*{ http://www.foe.org/imf/credits.html
19 juillet 2002

The IMF: Selling the Environment Short 

Table of Contents 

Introduction 

In Africa 

In Asia 

In Latin America 

Conclusion and Recommendations 

References 

Bibliography

}
 
 *partie=titre The IMF: Selling the Environment Short  *partie=nil

*{ Friends of the Earth
March 2000 

This report was made possible by the generous support of the Charles Stewart Mott Foundation, the Conservation, Food, & Health Foundation, and the W. Alton Jones Foundation. 

Written by Dawn Montanye and Carol Welch With contributions from Nicola Bullard and Masaru Kato 

Editing by Andrea Durbin and Lisa Speckhardt 

Design and layout by Jeff Hughes 

This report will be made available for free via the Internet. Please point your web browser to http://www.foe.org/imf/ 

Additional copies of this report can be ordered from: 

Friends of the Earth
1025 Vermont Ave. NW, Suite 300
Washington, DC 20005
(202) 783-7400
fax: (202) 783-0444 

For information about this handbook, contact: 

Carol Welch
Friends of the Earth
1025 Vermont Ave. NW, Suite 300
Washington, DC 20005
(202) 783-7400 ext. 237
fax: (202) 783-0444
cwelch@foe.org

}


The growing civil society movement coalescing around issues such as debt and sustainable development combined with the global financial crisis in 1998 has led to a shift in the debate surrounding structural adjustment policies in the developing world. One of the most significant signs that this debate has changed is the International Monetary Fund’s (IMF) recent decision to re-name its structural adjustment facility- the Enhanced Structural Adjustment Facility (ESAF)- the Poverty Reduction and Growth Facility (PRGF). This name change symbolizes the IMF’s newly stated commitment to poverty alleviation in the poorest countries. What is symbolically implied is that the IMF and other international economic heavyweights such as the U.S. Treasury Department now recognize that the IMF impacts on poverty. They realize the deep-rooted problem that poverty poses for the global economy, and the complexity of the factors that influence it. While there are still significant differences in how these actors and civil society groups view the proper response to the poverty problem, this recent shift implies that there is a new acceptance that policies must be geared first and foremost toward poverty reduction. Whether and how effectively this new approach is applied is the next challenge. 

In much of this new thinking, however, there is a major missing element: the environment. For years, environmentalists around the world have been concerned about the impact of the IMF and World Bank’s economic development approach on the global environment. While the World Bank instituted policies to incorporate environmental considerations in its project lending, it has not extended these policies to structural adjustment policy lending, which today represents more than half of its portfolio. The IMF claims to defer to the World Bank on environmental matters, but promotes export-led development that has major environmental impacts without asking the World Bank for any formal assessment of the environmental implications of its approach. The World Bank has failed to provide environmental guidance to the IMF, and is even delinquent in assessing the environmental impacts of its own structural adjustment loans. A recent internal World Bank study found that fewer than 20 percent of World Bank adjustment loans included any environmental assessment. Nor does the IMF require any written, public environmental analysis from the World Bank or other knowledgeable institutions. The IMF plays a critical role in setting countries’ economic frameworks and indicating to other donors, such as the World Bank and bilateral donors, the health of a country’s economy. Though the IMF is not an environmental institution, its role in setting economic stabilization and structural adjustment policies means that it has a major impact on the environment. These impacts must be taken into account in advance of formulating country programs. This report is intended to provide a snapshot of how the IMF’s economic policies have led to increased pressure on the environment, and jeopardized the potential for sustainable development in various countries. The report looks at cases across the globe where the IMF’s programs have helped lead to reductions in environmental spending, increases in natural resource exploitation, and weakening of environmental laws. * The report identifies how the IMF’s programs affect the environment and why environmental issues need to be at the core of issues evaluated. We conclude the report with a series of recommendations that the IMF and its member governments should institute in order to begin to rectify this problem. 

The IMF and World Bank have claimed that structural adjustment is too complex to accurately assess. They assume that any policy changes will achieve economic stability and thereby promote sustainable development. While economic instability is admittedly a threat to sustainable development, the IMF’s approach to economic reform has generally promoted and rewarded short-term monetary improvements in export performance and budget balances, and thereby encouraged unsustainable development. The result—too many economic policies that promote environmental degradation and too few policies that promote positive environmental gains. 

[* Determining the IMF’s exact policies in a given country is difficult. It has only been in the last two to three years that loan program documents have been made available on a regular basis. Furthermore, these documents can be very general, lacking details, for example, on exactly how a forestry or mining code is being made more “conducive for investment.” However, to the extent possible, IMF policies were derived from actual program documents, as well as staff country reports and IMF press releases.]

The IMF’s economic policies affect the environment in various ways. One major goal of structural adjustment programs (SAPs) and stabilization programs is to generate foreign exchange through a positive trade balance. To meet the IMF’s ambitious targets for currencyreserves and trade balance, countries must quickly generate foreign exchange, often turning to their natural resource base. Countries often over-exploit their resources through unsustainable forestry, mining, and agricultural practices that generate pollution and environmental destruction, and ultimately threaten future exchange earnings. As the country examples in this report show, exports of natural resources have increased at astonishing rates in many countries under IMF adjustment programs, with no consideration of the environmental sustainability of this approach. Furthermore, the IMF’s policies often promote price-sensitive raw resource exports, rather than finished products. Finished products would capture more value-added, employ more people in different enterprises, help diversify the economy, and disseminate more know-how. 

Structural adjustment and stabilization also aim to generate positive government budget balances. In the effort to rapidly trim budget deficits, governments are forced to make choices, and inevitably, the environment loses. Decreased spending weakens government ability to enforce environmental laws and diminishes efforts to promote conservation. In addition, governments are told to increase private investment and to reduce the role of the state in favor of private sector development. Budget priorities are often directed toward business promotion, creating a further strain on cash-strapped environmental enforcement agencies. The example of Thailand in this report shows how IMF stabilization and adjustment programs have shifted budget priorities away from environmental protection and toward industrial promotion. Governments may also relax environmental regulation to meet SAP objectives of increasing foreign investment, as occurred in the case of the Philippines. 

The other environmental tragedy of adjustment is that economic policies that could help promote environmental sustainability are being ignored. The IMF regularly advises countries on their tax policy: they could broaden their scope to emphasize ecological taxes. Ecological taxes would generate revenue and benefit the environment by discouraging wasteful and excessive natural resource use. Instead, the IMF currently favors a regressive value-added tax system. In the IMF’s effort to build countries’ accounting systems and statistics- tracking capabilities, the IMF could also pursue environmental full-cost accounting to help countries and international financial institutions realize the value of natural resources to a country’s economy, thereby encouraging sustainable resource use. Both of these areas, green taxes and environmental full-cost accounting, are within the IMF’s technical assistance function, and would contribute to environmentally sustainable development. 

Until policy makers recognize the importance of genuine sustainable economic development and the role the IMF plays, and take immediate steps to truly promote environmentally sustainable development in all their policies and programs, global environmental degradation will continue and poverty will be perpetuated. Environmental protection and sustainable resource use must be considered a core component of any strategy aimed at economic policy reform and poverty alleviation. 

This report examines the impact of IMF policies in eight IMF borrowing countries: Brazil, Cameroon, Cote d’Ivoire, Guyana, Indonesia, Nicaragua, the Philippines, and Thailand. Countries undergoing years of long-term IMF structural adjustment were chosen, as well as recipients of recent large-scale IMF stabilization programs. Countries in Africa, Asia, and Latin America were selected as the IMF has had most of its lending programs in these regions; the countries are grouped by region. Since these cases provide snapshots of how IMF policies affect the environment, each country generally focuses on one environmental implication of the IMF’s program, such as the impact of budget cuts on environmental programs, or forest product exports, or the imbalance between investment incentives and environmental regulations. 
 
 *partie=titre Cote d'Ivoire  *partie=nil 

It has been nineteen years since the IMF’s first adjustment program was introduced in Cote d’Ivoire, and the country has been on and off IMF programs ever since, instituting structural adjustment policies including liberalization of pricing systems and intensification of exports. The 1990s have been marked by a more sustained effort by the government to pursue policies for fiscal and structural reform.As a result of SAPs, Cote d’Ivoire devalued its currency in 1992, and eliminated export taxes creating incentives for increased agricultural output. These policy changes yielded significant results. While the overall diversification of agricultural exports increased slightly, cocoa exports rose considerably. From 1992 to 1996 cocoa production increased by 44 percent with exports growing by an annual average rate of 11 percent from 1994 to 1996.1 In 1995 Cote d’Ivoire liberalized its domestic market, further spurring the output and export of cocoa of which Cote d’Ivoire is the world’s leading producer. While adjustment measures in the agricultural sector resulted in an economic boost, there were also significant changes in land use. From 1980 to 1996, land used for crops such as cocoa increased from 7.2 percent to 13.5 percent of total whole land area.2 Following liberalization, the area under cultivation for cocoa production increased dramatically from 1500 hectares in 1994 to 1950 hectares in 1995.3 

Rising cocoa output has been the primary source of decreased forest cover which now equals 3.9 million hectares, a small fraction of the 12 million present in 1960. Belatedly recognizing the threat that twenty years of export-led agricultural development has wrought, the Policy Framework Paper (PFP)** for 1998-2000 states that the country’s environment and forests are "faced with a number of problems, particularly soil degradation, deforestation, the loss of biodiversity and pollution." 

Although the latter half of the 1990s has seen some government efforts to protect its remaining forests, illegal cocoa and coffee planters have been taking out trees in protected forest areas in order to expand cropland. In 1997, 30 percent of protected forests were "illegally occupied" by farmers growing up to 100,000 tons of cocoa (roughly 1/10 of the 1996/97 crop).4 Long-term environmental stability is at risk as cocoa and coffee production is moved to new areas as soils become exhausted.5 

At the same time, the IMF Policy Framework Paper praises the competitive gains in export volumes that Cote d’Ivoire was able to maintain through the currency devaluation. In looking towards further economic growth, the IMF recommends "vigorous liberalization of the economy, particularly in the coffee and cocoa sectors," and establishing incentives for accelerating the development and diversification of the agricultural sector. It is this very liberalization that has contributed to the land clearing and soil exhaustion in Cote d’Ivoire in the first place. 

[ The Policy Framework Paper (PFP) is the document that sets out the eco-nomic policies that a government agrees to adopt as part of its agreement with the IMF. The PFP is technically a government document, though it has been widely reported as being written by the IMF. The PFP was replaced at the end of 1999 with a new document—the Poverty Reduction Strategy Paper.)]

But unsustainable agricultural practices are not the only problem in Cote d’Ivoire. IMF policy prescriptions for 1999-2000 include a big push for mining. The plan calls on the government to "transform the mining and petroleum sector by the year 2000 into one of the critical sectors of the economy, alongside agriculture." The IMF is relying on the exploitation of Cote d’Ivoire’s natural resources to generate critical foreign exchange. The problem is that the foreign exchange often comes at the cost of environmental degradation leaving the country with depleted soils and forests, and communi-ties negatively impacted by mining. The IMF has adopted a short-term approach that undermines Cote d’Ivoire’s natural resource base. 

 *partie=titre Cameroon  *partie=nil 

Cameroon is one of the most ecologically diverse countries on the African continent. Between coastal mangrove swamps and Mount Cameroon, West Africa’s highest mountain, lies a hot and humid southern region of dense tropical forests of mahogany, ebony and obeche trees. There are over 9,000 plant species in Cameroon, 150 of which are found nowhere else in the world. Cameroon’s forest resources are estimated at 22 million hectares, of which 14 million are tropical rainforest. Intensive logging now threatens the country’s tropical rainforests and the habitat of over 40 species of wildlife, leaving gorillas, elephants, and the black rhinoceros threatened with extinction. 

Cameroon could once boast of one of the highest incomes on the African continent. Until 1982, rich oil reserves facilitated dramatic economic growth, after which oil crisis left the country with a shrinking GDP and growing external debt. In the face of an economic crisis, Cameroon implemented a series of IMF structural adjustment programs beginning in 1988 and contin uing into the present. The IMF’s conditions included efforts to diversify the economy and stimulate export production in the non-oil sectors. 

Because of Cameroon’s wealth of forests, logging these unharvested forests became an attractive option to diversify the economy. The IMF encouraged the government to reduce export taxes on forest products and devalue the currency. With these macroeconomic policies in place, forest products production grew sharply, the scale of the logging industry expanded, and exports of forest products increased significantly, leading to widespread deforestation of these ecologically important forests of west-central Africa. After the 1994 currency devaluation, the number of logging enterprises increased from 194 to 351 in 1995.6 Lumber exports grew by 49.6% between 1995-96 and 1996-97.7 

In addition to tapping into Cameroon’s wealth of forests, the IMF’s requirements to shrink government spending and reduce government employment negatively affected environmental programs. Between 1995 and 1997 total government employment was reduced by 5,500. Nearly 1000 government positions were eliminated from the agriculture, forestry and fishing sector, an 8 percent decrease. In contrast, the Defense Ministry increased by 16 percent, adding over 4500 employees.8 

The lack of financial resources and personnel to enforce forest protection, combined with few incentives for appropriate forest management and land use by loggers and rural dwellers, served to undermine any potential for sustainable forestry management practices. In spite of the creation of the Ministry of Environment and Forestry in 1992, Cameroon’s membership in the International Timber Trade Organization, and the passage of a new Forestry Code in 1994 as a result of SAP requirements to reform the forestry sector, the inability to finance and enforce these efforts has resulted in the wholesale destruction of one of Cameroon’s most valuable environmental resources. 

In a move to counteract these disincentives for forest conservation, the Cameroon government enacted a ban on log exports in June 1999. However, this new law has major loopholes (such as excluding the two main export species) and does not address the fundamental problem: the Cameroon government’s economic incentives encourage the exploitation, rather than the protection, of its critical forests. 

 *partie=titre Thailand  *partie=nil 

The Asian financial crisis started in Thailand in the summer of 1997, when the Thai currency, the baht, came under a series of increasingly serious speculative attacks and the markets lost confidence in the economy. Shortly thereafter, the IMF’s Executive Board 
*{ Source: Bullard 1999

Source: Bullard 1999} 
 
approved a loan of $4 billion as part of a much larger $17.2 billion bailout package, which included contributions from the World Bank, the Asia Development Bank and individual countries. 

The bailout package initially focused on financial sector restructuring, the identification and closure of unviable financial institutions, intervention in the weakest banks, and the recapitalization of the banking system. To provide for the costs of financial restructuring, and improvement in the current account position, the program imposed harsh fiscal measures, including expenditure reduction, to bring the public sector deficit to a surplus of 1 percent of GDP in 1997/98. On the revenue side, the value-added tax rate was raised from 7 percent to 10 percent. In addition, the program provided structural initiatives to deepen the role of the private sector in the economy and reinforce its outward orientation, including civil service reform, privatization, and initiatives to attract foreign capital. 

The severe contractionary nature of the IMF’s economic program led to a deep recession, and as a result, the program was modified several times to adjust fiscal policy targets and allow the government to run a budget deficit. This was done partly to finance higher social spending and strengthen social safety nets. 

Environmental sustainability was thoroughly ignored in the response to Thailand’s financial crisis. Budget cuts, even in light of the loosening of the fiscal targets, have had serious ramifications across the board for environmental programs. In 1999—two years after IMF intervention— the Science, Technology, Energy and Environment budget had been reduced by 40 percent. Since the crisis, Thailand’s pollution control budget has plummeted 80 percent from 1997 levels. It is now only 25 percent of the industrial promotion budget. Budget expenditures have also declined for conservation programs. Prior to the economic crisis, the Thai government spent one baht on marine conservation for every three baht it spent on aquaculture promotion. This ratio has been reduced to one baht for every five since the crisis. 

The priorities of the bailout have significantly decreased the chances of pursuing sustainable development in Thailand. Shortly before the onset of the economic crisis, the Thai government implemented the progressive 8th Economic and Social Development Plan, which emphasized sustainable development and moved away from the previous "growth at all costs" model of development. However, after signing its $17.2 billion IMF-led bailout, growth and development have once again become the absolutes of Thai government policy, at the expense of natural resource and environmental protection. 

The devaluation of the Thai baht was envisioned as a key means of boosting international competitiveness; the repercussions of this have had a profound impact on the environment. For example, the international competitiveness of exports of agricultural and agro-processing products increased. During the second half of 1997, export of agro-processing products rose by 47 percent from the same period in the previous year. In 1998, the exports of agricultural products also rose dramatically, by 33.6 percent. This is significant because agriculture accounts for approximately 42 percent of land use and it consumes about 90 percent of total water usage in Thailand. 

Similarly, fishery depletion has increased after the devaluation of the baht. Canned fish exports alone rose 58.4 percent. Fishing trawler activity in neighboring waters increased dramatically. Moreover, to feed the need for foreign currency, the government has increased its fishery promotion budget. In 1995, the fisheries conservation budget was around one-third of the promotion budget. In 1999, the ratio had changed. For every baht spent on conservation, five were spent on promoting extraction. As a result, field reports claim that government patrol boats can no longer afford to monitor activities in protected areas, and illegal activities such as dynamiting and cyanide fishing in protected coral reefs have increased. 

The financial crisis has had lasting impacts on the environment in Thailand, impacts that were neither foreseen nor considered by the IMF. 


*{ Source: Bullard 1999 }

 
 *partie=titre Indonesia  *partie=nil 

In 1997, Indonesia became the second recipient of the Asian financial contagion that originated in Thailand. Spooked investors fled the country, sparking a precipitous drop in the national currency and a spike in the rate of inflation. As a result of this crisis situation, Indonesia signed an economic bailout package with the IMF. Together with pledges from the World Bank and the Asian Development Bank, the loan totaled US$43 billion. 

In the wake of the Suharto era, an era characterized by collusion, corruption and nepotism, the economic crisis and adoption of reforms offered opportunities to change the tide of rampant environmental destruction, particularly of Indonesia’s vast forests. IMF policies aimed at creating competitive markets were meant to break trade monopolies, particularly in the forestry sector, eliminating opportunities for corruption and fostering better forest management practices. 

Unfortunately, these efforts have been ineffective. Only 15% of forest concessions known to have been allocated through corrupt means have been revoked. Illegal logging has increased dramatically as the economic crisis has forced people to use desperate measures to survive. The result has been threats to the existing forest preserves and wildlife habitat. The majority of illegal logging is said to involve timber barons, the military and police, as well as conservation authorities.9 

A major problem in these forestry sector conditionalities is that Indonesian civil society, who would be best placed to identify forestry sector problems and to recommend policies to their own government, are excluded from any meaningful process in designing the new forestry sector policy. Indonesia’s Letter of Intent*** with the IMF called for the establishment of a new forestry law in 1999. Indonesian NGOs felt that the time allocated for the process, and consultations were inadequate. Not surprisingly, the new law focuses on forestry for economic purposes by opening up the sector to competition without ensuring critical issues such as indigenous land rights and regulatory reforms that address forest conservation. 

[ The Letter of Intent is the document that indicates a country’s agreement to enter into an arrangement with the IMF. For non-International Development Assistance countries that are not eligible for IMF concessional funds, the Letter of Intent and the associated Memorandum of Economic and Financial Policies contain the economic policies that are part of the agreement.] 

Enforcement mechanisms needed to ensure that existing policies achieve their intended goals are woefully inadequate. The budget for management of protected areas has been declining in real terms every year since 1996,10 and in 1998 budget cuts forced Jakarta, one of the world’s most polluted cities, to suspend all environmental programs.11 

As the IMF is ordering the government to dismantle competitive monopolies, other IMF policies-like budget cuts-are making it impossible to comply with other demands to promote sound forest management programs. 

While efforts for forest protection have faltered, other IMF economic policy measures threaten to directly undermine the environmental and social health of the region. The IMF’s mandate to remove restrictions on foreign investment and exports stands in direct opposition to environmentally sustainable land conversion targets also mandated by the IMF loan agreement.12 

For example, Indonesia’s Letter of Intent supports the expansion of Indonesia’s oil palm sector through the removal of barriers to foreign investment. Although oil palm production had slowed in the last two years, due to among other things, heavy export tariffs and expensive start up costs, under the IMF bailout, tariffs are slated to be cut and incentives to producers put in place. As a result, palm oil exports have become much more profitable to the Indonesian producer. At the same time, oil palm production in Indonesia has been identified as a major cause of the conversion of Indonesia’s forests to agricultural and non-forest use, leading to increased deforestation and forest fires. 

And because yield has gradually decreased, increased production has been facilitated by the great expansion of agricultural land area, much of which has involved deforestation. 

The devastating fires that took place in Indonesia in 1997 were caused, in part, by large-scale land clearing for oil palm plantations. The fires spread to neighboring farmlands and forested areas and eventually spread smoke across Southeast Asia. The result of the 1997 fires was widespread deforestation and serious human health problems which cost the South East Asian economies an estimated $4.4 billion.13 

Indonesia is rich with resources, but these natural resources are not sufficiently valued. The IMF’s loan program in Indonesia did not recognize the long-term value of its forests, but promoted economic incentives that led to increased deforestation. 


*{ Source: FAO Database 

Source: FAO Database }


 *partie=titre Philippines  *partie=nil 

For decades, the Philippines has been tied in one way or another to an IMF agreement. Although touted as a success story by remaining relatively unscathed in the wake of the Asian financial crisis, the Philippines has not escaped the social and environmental disruption that has come as a result of structural adjustment policies. 

In an IMF agreement signed in 1998,the IMF mandated that the budget deficit be turned into a budget surplus. In response the Philippine government required 25% reduction of all expenditures, only excluding outlays for personnel and debt service. This imposed budget axe seriously hurt the programs of the Department of Environment and Natural Resources, which was already dealing with cuts in appropriations. The result was reduced enforcement capabilities and less support for communities in forest management. With the cuts in enforcement, the government will have even less power to police unchecked illegal logging, which has plagued the country and played a key role in reducing the forests from 16 million hectares to a mere 700,000 hectares.14 

The Philippine government was also required by the IMF to increase foreign exchange reserves by increasing exports. It is perceived by many that the pressure to increase export earnings led to the proposed lifting of a decade-old export ban on logs. The significant level of opposition against this proposal by local NGOs led the President to ultimately reverse his decision. 

The Philippines is also a country rich in mineral resources. Restrictions on foreign investment were seen by the IMF as a barrier to their exploitation. In a 1990 staff report, the IMF noted the "relatively restrictive laws and regulations governing foreign investment in key sectors," and called for foreign investment reforms that would "play an important role in supporting the adjustment efforts by enhancing the efficiency of resource mobilization." The structural reforms were meant to "substantially reduce the sectoral restrictions on foreign investment"15 and move from limiting for-eign participation to encouraging the promotion of investment and exports. 

New laws in place now encourage and facilitate large-scale commercial mining and increased private sector investment, particularly by foreign-owned companies. The Philippine Mining Act of 1995 allows full foreign ownership in the exploration, development and uti-lization of the country’s mining resources, in violation of the 1987 Philippine Constitution requiring 60 per-cent ownership by Filipino citizens in mining develop-ment and exploitation. 

When the 1995 mining law was fully implemented, the budget of the Mines and Geosciences Bureau (MGB) saw an 80 percent increase at a time when total gov-ernment environmental spending was decreasing. In 1997, the total number of applications for financial and technical assistance between the government and foreign corporations interested in mining covered a cumulative area of 6,797,309 hectares (approximately 23 percent of the country’s total land area). 

Creating a favorable investment climate for foreign mining companies has led to new social problems, namely human rights problems and dislocation of indigenous peoples. The country has experienced inci-dents of armed violence from mining guards and mili-tary personnel assigned to assist the mining compa-nies. Indigenous tribes have been displaced as military operations facilitate the entry of corporations into mining areas. Mining operations are severely infringing on communities and their livelihoods. In 1996, a min-ing tailings spill from the Marcopper tailing dam in Marinduque seriously polluted the Boac River and Calancan Bay on which the local communities depend. 

The Philippines case illustrates how national laws can be radically altered to encourage a certain model of economic development that exacerbates environmental degradation and jeopardizes the communities’ quality of life.