deforestation has already happened there, so higher productivity tends to result in higher intensification of agriculture.

Beyond agriculture, productivity gains in all sectors in the Legal Amazon reduce deforestation. Within this overall finding, two results are noteworthy, however. First, manufacturing productivity reduces deforestation in the Legal Amazon and in Brazil overall—however, the reduction in deforestation across the country is slightly lower compared to the Legal Amazon. This suggests small spillovers of deforestation from the Legal Amazon states that experience a relative productivity gain to other Brazilian biomes, like the Cerrado. The reason for this is that the relative loss of agricultural competitiveness in the Legal Amazon associated with higher manufacturing productivity there will partly be picked up by agriculture in other parts of the country resulting in a small increase in deforestation there. The overall net effect however remains lower deforestation across Brazil.

Second, the model results suggest that services productivity unequivocally reduces deforestation across Brazil if it occurs in the Legal Amazon (contrary to the more ambiguous finding for national-level services productivity). The reason is that services tend to be nontraded, so an increase in productivity raises local consumption and imports without increasing exports (except through indirect value chain effects not captured by the CGE model). When happening at the national level, this raises consumption more than it lowers the relative competitiveness of agriculture through relative price movements. This additional demand for agricultural goods thus causes some additional deforestation. This effect is, however, weaker in the Legal Amazon where the services sector value share in the local economy is somewhat smaller than in the rest of Brazil—thus in the Legal Amazon the model suggests that an increase in services productivity also lowers deforestation there.

_Table 2. Sectoral impacts productivity gains on growth, welfare, deforestation, and net emissions._

|||**GDP**|**Legal**<br>**Land**<br>**rents**|**Amazon**<br>**Forested**<br>**land**<br>**(Mha)**|**CO2** **(gG)**|**All**<br>**Forested**<br>**land**<br>**(Mha)**|**Brazil**<br>**CO2** **(gG)**|
|---|---|---|---|---|---|---|---|
||Agriculture|1.8|0.0|0.3|4,193|0.8|18,221|
|TFP|Mining|0.3|-1.2|0.1|-2,834|0.2|-650|
|Brazil|Services|9.1|-10.5|-0.1|-6,637|-0.1|3,085|
||Manufacturing|3.9|-24.9|0.8|-33,486|1.9|-67,833|
||Agriculture|2.1|10.3|-0.5|32,282|-0.1|15,004|
|TFP|Mining|0.2|0.9|0.0|-693|0.0|-708|
|Amazônia|Services|9.8|-5.9|0.4|-14,211|0.2|-8,372|
||Manufacturing|3.8|-8.1|0.6|-16,310|0.4|-14,350|
|TFP in Br|azil South/Southeast|0.5|-40.6|0.8|-56605|1.9|<br>-90,420|

Source: Simulation results from CGE model.

Note: red (green) coloring implies higher (lower) deforestation and CO2 emissions relative to the baseline.

To unpack these macroeconomic effects, Figure 2 displays some of the mechanisms underlying Table 2 for the case of manufacturing. It shows that an increase in manufacturing productivity appreciates the real exchange rate, thus reducing the external competitiveness of sectors that do not experience a productivity shock in this simulation (like agriculture). The figure 9