The Effect of IMF Programs on Deforestation James Raymond Vreeland Robynn Kimberly Sturm Spencer William Durbin Yale University P.O. Box 208301 New Haven, CT 06520-8301 Tel: 203-432-6220; Fax: 203-432-6196 May 29, 2001 Abstract According to International Monetary Fund (IMF) officials, “The IMF is acutely aware that natural resource degradation that threatens growth cannot be ignored” (Fischer, 1996). Critics of IMF programs, however, claim that Fund policies hurt the environment by encouraging budget cuts to environmental programs, promoting primary product export-oriented development, and inducing economic contractions that lead to extensive migration to marginal lands. As the first large-n study of the effects of IMF programs on the environment using a methodology that controls for nonrandom selection, our question is narrow: What is the effect of IMF programs on rates of deforestation? We use a dynamic version of the Heckman selection model to estimate the effect of the IMF with a data set of 2,258 observations from 112 countries from 1970 to 1990. We find that deforestation increases when governments participate in IMF programs, even after controlling for nonrandom selection. Key Words: IMF, deforestation, environmental, nonrandom selection, international, cross-country1 1. Introduction What is the effect of International Monetary Fund (IMF) programs on the environment? Critics of the Fund claim that IMF structural adjustment programs hurt the environment by encouraging budget cuts to environmental programs, promoting primary product export-oriented development, and inducing economic contractions that lead to extensive migration to marginal lands. As a result, IMF Structural Adjustment Programs may cause widespread environmental destruction, squandering the country’s natural resources, environmental capital and economic future (Hayter, 1989; George, 1992, 1998; Cruz and Repetto, 1992; Cruz and Munasinghe, 1996; Owusu, 1998). Yet, IMF officials contend that their programs have beneficial effects on the environment. They argue that the macroeconomic stability their programs promote is vital for environmental preservation (Fischer, 1996). Furthermore, programs reduce resource waste and improve resource allocation by correcting market distortions and stimulating competition (Owusu, 1998). Despite the disagreement over how IMF programs affect the environment, there has been no large-n study of the systematic effects of these programs using a methodology that controls for the problem of nonrandom selection. IMF programs may affect all sorts of environmental factors – raw materials exports, mineral depletion, and deforestation, to name a few. Our question, as a first step towards assessing the overall environmental impact of IMF programs, is a very narrow one: What is the effect of IMF programs on deforestation? We have chosen to study deforestation because of its saliency to global environmental issues vis-à-vis climate change, biodiversity, clean air and water, and many other environmental and human considerations. Moreover, there is a large body2 of quantitative literature available on deforestation to inform our study (see Allen and Barnes, 1985; Palo et al., 1987; Capistrano and Kiker, 1995; Angelsen and Kaimowitz, 1999). Note that analyzing the effects of IMF programs is not straightforward (Goldstein and Montiel, 1986). If countries entered into IMF programs as random experiments, then the impact of the IMF could be measured as the difference between the average rate of deforestation in countries that do implement IMF programs and in those that do not. These two groups would conveniently serve as the necessary treatment and control groups. However, previous research concludes that countries do not enter IMF agreements randomly (Przeworski and Vreeland, 2000). Usually they approach the IMF because they need a loan due to a balance of payments disequilibria, low foreign reserves, or high debt. They may also participate in IMF programs only when governments have the political will to swallow the “bitter pill” of economic reform. Note that the factors that influence selection into IMF programs may also influence rates of deforestation. The methodology used to evaluate IMF programs must, therefore, distinguish the effects of selection from the inherent effects of these programs. In this paper we use a dynamic version of the Heckman selection model to ascertain the effects of IMF programs on deforestation (Przeworski et al., 2000). Our sample includes 2,258 observations from 112 countries from 1970 to 1990.1 We find that deforestation increases when governments participate in IMF programs, even after controlling for nonrandom selection. The data on deforestation come from the Food and Agriculture Organization (FAO) Forest Resource Assessments. The valuation of forest area is problematic, and 1 All of the variables used in this study are defined in Appendix 1.3 critics have pointed out flaws in the data set that we use (see Angelsen and Kaimowitz, 1999). However, because the data are collected by the FAO and not the IMF, there is little reason to suspect that the errors in measurement are systematically related to participation in IMF programs. And if the measurement error is not correlated with IMF participation, the flaws in the FAO measure should not bias our results. This data set allows us to determine how IMF programs affect deforestation globally – a question we feel is too important to be ignored. In the following section, we review the theoretical link between IMF programs and deforestation, discussing the ways in which IMF programs can potentially decrease or increase rates of deforestation. We analyze in depth a particular case, Ghana, in Section 3. Then we turn to a wider empirical study of the effect of the IMF. First, in Section 4, we address the problem of nonrandom selection into IMF programs. And in Section 5, we present an econometric model of deforestation. We use this model to estimate the impact of the IMF on deforestation. Section 6 concludes. 2. The deforestation debate The ostensible goals of IMF programs are to promote economic stability and growth. Fund officials recognize the importance of safeguarding the environment to achieve these goals.2 According to the First Deputy Managing Director of the IMF, Stanley Fischer, poor environmental conditions can have an adverse impact on economic 2 Others outside of the