Deforestation and credit cycles in Latin American countries

This paper establishes a link between deforestation and credit cycles in Latin American countries. The latter exhibit rapid deforestation rates as well as macroeconomic instability that is often rooted in credit booms and crunches episodes: data available on the last years show a coincidence between higher macroeconomic instability and deforestation increases. This paper provides a theoretical explanation and econometric investigations of this phenomenon. A key ingredient of the model is the existence of two sectors: a modern agricultural sector and a subsistence one, which are hypothesised to catch the basic features of Latin American agricultural sectors. Agricultural production relies on three production factors: land, capital and labour. Agents clear forested areas in order to increase agricultural lands. Interest rates movements have an effect on agricultural decisions and thus on deforestation since they induce factor movements between the agricultural sectors. It is shown that deforestation occurs in response to interest rates increases or decreases primarily because of the irreversible character of forest conversion. Econometric tests are conducted on the 1948-2005 period on an exhaustive sample of Latin American countries. The database on deforestation is a compilation of FAO censuses and several measures of credit cycles are calculated as well. The main output of the paper is to evidence a link between credit cycles and deforestation. The results are robust to the introduction of usual control variables in deforestation equations.Credit cycles;deforestation;Latin America

A methodology to estimate impacts of domestic policies on deforestation: Compensated Successful Efforts for “avoided deforestation” (REDD)

Climate change mitigation would benefit from Reduced Emissions from Deforestation and Degradation (REDD) in developing countries. The REDD mechanism is in charge of distilling the right incentives for fostering forest conservation with appropriate compensation of foregone revenues, which in turn is related to avoided deforestation (how many hectares of forests are saved). Although any prediction of deforestation rates (i.e. business-as-usual scenarios) is challenging, and any negotiated target is subject to political influence, these two ways have been prioritirized so far. In other words, proposals have focused on a baseline (or cap)-and-trade approach, which relevance is questionable because resulting financial compensations are subject to unfairness if estimations of avoided deforestation are not reliable. Rather than considering overall deforestation (predicted and observed), we argue that a REDD mechanism would gain from linking compensations to real efforts that developing countries implement for slowing deforestation rates. This would provide more efficient incentives to design and enforce suitable policies and measures. The methodology we present to measure these efforts (labeled Compensated Successful Efforts) is based on the rationale that overall deforestation is due partly to structural factors, and partly to domestic policies and measures. This typology differs from others presented in the literature such as proximate / underlying causes, or economic / institutional factors. Using an econometric model, our approach estimates efforts that are (i) independent of structural factors (economic development, population, initial forest area, agricultural export prices), (ii) estimated ex post at the end of the crediting period, and (iii) relative to other countries. In order to illustrate the methodology we apply the model to a panel of 48 countries (Asia, Latin America, Africa) and four periods between 1970 and 2005. We conclude on the feasibility to estimate avoided deforestation using the Compensated Successful Efforts approach. In addition to being conservative from an environmental perspective, this approach guarantees fairness by accounting for dramatic changes during the commitment period.avoided deforestation;REDD;climate change;baseline scenario;Forest

Deforestation and credit cycles in Latin American countries

This paper establishes a link between deforestation and credit cycles in Latin American countries. The latter exhibit rapid deforestation rates as well as macroeconomic instability that is often rooted in credit booms and crunches episodes: data available on the last years show a coincidence between higher macroeconomic instability and deforestation increases. This paper provides a theoretical explanation and econometric investigations of this phenomenon. A key ingredient of the model is the existence of two sectors: a modern agricultural sector and a subsistence one, which are hypothesised to catch the basic features of Latin American agricultural sectors. Agricultural production relies on three production factors: land, capital and labour. Agents clear forested areas in order to increase agricultural lands. Interest rates movements have an effect on agricultural decisions and thus on deforestation since they induce factor movements between the agricultural sectors. It is shown that deforestation occurs in response to interest rates increases or decreases primarily because of the irreversible character of forest conversion. Econometric tests are conducted on the 1948-2005 period on an exhaustive sample of Latin American countries. The database on deforestation is a compilation of FAO censuses and several measures of credit cycles are calculated as well. The main output of the paper is to evidence a link between credit cycles and deforestation. The results are robust to the introduction of usual control variables in deforestation equations.Credit cycles, deforestation, Latin America

A methodology to estimate impacts of domestic policies on deforestation: Compensated Successful Efforts for “avoided deforestation” (REDD)

Climate change mitigation would benefit from Reduced Emissions from Deforestation and Degradation (REDD) in developing countries. The REDD mechanism is in charge of distilling the right incentives for fostering forest conservation with appropriate compensation of foregone revenues, which in turn is related to avoided deforestation (how many hectares of forests are saved). Although any prediction of deforestation rates (i.e. business-as-usual scenarios) is challenging, and any negotiated target is subject to political influence, these two ways have been prioritirized so far. In other words, proposals have focused on a baseline (or cap)-and-trade approach, which relevance is questionable because resulting financial compensations are subject to unfairness if estimations of avoided deforestation are not reliable. Rather than considering overall deforestation (predicted and observed), we argue that a REDD mechanism would gain from linking compensations to real efforts that developing countries implement for slowing deforestation rates. This would provide more efficient incentives to design and enforce suitable policies and measures. The methodology we present to measure these efforts (labeled Compensated Successful Efforts) is based on the rationale that overall deforestation is due partly to structural factors, and partly to domestic policies and measures. This typology differs from others presented in the literature such as proximate / underlying causes, or economic / institutional factors. Using an econometric model, our approach estimates efforts that are (i) independent of structural factors (economic development, population, initial forest area, agricultural export prices), (ii) estimated ex post at the end of the crediting period, and (iii) relative to other countries. In order to illustrate the methodology we apply the model to a panel of 48 countries (Asia, Latin America, Africa) and four periods between 1970 and 2005. We conclude on the feasibility to estimate avoided deforestation using the Compensated Successful Efforts approach. In addition to being conservative from an environmental perspective, this approach guarantees fairness by accounting for dramatic changes during the commitment period.avoided deforestation, REDD, climate change, baseline scenario, Forest

A response to the commentary on “Compensated Successful Efforts”

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The Economic Consequences of Export Instability in Developing Countries: A Survey

In this note we provide a brief survey of the literature about the effects of exports instability in developing countries, mainly focused on commodity dependent economies. Whatever the nature of instability, exports instability generate major disturbances in those economies. Exports instability is often considered as a major source of macroeconomic instability that is welfare costly. Exports instability is also risk generating for individual economic agents who take it into account in their economic decisions but cannot get rid of it in the absence of appropriate credit and insurance devices. We thus examine the macroeconomic consequences of export instability, first in the short term, using the Dutch Disease framework, and second its effects on growth. We then examine the effects of instability from a microeconomic point of view.

Geographical Spillovers and Growth

One of the main subjects in the theory of economic growth is to explain regional differences among rates of growth. In this paper, we address this issue through the notion of the "underdevelopment trap". Such a trap may be the result of strategic complementarities between investment decisions which generate multiple equilibria. The latter may be Pareto inefficient because of technological externalities. We test our model on international pooled data on the period 1970-90. The econometric analysis shows that economic growth rates depend on regional investment decisions. Moreover, it appears that such regional spillovers are channeled mainly through the physical rather than through the human capital stock.Underdevelopment Traps., Technological Externalities, Strategic Complementarity, growth, Regional Spillovers

The effect of devaluation on cattle markets integration in Burkina Faso

The aim of this paper is to highlight an aspect of devaluation that is generally ignored in the literature, namely, its positive impact on domestic trade. We develop a parity bounds model for cattle markets of Burkina Faso with two regimes of prices, autarkic and integrated, consistent with spatial and inter-temporal arbitrage conditions. When markets are autarkic, prices follow a random walk and when markets are integrated, prices are equal up to transaction costs. The integrated regime is more likely when transaction costs are low. In our model, the 1994 franc CFA devaluation reduces transaction costs relatively to cattle prices, thereby promoting markets integration. The model is tested using a switching regression with exogenous selection variables. The results show that the probability of market integration significantly increased after the devaluation.panel data., switching regression model, burkina faso, franc CFA devaluation, cattle, inter-temporal arbitrage, Market integration

Devaluation and Cattle Markets Integration in Burkina Faso

The aim of this paper is to highlight an aspect of devaluation that is generally ignored in the literature, namely, its positive impact on domestic trade. We develop a parity bounds model for cattle markets of Burkina Faso with two regimes of prices, autarkic and integrated, consistent with spatial and inter-temporal arbitrage conditions. When markets are autarkic, prices follow a random walk and when markets are integrated, prices are equal up to transaction costs. The integrated regime is more likely when transaction costs are low. In our model, the 1994 franc CFA devaluation reduces transaction costs relatively to cattle prices, thereby promoting markets integration. The model is tested using a switching regression with exogenous selection variables. The results show that the probability of market integration significantly increased after the devaluation.panel data., switching regression model, burkina faso, franc CFA devaluation, cattle, inter-temporal arbitrage, Market integration

Increased Exposure of China to Asymmetric External Shocks: Is Fiscal Federalism an Efficient Answer?

The aim of this paper is to examine whether there is a co-insurance mechanism against provincial aggregate income fluctuations between the Chinese provinces. Our theoretical argument relies on the existence of an efficient allocation of risk between the Chinese provinces. According to this analysis, an institutional arrangement between the provinces allows the perfect smoothing of provincial private consumption. In this case, changes in provincial private consumption depend rather on changes in aggregate Chinese income than on asymmetric changes in provincial income. We test this hypothesis on the 1989-2000 period for 30 Chinese provinces using the GMM estimator. Econometric evidence highlights the weakness of co-insurance mechanisms between the Chinese provinces. First, we reject the hypothesis of perfect insurance. Second, there does not seem to exist a significant, though imperfect, insurance mechanism. Indeed, the provinces’ private consumption reactions are the same either after a shock affecting all the provinces or after an asymmetric shock.China., Fiscal Federalism, Regional Economics Risk Coping, Co-insurance