Debt-for-Nature Swaps and the Coase Theorem

Debt-for-nature swaps have emerged as one method for debt burdened nations to retire their foreign debt through international markets. In a typical debt-for-nature swap, conservation groups buy some portion of a nation's debt, usually in secondary markets at discounted prices, in return for long-term commitments from the country to preserve domestic ecological zones. The first debt-for-nature swap occurred in Bolivia in 1987. Since then these programs have been used by a variety of Least Developed Countries (LDCs) as a means of reducing debt loads. While an extensive literature exists on the practical workings of these programs and on the level of their usage, there exists a dearth of theoretical explanations for the development of debt-for-nature swaps. The premise of this paper is that debt-for-nature swaps can be interpreted as an application of the Coase Theorem to the problem of environmental degradation. In 1960, Ronald Coase published "The Problem of Social Cost". This work has had tremendous influence on the way that the legal system and many economists view the problem of externalities or third-party costs. As Coase stated in his 1991 Nobel prize acceptance speech: "I explained in ‘The Problem of Social Cost ’ that what are traded on the market are not, as is often supposed by economists, physical entities, but the rights to perform certain actions..." The Coase Theorem, in simple terms, posits that in the presence of low transaction costs and competitive markets, solutions aimed at maximizing societal welfare will present themselves. Coase presented an alternative to the widely accepted Pigouvian solution fo