Practically all Latin American countries subsidize tree plantations. These subsidies take the form of tax exemptions, low – interest loans, direct payments, food for work programs, donated tree seedlings, and free technical assistance. In the last few years, Brazil and Uruguay have reduced their subsidies, but other countries like Colombia, Ecuador, and Paraguay have gone in the opposite direction.

In ’Financing Forest Investment: The Issue of Incentives’, Olli Haltia and Kari Keipi review the subsidy debate. To illustrate their discussion they use two cases from Brazil and Costa Rica where they consider subsidies justified and a Chilean example where they do not. In the first two countries the social benefits from tree plantations outweighed the costs, but from a private perspective they did not appear profitable. The private owners could not capture all of the plantations’ environmental benefits and many found it difficult to get reasonable loans for risky long-term investments such as a forest plantations. In contrast, landowners in Chile don’t need subsidies to plant trees because they can make good profits from their plantations without them.

Subsidies, when used, should not exceed the smallest amount necessary to convince landowners to plant and maintain the trees. Policy makers and projects can target locations where tree planting will provide the greatest environmental benefits. Governments can use taxes and fees to recuperate part of the cost of the incentives. They may want to avoid fiscal incentives involving tax exemptions since they generally exclude small land holders that pay few direct taxes. To overcome land holders’ liquidity problems, banks might be induced to give them loans using the expected future value of their plantations as collateral.

Haltia and Keipi’s paper form part of a new collection on ’Forest Resource Policy in Latin America’, published by the Inter-American Development Bank (IDB) that also includes chapters on concession policies, trade issues, property rights, indigenous people, and other forest policy issues. The IDB expects to make a Spanish translation available shortly.