Wednesday, October 15, 2008

Is the financial crisis good or bad for deforestation? Lessons from history

The following is a guest post from Sjur Kasa (CICERO, OLSO).

This is a timely piece looking at the relationship between financial crises and the environment.

The crux of the argument is that a global recession has positive and negative effects on the environment. Clearly, slower growth means less resources (both renewable and non-renewable) but on the other hand, less resources will be given to "environmental groups" in the sense that the environment is perceived as a luxury.

Over to Sjur:

We are heading for hard times, what happens to deforestation? In this article I discuss the lessons from Brazil during the last financial crisis.

This is something to start thinking about: The supercycle of easy credit is over and the credit crunch is making things difficult for many developing countries. Recent reports suggest that several countries are on the brink of defaulting on their debt. This happens both because commodity markets are cooling down rapidly, and because credit is increasingly unavailable. What consequences could such a turn have for an environmental problem like deforestation?

Some lessons can be drawn from the last global financial crisis, the so-called Asia-Russia-Brazil crisis of 1997-1999. In a paper in Society and Natural Resources from 2005 (Society and Natural Resources 18(9)), Sjur Kasa and Lars Otto Naess from CICERO, an environmental research institute in Norway, looked at the consequences of the crisis that hit Brazil in 1998-99 for deforestation in the country's Amazon region. The relevance of this study may be seen now, when many developing countries are headed for financial problems again.

First, the negative effects of the crisis: The credit crunch in this period led to severe reductions in funding for the environmental agencies both at federal and state level. These agencies did indeed receive disproportional cuts, since they traditionally are less powerful in the budget infighting within the Brazilian government. The cutbacks also hit externally funded programmes like the PPG7 Pilot Programme due to absent Brazilian counterpart funding. This programme included several initiatives to curb deforestation and strengthen public and NGO efforts capacity in this respect. State and municipal programmes also most probably suffered because of harsh measures put in place to force them to produce surpluses that could be siphoned off to the federal state.

However, these negative effects should not be exaggerated. First, the environmental administration in Brazil, such as IBAMA, has been notoriously weak in controlling deforestation in Amazonia both due to organizational and financial problems. Second, in the Amazon, the crisis led to equally severe cutbacks of both public and private investments that would have actually enhanced deforestation. Plans to greatly expand infrastructure in the Amazon region adopted by the Cardoso government had to be temporarily halted alongside with private investment in agriculture due to skyrocketing interest rates and weakening domestic and international markets. nvironmental officials indeed called this "a breathing space" for the region, marking a welcome break in government efforts to "develop" the Amazon.

In addition to these effects, Brazil in this period also demonstrated the importance of a strong environmental movement. Alongside with the weakening of the public environmental administration, NGOs like Greenpeace, Friends of the Earth-Brazil and IPAM (Institute for the Study of Environment and Man in the Amazon) continued and expanded their activity on a series of innovative initiatives for curbing deforestation. Most interestingly, many of these initiatives were carried out in cooperation with still functioning parts of the environmental administration at state and federal level, often with external support. One example here is the satellite-assisted programme developed to control deforestation in Mato Grosso by the state's environmental authority FEMA in which local NGOs also played roles. Another
example was a number of forest certification initiatives supported by international NGOs that gained momentum just when the crisis picked up. In spite of the problems faced by the PPG7 assistance programme, the role of this as well as international donors like the World Bank and specific governments helped a lot by sustaining the activity of the NGOs and some environmental agencies.

Institutional stability and democracy also probably played a role in comparative terms. The Brazilian state continued to function as a shaky, but still conducive framework for the initiatives described above. Indonesia, where a political crisis led to the collapse of the Suharto regime, is an instructive contrast. Here, the destruction of the state made the activities of a much weaker environmental movement very difficult. On the Outer Island, where most of the valuable timber stands are located, local "resource mafias" moved in as the state lost control, contributing to very high levels of forest destruction in the period since.

Does this mean that financial crises are good for deforestation as long as you have strong NGOs, willing donors and a reasonably functioning democratic state? While this is one of the intriguing conclusions of our study, it does not come without important qualification. First, most developing countries do not have comparably affluent and willing donors and an environmental movement with the same sophistication as Brazil, meaning that the positive forces are probably much weaker in most cases. Second, the "breathing space" for the Amazon that we admit was provided by the credit crunch and the weakening global markets proved to be short-lived. Neither donors, NGOs nor public environmental authorities were able to prevent the rise of deforestation produced by the credit, soya and beef super-boom that emerged later in the 2000s. Again, this means that without expanding international cooperation on curbing deforestation and assisting environmental movements in developing countries in the coming years, any "breathing space" produced by the coming financial crisis in developing countries will prove short-lived.

Link to the full paper: