The effects of resource-backed loans on deforestation: Evidence from developing countries

Abstract

Resource-backed loans are used today by many resource-rich countries as an effective means of providing public goods and services. However, this type of financing can undermine environmental sustainability via deforestation. In this paper, we first use propensity score matching, which allows for self-selection bias in signature policies, to test whether resource-backed loans have a causal impact on deforestation in 64 developing countries from 2004 to 2018. Through a series of econometric and alternative specification tests, we find that resource-backed loans increase deforestation, measured by forest cover loss. Nevertheless, when we disaggregate resource-backed loans to capture the heterogeneous effects, our results indicate that mineral, tobacco, and cocoa-backed loans increase deforestation, whereas oil-backed loans have no significant direct impact on deforestation. We conclude the paper by providing recommendations for research, policy, and practice, particularly about environmental protection and biodiversity, transparency through improved institutional variables and the management of revenues from natural resources.