Two sides of the same coin: Reviving Brazil’s economy and curbing Amazon deforestation

Community living on the banks of the Amazon. Photo by Marcelo Camargo/Agência Brasil Community living on the banks of the Amazon. Photo by Marcelo Camargo/Agência Brasil

Not only is Brazil one of the most unequal countries in the world, but it has become poorer over the last decade as per capita GDP shrank by 0.4 percent over the last decade. By comparison, China grew by 6.2 percent and India by 4.3 percent during the same time.

Growth was not only slow. It also came at the expense of relentless deforestation on its agricultural frontier, the nine states of the “Legal Amazon” - Acre, Amapá, Amazonas, Mato Grosso, Pará, Rondônia, Roraima, Tocantins, and parts of Maranhão. In 2021 alone, Brazil lost the equivalent of 1.6 million soccer fields in those states.

Arguably, deforestation is neither a recent nor uniquely Brazilian problem. But Brazil is one of the main tropical deforestation hotspots as its agricultural frontier pushes ever deeper into the Amazon  and the stakes of the Amazon reaching a tipping point are huge.

In our Amazon Economic Memorandum, we argue that Brazil’s slow growth and deforestation are two sides of the same coin.

The environmental side of the coin

In the 2000s, Brazil made a concerted effort to protect the “lungs of the world” – for example, with the Amazon Region Protected Areas Program (2002), the Action Plan for the Prevention and Control of Deforestation in the Legal Amazon (2004), blacklisting municipalities (2008), an updated Forest Code (2012), and private sector commitments (like the 2006 Amazon Soy Moratorium and the 2009 Zero-Deforestation Cattle Agreement). These programs helped: deforestation fell dramatically from 27,772 km2 in 2004 to 4,471 km2 in 2012. But since then, there has been an acceleration in the destruction of ancient ecosystems, the “flying rivers” of Amazonian evaporation that sustain South American agriculture, and the home of most of Brazil’s indigenous people.

The economic side of the coin

Brazil’s export growth has become increasingly reliant on commodities, notably agriculture and mining. Manufacturing exports declined. The country simply was not any more competitive since productivity in non-commodity sectors, including manufacturing and services, which account for 87 percent of Brazil’s GDP, faltered and brought down overall growth. Non-commodity sectors are heavily concentrated in cities. Brazil’s poverty-stricken favelas are a powerful reminder that its cities have not been able to deliver opportunities for everyone.

What is the connection?

Our research suggests that weak productivity growth in Brazil’s urban sectors, notably manufacturing and certain services, undermine economic progress and hasten deforestation. Although a simplification, this is evident in basic data: when total factor productivity rose in Brazil, forest cover increased. The end of the last commodity price super-cycle dented productivity further—and deforestation rose again.

Growing deforestation is consistent not only with laxer enforcement of forest protection laws but also driven by economic factors.  In fact, the two may reinforce each other: as economic returns from deforestation increase lobbying for laxer controls to protect forests is likely to increase.

Total factor productivity (index, LHS) and year net change in Legal Amazon forest cover (‘000km2, RHS)

Graph on total factor productivity

Productivity growth in urban sectors like manufacturing which dominate the economy but use very little land, unlike agriculture (which we discuss separately) is likely to reduce pressure on the forest. In fact, cities become more productive if they build upwards rather than outwards.

Economic models, calibrated to the Brazilian context, show that higher productivity in cities is likely to reduce the demand for land – by reducing external demand for Brazilian export and making other inputs cheaper. Higher productivity in cities will strengthen Brazil’s real exchange rate, hitting exporters’ competitiveness if their individual productivity remains unchanged. Wages however are expected to rise across the economy, increasing production costs. Both lower local agricultural prices (in domestic currency) and higher wages mean that farmers will produce less for exports—and therefore demand less land, so clearing fewer forests for agriculture.

Furthermore, productivity gains in manufacturing will reduce the cost of manufactured goods, such as tractors, feedlots, and fertilizer. If Brazil does not produce those goods itself, a stronger currency will allow it to import them more cheaply. Farmers will therefore spend more on cheaper manufactured goods, and less on the other factors of production, land, and labor. If overall demand for landfalls, deforestation will also decline.

Urban productivity and deforestation are clearly connected—and some of their problems are different sides of the same coin.  It is also a reminder that although the Amazon is remote, it is connected with the rest of Brazil, and indeed the world, through markets. The Legal Amazon states may only account for about 10 percent of GDP, but economic developments in São Paulo and Rio de Janeiro will affect economic choices in remote areas. 

The good news

The good news is that domestic policymakers have the power to increase productivity. The effects will not be immediate though. Active command and control measures to stop deforestation remain urgent: higher productivity cannot save the Amazon’s forests alone, less so in the short term. But in the long term, they will not be enough to deliver for the economy, the poor, and the environment.




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Marek Hanusch

Lead Economist and Program Leader in the World Bank’s Practice Group for Equitable Growth, Finance and Institutions

Joaquim Bento de Souza Ferreira Filho

Senior Professor, University of São Paulo

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