“green” development in the medium or long run is impossible to achieve without micro units (households and businesses) facing appropriate price signals. A greater public-induced supply of “green” goods is only part of the story and not by itself sufficient or sustainable. In the concluding section of the paper we argue that reforms of price distortions that work against green investment and consumption patterns are crucial not only in the longer term, but also in the context of short-term stimulus.

A further initial warning should also be given, related to the use of fiscal policies for short-run activity regulation in developing countries more generally. As argued by Kraay and Serven (2008), fiscal policies particularly in lower-income developing countries tend to be procyclical, for various political and economic reasons; are difficult to reverse; and may have limited stimulus effect in the short run. While this may leave one somewhat pessimistic about the prospect of using fiscal policies to stimulate LIC economies, it does not affect our main argument here, which relates to the relative degree of “greenness” that is desirable in a given fiscal policy.

# **2. Some Implications of the Economic Crisis for Environmental and Natural Resource Management and Quality**

As an additional backdrop for a discussion of green stimulus, it may be helpful to consider impacts of the current economic downturn on the quality of the environment and on natural resource management. In terms of the crisis, most attention has so far been drawn to reduced overall economic activity and employment. The crisis also is likely to have impacts on the management and exploitation of environmental and natural resources in many developing countries. However, these impacts will depend on a variety of factors.

For example, a crisis that dramatically reduces urban employment opportunities may lead to return migration to rural areas, and for some back to farming, and increase the rate of rural poverty.<sup>2</sup> This may result in additional pressure to deforest through agricultural expansion by poor and subsistence farmers.<sup>3</sup> Another main avenue is via commercial logging, and crisisinduced changes in prices and terms of trade. Heavy devaluations, experienced by some countries in crisis (as exemplified by Indonesia in the 1997-1998 East Asia crisis), may make increased logging more lucrative. On the other hand, timber prices are likely to drop during a global recession, which may work in the opposite direction.<sup>4</sup> The fiscal regime, for public management of forest extraction and related revenues, could here be central.<sup>5</sup> Crises also may affect environmental quality in developing countries, but these potential effects can be complex and dependent on certain initial conditions in specific countries. One factor is environmental regulation. In countries with a relatively high degree of regulation, the crisis could lead to environmental deterioration if the enforcement of standards is weakened in an effort to reduce the impacts of the crisis. Where there is relatively little effective environmental regulation, on the other hand, the crisis could lessen pressure on the

> 2 See Barbier (2004), Deininger and Minten (2002) for studies of the relationship between poverty and deforestation in LICs.

> 3 Dauvergne (1999) showed that the 1997-1998 East Asia crisis led to increased deforestation, and laxer enforcement of forest laws, in Indonesia. From Pagiola (2001), there were no similar effects for Thailand nor the Philippines; these countries were however much less seriously hit by this crisis.

> 4 See World Bank (1999); and Wunder (2003) where the main argument is that exogenous positive (negative) wealth shocks to a country could dramatically reduce (increase) deforestation.

> 5 See the discussion in World Bank (2003).

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