Third-world debt and tropical deforestation

Abstract

The deforestation and degradation of tropical forests are taking place at an extremely rapid pace. According to the Food and Agriculture Organization (FAO), the estimated annual rate of tropical deforestation during the 1981–1985 period was 113 846 square kilometers or 0.6% of the 1981 total forested area. The implications of the loss of these forests are staggering (Myers, N., 1989. Deforestation Rates in Tropical Forests and Their Climatic Implications. Friends of the Earth, London). Tropical forests are extremely rich ecosystems which support a disproportionately large share of the world's plant and animal species. Forests play a crucial role in both nutrient and hydrological cycling and may provide sustainable economic benefits through managed harvesting of timber and the collection of non-timber products such as fruits, nuts, and rubber. Also, deforestation is a significant source of global warming through its effects on the global carbon cycle. This paper focuses on the relationship between debt and deforestation, examining conceptual and empirical arguments that debt is a source of deforestation pressure. Our study develops a behavioral model which suggests that debt can lead to myopic behavior, leading to deforestation rates that may not be optimal in the long run, but are necessary in the short run to meet current constraints. Then, country-by-country data on debt, deforestation, and other variables are analyzed with regression analysis. It is shown that debt is significantly correlated with deforestation under a wide variety of assumptions and specifications. Our results indicate that debt is an important factor in the deforestation of tropical countries. There are certainly other sources of deforestation, both micro- and macroeconomic, which may vary significantly from country to country. However, we focus on debt because of its dominant role in the economies of developing countries, and because of the increased use of debt-for-nature swaps. The link between debt and deforestation that is suggested in this paper implies that debt-for-nature swaps may have a dual effect on deforestation. First, the contractual agreement is designed to preserve forests as part of the swap. Second, the reduction in debt may itself reduce the pressure to deforest, although this indirect effect is small. Our research provides evidence that reducing debt reduces deforestation, which may be an argument to offer deforesting third-world countries some form of debt relief, and to utilize more fully debt-for-nature swaps as a tool for preserving environmental quality.