The effects of extractive industries rent on deforestation in developing countries

The extractive industries (oil, gas, and mining) play a dominant economic, social, and political role in the lives of approximately 3.5 billion people living in 81 countries across the world. However, the benefits come at a cost that is no longer limited to the problems of the ‘curse of natural resources', but also includes the damage of greenhouse gas emissions, pollution, and biodiversity that extraction wreaks on the environment. This paper revisits the links between man-made and natural capital in developing countries, focusing on the case of forest cover loss . Considering a theoretical model of income maximization, we assess through empirical observation the impact of extractive industries on forest cover loss. Based on a panel of 52 resource-rich developing countries, over the period 2001-2017, we adopt a dynamic specification with the two-step Generalized Method of Moments (GMM) system to address the inherent bias. Our main results show that the total rent from the extractive industries is detrimental to the forest. More specifically, mineral and gas rents accelerate forest cover loss. In contrast, oil rents contribute to reducing forest cover loss. In addition, we find that natural resource tax revenues contribute to reducing forest cover loss. Our results suggest substitutability between oil rents (natural resource tax revenues and forest natural capital), and complementarity between mineral rents (gas rents and forest natural capital). To promote corporate environmental management, stakeholders must overcome regulatory inefficiencies in exploration and exploitation contracts so that environmental compensation is at least equal to the marginal damage caused by the extractive industries.