The foreign debt crises that afflicted many Latin American and Caribbean nations, beginning with Mexico in 1982, led to lending programs by multilateral lending agencies (MLAs) that required recipients to undertake structural reforms in their economies. Structural Adjustment Loans (SALs) to assist with balance of payment problems were conditioned on the implementation of policies that would eliminate fiscal deficits, control the money supply, and liberalize trade and financial markets. Privatization of state-owned enterprises, termination of subsidy programs, and decentralization of government activities were often part of these policies. Given the need to reduce government spending and to spur economic growth, it appeared as though these structural adjustments were destined to result in the depletion and degradation of environmental resources. Debate and analysis of this prospect has generated its own literature. The purpose of this paper is to focus on the recent efforts of the lending agencies to provide the types of assistance that recipients need in order to conserve natural resources and institute pollution control policies. Financial support for institutional change in the environmental sector is shown to be an important facet of this assistance.
At its core, structural adjustment means changing the institutional structures that govern economic decision making. Old processes will not provide the new results the MLAs are seeking. While the indicators of success may be economic measures such as trade balances, fiscal surpluses, and low inflation rates, the MLAs have, over time, come to recognize that success comes from institutional change. Structural adjustment was a process that in some cases failed in its initial attempts because there was insufficient development of the institutional structure necessary to carry out the needed reforms [Dornbusch 1993; Inter-American Development Bank 1996b]. Given their early experience with SAL failures, the MLAs began to include institutional strengthening components in their projects.
Concern for Environmental Impacts
The environmental impacts of standard lending and the reforms required under SALs were not initially given any consideration. In the late 1980s, the links between MLA lending and the environment began to receive increasing attention. In 1989, the World Bank began to require Environmental Impact Assessments (EIA) of projects likely to have environmental impacts. The World Bank has also encouraged the development of National Environmental Action Plans [Panayotou and Hupe 1996; LePestre 1995].
Adjustment programs can affect the environment through either of two general paths. The requirement that a recipient country get its fiscal accounts in balance can have negative impacts through reduction in spending programs that reduce pollution and/or improve environmental quality. Positive effects can result from reducing subsidies to environmentally destructive projects and activities. The other route is through institutional reforms, which can include policies as diverse as training for government regulators, support for national park management, support for indigenous and minority communities, and securing land tenure.
The impact of adjustment lending programs, however, is not easily assessed, and these programs are not subject to EIAs. Since the adjustment process tended to be piecemeal, extending over a period of years and sometimes being abandoned and restarted, it is not possible to identify a starting date for adjustment in any one country. The types of potential linkages between the varied reforms and the environment are numerous, not always evident, and often complicated by other factors. Some, like energy efficiency programs, may have positive impacts. Others, such as trade liberalization, may encourage faster depletion of natural resources. Some sectors may be impacted both ways. For example, eliminating subsidies for agricultural chemicals may help reduce the run-off of fertilizers and pesticides, but the increased demand for...