Common Tragedies

Thoughts on Environmental Economics

Money does grow on trees

Posted by Evan Herrnstadt on October 23, 2007

The U.S. Government, in conjunction with some NGOs, continues its program of swapping debt relief for forest conservation:

As part of the U.S. Tropical Forest Conversation Act, the United States will spend US$12.6 million (€9 million) to buy back Costa Rica’s debt at discounted rates. Conservation International and The Nature Conservancy will each contribute US$1.26 million (€890,000). Together, with interest, the money will be enough to pay down US$26 million of the Central American country’s debt, according to the agreement.

I’d like to highlight two aspects of this policy.

One, it clearly reflects some sense of non-use value. Americans are essentially forgiving a portion of Costa Rica’s debt in exchange for the conservation of ecosystems few of us will ever visit. For a Central American nation which thrives on ecotourism, this is not exactly a one-to-one exchange. In addition, the reduced debt frees up public money that would have been spent on debt servicing. On the other hand, the U.S. receives some external benefits from the prevented deforestation, such as reductions in atmospheric carbon, and potential pharmaceutical applications. One wonders what the true balance of costs and benefits is here.

Two, this policy could create an environment of moral hazard. Will tropical nations take on more external debt than they ought to, hoping that the U.S. will bail them out in the name of the environment? This is probably not an issue, as there are eligibility requirements, ranging from the relevant (have an democratically-elected government, be undertaking certain investment reforms) to the political (cooperate with U.S. on drug control).

Regardless, it’s a relatively non-imperialistic way to encourage conservation activities in tropical nations while helping to strengthen their economies. At this point, though, it’s kind of a drop in the bucket; according to the CIA World Factbook, Costa Rica’s external debt is $6.3 billion.

One Response to “Money does grow on trees”

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