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Chapter I - Introduction: the challenge of rational environmental management
The role of financial institutions
The heart of the problem - forest clearances and agricultural intensification
There is growing awareness that agriculture in the broadest sense of the word (crop and livestock production, agroindustries, forestry, and aquaculture) has had, and continues to have, a major impact upon the environment of our globe. Thus, tropical ecology has become of vital concern not only for the inhabitants of the developing countries, but also for the urban dwellers in the northern hemisphere. As concern has increased about rapid deforestation, rising levels of "greenhouse" gases 1, rising atmospheric temperatures and loss of bio-diversity, attention has focused upon strategies to conserve and protect what is increasingly recognized as a fragile, interdependent world ecosystem.
1 Global warming has been a subject of intense study both in the academic and policy making communities. A good summary of the issues and some of the policy approaches to controlling greenhouse gas emissions, such as a carbon tax (Poterba and Whally and Wigle) and alternative technologies (Barbier, Burgess, and Pearce) is found in Rudiger Dornbusch and James M. Poterba, editors, Global warming: Economic Policy Responses, Massachusetts Institute of Technology, 1991.
It is only in recent years that the scientific and lay communities have come to understand the interrelationship of the world's ecology and the necessity for a planned, rational, sustainable use of these resources for development. Fundamental to this understanding that the economy is not separate from the environment in which we live is the realization that there is an interdependence both because the way we manage the economy impacts on the environment and because environ mental quality impacts on the performance of the economy. 2 When society consumes its "natural capital", it impairs its ability to sustain income, and perhaps even society itself, over the longer term.
2 Pearce, D., A. Markandya and E.B. Barbier, Blueprint for a Green Economy. Earthscan Publications Limited, London, 1989.
This process of trying to develop rational responses to deforestation, flooding, desertification, environmental pollution, rising ocean levels, atmospheric warming and loss of bio-diversity, has focused a spotlight on the rural sector and upon agricultural banking practice. One of the driving forces in agricultural change and development are certainly credit and investment policies. These policies, if properly conceived and directed, can help channel economic investment into environmentally benign or even beneficial projects. If the environmental concerns are ignored, the effect of these capital flows could be to encourage further destruction.
The role of financial institutions
The concern in the international financial community has produced a far reaching reevaluation of the basis upon which projects are evaluated and financed. For example, one of the principle sources of capital for projects in the past that have had adverse environmental impacts, the World Bank, has recently reversed many of its past practices of financing the exploitation of forest resources. The new forest policy paper is an almost complete reversal of previous policy. It states:
"There has been a substantial increase in the world's understanding of and concern about the forest sector of the developing world. [These] forests and woodlands play an even more important economic and ecological role than had earlier been recognized ... in protecting biological diversity [as well as] their role in the world's carbon cycle and climate change." 3
3 World Bank, Forest Policy Paper Washington, 1991, p.1.
At the national level there is similarly rising concern about the impact of financing environmentally damaging projects. Both governments and banks in the developing countries are questioning past policies and lending practices. In many countries, the Philippines and Brazil to mention only two, governments and national financial institutions have acted vigorously to change macroeconomic policies and redirect lending so as protect remaining biological resources. The results of past projects are being reappraised in the light of the new environmental consciousness and their successes reevaluated, not exclusively on their financial rate of return, but also in light of their environmental impacts.
The crucial role that national financial institutions could potentially play in protecting, conserving and rationally exploiting the natural capital cannot be overestimated. The importance of these institutions resides in the fact that they are the principal organized source of development capital. This capital is generated through domestic savings, sovereign lending by international banks, or private sector investments. It is to these institutions that falls the task of evaluating, and often overseeing, the implementation of, new loan financed development projects. Because of this, they have a significant responsibility for protecting and preserving the environment and for financing projects that utilize the natural capital in a sustainable manner.
The heart of the problem - forest clearances and agricultural intensification
In recent years, there has been growing recognition that the natural resource base, especially the tropical moist forests (TMFs) and, to a lesser degree, the tropical dry forests (TDF's), can no longer be viewed as a resource to be exploited or even destroyed for private gain by stripping these forests off for fuel, fodder and exports, or for livestock and crop production. The clearance of the forests, as well as the extension of human agricultural activities into them has accelerated in recent decades.
With increasing knowledge, these forests have come to be recognized for the important environ mental services that they perform for the globe. They:
-provide habitat and livelihood for forest dwellers;
-shelter over half the world's known species plus numerous species yet to be named and researched;
-protect soils and watersheds;
- provide wood and forest products for present and future use;
- help regulate global climate through evapotranspiration and carbon sequestration. 4
4 Forest clearance end its effect on carbon sequestration have been the subject of sustained debate in recent years. While deforestation is an important source of "hot house" gases and subsequent global warming, it is important to keep the contribution of forest clearances in perspective. The amount of carbon, principally in the form of carbon dioxide, arising from forest clearances and the burning and decay of the cleared plants is relatively small. It is variously estimated as 0.4 to 2.5 billion tons per year. (Here a billion is one thousand million.)
This compares to about 100-115 billion tons absorbed by the oceans and only a slightly smaller amount given off by them to the atmosphere due to some retention in the form of fecal pellets and calcium carbonate shells that sink to the bottom. Air and oceans are largely in balance.
Photosynthesis by green plants removes about 100-120 billion tons of carbon dioxide per year from the air, fixing most of it in plant tissue. However, of this amount, 40-60 billion tons are released in metabolic activities with a net of about 60 billion tons per year retained. About 45 billion tons are stored in trees and 15 billion tons in shrubs, grasses and other plants. By comparison, topsoils store about 1.2 to 1.6 trillion tons of carbon. (A trillion is here a thousand billion, or a million million)
Human activities, such as use of organic fuels and industries such as cement, which cooks carbon out of limestone, release between 5 and 6 billion tons of carbon per year. The effects of deforestation produce a net increase in global carbon levels in atmosphere. The estimates range from a low of 0.4 billion tons to a high of 2.6 billion tons per year. Although small in relative terms, the loss of forest has a two fold effect. It removes the storage area for future carbon sequestration, as well as adding carbon dioxide to an environmental carbon cycle increasingly unbalanced due to human activities. By analogy, it is rather like a small error of navigation multiplied by the distance of travel by a ship. The magnitude of the error increases with time.
Data from Oak Ridge National Laboratory's Environmental services Division.
Managing, conserving and preserving these resources as part of a global effort to modify agricultural production systems, both to produce the required food and fuel for a growing population and to protect the world's environment from the consequences of the past patterns of uncontrolled exploitation of these resources, requires the intimate and ongoing involvement of national financial institutions. It is their role to evaluate lending in the light of the impact upon the environment's capacity to continue to supply these "environmental services."
Likewise, intensification of agriculture on existing grazing and crop land has contributed to environmental degradation. Intensive cropping brings as a consequence erosion of soils left unprotected against wind and water as well as against intensive spray regimes that both destroy beneficial in sect populations and endanger the health of people exposed to these chemicals. The heavy use of machinery all too often produces soil compaction and is frequently characterized by the "mining" of the soil's organic matter and nutrients through abandonment of crop rotation and fallowings. Intensive livestock and poultry production and processing produces large quantities of material that prove toxic to the environment if not treated. Tropical product processing industries produce waste products and waters that can, if untreated, produce lethal effects in the environment.
In order to understand how developing countries can ameliorate the environmental situation, Chapter II will first synthesize the principal sources of environmental degradation, especially deforestation and agricultural intensification. Chapter III will explore the economic forces that provoke this degradation. Chapter IV outlines some of the methods currently in use to evaluate environmental degradation and presents a brief summary methodology which financial institutions can use to evaluate the environmental consequences of their lending programs. Chapter V explores the economics of banking and the internal structural factors that may militate against developing environmentally beneficial lending programs. Chapter VI argues that these constraints are not as severe as they first appear and that there are sound and compelling reasons for banks to develop environmentally beneficial lending programs. Chapters VII and VIII present the institutional framework for environmentally sustainable lending programs and a method of institutionalizing this program within the present operating procedures of the banks. In Chapter IX, the informal sector's importance as a non-institutional source of agricultural credit is explored. Chapter X outlines a paradigm to permit a societal response to this flow of funds to agriculture in order to preserve, protect and rationally exploit environmental capital and existing agricultural land.