Rising real rates of interest, transmitted to LDCs and to their DRAs, are likely to cause rising rates of resource degradation, via private incentives and public capacities.

Suppose a farmer is choosing between a “sustainable” way to manage land, which generates a net return of y1 each year forever, and “exhaustive” way, which generates a higher return, y2 each year for n years, after which the land has been destroyed and yields nothing. It can easily be shown that the “sustainable” path yields a higher present value if, and only if

(y2/y1) < 1 – 1/ (1 – r)ⁿ⁺¹

Where r is the real interest rate for a n-year loan. For example, if r = 10 percent and n = 15 years, the sustainable path is chosen only if it produces at least 78 percent as much, forever, as the exhaustive path produces for 15 years before destroying the land. If r = 5 percent, the sustainable path needs to produce less, namely, 54 percent of “exhaustive” net returns, to be preferred. Clearly, the rise in real long-term rates of interest, if transmitted to DRAs, must have had enormous incentive effects on resource management, shifting it away from sustainability.

If risk is allowed for, the interest rate incentive to deplete is probably sharpened. Higher interest rates reduce the present-value burden of long-term-future downside risks, relative to that of near-term risks (and costs). The land use patterns are therefore shifted toward activities with long-term risks, such as possible long-term resource degradation.

According to the text, the halving of the interest rate, everything else remaining the same, produces the following effects:

Item 0 - makes the exhaustive path less competitive;

Avalie o item:

Item 3 - Para os novos clássicos, a ocorrência de uma contração da oferta de moeda é condição necessária à ocorrência de deflação.

Rising real rates of interest, transmitted to LDCs and to their DRAs, are likely to cause rising rates of resource degradation, via private incentives and public capacities.

Suppose a farmer is choosing between a “sustainable” way to manage land, which generates a net return of y1 each year forever, and “exhaustive” way, which generates a higher return, y2 each year for n years, after which the land has been destroyed and yields nothing. It can easily be shown that the “sustainable” path yields a higher present value if, and only if

(y2/y1) < 1 – 1/ (1 – r)ⁿ⁺¹

Where r is the real interest rate for a n-year loan. For example, if r = 10 percent and n = 15 years, the sustainable path is chosen only if it produces at least 78 percent as much, forever, as the exhaustive path produces for 15 years before destroying the land. If r = 5 percent, the sustainable path needs to produce less, namely, 54 percent of “exhaustive” net returns, to be preferred. Clearly, the rise in real long-term rates of interest, if transmitted to DRAs, must have had enormous incentive effects on resource management, shifting it away from sustainability.

If risk is allowed for, the interest rate incentive to deplete is probably sharpened. Higher interest rates reduce the present-value burden of long-term-future downside risks, relative to that of near-term risks (and costs). The land use patterns are therefore shifted toward activities with long-term risks, such as possible long-term resource degradation.

In the analysis of the effects of risk on resource depletion, the text allows one to conclude that:

Item 4 - higher interest rates increase the likelihood of long-term resource depletion.

High (and Exogenously Set) Rates of Interest

It will now be shown that DRA resource depletion is in significant part caused by developed country policies that raise real long-term interest rates and that it could be moderated or reversed if these policies were. This interest rate argument asserts that rates of interest in the 1980s were excessive in the sense that they increased resource degradation by worsening the structures of investment, production, consumption, and resource management, and that these rates should therefore be reduced.

In May 1991 the World Bank summarized the position: “In the prosperous 1950s and 1960s, real long-term prime interest rates for prime borrowers stood at some 1 to 1.5 percent and short-term rates were even lower”. After an aberrant period of negative real rates during the rapid inflation of 1973-1977, “real long-term prime interest rates have hovered between 4 and 5 percent, and they appear set to remain at these levels or to climb even higher”; they have fully met that prediction in the 1990s. Such high rates appear to be historically without precedent.

In its discussion of the role of interest rates on resource depletion, the text asserts that

Item 4 - predictions of further increase in interest rates in the nineties never materialized;

Os períodos de 1957-61 e 1968-73 foram de elevadas taxas de crescimento do produto. São características comuns aos dois períodos:

Item 1 - a implementação de política monetário-creditícia expansionista;

Rising real rates of interest, transmitted to LDCs and to their DRAs, are likely to cause rising rates of resource degradation, via private incentives and public capacities.

Suppose a farmer is choosing between a “sustainable” way to manage land, which generates a net return of y1 each year forever, and “exhaustive” way, which generates a higher return, y2 each year for n years, after which the land has been destroyed and yields nothing. It can easily be shown that the “sustainable” path yields a higher present value if, and only if

(y2/y1) < 1 – 1/ (1 – r)ⁿ⁺¹

Where r is the real interest rate for a n-year loan. For example, if r = 10 percent and n = 15 years, the sustainable path is chosen only if it produces at least 78 percent as much, forever, as the exhaustive path produces for 15 years before destroying the land. If r = 5 percent, the sustainable path needs to produce less, namely, 54 percent of “exhaustive” net returns, to be preferred. Clearly, the rise in real long-term rates of interest, if transmitted to DRAs, must have had enormous incentive effects on resource management, shifting it away from sustainability.

If risk is allowed for, the interest rate incentive to deplete is probably sharpened. Higher interest rates reduce the present-value burden of long-term-future downside risks, relative to that of near-term risks (and costs). The land use patterns are therefore shifted toward activities with long-term risks, such as possible long-term resource degradation.

According to the text, the halving of the interest rate, everything else remaining the same, produces the following effects:

Item 3 - decreases the sustainable path net returns that are required to make it preferred;