MANAGUA, Nicaragua—Towering high in the tropical clouds of Ometepe, the conical symmetry of Nicaragua’s tallest active volcano looms over the expanse of Central America’s largest lake. Across the water to the east lies an unspoiled rain forest surrounding the San Juan River, which extends to the Caribbean’s famed Mosquito Coast. These are rich UNESCO Biosphere Reserves that host creatures from toucans to jaguars. Next to Haiti, however, Nicaragua is the most destitute country in the Western Hemisphere, where more than 40 percent of the population lives in poverty. Until now, the environment has been protected, but the people have not.

There could soon be quite a dramatic transformation—at quite a high price. The wheels of economic change are in motion and choices between the climate and prosperity are approaching a crossroads. In this largely undeveloped territory, a $40-billion governmental deal struck...

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