Debt Relief for Environment: Experience and Issues

Abstract

This paper addresses two major contemporary problems: the Third World debt crisis and the global environmental problem. Since 1987, several Latin American countries received some foreign debt relief in exchange for local currency expenditure, primarily carried out by non-governmental organizations (NGOs) in programs that improve environmental quality. This paper examines the experience of these mechanisms-called "debt-for- nature swaps"-and recent moves, including the Enterprise for the Americas Initiative and the North American Free Trade Agreement, and identifies policy issues and prospects ofsuch programs. The paper addresses issues such as local needs and aspirations, sovereignty of indebted countries, limited capacity of NGOs, inflation and domestic debt, moral hazard and debt forgiveness. In addition to the expanded role of NGOs, the paper favors active participation of national government and profit organizations in project planning and implementation. The paper also recommends matching creditor governments and international organizations with commercial banks and international NGOs in debt-for-nature swaps. The debt crisis will end when debtor nation economies recover and achieve sustainable development. To achieve sustainable growth, indebted governments must adopt economic and institutional reform policies that promote productive investment while restricting inflation.