’Dutch disease’ and forests in Ecuador

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No friends. We don’t mean Dutch elm disease. We are talking about what happens when large amounts of money pour into a country due to a temporary boom in petroluem or mineral exports. The literature calls this ’Dutch disease’ because it was first identified as an issue during the Dutch natural gas boom in the 1970s.

Many studies about how macroeconomic changes affect deforestation argue that strong foreign exchange outflows (e.g. external debt service) increase deforestation as a result of higher poverty and greater exploitation of natural resources to generate export revenues.

In contrast, a recent paper by Sven Wunder, a CIFOR collaborator at the Centre for Development Research in Denmark, looks at the opposite situation. What happens to deforestation when a country gets a major foreign exchange ’windfall’ from rising petroleum exports? In particular, are agriculture and timber production discouraged by overvalued exchange rates and greater job opportunities in the cities, as the ’Dutch Disease’ literature implies?

To answer this question, the author looks at the case of Ecuador, which experienced a foreign exchange boom between 1974 to 1982 as a result of strong oil exports and foreign borrowing, followed by a foreign exchange crisis from 1983 onwards. This boom-and-bust pattern is compared to the somewhat scattered data on Ecuadorean deforestation, using a combination of FAO estimates, regional deforestation reports, and agricultural land use data, to see if there is any relation between the two.

Wunder’s results do not support his initial hypothesis: there is no indication that deforestation was slower during 1974-82 than before and after. On the contrary, it is more likely that deforetation increased during the boom.

The reason for this was that the Ecuadorian state, which received a large portion of the boom revenues, used those revenues to finances activities that encourage deforestation. Oil expansion itself facilitated colonization of forested areas in the Amazon. Road construction programmes provided access to remote forest areas and spurred deforestation. Soaring credit and agricultural development budgets and higher meat and dairy product demand resulting from higher incomes, promoted the expansion of extensive agriculture and cattle ranching.

Factors that worked in the opposite direction (less deforestation) included: higher rural-urban migration, loss of competitiveness in land-extensive agricultural sectors (e.g. bananas, coffee), more money available for forest conservation, and higher rural real wages that increased deforestation costs. These, however, were apparently not sufficient to outweigh the factors promoting deforestation.

The paper’s detailed analysis of the Ecuadorean case highlights the complexity of the relations between macroeconomics, sectoral policies and growth paths, and deforestation. Thus, one should be cautious about making general statements regarding the links between external conditions, macro-economics, and deforestation: A lot depends on specific sectoral characteristics and domestic policy responses.

 

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Further reading

If you are interested in obtaining the complete version of Sven Wunder’s paper, titled ’From Dutch Disease to Deforestation - A Macro-Economic Link? A Case Study from Ecuador’ or have comments regarding these conclusions, please write Sven Wunder at the following e-mail address: mailto:Sven.Wunder@cdr.dk

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