# **1. Introduction**

Deforestation and land use change are among the largest source of net CO2 emissions for Brazil and a major threat to biodiversity. Most deforestation in Brazil occurs in the nine states of the Legal Amazon (Acre, Amapá, Amazonas, Mato Grosso, Pará, Rondônia, Roraima, Tocantins, and some municipalities in the state of Maranhão). Among those states, deforestation tends to be concentrated in the southeast, also known as the “Arc of Deforestation”, which keeps shifting north from the Cerrado savannah into the Amazon rainforest. The Amazon is at risk of vast irreversible destruction if a tipping point is triggered (Nepstad et al. 2008; Golding and Betts 2008; Vergara and Scholz, 2010; Franklin and Pindyck, 2018). Accordingly, one of Brazil’s central commitments in the Nationally Determined Contribution under the Paris Climate Accord, most recently renewed at COP26, is to halt illegal deforestation.

Deforestation in the Legal Amazon fell significantly in the 2000s, mostly attributed to Brazil’s Plan for Deforestation Prevention and Control for the Amazon of 2004 which focused on 1) land tenure and territorial planning, 2) environmental monitoring and control, and 3) fostering sustainable production. According to the Brazilian _Instituto Nacional de Pesquisas Espaciais (INPE)_ , deforestation in the Legal Amazon fell from 27,772 km<sup>2</sup> per year in 2004 to 4,571 km<sup>2</sup> per year in 2012.<sup>1</sup> Since then, deforestation slowly picked up again. In 2021, deforestation reached 13,235 km<sup>2</sup> . There is evidence that Command and Control policies can reduce deforestation (Assunção et al. 2019) and the recent increase in deforestation has generally been associated with weaker environmental law enforcement (e.g. Blackman 2020). Indeed, environmental law enforcement has weakened over the last two years, as declining fines for environmental crimes relative to accelerating deforestation illustrate (OECD, 2021), pinpointing the role of weakening law enforcement in the recent surge in deforestation in the Legal Amazon.

One angle less discussed in the literature is the macroeconomic drivers of deforestation. Wunder and Sunderlin (2004) show for a number of tropical countries that oil exporting economies tend to experience lower deforestation levels. This is consistent with the ‘Dutch Disease’ effect, where commodity sectors crowd out other tradable sectors like manufacturing or, indeed, agriculture or forestry. More recently, Richards (2021) also argues that macroeconomic forces related to the economy’s rate of economic growth have important effects on deforestation. This paper falls into a similar tradition, focusing on productivity.

The paper proposes that, from a macro-structural perspective, given a certain effectiveness of forest governance, deforestation in the Legal Amazon is the result of the inability of the Brazilian economy to overcome its legacy of import substitution industrialization. It entails a relatively weak manufacturing sector, protected by high trade tariffs juxtaposed with a highly competitive agriculture sector. Given the growing demand for agricultural products, competitive agriculture is land-hungry, sustaining strong demand for agricultural land—which drives deforestation. In this sense, a structural imbalance in Brazil’s economy causes a structural deforestation problem, which, leaning on the “Dutch Disease” concept, could be termed “Brazilian Disease”.

Overcoming “Brazilian Disease” would require advancing the Brazilian economy in its structural transformation toward productivity gains in more urban, less land-intensive traded sectors (like manufacturing) which would mitigate economic pressures on natural lands. This would not only reduce pressure on deforestation but also reinvigorate economic growth in Brazil, which in the

> 1 http://terrabrasilis.dpi.inpe.br/app/dashboard/deforestation/biomes/legal_amazon/rates

2