longer-term depends on productivity gains. A second point developed in this paper is that an increase in agricultural productivity in already consolidated land markets, notably in the south and southeast of Brazil rather than the frontier of the Legal Amazon markets, could also help raise national agricultural output while reducing overall deforestation pressures.

Structural economic change takes time and effective forest governance remains critical to counter the economic forces that drive deforestation in the shorter-term. In this light, structural policies to overcome “Brazilian Disease” and governance measures to protect forests are complementary.

# **2. Related literature**

As many other countries in Latin America and the developing world more generally, Brazil aimed to diversify from its externally competitive agricultural model into higher value-added activities by adopting a model of import substitution industrialization in the early 20<sup>th</sup> century (Vidal Luna and Klein 2014). This model has helped Brazil become a higher middle-income country with a gross domestic product (GDP) per capita of US$ 6,797 in 2020. Much of the growth to reach this level of development was driven by factor accumulation, notably demographics and growth in labor supply, accompanied by higher school enrollment, with lower savings rates limiting capital accumulation. Dutz (2018) shows that this was not, however, accompanied by significant progress in the quality of human capital or productivity. In fact, total factor productivity in Brazil has disappointed, remaining flat or even being negative.

At the heart of this lies a poorly performing manufacturing sector. Vasconcelos (2017), following the methodology proposed by Hsieh and Klenow (2009), found significant misallocation of resources in Brazil’s formal manufacturing sector, explaining low productivity of manufacturing. As another source of low manufacturing productivity, Lisboa et al. (2010) identify Brazil’s high tariff structures which limit the ability to import technologically sophisticated products and components. This contrasts with an agriculture sector that has always been export-oriented, from sugarcane and coffee in the early years to other crops like soybeans in more recent years. At the same time, Brazil’s agricultural research and development system<sup>2</sup> has helped make Brazilian agriculture highly productive (IFPRI, 2016). This helps explain the large gap in the productivity performance of agriculture and manufacturing in Brazil: data from the _Fundação Getúlio Vargas’s_ (FGV) _Observatório da Produtividade_ show that between 1996 and 2020 labor productivity grew by 5.8% in agriculture and -0.9% in manufacturing on average.

In principle, higher productivity in agriculture should reduce the required inputs to produce a certain amount of output, given the higher implied efficiency. However, while this tends to hold at the global level, it does not necessarily hold at the local level. This is known in the literature as the Jevons effect where higher productivity results in more intensive resource use (Jevons, 1866). Hertel (2012) provides a framework under which the Jevons effect emerges in agriculture. It emerges when the land supply is relatively elastic, as expanding land will only result in a small increase in its price, facilitating more extensive farming. For as long as native forests are not properly protected, the vast forests of the Legal Amazon imply an elastic land supply. Secondly, deforestation is more likely to occur when demand is elastic as farmers can expand outputs without

> 2 The Brazilian Agricultural Research Corporation (Embrapa) and many other institutions, like research centers and universities.

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