Debt-for-Nature Swap: a Good Pickle
GOOD ideas, like good pickles, are crisp, enduring, and devilishly hard to make. So when one comes along in the international arena - as they still do, despite the fashionable despair over global problems - it's worth getting the recipe. Here's one: the debt-for-nature swap, which first popped up in 1987. Here's how it works. Imagine that a developing nation (call it Uruland) has amassed more debt to overseas banks than it can reasonably repay. But it has some natural features - lakes, forests, grasslands - that environmentalists around the world want to preserve. Its citizens are rapidly pillaging these resources - cutting down forests, overgrazing grasslands, polluting the waters. Why? To create the exports that will earn the foreign currency needed to make payments on that debt.
Let's suppose, too, that there's a local organization called the Uruland Environmental Watch (UEW). Its members want to stop the devastation of their environment. But they're helpless through lack of leverage and funds.
Meanwhile, back in New York, two other players are watching Uruland: Empirebank, which loaned $1 million to Uruland a few years ago, and Ecoglobe, an international conservation organization. Empirebank wants to collect its money, but knows that Uruland is such a poor credit risk that, realistically, it might not even be able to collect 10 cents on the dollar. Ecoglobe wants to help the UEW preserve the environment, and has some wealthy donors - individuals, corporations, foundations - who agree.
So Ecoglobe, reminding Empirebank that its $1 million Uruland loan is worth only one-tenth that much, buys it for $100,000. It then strikes a deal with the government of Uruland. The loan will be entirely forgiven, it says, if Uruland puts $250,000 worth of its own currency into a conservation endowment. Uruland can do this by handing over $250,000 in government bonds to the UEW, which will use the money to help prevent environmental damage.
The Uruland government, seeing a way to reduce its external debt and use only local currency, is happy. Ecoglobe, getting $250,000 worth of results for $100,000, is happy. The UEW, seeing conservation projects getting a boost, is happy. Empirebank, making the best of a bad deal, is happy.
End of example. But is it all mere fantasy? Not at all. A recent report from the World Resources Institute (WRI), entitled ``Natural Endowments: Financing Resource Conservation for Development,'' notes that debt-for-nature swaps have already reduced the developing world's external debt by almost $100 million in five countries: Bolivia (where the concept was pioneered), Costa Rica, Ecuador, the Philippines, and Madagascar.
Given the total third world debt of $1.3 trillion, that's not much. And given the domestic politics of developing nations, as well as their differing views on what constitutes a worthwhile conservation project, it's not always easy. ``The primary condition for this to work well,'' explains Frederik van Bolhuis, co-author of the WRI report, ``is to have a spending plan in line with the priorities of the country in the first place.'' A second problem, he says, is inflation. Some countries might simply issue conservation bonds with nothing to back them - which, like printing more money, devalues the currency already in circulation.
Debt-for-nature swaps aren't the whole answer: No developing country, facing pressing social needs in schools, housing, health care, and so forth, can afford to commit major proportions of its currency solely to conservation. Costa Rica, having swapped down its debt by 5 percent, may already have reached the debt-for-nature limit.
Mr. Bolhuis thinks 1 to 2 percent is a reasonable target for most countries. But even 2 percent of $1.3 trillion is $2.6 billion. That may not be the whole meal. But it's a pretty good pickle.