Who Benefits from Debt-for-Nature Exchanges?

Article excerpt

LARGE international financial agents are not necessarily philanthropists. The less developed countries who turn to them for loans in an effort to survive, have to pay back these loans plus the interest on them. In 1990, Third World debt was estimated to be US$1,355 billion. How do these countries manage to meet debt-repayment instalments? By getting the most out of their natural resources through logging, mining, oil extraction and ranching, because only massive exports can provide them with the hard currency they need. The trouble is, the resources are not exploited rationally. Furthermore, what little capital is available for investment tends to be put into projects yielding short-term returns, which means that there is little opportunity for studying their possible environmental impact. It is easy enough to maintain that things will be "put right" later. Ideally, these projects should be jointly discussed by environmental specialists, economists and bankers. However, it is difficult to bridge the gap between the ideal situation and the need to meet daily survival requirements.

There are many reasons why these countries have to borrow. There may be a decline in the price of their raw materials (coffee, for instance). Their exports may be hampered by protectionist policies among the importing nations. They may lack adequate scientific and technological support. In addition, funds are sometimes diverted from their original purpose. Fresh money can be used to buy weapons or even for personal enrichment. In order to speed up debt repayment, the World Bank and the International Monetary Fund advise governments to implement reforms, including austerity measures, cutbacks in civil service staff and action to eradicate corruption. But however well-grounded the reforms may be economically, they are often resented by the population. However, these two agencies do not have exclusive responsibility for Third World debt management. Altogether some 500 banks are involved. Moreover, a flourishing, unpublicized secondary market in Third World debt has emerged.

The process is something like this: Bank X lends US$1 million to Country Y on the basis of its potential wealth or its expected economic recovery. For various reasons, Bank X may later decide to sell the debt to Bank Z for US$600,000. If Country Y finally pulls through and meets its obligations, Bank Z will have made a profit of US$400,000, because the debt has kept its initial nominal value. When a bank decides to invest in a particular country, this is part of a strategy and purchasing a debt gives it the power to influence entire sectors of the local economy.

In 1987, a new form of debt appeared--the debt-for-nature exchange. In the first issue of Environment Brief published by UNESCO in 1992 (1), debt-for-nature exchange is defined as follows: "...the foreign-currency debt holder negotiates a deal whereby the debtor redeems the debt through a commitment either to invest local currency in conservation and natural resource management projects or to encourage sustainable development through changes in policy and regulation." The following example, as reported by Peter Dogse and Bernd von Droste in MAB Digest (2), published by UNESCO in 1990, clearly shows the practical problems involved in implementing such an agreement. …