Most banks lend money to finance specific investments. However, the World Bank and the International Monetary Fund (IMF) often make loans to finance general government spending. To get the loans poor countries must agree to change their policies. Those policy changes affect exchange rates, government budgets, prices, and investment and spending patterns.

When the World Bank lends money for a specific investment project it always assesses how it will affect the environment. But when it makes loans to support policy reform, called structural adjustment loans, it usually does not do that.

During consultations about the Bank’s new forest policy many governments, NGOs, and other groups said the Bank should look at how structural adjustment loans affect forests. They noted that economic changes associated with these loans often have a larger impact on forests than forestry projects do. Bank officials agreed, but said that since structural adjustment lending affects all sectors the forest policy was not the appropriate place to deal with it.

Now the Bank is revising its structural adjustment policy. It put a discussion paper on its web site for feedback and will send a proposal to its directors in October. The proposal will probably recommend the Bank consider how its adjustment loans affect the environment, but not require any formal assessment.

The main argument for not requiring the Bank to evaluate the environmental impacts of adjustment lending is that it is too difficult. Many impacts of policy reforms are indirect and hard to measure.

However, a recent book by Sven Wunder of CIFOR suggests that such analysis can be done. In ’Oil Wealth and the Fate of Forests’, published by Routledge Press, Wunder looks at how changes in exchange rates, government budgets, and consumer spending resulting from oil and mineral exports booms influenced deforestation in Cameroon, Ecuador, Gabon, Indonesia, Mexico, Nigeria, Papua New Guinea, and Venezuela. The types of changes he analyzes are similar in many ways to those associated with structural adjustment.

Wunder found that currency devaluations often increase deforestation. Increasing government revenues discourage forest clearing if the money gets spent mostly in cities, but can have the opposite effect if it goes to finance agricultural credit, settlement schemes, or new roads in forested regions. Higher incomes for Latin Americans often lead to deforestation because they buy more beef produced in recently deforested areas.

These are the sorts of issues that the World Bank can and should be looking at when it analyzes how its structural adjustment loans affect the environment. It also needs to take into account what the IMF does, since their activities are closely linked. Hopefully the Bank’s new structural adjustment policy will ensure that happens.