Debt-for-Nature Swaps, Market Imperfections, and Policy Failures as Determinants of Sustainable Development and Environmental Quality

By Didia, Dal | Journal of Economic Issues, June 2001 | Go to article overview

Debt-for-Nature Swaps, Market Imperfections, and Policy Failures as Determinants of Sustainable Development and Environmental Quality


Didia, Dal, Journal of Economic Issues


A comprehensive survey of the world's tropical forests recently released by the Food and Agricultural Organization (FAO) of the United Nations (1999) stated that 13.7 million hectares (137,000 sq. km, or 53,000 sq. miles) of tropical forests are depleted annually. Tropical forests play such unique roles in our environment that their destruction will usher in a multitude of environmental problems involving real economic and social costs. Such issues as extinction of plant and animal species, extensive wind and soil erosion, decline in soil fertility, and global warming have all been linked to tropical deforestation (Natural History 1985; Mahar 1989; FAO 1999).

The reasons for the unprecedented depletion of tropical forests are numerous and very complex. Demand for agricultural land is one of the major factors responsible for tropical deforestation (FAO). Other factors contributing to the depletion of tropical forests include the absence of well-defined property rights, commercial logging, firewood and charcoal consumption by households and industries, lack of adequate forestry management facilities, misguided government policies, and natural forces such as drought and fire (Repetto and Gillis 1988; Hassan and Hertzler 1988; Barbier et al. 1991; Mendelsohn 1994; Cropper and Griffiths 1994; Deacon 1995; Didia 1997; FAO 1999). International forces, such as servicing the huge external debts owed by tropical countries, also add to the pressure to deforest (Konrad von Moltke 1990; Kahn and McDonald 1995).

In the search for instruments to slow down the rate of deforestation, debt-for-nature swaps (DFNS) have recently emerged as a popular interim tool for preserving tropical forests. The principle behind the application of DFNS is the belief that the pressure to service the huge external debts of developing countries leads to myopic policies that ultimately result in the over-exploitation of tropical forest resources. Consequently, if these debts are eliminated or reduced significantly, the rate of deforestation should decline.

This paper argues to the contrary that DFNS are not effective in preserving tropical forests. Rather, the preservation of tropical forests lies in the establishment of institutions that encourage more appropriate natural resource use. Available evidence shows that DFNS do not appear to be having any significant impact on the problem. It is therefore time to try other remedies. The paper is organized as follows: the following section discusses developing country debt crisis and debt-for-nature swaps. The next session discusses empirical results and the specific institutions necessary for the preservation of tropical forests. The last section takes up our concluding comments.

Debt-for-Nature Swaps

Before going into a discussion of DFNS, we review briefly the genesis of developing country debt problems. Since the 1970s, developing countries have been borrowing heavily to finance their development needs. These debts arose partly because countries facing severe balance-of-payments difficulties, rather than bearing the cost immediately, decided to finance the deficits, thereby postponing the costs. Today, many developing countries are unable to service their debt. Consequently, there has been a rash of efforts to prevent these debtors from defaulting on their loans. Restructured loans were offered to countries that were willing to institute a set of austerity measures (mainly devaluation, privatization, and deregulation of imports) designed to address their balance-of-payments problems. Efforts to address the debt crisis have yielded less than desired results, and the toll on the environment is staggering.

DFNS represent a new innovation in the effort to slow the rate of tropical deforestation and to simultaneously provide some relief to developing counties that are crumbling under the weight of heavy debt burdens. In a typical DFNS, an international donor or organization (mostly environmental/conservation groups) buys the problem debt of a developing country at a discount from the creditor in a secondary market. …

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