greenland halibut, plaice, catfish and witch; two pelagic species: herring and capelin; shrimp, lobster, and scallops. Together these species account for over 90 percent of the catch value.]
Several species that are not heavily fished are not currently subject to TAC and fishing of these species can be pursued freely. These fisheries are, in most cases, commercially negligible.

Every eligible vessel is issued a permanent share in the TAC for each species for which there is a TAC. These permanent quota shares can be referred to as TAC shares.

The initial allocation of TAC shares to individual vessels varies over fisheries. In the demersal, lobster, and deep-sea shrimp fisheries, the TAC shares normally are based on the vessel's historical catch-record during certain base years. In the demersal fisheries, this usually equals the vessel's average share in the total catch during the three years prior to the introduction of the ITQ system in 1984. There are some noteworthy exceptions to this rule. If, for instance, the vessel in question was not operating normally during the period from 1981 to 1983 due to major repairs, or had entered the fleet after 1981, the calculated share was adjusted upwards. Also, during the years 1985 to 1987, it was possible to modify the TAC shares by temporarily opting for effort restrictions instead of vessel quotas and demonstrating high catches during this period.
In the herring and inshore shrimp fisheries, the initial TAC shares were equal for all eligible vessels.[The management of inshore shrimp has moved from processor quotas to vessel quotas. ]
The same was true in the capelin fishery except that a third of the TAC shares were initially allocated on the basis of vessel hold capacity.

The size of each vessel's annual quota in a specific fishery is a simple multiple of the TAC for that fishery and the vessel's TAC share.[In some fisheries (e.g., capelin and inshore shrimp) the management periods are less than a year (seasonal). Nevertheless, the same rule applies. ]
While the TAC share is a percentage, annual quotas are denominated in volume terms.
As the Icelandic demersal fisheries are a mixed-stock fishery and vessels are bound to catch other species, the ITQs (or TAC shares) also are denominated in cod-equivalent terms, i.e., because cod is the most important species in the Icelandic fisheries, it is used as the common denominator for the whole ITQ system.[Cod equivalent values in 1995/96 are: Cod 1.00, haddock 1.10, saithe 0.55, redfish 0.8, plaice 1.30, Greenland halibut 1.70, capelin 0.05, herring 0.08, lobster (tails) 8.40, shrimp 1.00 and scallops 0.40.] This provides some flexibility for the vessels as they can subtract by-catch of other species from their quota at fixed values (Arason 1995).

Both the TAC shares and the annual quotas are freely transferable and perfectly divisible. Any fraction of a given quota may be transferred to another vessel. TAC shares are transferable without any restrictions. Transfers of annual vessel quotas, on the other hand, are subject to some restrictions. Annual vessel quotas are freely transferable between vessels within the same geographical region. Transfers of annual quotas among geographical regions are subject to revision by the respective fishers' unions and the local authorities. Offsetting transfers of different species with equal value are not subject to such restrictions. The rationale for this stipulation is that it will stabilize local employment in the short run. In practice, however, it appears that few interregional transfers are actually blocked (see table 4).
In 1992 and 1994, the parliament amended the Fisheries Management Act of 1990, adding further restrictions. These restrictions, however, are relatively insignificant; they were designed to discourage speculative quota holdings and stabilize regional and fishers' employment in the short run.[One amendment stipulates that if a fishing vessel did not harvest at least 25 percent of its annual quota for 2 years in a row, it would forfeit its TAC share. In another amendment, this harvesting requirement was doubled. It was also stipulated that no vessel could more than double its quota corresponding to its TAC share by temporary quota purchases. It may, however, acquire permanent quota shares without limit. In a temporary amendment that expired at the end of 1995, no vessel could buy annual quotas if it had during the same year sold more than 15 percent of its quota, nor could it sell if it had previously bought more than 15 percent of its annual quota. ] Apart from this, transfers of quotas are subject to registration with the Ministry of Fisheries. The particulars of the exchange, including price, are not registered.[Vessel owners are not allowed to have the crew share costs in quota transfers. ]

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In addition to the ITQ system, the Icelandic fisheries are subject to restricted access. All commercial fishing vessels must hold both a valid fishing licence and catch quota. Fishing licences are issued to vessels in the fishery since 1990 and replacements comparable to the original in fishing power. Fishing licences are transferable only with vessels.[One consequence of restricting access and licensing is that licences become valuable if they are transferable. As restricted access and licensing usually accompanies an ITQ system, this "wealth effect" or "windfall" is often associated incorrectly with ITQs. The "wealth" or "windfall" is the result of the licensing, not the ITQs. ] One of the impacts of a well designed ITQ system is to provide the socially appropriate incentive for investment (or disinvestment) in the fishing fleet; the fishing-licence stipulation clearly adds a deterrent to investment in fishing vessels.

There is one minor exemption from the current ITQ system. In the demersal fisheries, hook-and-line fishing by vessels under 6 GRT are allowed exemption from quota restrictions, but are subject, instead, to limited fishing days and an overall TAC. Although this arrangement was to end in 1994, the exemption was extended, though the number of fishing days was reduced. Under the 1996 amendment to the Act, these vessels must choose between a share quota and an effort quota. As a group, they continue to receive a common share of the general TAC.

The annual vessel quotas were initially issued by the Ministry of Fisheries free of charge. However, in accordance with the Fisheries Management Act of 1990, the Ministry now collects fees for catch quotas to cover the cost of monitoring and enforcing the ITQ regulations. The law imposes an upper bound on this fee amounting to 0.4 percent of the estimated catch value. The Ministry estimates that it will collect US$6 million in quota fees in the 1996/97 fishing year. In addition, the vessel owners will pay an estimated US$2 million in licence fees in 1996/97, and each vessel also has to pay harbour fees for docking at a port and fees for having the catch weighed, whether it uses a public weighing station or a private firm.

The Icelandic ITQ system has most of the features of an ideal ITQ system, as described in the literature (see Arnason 1990). However, there are particular aspects of the Icelandic ITQ system that deviate from the theoretical ideal and subtract from its economic efficiency. First, in the Icelandic ITQ system, the ITQs are associated closely with fishing vessels. Only those who own vessels with a valid fishing licence can hold quotas. In addition, the total holdings of quotas must not exceed the fishing capacity of the vessel in question. This severely restricts the set of potential holders of ITQs and clearly subtracts from the ability of the quota market to generate the most economically beneficial allocation of quotas. Second, the holders of TAC shares must harvest at least 50 percent of their TAC share every second year to retain the share. This stipulation is designed to stop speculative quota holdings. However, it reduces the efficiency of the quota market and maintains more vessels than would be optimal. Third, the ITQ system in the demersal fisheries was combined with an optional limited-effort system in 1985. This option was not abolished until 1991. In the meantime, a large fraction of the demersal fleet opted for limited effort rather than IQs. Further, the part-time fleet only became subject to ITQs in 1996, and a little less than half of those vessels can choose to be exempted from the system. Table 5 shows what fraction of the demersal catch has been subject to ITQs. The performance of the ITQ system in the Icelandic demersal fisheries has to be interpreted with this in mind.

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The main purpose of the vessel-quota system is to improve the economic efficiency of the fisheries. The Icelandic fisheries are biologically very productive and able to generate high economic rents. Until the adoption of the vessel-quota system, however, comparatively low rents were generated in the industry. During the years preceding the introduction of the vessel-quota system, losses in the various fisheries were often very great (see Arnason 1995a). Since, the ITQ system was introduced at different times and in different forms in the various fisheries, we shall discuss the impact of the system on each of these fisheries separately.

The herring fishery resumed in 1975 after a three year fishing moratorium. A system of individual vessel quotas was imposed on the fishery, with eligibility for quota allocations limited to small vessels with a history of herring fishery participation. The larger purse-seiners were excluded on the grounds that they were capable of pursuing the North Sea herring fishery and the Icelandic capelin fishery. Due to the generally favourable experience with this system, the quotas were made perfectly divisible and transferable in 1979. In 1990, the herring fisheries management system was incorporated, largely unchanged, in the comprehensive fisheries management system for the Icelandic fisheries.
The ITQ system in the herring fishery has been very successful. Herring catches have increased almost tenfold since 1975, and fishing effort has declined substantially. The number of vessels in the fishery decreased from about 65 vessels in 1975 to 30 to 40 in recent years.[These 30 to 40 vessels catch Icelandic herring in the autumn and winter months. Roughly half of these vessels also participate in the Norse herring fishery, which resumed in 1994. The Norse herring stock migrates between Norwegian jurisdiction and Icelandic and Greenland waters. IQs were issued for this fishery in 1996. The Ministry of Fisheries has declared open-access for all licensed vessels in this fishery in 1997, a decision that the Association of Vessel owners has protested, since they prefer ITQs. ] Technical efficiency in the herring fishery is now roughly 10 times higher than it was at the outset of the vessel-quota system in the fishery 20 years ago (Arnason 1993). The development of the herring fishery in terms of number of vessels and catches is described in figure 4.

An individual vessel-quota system was introduced in the capelin fishery in 1980. In 1986, the quotas were made transferable. In 1990, the capelin management system was incorporated in the overall Icelandic fisheries-management system.[Part of the capelin stock migrates seasonally into the jurisdiction of the Greenland and Norwegian fisheries. The capelin is therefore a shared stock, but, through an agreement with these two countries, Iceland determines the annual TAC to be shared between the three countries. Iceland's share is 78 percent of the TAC and Norway and Greenland each receive 11 percent. In winter, the capelin is fished exclusively in Icelandic waters. ] The capelin is a short-lived species and the fishery is very volatile. Since the introduction of the vessel-quota system in 1980 there has been no trend in catch levels, though mean catches have remained roughly unchanged. The capelin fleet, on the other hand, has been substantially reduced: the number of vessels has declined from 68 in 1979 to 44 in 1996, or by more than 30 percent, and the number of vessels is expected to decrease further this year.[The number of vessels participating in the capelin fishery in 1993 was down to 39. In the Summer of 1994 the Norse herring fishery resumed and that seems to have induced some vessel owners to revert to purse-seine fishing. The TAC for the Norse herring in 1995 was 150,000 tonnes and 190,000 tonnes in 1996. The size of the capelin stock has been growing and the TAC increasing as a result. The capelin catch had averaged less than 680,000 tonnes since 1980 but the TAC for the 1996 fishing year was 1,175,000 tonnes. ] The total tonnage (GRT) of the fleet has been reduced by over 25 percent. Thus, there are strong indications that the efficiency of the capelin fishery has increased substantially since the introduction of the vessel-quota system. The development of the capelin fishery, in terms of vessel number and catches, is illustrated in figure 5.

The demersal fisheries are by far the most important Icelandic fisheries, accounting for around 80 percent of the total wetfish value. These fisheries have been subject since 1984 to an individual transferable quota system, which has been under continuous revision, even since the adoption of the comprehensive Fisheries Management Act of 1990.

One of the reasons for the dissipation of economic rents in the Icelandic fisheries is overinvestment in fishing capital and excessive fishing effort. Therefore, one of the tests of the efficacy of the vessel-quota system is the development of fishing capital and aggregate fishing effort since the introduction of the system.
The trend in fishing capital and fishing effort in the demersal fisheries in recent years is illustrated in figure 6. The previous growth in the value of aggregate harvesting capital halted abruptly in 1984 when the vessel-quota system was introduced. In fact, fishing capital contracted between 1984 and 1985. This was the first time since 1969 that the value of the fishing fleet decreased. In the preceding 15 years, capital value had grown at an annual rate of over 6 percent. The vessel-quota system seems to have generated beneficial results, although the halt in investment can not be attributed exclusively to the vessel-quota system. The years 1982, 1983, and 1984 were periods of heavy losses for the fishing industry. In 1986, investment in fishing capital resumed at a high rate. This resumption of investment should not, however, be interpreted as a failure of the vessel-quota system. The increase in the value of fishing capital since the inception of the ITQ system has amounted to just over two percent annually while, during the preceding 15 years, this annual increase was over 6 percent. Moreover, most of the investment since 1986 can be explained by factors extraneous to the ITQ system.

First, a good deal of the investment in fishing capital from 1986 onwards consisted of the installation of freezing equipment and the corresponding modifications of several deep-sea trawlers. In 1983, there were three freezer trawlers, in 1990, there were 28, and in 1996, there were 50. This part of the capital investment was for new, profitable, techniques for fish processing. Second, a part of the investment was in specialized trawlers for the emerging and very valuable deep-sea prawn fishery that was not subject to vessel quotas until 1988. Third, by the mid 1980s a significant fraction of the deep-sea trawler fleet was due for replacement. Many firms took the opportunity to replace their ageing vessels in 1986 and 1987 as these years were unusually profitable for the harvesting sector. Fourth, during this period there was significant investment in small vessels (under 10 GRT) that were not subject to the vessel-quota system. Last, the effort-quota option in the demersal fisheries introduced in 1985 undermined the efficiency incentives of the ITQ system since it induced many vessel owners to upgrade or replace their vessels. The effort-quota option was abolished in 1990 and there was a significant reduction in fishing capital in that year and the following years.
The course of the demersal fishing effort tells a similar story. As indicated in figure 6, fishing effort in the demersal fisheries dropped by 15 percent in 1984, the first year of the vessel-quota system, and by an additional 6 percent in 1985. From 1986 to 1990, on the other hand, fishing effort increased considerably. This is due to the widespread selection of the effort-quota option within the ITQ system. Another important explanation for the increase in fishing effort in 1989 and 1990 was the decline in the demersal fish stocks without a commensurate reduction in the TACs. Thus, more fishing effort was required to fill the catch quotas. From 1991 onwards, demersal fishing effort declined substantially.[It could be argued that a decline in effort and capital should be expected since the demersal catch in domestic waters has been declining. But, it should be remembered that Icelandic vessels have increased their catches in international waters in recent years.]
The important question, however, may not be whether fishing effort has been reduced from its 1983 level. A more crucial measure of the impact of the vessel-quota system is the difference between the actual fishing effort from 1984 onwards compared to the fishing effort level that would have prevailed had the vessel-quota system not been introduced. Although, it is by no means straightforward to predict the course of fishing effort under the earlier management regime, attempts have been made to do so. Using a simple trend model, one can produce some interesting results (Arnason 1993: 213-14; 1995a: 125-27; see figure 7). We estimate that the vessel-quota system reduced total demersal fishing effort from 1984 to 1990 by over 30 percent compared to the expected fishing effort under the previous management system.[Arnason (1995a: 126-27) tests the hypothesis that there is no structural break in the evolution of fishing effort between the two management regimes. The hypothesis is soundly rejected. ] The financial benefits of this kind of a reduction in effort are substantial. When interpreting these results, however, one should be mindful of the extreme simplicity and mechanistic nature of Arnason's underlying model. In fact, Arnason claims these results should be regarded as indicative only.

Unfortunately, little research has been done in this area and the available information is thus rather scant. From a theoretical point of view, the economic benefits of a vessel-quota system should include the following items:
(1) A Reduction in Fishing Effort Under the vessel-quota system, competition between vessels for a limited stock of fish is eliminated. Consequently, fishing firms will attempt to catch their vessel quota with a minimum of fishing effort. It is important to realize, however, that aggregate fishing effort will not be reduced if the TAC is excessive relative to the size of the fish stocks.
(2) Reduced Cost of Fishing Effort Having secured property rights to a certain volume of catch under the vessel-quota system, fishing firms can concentrate on taking that catch with minimal costs.
(3) Improved Quality of the Catch Being bound by vessel-catch quotas, fishing firms can only increase revenues by improving the quality of this catch.[Arnason (1996a: 86-7) estimates that the economic rents in the demersal fisheries in 1994 amounted to a little over US$200 million, or just over 50 percent of the maximum attainable rents. ]

Monitoring and enforcement is necessary to counter any tendency to "high-grade," i.e., discard inferior catch, and exceed assigned quotas. Violations of fisheries regulations are subject to fines, expropriation of catch and gear, and cancellation of fishing licences, depending on the seriousness of the violation. The Ministry of Fisheries and its agencies have discretionary power to assess these penalties and a proven willingness to use them. Alleged violators have recourse through the court system in cases where they do not accept the Ministry's penalties.
To apprehend those who catch more than their quota of fish, Iceland uses an effective landings-control system. By law, all marine catch must be weighed on officially approved scales at the point of landing, and public officials record the landings and verify the species composition of each catch. The landings-control system covers all 67 landing ports in Iceland, as well as the major foreign export ports.
The Coast Guard has an important role in monitoring and enforcing domestic fisheries regulations, and the Ministry maintains a group of observers to monitor adherence to quota rules and other fisheries regulations. Some observers are stationed aboard fishing vessels during fishing trips, while others travel between the landings ports. Despite elaborate monitoring and enforcement, there are some violations of the various regulations; all together, though, they are negligible.

There are certain weaknesses in the current fisheries-management system, especially from the point of view of economic efficiency. The most serious ones appear to be the following.

High-grading (i.e., discarding less valuable catch) is a problem often attributed to ITQ systems, especially in mixed fisheries. The Icelandic demersal fisheries are certainly mixed fisheries but there is little evidence of increased discarding under the ITQ system. According to measurements published in a 1993 report by a government commission, demersal discards range from 1 to 6 percent of total catch volume depending on gear and vessel type. According to this report, there has not been any detectable increase in discards since the introduction of the vessel-quota system in 1984.

Although the comprehensive Fisheries Management Act of 1990 closed many of the loopholes of the previous ITQ system(s), one worrisome loophole remains. Fishing vessels under 6 GRT in size were offered the option of remaining outside the ITQ system provided they restricted their operations to hook-and-line fishing for demersal species. This exemption, usually referred to as the hook licence, was to expire in 1994, but the Act was amended in 1996 so that this group of vessels now receives a common share of the TAC; these vessels receive a 13.9 percent share of the TAC for cod. Of the 1,009 vessels in this group, 533 chose IQs.
This exemption has resulted in a distortion in the composition of the fishing fleet and the amount of effort in the fishery. The fleet of small boats has increased its share in the demersal catch. The hook-licence fleet has expanded its share in the catch of cod from less than 3 percent in 1989 to over 20 percent in 1995 (see figure 8). After the introduction of the ITQ system in the demersal fisheries in 1984, the number of small hook-licence vessels mushroomed, almost doubling in numbers between 1983 and 1990. Further, investment in small vessels has accounted for almost 15 percent of total investment in the fishing fleet since 1984.[Here is a clear example of rent-seeking in the fisheries. In 1988 vessels between 10 and 12 GRT had to convert to ITQs. At the same time, it was announced that smaller vessels would have to convert to ITQs in 1991, and the vessel's catch in the years 1988 to 1990 would determine its quota share. This fuelled investment in small vessels and increased fishing effort on the part of fishermen using small vessels. In 1990, there were almost 1800 vessels under 12 GRT in the fleet. Their number has decreased by more than 300 since then; these vessels have officially retired, cashing in on their licences by selling their TAC shares.] Similarly, since the introduction of the ITQ system in the demersal fisheries in 1984, the longline fleet has expanded its share in the cod catch from about 9 percent to just over 20 percent. There also has been substantial investment in this fleet.

Quota holdings are limited to owners of fishing vessels. This restriction obviously reduces the number of potential quota-market participants and severely limits the scope for quota arbitrage in the market. The efficiency of the market is impaired and its effectiveness in allocating quotas to the most efficient operators reduced.

The current ITQ system allows quota holders to postpone the harvesting of up to 20 percent of the annual quota allotment until the following year. It also allows quota holders to exceed their quota allotment by up to 5 percent in any year subject to a corresponding quota reduction in the following year. These provisions provide some operational flexibility to vessel owners but, since they allow actual catches in a given year to deviate as much as 25 percent from the TAC, they also admit excessive imprecision in the biological management of the stocks.

Economic theory suggests that the efficiency of an ITQ system stems from its creation of private property in harvesting rights (see, for example, Scott 1989; Arnason 1990, 1995b; Libecap 1989). This suggests that the higher the quality of this property right in terms of security of title, permanence, exclusivity, flexibility, divisibility, and transferability, the greater will be the resulting efficiency of the ITQ system (see Scott 1988, 1989 for more details). Article 1 of the Fisheries Management Act of 1990 states that the fish stocks in Icelandic waters are the common property of the Icelandic people. It further states that the allocation of ITQs to individual firms and vessels does not give irrevocable property rights to these TAC shares. The article has created uncertainty concerning the permanence and exclusivity of the ITQs and undermined its economic effectiveness.
The uncertainty and insecurity of the property rights in ITQs has also created problems for tax authorities and banks. The tax authorities are uncertain whether a vessel-quota should be regarded as an asset on the firm's books, or if expenditures on quotas should be regarded as outlays that are deductible from taxable income. When the tax authorities and the Ministry of Finance could not agree on the rules, it was left for the courts to decide the matter. The courts have reached a decision, which can be described as a compromise of differing views. Transfers of annual quotas are to be treated as taxable income or outlays, while transfers of TAC shares are to be treated as assets and depreciated over 5 years. Allocated quotas, whether annual or TAC shares, are not subject to these tax rules and are to be treated as non-taxable.
The banks have been unsure whether a vessel quota should be regarded as part of the vessel's equity (value) when a vessel is put up as collateral for a bank loan. The courts have ruled that quotas are not to be regarded as the property of a vessel owner, and are, therefore, not a legitimate collateral for loans. Vessel owners and banks have, of course, figured out ways to circumvent this ruling: for example, the bank will make a loan on condition that it must approve of any transfer of TAC shares.
In addition to these rulings by the courts, legal scholars in Iceland have debated these issues and there seems to be a general consensus among them that Article 1 of the Fisheries Management Act of 1990 lacks grounding in other legislation (see Ulfljotur 1995). These scholars, it should be noted, do not consider the fishery the property of TAC shareholders, but rather that they have a property (an asset) in harvesting rights.

Icelandic fishing vessels have sailed to far away international waters to compensate for smaller quotas in domestic fisheries. Vessels have increased their effort in catching deep-sea redfish (which migrates from Greenland waters, through international waters, into Icelandic waters) and blueling just inside and outside of the 200 mile exclusive zone. The catch in these stocks is about 45,000 MT in recent years.
The Icelandic government has participated in international negotiations on several fronts recently. They negotiated with Norway and Greenland on the capelin stock, which migrates into their waters. They negotiated with Norway on the Norse herring stock, which migrates into Icelandic waters in the summer; Icelandic vessels are allowed a catch of 190,000 MT in 1996. The Ministry allocated IQs for that fishery to 67 vessels, 59 purse-seiners and 8 deep-sea trawlers.
They are also negotiating with Norway, Russia, Faeroe Islands and Poland on the deep-sea redfish, as these nations claim a history of catch in that stock. Although these talks have not produced sufficient results, the Ministry will issue ITQs based on catch history in that fishery in 1997. Negotiations with Canadian authorities have led to an agreement on the shrimp fishery on the Flemish Cap and, on the basis of this agreement, the Ministry has allocated ITQs to all Icelandic vessels with catch history on the Flemish Cap. They have also been on-and-off talks with Norway, Finland and Russia on demersal fishing in the Barents Sea. In 1995 the demersal catch of these Icelandic vessels in international waters was around 42,000 MT, of which 75 percent was cod and 20 percent shrimp.

Versions of the ITQ fisheries management system have been in operation in Icelandic fisheries since 1979 and the evidence on the performance of this system is generally favourable. The ITQ system in the herring fishery has resulted in increased efficiency. In the capelin fishery the ITQ system also appears to have produced economic benefits, although the evidence is less conclusive. In the demersal fisheries the evidence is mixed. The fishing fleet has decreased only in the most recent years. Aggregate fishing effort decreased immediately after the introduction of the ITQs in 1984 only to increase again in 1986-1990. From 1992 onwards there has, however, been a dramatic decrease in effort.
When interpreting the development of the demersal fisheries since 1984, one should bear in mind the imperfections of the ITQ system especially in the period 1985-1990. During that period there was widespread use of the effort quota option and the fisheries management system was only partially an ITQ system in those years.
Despite increasing evidence on the favourable impact of the ITQ system, there is still a debate on its merits. The debate is focused on three main issues: economic efficiency, equity, and regional implications.[The equity issue is based on Article 1 of the Fisheries Management Act of 1990 which states that the fish stocks in Icelandic waters are the common property of the Icelandic people. The rents now accruing to ITQ (licence) holders should therefore be partly or fully expropriated and returned to the people. Some economists have applied the argument of efficient taxation to fisheries rent. For a discussion of the possible inefficiency of such a tax see Johnson (1995). ] A fourth issue has been raised in this discussion concerning the condition of the fish stocks. Although this issue is based on a misunderstanding of the ITQ system, it has been associated with it.
The evidence on the economic benefits of the ITQ system is becoming clearer and the TAC for some species will be increased in the near future. The regional impact of the ITQs seems favourable (see Runolfsson, this volume). All this should increase support for the system and its continuation.

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--- (1992b). Stjornkerfi fiskveida: Aflamark og byggdathroun. Greinargerd fyrir nefnd um motun sjavarutvegsstefnu (mimeograph). Reykjavik.
--- (1993). The Icelandic Individual Transferable Quota System: A Descriptive Account. Marine Resource Economics 8: 201-08.
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--- (1995b). The ITQ Fisheries Management System: Advantages and Disadvantages. In S.T.F. Johansen (ed.), Nordiske Fiskerisamfund I Fremtiden (Kobenhave: Nord): 43-70.
--- (1996a). On the ITQ Fisheries Management System in Iceland. Reviews in Fish Biology and Fisheries 6: 63-90.
--- (1996b). Property Rights as an Organizational Framework in Fisheries: The Case of Six Fishing Nations. In B.L. Crowley (ed.), Taking Ownership; Property Rights and Fishery Management on the Atlantic Coast (Halifax: Atlantic Institute for Market Studies): 99-144.
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The Icelandic economy is heavily dependent on fisheries: the export of fish products accounts for around 80 percent of the commodity exports in Iceland and 50 percent of all foreign exchange earnings. The fishing industry's direct contribution to GDP is about 17 percent, but the total contribution-direct plus indirect-may be as high as 45 percent of GDP. In other words, without the fisheries, Iceland's GDP would be only about 60 percent of current amount. The country's relative affluence is, therefore, mostly due to the biological productivity of its marine environment and the activity of its fishing industry. The size of the fishing industry relative to the whole economy means that any fisheries policy has far reaching implications. The fishing industry is a major determinant of personal incomes and income distribution and, in many parts of Iceland, the fishing industry is virtually the only basis for economic activity. Anything that affects the fishing industry, therefore, has a regional impact that often has very potent political repercussions. As a result, fisheries management is a major topic of public discussion and has great influence on the formulation of Iceland's economic and regional policy.
The purpose of this chapter is to examine the impact of fisheries management on Icelandic communities. For this examination, it is convenient to divide Iceland into 7 regions: Western, Western Fjords, Northwestern, Northeastern, Eastern, Southern (including the Westman Islands) and Southwestern (combining Reykjavik and Reykjanes) (see figure 1 for a map showing these regions and important cities and towns.) The Southwestern region is almost completely urban; it holds about 65 percent of the total population of Iceland but only about 6 percent are involved in the fishing industry. The other regions are much less densely populated but the fishing industry in those areas employs from about 20 percent to 40 percent (in the Western Fjords) of the population.

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An ITQ system has been in operation in the Icelandic demersal fisheries since 1984. In public and parliamentary discussions of the merits of the ITQ system in Iceland, some have claimed that it has the fault of undermining regional policy. This group argues that transferability of the quotas will lead to concentration of quota holdings in the urban Southwest region, and that this will harm the villages around the country that rely exclusively on the fisheries. The result will be increasing unemployment in those regions and migration to the Southwest.
In the course of this debate, various proposals to restrict the transferability of quotas have been made. [There were three debated questions at the initial allocation of quotas. (1) What were the base years for catch history? This was resolved by allowing vessels to adjust their quotas through an effort-restrictions option from 1985 to 1990. (2) Should entities other than vessels (e.g., processing plants and fishers) receive quota. The fact that a large part of the demersal catch was caught by vessels owned by firms with processing plants quickly made this question of no importance. (3) Should the government have charged the vessels for the initial allocation of quotas? From this has arisen the further question whether the government should charge the vessels "rent" for using the resource (see Arnason, et al. 1992). For arguments on the efficiency and justness of the initial allocation, see Gissurarson (1990), Arnason and Runolfsson (1991), and Runolfsson (1992). ] Some have even suggested that quotas be attached to certain regions and that transfers be restricted, while others have others have proposed giving local governments, town councils, or fishers' unions some veto power on transfers. The current Fisheries Management Act makes shares in the total allowable catch (TAC) transferable without any restrictions whatsoever. Interregional transfers of annual vessel quotas, however, are subject to some restrictions unless they are offsetting transfers of different species of equal value. Fishers' unions are to evaluate such interregional transfers of annual vessel quotas. Further, local governments have the right to match any offer for annual vessel quotas if they wish to block the transfer of quota out of their regions. In practice, however, few interregional transfers are actually blocked.

The harvesting and processing sectors of the Icelandic fishing industry have until recently been characterized by numerous, relatively small, firms. Frequently these firms exhibit a high degree of vertical integration through the harvesting and processing sectors but there was little horizontal integration. The typical firm in the fishing industry is based in one fishing town or village and operation across regions is rare, though on the increase. The firm operates one or several processing plants and sends out one or several fishing vessels that supply most of its wetfish needs. Independent vessels provide any additional fish needed, on the basis of implicit or explicit contracts, or through wetfish floor markets, where vessels and processors can sell and buy wetfish by auction.[Some markets, such as the Sudurnes fish market in the Southwestern Region, rely less on auction floors and more on telecommunication. In such markets, a buyer can bid via computer and modem. Note also that the fish auctioned need not have been already caught. ] The first three floor markets were established in 1987 and there are now 15 markets, at least one in every geographical region. [This description applies to most of the demersal, crustacean, and shellfish fisheries, and, to a lesser extent, to the herring fisheries. Together these account for around 90 percent of the total value of the Icelandic fisheries. The reduction fisheries, based primarily on capelin and herring, are organized somewhat differently. See Arnason (1995a; 1996a) for further details on the organization of the fishing industry. ]

The purpose of any fishery management system must be to increase efficiency and rents in the fishery. This will be accomplished through a smaller fishing fleet, less effort, and larger fish stocks resulting in increased TAC. A smaller fleet and decreased effort are likely to alter the structure of employment and regional development, since fewer vessels may mean fewer fishers, although the decrease in their number should be proportionally smaller. Fewer vessels and decreased effort will also affect the suppliers of the fishing industry, such as shipyards and gear makers. But fewer vessels and increased TAC will increase the catch per vessel. Fishery management should also work to increase the quality of the landed catch. These improvements should increase fishers' income, in total if not per capita.
Although the increased efficiencies of the fisheries through the ITQ system may decrease employment for fishers and for workers in industries that are suppliers for the fishing vessels, employment in other industries should increase. The increased rent in the fisheries and the consequent higher income of those in the industry should increase demand for other domestic services and industries. There is no reason to expect the net effect on total employment to be negative; the opposite is more likely.

It is now over a decade since the introduction of the ITQ system in the Icelandic fisheries, and it is now possible to examine the impact of the system on regional development in Iceland.
In an ITQ system, the quotas are the key to receiving catch landings. Quota holdings decide how much catch will be landed in a village and, therefore, they determine the employment opportunities in the village's fishing sector. To estimate the impact of the ITQ system on regional development, we shall look at changes in regional quota holdings since the adoption of the ITQ system.
The initial allocation of quotas was based on vessel catch history from 1980 to 1983, and this allocation mirrors the regional distribution of the fishing industry in terms of catches in those years. Since the initial allocation of quotas, subsequent allocation may have changed for any of four reasons. First, it may have changed because of the catch history of vessels in the period from 1985 to 1990, when vessels were allowed to opt for effort quota. Second, it may have changed as a result of a larger part of the fishing fleet coming under the ITQ system after the effort quota option and small vessel exemption (6 to 10 GRT) were abolished in 1991. Third, it may have changed because of transfers of TAC shares between vessels. Fourth, it may have changed with the sale of ITQ vessels from one region to another. Only the third and fourth changes of quota allocation are the result of the ITQ system.
Table 1 lists each region's share of allocated quotas, in terms of cod equivalents.[The weight for the different species, except cod, changes slightly each year. The Ministry of Fisheries puts out new regulations for each fishing year, announcing the TAC for various species, cod equivalent values, and so forth. By changing the cod-equivalent values for the different species, they approximate more closely the actual market value of the catches of these species. Changes in cod-equivalent values explain some of the variations in quota holdings and groundfish landings listed in tables 6 and 7. These changes in cod-equivalent values are insignificant between single years, except for the fishing seasons 1995/96 and 1996/97. ]
As table 1 shows, the changes in quota holdings for the regions are, for the most part, insignificant. The most significant change is the gain in the Northeast region and the loss in the Southwest.

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If quota holdings define the opportunities that villages have for job creation in the fishing industry, the actual catch landings in the village determine the realized number of jobs. Quota holdings and landed catch do not necessarily go together. Vessel owners may choose to land the vessel's catch in another village, region or to export the catch unprocessed. The data on the catch landings from the demersal fisheries are, therefore, important.
Table 2 lists regional landings of the ITQ species from the demersal fisheries. The five species included are cod, haddock, saithe, redfish, and Greenland halibut, and are shown in cod equivalents. The table shows that the regional patterns of demersal landings have a much higher volatility than quota holdings. The Northeast shows an increased share of the landings, as it did in the quota holding. The Southwest increased its share of landings substantially despite its smaller share of quota holdings. This must be attributed to the introduction of floor markets as the first three floor markets-the largest in the country-were established there. They handled close to 50 percent of the total volume of all floor markets in 1994. Since their introduction in 1987, they have grown so that in 1994 they handled about 37 percent of all groundfish landings intended for the domestic processing plants.

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Another significant change is the export of unprocessed groundfish-especially the export in cargo containers-that started in the 1980s. Export of unprocessed groundfish accounted for about 6 percent of the volume of demersal catches (ITQ species) in 1983, about 17 percent in 1990 and 10 percent in 1994. In cod equivalents, the export in 1994 accounted for almost 9 percent of demersal ITQ catches. The Southern region has traditionally been the leading exporter of unprocessed fish, and in 1994 they exported almost 20 percent of their groundfish ITQ catches unprocessed. The Northwest exported close to 17 percent, but all other regions exported less than 9 percent.
Yet another explanation for the divergence between quota holdings and catch landings is found in the increased number of freezer trawlers. In 1996, there were 50 such processing vessels in Iceland, but only three in 1983. Of those, 15 were registered in the Southwest, 14 in the Northeast, 6 in the Western Fjords, 5 in the Northwest, 4 in the South, 4 in the East, and only two in the West.
When the ITQ system was adopted in 1984, small vessels were excluded from the system. From 1984 to 1988, all vessels under 12 GRT were excluded; from 1989 to 1991, vessels under 10 GRT were excluded; from 1991, only vessels under 6 GRT were excluded. These small vessels were allowed to choose between ITQs and effort-days restrictions. The latter option restricts the number of fishing days and limits the vessels to hook and line gear, and is generally referred to as the hook licence. A decreasing majority of these small vessels has opted for the hook licence since 1991, and from 1990 to 1994, the hook-licence vessels more than doubled their catch volume from less than 20,000 gross metric tonnes (GMT) to over 40,000 GMT. Table 3 shows the catch by the hook-licence vessels from 1991 to 1995 and the regional distribution of that catch. As can be seen in the table, the regions have had mixed success in holding their share in this catch.

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Despite initial claims that the ITQs would result not only in a decrease in the number of fishing vessels but also in a decrease in employment for fishers, the opposite has actually occurred. In 1983, there were about 5,800 fishers employed in the harvesting sector; in 1990, there were 7,000 and, in 1995, about 6,800.5. [Employment, number of man years (National Economic Institute 1997). ]
This increase is to be explained mainly by the increase in the number of freezer-trawlers but also by the increase in the number of small vessels. There has, on the other hand, been a decrease in processing employment from 10,200 in 1983 to less than 7,000 in 1993. This decrease is in some part explained by the increased number of freezer-trawlers, but mainly by the smaller demersal catches and the increased exports of fresh fish. Despite the increased number of fishers, the catch value per fisherman has increased by over 20 percent since 1990 (Arnason 1996b).

A substantial portion of annual vessel quotas is traded every year. A number of TAC shares traded each year is smaller, but these exchanges are very significant as they result in fewer vessels in the fishery. The transfers of permanent quotas (TAC shares) of demersal species [There have also been substantial transfers of other quota species, e.g., herring, capelin, shrimp and lobster. ] between regions [Transfer of permanent TAC shares between vessels with different owners has been allowed since 1988. ]
during the period from 1991 to 1994/95, expressed in cod equivalents and as fractions of the total allocated demersal quotas for each year were: 1991-7.3 percent; 1991/92-10.1 percent; 1992/93-14.1 percent; 1993/94-7.6 percent; 1994/95-15.8 percent (National Economic Institute 1997). Despite these high percentages, net transfers to or from any region are smaller, about one percent at most. [Quota holdings by foreigners is not an issue in Iceland, since foreigners are not allowed to own fishing vessels in Iceland. Foreign investment in Icelandic fish processing firms is also restricted. Icelanders have nevertheless invested in harvesting and processing firms abroad. ]

Shortly after the introduction of the ITQ system in the demersal fisheries, there was discussion of the potential for concentration of quotas. If TAC shares were transferable, it was argued, the bigger and richer harvesting firms would in a short time buy the quotas from the smaller firms. It was even suggested that, if permanent quotas were made transferable, a limit should be set on the quota holdings of any one firm. [The Fisheries Management Act of 1990 has a clause setting a limit on the quota holdings of any single vessel; it states that no vessel can have a larger TAC share than it could catch within the fishing year. This clause was added to counter circumvention of the Act by the wetfish floor markets, which had been buying TAC shares and registering them on a single small vessel to increase market activity by providing quotas for vessels selling in the market. In January 1997, the Minister of Fisheries appointed a workgroup to address the issue of whether an upper limit should be set on the ITQ holdings of individual firms. ]

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Table 4 shows the quota holdings of the 11 largest firms in the demersal fisheries. Together they hold about 33 percent (30 percent if we use constant cod-equivalent values) of the demersal quotas and a little less than 32 percent of all ITQs.[The 50 largest harvesting firms held roughly 60 percent of all ITQs at the start of the 1996/97 fishing year (Arason 1996: 120-22). ] Only 5 of these eleven firms have increased their share to any extent in the last 5 years, and one firm has lost some share in the same period. In total these firms have increased their share by some 8 percentage points (5 percentage points in constant cod-equivalent values); about 1.5 percentage points of this increase are explained by Sildarvinnslan Ltd. joining the ten largest harvesting firms.

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That the 11 largest harvesting firms hold roughly 33 percent of all demersal quotas may be seen as a sign of concentration, especially considering that these same firms have increased their share by more than 20 percent in only 5 years.[Of these 11 firms, 8 exhibit a high degree of vertical integration; i.e., they process almost all the catches of their vessels in their own plants.
] But looking only at the number of harvesting firms and their quota holdings can be misleading. Consider the number of shareholders that hold stock in these harvesting firms, since these shareholds are the real owners of the harvesting rights. Table 5 shows how the top 50 percent of stocks are distributed in the eleven largest harvesting firms at the end of 1994. The number of stockholders in these corporations is well over 4,000, so that the percentage of quotas held by these firms is not a sign of concentration.
Further, the example of Samherji Ltd. counters the argument that concentration within an ITQ system makes entry into the industry difficult. This firm, though founded in 1972, came under the current ownership only in 1983, when its only asset was one deep-sea trawler. Samherji Ltd. has since grown to be, in January 1997, the largest quota holder in Iceland and has also invested in other firms, domestic and foreign. Today, Samherji Ltd. and its subsidiaries operate 20 vessels from 4 countries, 2 shrimp processing plants, 2 reduction plants, 1 freezing plant, and a marketing office in England. When the company went public in April 1997, 6,700 parties bought stock.

Every government in Iceland since the early 1950s has had some policy on regional development. For the most part, these policies have not been articulated in detail but rather had a common emphasis on maintaining population in all regions of the island. This has been effected by supplying credit and grants to marginal areas, providing capital, for example, to harvesting firms in the various villages around the island.
After World War II, the government put the emphasis on providing credit to renew the deep-sea trawler fleet and the herring fleet (multipurpose). In the following years, capital was also provided for new demersal freezing plants and herring reduction plants around the island. In the late 1950s and early 1960s, another injection of capital was provided to renew the multipurpose vessel fleet and, in the 1970s, credit was offered to renew the deep-sea trawler fleet and to renew freezing plants and expand capacity. Within a decade the policy of "a new stern-trawler in every port" had delivered that-and a few more. By 1980, there were 83 deep-sea stern trawlers and still only 67 official landing ports, not all of which could dock these trawlers.
Despite the governments's support for investment in renewing the fleet, in expanding processing capacity, and in improving docks, rural islanders chose the comforts of urban living. Table 6 shows an almost continuous increase in the proportion of the population settling in the urban Southwest. Only in the period from 1970 to 1980, during the rural investment boom, did the rural regions keep their share of the population increase, and when the credit flow stopped, the Southwest continued its gain.

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Above we have been describing regional development in Iceland by comparing the Southwestern region with the other regions as a whole. Since the other regions are, of course, not identical and share common characteristics only to some degree-urbanization and the structure of local industry, for example, are different in each-a brief description of each particular region follows.

The Western region has slightly more than 14,000 inhabitants and is the fourth most (and least) populous region in Iceland (see table 7). The region includes Akranes, the seventh largest town in Iceland, with a population of 5,100. Akranes is the base for Iceland's fifth largest harvesting firm, Haraldur Bodvarsson Ltd. A little more than 25 percent of the population is employed in fishing and fish processing; about 15 percent of the inhabitants engage in agriculture and another 15 percent in heavy industry. The other 40 percent of the population are employed in various trades, transportation, service industries and the public service.

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The Western region has increased its share of the TAC for various species by more than one percentage point since 1984; its share of demersal landings has decreased by less than one percentage point in this period (see figure 2). This decrease can be explained by the fact that the fishing grounds off this region have not been productive in recent years, and vessels from elsewhere no longer fish there. In 1994, the region's vessels exported less than 6 percent of their demersal catches unprocessed.

The Western Fjords region is the least populous in Iceland, having only 9,000 inhabitants; it has lost close to one-third of its population since 1940 (see table 8). More than 33 percent of the inhabitants reside in the town of Isafjordur. The Western fjords are heavily dependent upon the fisheries and over 40 percent of the inhabitants are employed in fishing or fish processing. Less than 10 percent are engaged in agriculture, and the remaining 40 percent of the population are employed in the service industry, public service and transportation.

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The region has increased its TAC share by about 5 percentage points since 1984, far more than any other region. Its share of demersal landings has also increased by about three percentage points (see figure 5). In 1994, the region's vessels exported only about 3.5 percent of their demersal catches unprocessed, less than any other region.

Northwestern Region

The Northwestern region is the second least populous region in Iceland, and has only 10,200 inhabitants. Since 1940, the region has lost almost three percent of its residents (see table 9). Fishing and fish processing employ just over 20 percent of the population, and agriculture employs a similar percentage. Saudarkrokur, the most populous town in the region, is home to Iceland's fourth largest fish-harvesting firm, Skagfirdingur Ltd., and the nearby town of Skagastrond is home to the sixth largest, Skagstrendingur Ltd.

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The Northwestern region has increased its share of the TAC for various species by more than one percentage point since 1984. Its share of demersal landings has decreased by a little less than one percentage point in the period (see figure 4). This decrease can be explained by export of unprocessed fish; in 1994, for instance, the region's vessels exported almost 17 percent of their demersal catches unprocessed.

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The Northeastern region is the second most populous in Iceland, having almost 26,700 inhabitants (see table 10). Close to 60 percent of the region's population reside in and around Iceland's fourth largest city, Akureyri. Two of Iceland's largest fish-harvesting firms, Samherji Ltd., and Utgerdarfelag Akureyringa Ltd., are based in Akureyri, and Saeberg Ltd. is based in Olafsfjordur. About 20 percent of the employment in the region is in fishing and fish processing. Less than 10 percent of the working population are engaged in agriculture, and about 15 percent are engaged in various small-scale industries.

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The Eastern region is the third least populous region in Iceland, having a little less than 13,000 inhabitants (see table 11). About 33 percent of the population are employed in fishing and fish processing, and 10 percent are engaged in agriculture. The town of Neskaupstadur is home to Sildarvinnslan Ltd., the tenth largest harvester of fish in Iceland.
The Eastern region's share of the TAC for various species has decreased by a little more than one percentage point since 1984. Its share of demersal landings has also decreased by about one percentage point (see figure 6). In 1994, the region's vessels exported 8 percent of their demersal catches unprocessed.

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The Southern region, with close to 21,000 inhabitants, is the third most populous region in Iceland (see table 12). The region includes the Westman Islands, which have a population of almost 5,000, and are almost exclusively dependent on the fisheries. The Westman Islands is the base for Vinnslustodin Ltd., the seventh largest harvesting firm in Iceland, and for many smaller fish harvesting and processing firms. In the region as a whole, however, only a little over 20 percent of the population is employed in fishing and fish processing. Another 20 percent are engaged in agriculture in this, the most important farming region of Iceland.

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Despite having the same share of the TAC for various species in 1995/96 as it had in 1984, the Southern region's share of demersal landings has decreased by about 5 percentage points in the period (see figure 7). Most of this difference between TAC shares and landings can be explained by the fact that this region has been foremost in exporting unprocessed fish. In 1994, the region's vessels exported about 20 percent of their demersal catches unprocessed. No other region exported as large a portion, and only the Northwestern region, which exported about 17 percent of its demersal catch unprocessed, approached this figure. From the mid-1980s, the export of unprocessed catches in cargo containers has become common, and these exports average a little over 10 percent of all demersal catches of the country's fishing fleet. A further explanation for the difference between TAC shares and landings in this region can be found in the rise of wetfish floor markets in the Southwest in 1987 and, subsequently, in the Southern region. [Both sellers and buyers at any particular floor market can come from any region, and there is no need to travel since most of the floor markets offer bidding through telecommunication. Further, some of the floor markets do not require the vessels to land the fish before a sale. The vessel captain can telephone the market, register his catch (or estimated catch), and announce at which port he will be arriving. The catch is then sold unseen to the buyers. This practice does not appear to create any problems since about one-fourth of the volume of the floor markets is sold this way. ]

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The Southwestern region is by far the most populous in Iceland. This region has close to 175,000 inhabitants (see table 13), and includes the capital city of Reykjavik, which has a population of over 104,000 in the core and an additional 54,000 in the surrounding suburbs. The capital-city area relies very little upon the fishing industry-only about three percent of the inhabitants are employed in fishing and fish processing, although the largest harvesting firm of recent years, Grandi Ltd., and also Ogurvik Ltd. are based there. In the Southwestern region as a whole, only a little over 6 percent are employed in fishing and fish processing. Compare this to the almost 20 percent working in the public service, the 20 percent working in the manufacturing and construction industries, and the more than 50 percent employed in the service industries. Agriculture is almost non-existent in this region.

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Since 1984, the Southwestern region has lost some of its share of the TAC for various species. Its share of demersal quotas has decreased by over 3 percentage points during the period since the inception of the ITQ system but, as figure 8 shows, this decrease took place during the first half of the period. Since 1990, however, its TAC shares have been increasing again. Landings of demersal catches, on the other hand, have risen by over 6 percentage points since 1983. Most of this difference between TAC shares and landings can be explained by the fact that three of the four largest wetfish floor markets are located in the region and they have attracted vessels from the other regions. This region also has the best and biggest ports.

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Wetfish prices tend to be higher in this region because of the presence of the floor markets, but also because the region has several firms that specialize in exporting slightly processed and fresh-fish products by air freight. The only international airport in Iceland is located in the region. In 1994, the region's vessels exported close to 9 percent of their demersal catches unprocessed-about the average for Iceland.

The verdict on the regional and social impact of the ITQ system must be favourable. Successive governments in Iceland have since the early 1950s attempted to support and expand employment opportunities outside of the Southwestern region. This policy has a record of failure, except during the 1970s, when government encouraged investment in new fishing vessels and processing plants and provided almost unlimited credit to the other regions. Migration to the urbanized Southwestern region halted, but resumed as soon as the credit flow stopped.
The continuous depopulation of the rural regions, which have lost population share and, in some cases, now have fewer people, cannot be attributed to the introduction of ITQs. There has been a trend towards depopulation throughout the century-continuous except for the brief period of the 1970s-and this trend is likely to continue. Migration from rural regions is not peculiar to Iceland and can be observed in any Western economy. The trend towards urbanization manifests the increasing orientation of these economies towards the service sector.
The ITQs have not resulted in a flow of quotas to the Southwest. In terms of TAC, the Southwestern region has actually lost over 3 percentage points (more than 10 percent of its 1984 quota holdings) of its TAC shares in the demersal fisheries to the other regions. The Northeastern region has gained 5 percentage points (a fourth of their current quota holdings) and the Western and Northwestern regions have gained slightly, while the Eastern and Western Fjords regions have lost some. The Southwestern region holds about 66 percent of Iceland's population but has only 25 percent of the TAC shares in the demersal fisheries.
In terms of demersal landings for domestic processing plants (excluding unprocessed exports), the Southwestern region has gained considerably. Since 1983, the Southwestern region's share in the demersal landings has increased by almost 25 percent (roughly 6 percentage points). The Southwestern region's gain seems to been mainly at the expense of the Southern region, which has lost roughly 5 percentage points in the same period. This shift is explained by the increased catch volume that is handled by the wetfish floor market in the Southwestern region. These markets attract landings from the other regions, and especially from the Southern region, as it is located close to the Southwestern region. The Southern region also exports a large portion of its catches unprocessed.
The ITQ system has not, therefore, had any adverse regional impact in Iceland, and, on the contrary, has had a favourable impact in some regions. There is no reason to expect that the ITQs will, in the future, have negative regional effects and positive effects can be expected. With the better condition of the fish stocks today, TACs will increase in the future, and, indeed, for the 1996/97 fishing year, the TAC for cod has already been raised by some 20 percent. [This was the first increase in the TAC for cod in 12 years. ]
Increased quota holdings in the rural regions could produce increased landings and income, although whether that will materialize will depend on other variables, such as market prices for various fish products, the changing structure of the processing plant industry, and the increased share of the processing vessels.

I am indebted to Professor Ragnar Arnason for comments and suggestions, and to the staff at the Fisheries Directorate for statistics.

Arason, Ari (1995). Kvotabokin 95-96. Reykjavik: Skerpla.
--- (1996). Kvotabokin 96-97. Reykjavik: Skerpla.
Arnason, Ragnar (1992). Stjornkerfi fiskveida: Aflamark og byggdathroun. Greinargerd fyrir nefnd um motun sjavarutvegsstefnu, [mimeo]. Reykjavik
--- (1993). The Icelandic Individual Transferable Quota System: A Descriptive Account. Marine Resource Economics 8: 201-08.
--- (1995). The Icelandic Fisheries: Evolution and management of a fishing industry. Oxford: Fishing News Books.
--- (1996a). On the ITQ fisheries management system in Iceland. Reviews in Fish Biology and Fisheries 6: 63-90.
--- (1996b). Property Rights as an Organizational Framework in Fisheries: The Case of Six Fishing Nations. In B.L. Crowley (ed),. Taking Ownership; Property Rights and Fishery Management on the Atlantic Coast (Halifax: Atlantic Institute for Market Studies): 99-144.
Arnason, R., G. Palsson, and O. Jonsson (1992). Stjorn fiskveida og skipting fiskveidiardsins. Reykjavik: Sjarvautvegsstofnun og Haskoli Islands.
Arnason, R., and B. Runolfsson (1991). Er kvotakerfid hagkvaemt? Reykjavik: Stofnun Jons Thorlakssonar.
Bureau of Statistics (1991). Landshagir 1991, Statistical Abstract of Iceland.
--- (1996). Landshagir 1996, Statistical Yearbook of Iceland.
---. Hagtidindi. Vols. 1991-1996
Fisheries Association of Iceland. Aegir. Vols 1977-1997.
---. Utvegur. Vols. 1977-1995.
Gissurarson, Hannes H. (1990). Fiskistofnarnir vid Island: Thjodareign eda rikiseign? Reykjavik: Stofnun Jons Thorlakssonar.
Herbertsson, T.T., and Hermann Bardarson (1996). Islenska kvotakerfid: framtid og throun. Unpublished manuscript. Institute of Economic Studies, University of Iceland.
National Economic Institute (1996). Atvinnuvegask Reykjavik: National Economic Institute.
National Economic Institute (1997). Atvinnuvegask Reykjavik: National Economic Institute.
Runolfsson, Birgir (1992). Skipulag fiskveida: Sereign, hagkvaemni og ardskopun. In Arnason, R., G. Palsson, and O. Jonsson, Stjorn fiskveida og skipting fiskveidiardsins (Reykjavik: Sjarvautvegsstofnun og Haskoli Islands, 1992): 31-52.

Bureaucratic Management versus Private Property
ITQs in New Zealand after Ten Years

Tom McClurg

The introduction in 1986 of the Quota Management System (QMS) to New Zealand's 29 main commercial fisheries illustrates the potential-unexplored up to that time-offered by private property and market forces to fisheries management.

In line with its overall economic policy, it has been the government's declared intention to bring market forces to bear in the realm of fisheries management. The government initially had some difficulty in accepting that the introduction of property rights into the fishery constituted a market solution, but after acceptance the concept was grasped firmly and supported strongly; the goal was to adopt property rights in a comprehensive manner through the introduction of individual transferable quotas. (Clark, Major, and Mollett 1989: 118)

The adoption of a rights-based approach to fisheries management has a number of theoretical advantages. A key virtue of perpetual private property rights is that owners are confronted with the economic consequences of their behaviour. Even consequences of management decisions expected to appear only in the long term are reflected immediately in the market value of the property right. Rights owners face incentives to maximize the present and future values of their harvesting rights. Given that fisheries are a renewable resource, the goals of economic efficiency and resource sustainability are therefore closely aligned. If these incentives can be effectively harnessed, the government can remove itself from traditional regulatory activity in favour of decentralized management by groups of rights holders.
In this chapter, I shall appraise some of the actual incentives faced by both bureaucrats and rights holders in New Zealand since 1986. In particular, I shall focus on factors that undermined the security of the ITQ property right and the theoretical incentives sometimes attributed to it. Some common arguments against ITQs also are reviewed.

Four main factors undermined the theoretical incentives provided by secure private property rights when ITQs were first allocated in 1986: (1) the legislative context encompassing the QMS; (2) the initial specifications of the ITQ property right; (3) the uncertain relation between ITQ and other rights (particularly those of the Maori); and (4) practical impediments to collective action. While the introduction of the QMS is regarded by all sectors in New Zealand as a great step forward in fisheries management, it is possible with hindsight to see the weaknesses in the original regime with clarity. This is not to say that all of the factors above could have been eliminated through some clever initial design work. Issues such as the resolution of long-standing and major claims by the Maori to commercial fisheries have their own momentum and dynamics. More generally, major changes to property rights affect fundamental relationships between groups and individuals within society. The passions aroused by these changes can be strong, and, when expressed politically, can cause unpredictable policy alterations.

Fisheries legislation in New Zealand to date has not included clear statements of purpose. The Fisheries Act 1983 consolidated the laws relating to fisheries management enacted since the Fisheries Act 1908. This, in turn, consolidated the fisheries legislation that commenced with the Oyster Fisheries Act 1866. A quotation from section 89, which is the heart of the current Fisheries Act, illustrates this point:

The Act goes on for over five pages listing the various types of protective or distributive activities that may be regulated. No clear boundaries constrain the use of regulations.
Hard working Governors General over the years have made some 4,000 regulations, which are still current. This centralized process was perceived as unresponsive to local needs or circumstances, and, to introduce public accountability and consultation into this process, the 1983 Act charged the Ministry of Fisheries with producing comprehensive regional fisheries management plans. Fisheries management plans did little to solve the information problems of the centralized command structure of traditional regulations as they had to be approved by central government. In addition, they were both slow in production and difficult to alter. Work on these plans continued for over five years after the introduction of the QMS in 1986, but none have been implemented although the Ministry is still charged with their completion.
The QMS and the allocation of individual transferable quotas (ITQs) did not supersede any of the existing legislative framework in New Zealand, but was regarded by bureaucrats as an additional management instrument. In particular, no legal provision was made for management by quota owners, and fisheries enhancement through re-seeding requires a special permit. Consequently, the advent of the QMS did not change the self-image of the many employees of the Ministry of Fisheries who considered themselves the nation's fisheries managers.
Appreciation for the constraining impact that secure private property rights can have on the scope of central planning and regulation grew very slowly. This is illustrated by table 1, which shows the number of fisheries regulations passed each year before and after the introduction of the QMS in the Auckland Fisheries Management Area.

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In reality, the reduced level of government intervention theoretically possible under a quota scheme has not appeared. While the existence of ITQs themselves is regarded as secure, the precise extent and value of the bundle of rights represented by ITQs still remains somewhat uncertain.
Initial specification of the ITQs
In addition to the threat of re-specification of harvesting rights through regulation, recreational closures, or the establishment of marine reserves, the incentives potentially available from secure ITQs were undermined in three ways by its initial specifications.

1. ITQs were originally defined as a fixed tonnage of fish per year rather than as a percentage of the total allowable commercial catch (TACC). If the TACC could be increased, the government was entitled to sell additional ITQs (approximately NZ$120 million worth of quotas for hoki (Macruronus novaezelandiae) and orange roughy (Hoplostethus atlanticus) was sold in 1987 and 1988). Conversely, if the government wished to reduce a TACC, it was required to buy back ITQs. At the time of its inception, many commercial fishers expressed a preference for the "certainty" of tonnage rights.
2. Owners of ITQs were charged resource rentals to be calculated by a complicated formula. These rentals were intended to remove "super-profits" from ITQ owners. Initially, the government carried the full burden of the risk associated with the environmental state of the quota fisheries. Perhaps it was believed that the cost of underwriting this risk could be minimized through the judicious setting of resource rentals to suppress quota market prices. This was not to be, as the industry vigorously contested attempts to raise resource rentals, and the complexity of the resource rental setting formula provided fertile grounds for dispute.
3. Quotas for rock lobster (Jasus edwardsii) were allocated with a 25-year term in order to facilitate possible settlement of future claims by the Maori. The indication that future re-allocation of rights was a possibility promoted uncertainty in that fishery, which may have led to short-sighted behaviour towards the end of the quota term.

In 1990, the government faced large compensation payments in order to reduce the TACCs for orange roughy, hoki and rock lobster. The Fisheries Act was altered so that ITQs were defined as a proportion of a TACC, rather than a fixed tonnage, and approximately NZ$69 million in compensation was paid to affected quota owners over the following four years. This change transferred to the quota owners the risks associated with the resource, although ownership of ITQs did not include the right to manage or enhance fisheries.
Furthermore, some still doubted that quota owners could capture any significant benefits because of the resource rental mechanism (the government could also expropriate returns from industry investments through the same mechanism). Resource rentals were scrapped in 1994, at which time all 25-year ITQs were changed to perpetuity.

The existence of Maori Fishing Rights and attendant Maori claims to commercial fisheries also undermined the classical incentives associated with private property. Sir Tipene O'Regan (Maori fisheries negotiator and chairman of the Treaty of Waitangi Fisheries Commission) recently stated:

When we had the commons out there, you went out and the fish belonged to no one until they were caught. The whole model of the commons, from our point of view, was a device, driven by the majority culture, for preventing particular Treaty property rights being given effect to. It was thus a great irony when this country moved towards a model of property rights in fisheries under a quota management system. Although it was a model driven by a whole lot of notions, principally sustainability, it was very much centred on notions of property as far as the fishers themselves were concerned. Even though the quota management system was not invented, developed and conceived to give effect to Treaty rights it provided, conceptually, the key to that historic resolution. In New Zealand history that may yet stand as its greatest triumph. (O'Regan 1996)

A rights-based approach to fisheries management has a ripple effect upon fisheries users. The clarification of the rights of one sector compels the examination of the rights and claims of other sectors. In New Zealand, the allocation of ITQ property rights provided an opportunity for Maori to mount a stronger legal challenge against the Crown for damage to Treaty rights. Previous government actions had the practical effect of alienating Maori from the ancient fishing rights secured to them by the 1840 Treaty of Waitangi.
Although it was not the intention of the promoters of the QMS within the industry and government, the Crown was catapulted into a major negotiation of treaty rights that continued from 1987 to 1989. The negotiations caused great anxiety among quota owners, who feared that the government might discharge whatever obligations it was found to have to the Maori at the expense of quota owners. This did not occur as, when the government offered 10 percent of all quotas to the Maori as part of an interim settlement, this 10 percent of the quotas were acquired from their owners through willing-seller-to-willing-buyer purchases.
The creation and allocation of ITQs made negotiation over Maori fisheries claims unavoidable, but it also provided a means of settlement. All commercial rights, whether held by Maori or non-Maori, were of the same currency. Though integration of Maori into the commercial rights framework provided by the QMS was troubling to the owners of ITQs, it now provides one of the primary sources of security. Extensive Maori ownership of ITQ was a crucial factor in the abandonment of the original resource rental mechanism.
An aside on generic commercial rights In the last few years, there has been intense debate among Maori tribes over how the ITQs delivered by the Crown to Maori should be divided among the approximately 70 tribes. It is widely accepted that tribes have a special interest in the fish off their coastlines. However, quotas can be taken anywhere within a quota management area (QMA), which is normally a far larger area than can be associated with a single tribe. Depending on the species, the New Zealand exclusive economic zone (EEZ) can be subdivided into one to ten QMAs. Consequently, the location and extent of a tribe's territory (rohe) will influence its ultimate claim on the amount and type of Maori quota it receives, but future harvesting activity will not be confined to that rohe. Maori customary (i.e., non-commercial) fish harvest will be confined to the tribal rohe, but commercial harvest can take place anywhere within the relevant QMA that maximizes returns.
The QMS provides to holders of ITQs other theoretical opportunities to alter traditional patterns of harvesting to general economic advantage. Once ITQs are allocated (in proportion to the historical catch of licence holders), the QMS does not provide special protection or rights to industry subsectors such as fishers using particular fishing methods. There are, however, some long-standing regulations that impede rationalizations of effort and eliminating such regulations would increase the value of quota. Fishers now protected from competition by these regulations stress or invent rationales based upon sustainability for their retention.
One of the striking features of salmon management within British Columbia is the plethora of site and method controls affecting industry and native Indian harvesters. To an outsider, this appears to have two consequences: it creates sub-groups of harvesters with hostile interests to each other, and it is economically inefficient because salmon are not harvested at times and by methods that maximize their commercial value.
If it is ultimately decided that an objective of salmon management is to maximize the value of the salmon fishery, it will be necessary to break these two patterns. New Zealand's experience shows that generic ITQs can be successfully allocated in multi-method fisheries, and that the commercial aspect of indigenous fishing rights can be accommodated within that generic framework. Because ITQs are property rights in fish and not in gear types, harvesting technology and other investment decisions can be made with few distortions.

It is a common observation that we change our behaviour in response to incentives only when we perceive a practical and effective course of action that will improve our situation. Those with experience of the harsh realities of fishing are especially resistant to futile gestures. In New Zealand, we have been slow to appreciate that ITQs confront the individuals, not only with the consequences of their own actions on the fishery, but also with the consequences of the actions of all involved in the fishery. In this sense, ITQs remain common property rights. Effective management actions, whether it be re-seeding, area or seasonal closures, or other conservation measures, require collective action. The allocation of ITQs created notional communities of interest, not actual or functioning communities of interest. To understand why such functioning communities have been slow to emerge, we must retrace the evolution of the QMS and the opportunities available for management initiatives by rights holders.
It is revealing to pose the question, "who managed New Zealand's fisheries at various times over the last decade?" Prior to 1986, the answer was unambiguously "the government." This answer did not change with the introduction of the QMS and government officials perceived the QMS and ITQs as additions to their fisheries-management tool kit. In turn, many owners of ITQs (not unreasonably) viewed ITQs as a harvesting right subject to considerable government constraint or re-definition.
The move to proportionality in 1990 and the subsequent difficulties in introducing the regional fishery-management plans produced by the ministry of Fisheries after extensive public consultation, changed perceptions. Ministry employees became conscious of the constraints that ITQs placed upon their management powers, though these constraints did not greatly alter their role. The settlement of Maori claims in 1992, and the elimination of resource rents in 1994, provided to owners of ITQs incentives to determine management strategies for their fisheries. These incentives were strengthened by the introduction of full-cost recovery for government fisheries-management services in 1995.
The late 1990s are characterized by a curious limbo. On one hand, bureaucrats are still equipped with a full range of fisheries regulatory mechanisms but (with the exception of setting TACCs) are increasingly loath to employ them without the support of a consensus from rights holders. On the other hand, quota owners face increasingly strong incentives to manage their own affairs but lack mechanisms to make rules, collect funds, or purchase management services except on a totally voluntary basis.
Although they do not currently enjoy the legal right to manage or enhance their fisheries, quota owners have begun to organize themselves into management companies. Depending on the fishery involved, these companies have a number of purposes. At this stage, they appear to have four primary functions. First, they facilitate the collection of funds to finance fisheries-management activities such as research or re-seeding and manage the delivery of such services. Second, they make fisheries-management rules designed to achieve effort spreading or seasonal closures and to impose sanctions for non-compliance on company shareholders. Third, they represent the interests of shareholders in the government processes that determine the fisheries-management services required by government and set the TACCs. Finally, they defend against erosion of harvesting rights and promote the expansion and development of management rights.
The introduction of cost recovery (NZ$37 million in 1995/96) stimulated the establishment of companies of quota owners, who believed that considerable efficiencies were possible if they could purchase directly in a contestable market the fisheries-management services specified by government. At the moment, quota owners are forced to purchase most fisheries management service from government monopolies; this is a market of a kind but not yet a contestable market.
The establishment and operation of companies of quota owners requires that several difficult issues be addressed. Groups of ITQ owners, when in the process of forming a company, must decide who to include-e.g., they may decide to include one species within a quota management area or several species within a quota management area. They also need to decide funding mechanisms, possible sanctions against shareholders, and voting rules, including those that protect minority interests. At present, the companies tend to operate by consensus and many quota owners, because of the rigidity of regulatory alternatives, adopt a pragmatic attitude towards voluntary rules and the compromises required to reach consensus. However, there are strong incentives to take a "free ride" and much debate is directed at the question of the appropriate powers of coercion (if any) that companies should be able to exert over members to ensure compliance with management rules. The most successful management company has statutory powers to collect funds for purposes outlined in special legislation.

I am not aware of any studies of the impact upon communities made before or after the establishment of the QMS. This is not an oversight but rather the result of the youth of the New Zealand fishing industry and the absence of long-established communities solely dependent on fishing. In 1981, the export value of New Zealand fisheries was NZ$100 million; it is now approximately NZ$1.3 billion.
Even in fishing communities such as the Chatham Islands, few distributional issues were anticipated as ITQs gave harvesting rights that were allocated to those with a current commercial fishing permit on the basis of their historical catch, commitment to, and dependence upon the fishery. In other words, the pattern of allocation of ITQs had been set through the pattern of allocation of commercial fishing permits and subsequent harvesting activity under those permits. Moreover, although the fish stocks on which the Chatham Islands depended-particularly rock lobster-had been depleted, Islanders were still capable of earning satisfactory incomes. Finally, it was generally recognized that a reduction in harvesting effort was needed in many inshore fisheries and that allocation of ITQs provided compensation for those individuals who chose to exit the industry.
New Zealand fishers did not feel themselves part of a community in the sense that they were subject to meaningful obligations and responsibilities that derived from their attachment to a particular port. New Zealand villages and settlements did not have a well-developed proprietary feeling towards particular fisheries that extended to the development and imposition of local rules by the community itself. The companies of quota owners now being established are a vehicle for such activity, but in countries where functioning fishing communities are an historic fact, their existence could be recognized in the allocation of ITQs, and the role that the community has in regulating the activities of rights holders could be retained.

In 1986, the effects of the QMS upon the distribution of wealth were underestimated by bureaucrats because of they believed that resource rents could tax away "super profits" and that quotas would trade for low prices. The tradable nature of ITQs allowed licence holders to capitalize the projected net income to which a non-tradable licence had entitled them. When quota owners sold out, fishing companies that were vertically integrated (i.e., those involved in fishing, processing and marketing), frequently offered the best price and, consequently, there was some consolidation of quota ownership.
Consolidation has taken place for two reasons. First, vertically integrated companies have better access to capital markets than owner-operators. Banks have been reluctant to lend against quotas because it may be forfeited following conviction for many offenses. Further, banks and other lenders cannot register interests against quota since, unlike registered land titles in New Zealand, the quota registry does not provide for the registration of security interests indicating that the quota has been used as collateral against a loan. Second, ITQs act to some extent as repositories for value created anywhere within the fish production and marketing chain that is unable to be captured by its creator.
The trend towards consolidation has been less dramatic than is usually assumed; the share of quota owned by the top 10 companies increased only slightly during the period from 1986 to 1996. It is also easy to overstate the trend towards consolidation if the impact of the expansion of orange roughy, hoki, squid (Notodarus gouldi) and other deep water fisheries is not appreciated. The number of smaller vessels in the full time domestic fleet has been surprisingly constant over the past decade, and the total number of vessels, full time employees and quota owners have all shown increases during that time. (See table 2.)

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Contrary to popular opinion, the experience in New Zealand proves that ITQs are not detrimental to the interests of small fishers. The evidence cited to support the popular opinion is the removal of part-time fishers from the commercial fishery during the 1983/84 season. By 1981, the government realized that its subsidy programs designed to expand domestic harvesting capacity in the 1970s had led to overfishing of prime inshore species and overcapitalisation within the inshore harvesting sector. A moratorium was placed on the issue of new licences in 1982 and, as a further step in halting and reversing the expansion of effort, the 1983 Fisheries Act allowed for the cancellation of unused licences and licences held by part-time fishers. As a consequence, 2,260 licences were cancelled.
It is a mistake to view this action as a planned or necessary precursor to the introduction of ITQs three years later. ITQs were not under consideration at that time and analysis focused on the possible application of boat buy-back schemes, though some feared that buying vessels from part-timer fishers would prove expensive and remove little effort. And, while it is probably true that the administration of fisheries rights and catch data is easier if there are fewer fishers, this is true for all administrative systems and not only for those dealing with quota fisheries. The administrative costs of accommodating those part-timer fishers with catch history in the allocation of ITQs and the subsequent operation of the QMS was not a significant barrier to its introduction.

Common charges levelled against the QMS are that it is costly to operate, that the catch reporting systems are expensive, that research costs to support the setting of the TACCs are high, and that fisheries enforcement must be upgraded. Quota options are rejected on cost-benefit grounds, although it is not self-evident that regulatory regimes have a lower demand for information or research than rights-based alternatives. A regulatory regime is not a substitute for knowledge; nor is it a guarantee that regulations are complied with.
It is the net benefits of alternative management systems that should be compared rather than their costs. Net benefits are difficult to assess, but New Zealand's QMS gives some indirect indications of satisfactory performance. The New Zealand fishing industry sells 90 percent of its products to export markets, receives no government subsidies, and pays the full cost of government fisheries-management services. On that basis, the net value of the New Zealand fishing industry is positive and the NZ$2 billion of quota value represents real economic worth rather than capitalized subsidies. Accordingly, there are strong incentives to ensure that the Quota Management System is cost effective, and a growing appreciation that sound administrative systems, targeted research, and effective compliance are investments rather than taxes.

The main conclusion that British Columbia can draw from New Zealand's Quota Management System is that it works and enjoys widespread support. It is possible to say that a number of major mistakes were made during its conception and introduction, and there have been sporadic legislative amendments to address problems arising from those mistakes.
The last decade has been a period of continuous challenge and change for New Zealand's fishing industry, which is currently grappling with the introduction of a completely rewritten Fisheries Act plus comprehensive cost recovery for fisheries management services. Yet this period of flux and uncertainty has been accompanied by profitability, unparalleled levels of investment and generally improving availability of fish. The inshore fish stocks about which there was concern in 1986 are now regarded as being in sustainable and, frequently, in improving condition. The underlying mood today is one of confidence in the future and there is agreement that more species should be managed under the Quota Management System (QMS).
The main reason for this confidence is that ITQs have emerged stronger and better specified from every major crisis since the introduction of the QMS. Although rights to use the fisheries for recreation, customary Maori fishing, and aquaculture have yet to be integrated properly with the QMS, there is growing general recognition that this should be done. It has taken most of the last decade for ITQs to outgrow their experimental and tentative status but they are now viewed as irreversible and secure.
In 1986, Parzival Copes commented:

As described in this paper, that was certainly the case in New Zealand where ITQs were initially a feeble property right. Copes concluded:

Experience so far suggests that we should be non-dogmatic in our choice of management technique and that we should select from the array of available fisheries management devices, the combination that is most beneficial and least deficient in any particular set of circumstances. Above all, we must reconcile ourselves to the fact that the best possible solutions will still be flawed. (Copes 1986, p. 290)

We do occupy an imperfect world, but the experience in New Zealand during the last ten years has shown that ITQs are not just another regulatory option. If the positive incentives of ITQs are to be fully manifest, property rights must be secure and specified in such a way that rights holders can make meaningful management decisions. Rights-based and regulation-based approaches to fisheries management are antithetical to each other; they cannot be pursued simultaneously.
Half-hearted attempts to establish property rights will not change into fish farmers most of those harvesters who are now exploiters of resources in the short term. Results are not seen overnight because fishers remain mistrustful of the government while a record of government support and protection for the new property rights is accumulated. For this reason, the hedge-your-bets approach advocated above predestines failure because it suggests that what is done can be undone.
Finally, a comment on the British Columbia salmon fishery. The QMS was established in New Zealand in response to a crisis of overfishing and overcapitalization in some fisheries. Major institutional reforms often come about only through the impetus of a crisis. However, in any crisis, there is a temptation to address symptoms or pressing problems. Whether a fishery is in good or poor condition, the same general issues apply to its management. Who should manage the fishery? What incentives should they face? What powers should they have? To the extent that such fundamental questions were not fully analyzed prior to 1986, we in New Zealand have since had cause to ponder them. The principles underlying the QMS have stood up to that examination, and that is why there is widespread agreement in New Zealand that all commercial fisheries-including presently undeveloped fisheries-should be managed under the QMS.

Clark, Ian N., Philip J. Major, and Nina Mollett (1989). "The Development and Implementation of New Zealand's ITQ Management System." In Philip A. Neher, Ragnar Arnason, and Nina Mollett (eds.), Rights Based Fishing (London: Kluwer Academic Publishers): 117-145.
Copes, Parzival (1986). "A Critical Review of the Individual Quota as a Device in Fisheries Management." Land Economics 62, 3 (August): 278-91.
Fisheries Act 1983. Public Act 1983, No. 14. Reprinted in Reprinted Statutes, vol. 27.
O'Regan, Sir Tipene. Video interview with Jerry Morris, shown at Fishing Industry Association Conference, April 11, 1996.

During the 1980s, individual quotas (IQs) and enterprise allocations (EAs) came into use in many fishing nations around the world, notably New Zealand, Canada, Iceland, and Australia. The common feature of these management programs was the allocation of output quotas to individuals or companies, although the specific design of the output quota programs differed considerably from one country to another. In Canada, programs incorporating individual quotas or enterprise allocations were introduced gradually throughout the country and now operate in more than 20 fisheries. In most instances, output quotas were introduced on an experimental basis and with strict restrictions on transferability. However, in all cases where IQ/EA programs have been introduced, they have become firmly established as the management approach preferred by participants in the fishery. The purpose of this chapter is to review and assess experience with individual vessel quotas in British Columbia's halibut fishery, which has been under an IQ management program since 1991.
IQs have usually been introduced into fisheries that were experiencing problems associated with the traditional fisheries management approach of input controls: excess fishing capacity, pressure to overharvest, increasingly unsafe fishing practices, poor economic returns to the fishery, and recurrent financial crises for fishers-problems clearly linked to the common property nature of fisheries resources. Economists generally agree that an IQ management program can overcome the inefficiencies associated with the exploitation of common property resources. In practice, the performance of IQ management programs depend upon a number of factors such as the characteristics of the fishery, the design and implementation of the IQ program, and the role of industry participants.

From 1979 until 1990, management of the halibut fishery was based on three main elements:

In 1980, fishers took 65 days to catch 5.7 million pounds of halibut. Over the next decade, technological advances such as circle hooks, snap-on gear, and automatic baiting machines improved the efficiency of the fleet enormously, and in 1990, fishers took only six days to catch 8.5 million pounds. In 1980, then, the halibut fleet took 10 times longer than in 1990, to catch two-thirds the amount of fish. Fisheries management in the 1980s was ineffective in controlling fishing effort, and the race for the fish resulted in very short seasons, unsafe fishing conditions, large quantities of by-catch being wasted, poor product quality, gluts in supply, and low landed prices.
In 1991, IVQs were introduced on a two-year trial basis. The Individual Vessel Quota (IVQ) program was developed with extensive advice from the halibut industry and from licence holders. The main features of the IVQ program are the following.

1. Longer season: the fishery is now open from March 15 to November 15.

2. A percentage share of the TAC: initial individual quota allocations were calculated using a formula based on the length of the licence holder's vessel and historical catch. The resulting 435 individual vessel quotas were expressed as fixed percentages of the annual TAC.

3. Limited transferability: during the first two years of the IVQ program, quotas were not transferable. Beginning in 1993, each quota was divided into two equal shares and up to four shares could be fished on one vessel.

4. Catch validation: a mandatory port monitoring program was initiated according to which fishermen must notify the Department of Fisheries and Oceans (DFO) prior to fishing and 24 hours prior to landing. An observer then meets the vessel at the landing site, validates the weight of the halibut landed, and tracks each quota holder's total landings.

5. Cost recovery: quota holders are required to pay all the incremental costs associated with the management, monitoring, and enforcement of the IVQ program. The cost recovery program also pays for some stock assessment and other research activities at the discretion of the quota holders. Activities paid for by halibut-licence holders under the IVQ program cost nearly CDN$800,000 in 1995.

The major effects of the IVQ program fall under the following categories: biological management, economic efficiency, equity and distributional considerations, and administration and enforcement.

Prior to the introduction of IVQs, it was difficult for fisheries managers to estimate when the TAC was reached; this often led to overharvesting and depletion of the halibut resource. Since the introduction of IVQ management, the catch has been slightly lower than the TAC each year. This is noteworthy, as 1991 was the first time that the annual catch fell below the TAC since limited entry was introduced in 1979. Further, the department of Fisheries and Oceans estimates that waste in the halibut fishery, resulting from the discarding of undersized halibut (and lost and abandoned gear) decreased by 50 percent with the introduction of IVQs.
Additional stock assessment is possible since the quota holders are now supplementing the cost of research. In 1993, quota holders contributed CDN$34,000 to the International Pacific Halibut Commission (IPHC) for research projects. And, there has been a higher return of data from logbooks since the introduction of IVQs.

The economic performance of the halibut fishery improved significantly after the introduction of IVQs. This improvement is attributed both to higher revenues from better meeting the needs of the market and to lower fishing costs.
The halibut season was 214 days in 1991, compared to 6 days in 1990. Under IVQ management, fishermen altered their fishing patterns to increase net revenue by fishing to meet market demand and by reducing costs. The number of active vessels has decreased every year since the introduction of IVQs (see table 1), and landed prices have risen under IVQs because harvesters can time their landings to match periods of high market-demand and can supply the high-value market for fresh fish. While landed prices in Alaska (which was not under ITQ management) remained the same, in 1991 landed prices in British Columbia increased by an estimated CDN$0.50 per pound over 1990 prices, and in 1992 increased another CDN$1.00 per pound as a result of these positive marketing aspects of IVQs. The price increase produced, in 1991, an increase in revenues for the halibut fleet of CDN$3.6 million, while harvesting costs decreased by CDN$440,000 (mostly because of decreased crew payments). Thus, the net income earned by the halibut fleet in 1991 increased by about CDN$4 million as a result of the IVQ program.

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During the first two years of the IVQ program, the number of crew members employed was reduced by nearly 300 (from about 1,600 to about 1,300). Further reductions in employment have occurred since then, as the number of active vessels has decreased further through "quota stacking," i.e., fishing more than one IVQ from a single vessel. The individuals who are still employed, however, are generally working a longer season and earning higher incomes. Employment of shore workers has declined slightly, because there has been a shift from frozen product to fresh halibut, which requires less shore-based employment.
Before IVQ management, harvesters were under pressure to fish every day the fishery was opened, even if the weather was bad; they often had to overload their vessels. Now working conditions have improved, and a safer, more stable, working environment exists.

The level of enforcement has increased under IVQs as quota holders pay for the port monitoring and for fishery officers specifically assigned to the halibut fishery. This contribution provides for enforcement above previous levels, and the port monitoring program ensures that the landings reported are accurate and timely. The Department of Fisheries and Oceans and quota holders can determine the balance of the licencee's quota immediately after each landing.

In December 1992, halibut-licence holders were asked to vote on whether to continue the Pacific Halibut IVQ program. Ninety-one percent of those responding voted in favour of IVQs. Since that time, the trial program has been extended on an annual basis. While there is a high degree of support for the IVQ program, there is also criticism. The main complaints focus on two issues:

Overall, the Halibut IVQ program is regarded as a success by the majority of the participants in the fishery and by those responsible for managing the fishery. The IVQ program is credited with improving both the biological management of the halibut fishery and its economic performance. The following factors have contributed to the success of the program:

•the halibut fishery is a single species fishery with selective gear, thereby avoiding bycatch problems associated with some fisheries
•a good program design with extensive input from participants
•effective implementation with most costs covered by parti-cipants
•a high degree of support and involvement of the participants in the operation of the program through the Halibut Advisory Board.