Climate change as a macro-critical issue: Do IMF programs support or undermine national climate action?

In 2021, the International Monetary Fund (IMF)—an international lender of last resort—has recognized climate change as a macro-critical issue for financial stability and debt sustainability. This marks the latest step in which the IMF is ‘placing climate change at the heart of its work.’ Yet the contours of its climate policy advice remain elusive. In addition, it remains under-appreciated how the Fund policy advice has contributed to environmental policies and outcomes of member-states in the past. This is the task we take on in this paper by focusing on deforestation, which contributes to increased greenhouse gases in the atmosphere, desertification, and a lack of biodiversity. Theoretically, we build on scholarship on land-use change and IFI program evaluations to develop pathways that disentangle the effects of economic downturns and components of IMF programs on borrowers’ forest transition. To test these empirically, we regress developing country’s share of forest area on a binary IMF treatment indicator between 1990 and 2019, employing a recently developed fixed effects counterfactual estimator. We find that IMF programs are associated with greater rates of deforestation, with the effects manifesting and persisting in the medium term. We also conduct quantitative text analyses on lending terms which suggest these environmental effects of IMF programs are likely to constitute ‘unintended consequences,’ rather than the Fund deliberately promoting unsustainable forest management. Taken together, our work has important implications for distinct scholarly and policy debates. Academically, the paper extends an increasing literature on the determinants of national-level climate policies. In terms of policy, the results will inform efforts to guide the Fund’s emerging climate advice by showing what has, and what has not, worked in the past.