IPD AI

Impacts of Macroeconomic Policies on the Environment, Natural Resources and Welfare in Developing Countries

10/10/2003
Working Paper

This chapter discusses some relationships between the macro economy, economic policy at the macro level, and the environmental and resource situation in developing countries. We focus on five issues, namely taxes and subsidies directed at energy and resource sectors, investments with particular environmental and resource implications, exchange rate and monetary policy, financial sector issues, and effects of crises and stress situations. Main findings are, first, that while having been reduced somewhat in later years, energy and resource subsidies still contribute to substantial excessive environmental and resource stress.

Secondly, erratic monetary policy manifested through instability of the domestic currency, devaluations and high interest rate, lead to environmental and resource stress, in particular higher extraction of non-renewables such as forests. Thirdly, crises caused by financial turmoil and/or domestic chaos often have similar consequences as they tend to cause economic agents to take very short-run positions e.g. in the form of over-extraction and sub-optimal environmental care. It is stressed that most of the relationships discussed in this chapter are quite uncertain and that further research is highly warranted.