Financial sector reform and sustainable development: the case of Costa Rica

How can financial sector reform be designed specifically so that it enhance s the prospects for sustainable development? This paper begins an analysis of this little-discussed intersection, with a focus on the problems and pos sibilities facing Costa Pica. Policy changes that encourage financial marke ts to incorporate long-term environmental sustainability concerns will requ ire moving beyond a standard model of financial liberalization. Flighty fin ancial flows, systemic pressures against innovation, and unpriced environme ntal externalities all mean that real sector environmental performance will be adversely affected by financial sector dynamics, lacking appropriate po licy markers. Financial market policies must encourage market forces to cha nnel capital flows that build productive capabilities based on complementar ities between development and environmental quality. Costa Pica's reform pr ocess and unusual depth of experience in pursuing sustainable development m ake it an ideal place for such financial market innovations to be attempted . Getting its incentive system right in financial restructuring could aid i mmensely in the emergence and application of sustainability-based competiti ve capabilities. A set of market-based 'green' financial reforms is propose d, including tax-advantaged banking and bond programs, rural group lending, and a single certification entity for potential borrowers in these program s. (C) 2001 Elsevier Science B.V. All rights reserved.