Topic Area: Deforestation
Geographic Area: Brazil
Focal Question: What are the historical causes of deforestation in Brazil and what needs to be done to change these trends?
Sources:
(1) Anderson, Anthony. "Smokestacks in the Rainforest: Industrial Development and Deforestation in the Amazon Basin" World Development, vol. 18, no. 9 (1990): pp. 1191-1205.
(2) Binswanger, Hans P. "Brazilian Policies that Encourage Deforestation in the Amazon" World Development, vol. 19, no. 7 (1991): pp. 821-829.
Reviewer: Andrew Pease, Colby College '97
Review:

Deforestation is a local problem with global consequences. Recently, Brazil's Amazon rainforest has come into the international spotlight prompted by concerns for a warming planet. In 1991, it was predicted that at current deforestation rates, only scattered"remnants" of tropical rainforests will exist and a quarter of all species on Earth will be extinct by the time today's preschoolers retire (Binswanger, 1991). This rapid rate of deforestation raises concern in a number of different environmental issues such as biodiversitiy loss and global warming.

These environmental externalities have been directly linked to Brazilian governmental tax policies, tax incentive systems, rules of land allocation, and the agricultural credit system. Combined, these policies create economic distortions that harm the environment by increasing the demand for farm, pasture, and ranch land. Brazil's policies not only injure the environment, but also"reduce the chances of the poor to become farmers" (Binswanger, 1991). Large corporations quickly claim the land to which new roads give them access. Small, poor farmers are pushed farther into the jungle in order to find arable, unclaimed land. In order to slow deforestation, these policies must be changed, and a new set of laws and regulations regarding the use of forest land need to be implemented. Hans Binswanger outlines these policies in his article and are presented below.

The first of these policies to be examined is the structure of taxes on agricultural income. Corporations and individuals can exclude up to 80%-90% (respectively) of agricultural profits from their taxable income under various provisions of the tax code. Two systems exist: an individual can be taxed on 10% of gross agricultural income, or the cost of modernization of capital can be subtracted from gross agricultural income. Fixed investments, animals, buildings and machinery can be depreciated fully in the first year as well as several times over (Binswanger, 1991). Under this system, up to 80% of income can be sheltered from taxation. Demand for land becomes extremely high, as agricultural projects become extremely attractive to corporate and private investors.

This system harms the small, poor farmer, since the low tax rate level becomes capitalized into the price of land, reflected in high land prices, making it unprofitable for the poor farmers of Brazil. This forces them to move further into the Amazon in search of cheap, unclaimed land, leading to the rules of land allocation that further encourage deforestation.

In 1991, little land remained unclaimed, as large corporations built roads into the forest to capitalize on the lenient Brazilian tax laws. The most common method by which to claim land is by squatting. Dating back to 1850, squatters gain usufruct rights to 100 hectares after one year. After 5 years on a plot of land, the inhabitant gets legal title to that land (Binswanger, 1991). Different regions of Brazil use different sets of rules pertaining to the amount to which one can win title. In general, total land obtainable is a function of the amount of land originally cleared. In order to curb deforestation, large reserves need to be set aside that can be well guarded. Plot sizes available to individuals needs to be reduced as well.

Brazilian land taxes lead to increased rates of deforestation. Brazil's land tax system is actually progressive in theory, and could offset the negative effects of the income tax system, but since so many tax exemptions exist, the rates are not progressive in practice. The major problem associated with land taxes is how land use is defined. Basically, the more the land is used, the less it is taxed. Uncleared forest land is considered unused, resulting in higher taxes. If that land were simply cleared for no reason, taxes would fall. Binswanger outlined three major needed changes. First, lower the amount a single land owner can hold from 3000 hectares to 100-200 hectares. Families could still establish ranches by dividing ownership up among family members. Secondly, land holding ceilings need to be implemented (or reduced) for corporations. Lastly, The definition of land use needs to include various forms of forest management schemes.

Land and income taxes effect deforestation greatly, but other areas of the tax system such as capital gains and commodity taxes, appeared to have had no effect on deforestation. Some specific tax breaks exist at the local level that encourage unsustainable forest use, but overall these taxes were relatively benign.

Different regions and sectors of Brazil employ various programs that promote deforestation. The SUDAM, Grand Carajas program, and the IBDF (Instituto Brasileiro de Desenvolvimento Florestal) are programs that basically single out specific corporate enterprises and provide those companies with special tax incentives (Binswanger, 1991). For example, the SUDAM program offers certain corporations a tax credit scheme that promotes live stock ranches in the legal Amazon. The SUDAM program was considered the worst according to Binswanger. Designed to improve economic development in a region, the result is rapid deforestation, modest afforestation, and enormous fiscal costs (exceeding $1 billion US dollars in the time period between 1975 and 1986) (Binswanger, 1991).

Lastly, credit in Brazil is basically too cheap. Real interest rates on official credit were negative until 1991 (Binswanger, 1991). Interest on loans for agriculture are lower than those for non-agricultural sectors. This difference in credit is again capitalized into the price of land, so poorer farmers are unable to obtain farmlands and again are forced to search deeper into the Amazon for unclaimed land (Binswanger, 1991). The system of credit goes beyond harming the environment, as it encourages mechanization which reduces employment. The extent of damage to the environment, and more specifically the Amazon, is hard to measure, but it is known that it does increase deforestation rates.

Binswanger found no tax or subsidy that even slowed deforestation. The projects intended to change land allocation rules by confining deforestation to specific areas cannot work due to the distortions in Brazil's governmental policies.

These policies have been shown to increase the size of land holdings, promote deforestation, and hurt the poor farmer by making land relatively unavailable through high prices. In order to curb deforestation and possibly promote afforestation, several steps need to be taken. The tax system, land allocation rules, and credit schemes must be restructured so as to reduce or eliminate the distortions described above. Elimination of these distortions is not enough to promote afforestation though. A "system of land use planning that sets aside more marginal lands in forest reserves and establishes biological reserves is also required" (Binswanger, 1991). Creating these reserves alone is insufficient as they must be protected under law. As part of this law, forest guards must be given stronger incentives to enforce these laws by giving them a portion of the fines levied on violators. With the removal of the aforementioned distorting policies and implementation of the suggested strategies, it appears that deforestation can be slowed (and hopefully reversed) in the Amazon rainforest.