The Theme on the Environment, Macroeconomics, Trade and Investment (TEMTI) has been carrying out a policy-oriented project on macroeconomic policies and the environment in five Latin American countries. The project was designed and directed by Alejandro Nadal, TEMTI co-chair, it received financial support from IUCN's 3IC Fund and was also sponsored by SUR, the regional office for South America. The country level reports are still in the process of revision by their authors: Alan Cibils in Argentina, Sergio Schlesinger in Brazil, Carlos Murillo in Costa Rica, Pablo Samaniego in Ecuador and Marcos Chávez in Mexico.

The countries in this study are burdened by severe environmental problems, many of which are relevant to today's debate on global sustainability. All of them have suffered severe financial and macroeconomic crises in the past two decades.

Macroeconomic policies affect growth rates, shaping decisions about output mix, resource management practices and environmental stewardship. However, the importance of this policy dimension for sustainability has not been adequately addressed. Today's financial and economic crisis poses new challenges, stressing the need for a responsible approach to the integration of macroeconomic policymaking and sustainability.

This project covers monetary, fiscal, credit, exchange rate policies, current account liberalization and financial deregulation. It has identified several common traits in the macroeconomic policy stance of the five countries. First, they have implemented an open economy model with deep financial liberalization and deregulation. This model involves important contradictions that affect economic performance and subordinate the stability of macroeconomic accounts to the vagaries of international capital flows. Second, monetary policy is dominated by the central objective of controlling inflation, leading to very high interest rates. Third, fiscal policy is organized around the priority of a balanced budget and the generation of a primary surplus to pay financial charges.

Highlights of the project's preliminary findings include the following. In Argentina, the combined effect of macroeconomic policies associated with an extreme version of the open economy model has caused primary sectors of the economy, which are closer to the natural resource base, to regain the importance they had fifty years ago with severe environmental repercussions. Brazil's financial liberalization and deregulation, combined with the wrong fiscal priorities has led to the expansion of soybean production, the displacement of cattle ranching and the intensification of deforestation. Costa Rica's reforestation program through the payment for environmental services is endangered by inconsistent fiscal and monetary policy priorities. Ecuador's novel scheme to leave the Yasuní oil reserves underground may point the way out from the conundrum of a dollarized economy. In Mexico, a severe contraction of expenditures for environmental stewardship results from a fiscal policy obsessed by primary surplus goals in order to pay financial charges.

A key lesson is that macroeconomic policies embody "implicit environmental policies" that may contradict and overwhelm explicit environmental policies. Ignoring the structure of macroeconomic policymaking, pretending it's environmentally neutral, may be one of the worst policy failures in history. This innovative project sets the stage for further work along these lines.