The Optimal Use of Environmental Resources by an Indebted Country

Abstract

Increasing environmental pollution and the over-exploitation of vital resources are major problems of economic development in many Third World countries. In general, these are not only national problems of single countries; the global impact is becoming increasingly obvious. Of particular concern are the depletion of the tropical rainforests and, as a result ofthat, the extinction of species. Many of these countries are highly indebted, and their foreign indebtedness situation is said to have an aggravating effect on their environmental problems. The economic argument used to support this hypothesis refers to the balanceof-payments situation of highly indebted countries. In order to be able to service the debt, such a country has to run a surplus on its balance of trade. This requirement can be achieved by increasing the production of exportable goods, e.g. via increased exploitation of the country's natural resources. Thus, a worsening foreign-indebtedness situation implies the acceleration of environmental devastation. - In a recent article, however, Hansen [1989] has shown that the opposite implication is also possible. The trade-balance surplus can also be achieved by reduction of imports. If these imports are capital goods which are needed to extract the natural resources, the country may find itself very soon in a situation in which the availability of technical equipment becomes the limit to the exploitation of its natural resources. According to this hypothesis, environmental problems are mitigated if the foreign debt is increased. Both of these views are static in the sense that they look merely at the balance of payments in a single period and then assume that there is a restriction on imports or exports. The intertemporal motives for foreign borrowing are not taken into account, though they have been investigated in the literature on optimum foreign borrowing. (See Bardhan [1967] and, with an application to * The results presented in this paper originate from my work in the SFB 178 research program of the Deutsche Forschungsgemeinschaft. I gratefully acknowledge helpful comments by Engelbert Dockner and Gustav Feichtinger as well as useful suggestions

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