Saving The Amazon: Can Sustainable Development Really Work?

The Amazon rainforest, one of the world’s greatest natural treasures, has long drawn people’s attention toward Brazil. “Save the Amazon” has been a major rallying cry for international groups trying to stop deforestation and protect this uniquely diverse ecosystem. While the Amazon covers large swathes of territory in Bolivia, Peru, Ecuador, Colombia, Venezuela, Guyana and Suriname, 60% of the forest lies within Brazil. Brazilians think of the Amazon as their backyard, and as a result, tend to have a more nuanced view than their contemporaries in distant countries to the North.

A Brief History of Amazon Settlement

Like the United States, Brazil was colonized along the Atlantic Coast by European settlers and African slaves. As its economic development was determined by trade with partners to the East, the coast formed the lifeblood of the colony. Migration inland was at first limited to coffee farms in São Paulo state, which quickly eclipsed the sugarcane plantations of the Northeast as the country’s main economic engine. Later on, settlement of the Brazilian interior was driven by the Bandeirantes, groups of roaming outlaws who enslaved native populations and prospected for minerals across the Brazilian Highlands, primarily in the southeastern states of Paraná, Goiás, and Minas Gerais. Despite their brutality and lack of respect for the law, the Bandeirantes established de facto control for the Portuguese crown well beyond the Tordesillas Line demarcated by the Pope in 1494, enabling Brazil to become the large country that it is today. These trends continued through the 1850s, with settlement highly concentrated in Northeastern coastal cities and the interior of the Southeast while the Amazon continued to be a sparsely populated wilderness, home to a handful of indigenous tribes and intrepid adventurers.

With the rise of the Industrial Revolution in Europe and the United States, the Amazon became a more attractive climate for settlement, as steamboats allowed for upstream travel and the car industry created a huge demand for rubber extracted from the rainforest trees. Manaus and Belém, the two largest cities in the Amazon, quickly grew from backwater towns into booming cities. The rubber boom was short-lived, however, as Atlantic trade was interrupted by the two world wars and the creation of synthetic rubber led to a sharp fall in demand. The bust was best exemplified by the catastrophic failure of Henry Ford’s “Fordlândia” project, an attempt to build an industrial city on the mouth of the Amazon to serve as a permanent source of rubber for the American automobile industry. With the collapse of the rubber industry, migration to the Amazon fell once again.

However, large-scale settlement began again in the 1950s, when the Brazilian government adopted its own version of manifest destiny to urge its citizens to “penetrate the interior” and increase the nation’s control over its immense territories. The government began to give away large tracts of land in both the Amazon and the neighboring cerrado ecosystem, encouraging settlers to farm their land and make it more productive. To promote this project of “national integration”, the government moved the capital inland, founding the city of Brasília in 1960 in the heart of the cerrado. Deforestation began in earnest during this period, as trees were cleared to make room for new agricultural settlements.

The trend accelerated through the second half of the 20^th century, as trees were chopped down at ever-increasing rates throughout the 1970s, 80s and 90s. In 2004 alone, 2.8 million hectares were cleared, the highest rate on record. As a result of this rapid deforestation, Brazil recently became the fifth-largest emitter of greenhouse gases, passing Japan, Germany and the U.K.

2004-2012: A Turning Point, or a Temporary Anomaly?

Recent news, however, has been more positive. Miraculously, the rate of deforestation has declined rapidly over the last eight years, falling to 623,800 hectares in 2011, a 78% reduction from 2004 levels. People began to speak more optimistically about the future of the Amazon, and some began to believe that deforestation could stop completely within a decade, permanently preserving roughly 80% of the original forest.

This success was caused not by any major policy changes, but rather by better enforcement. Brazil has had a very strict forest code on the books since 1965, but for decades  enforcing it has proved just about impossible. That has changed in the last few years. Giving more land rights to local indigenous groups has made a big difference, as their knowledge of local territories and desire to maintain the forest intact make them much more effective policemen than most government officials. Information technology has also been a game changer, as satellites have allowed the government to track deforestation from above, which is of course much easier than trekking on the ground through dense forest. Police are now able to spot illegal deforestation and respond quickly by flying in on helicopters. The government has also started to limit land plots in the Amazon, setting aside more areas as national parks where logging is declared illegal. These efforts have stemmed the tide, although the rate of deforestation remains uncomfortably high for the future of the forest.

In order to reinforce these efforts, the U.S., France, Britain, Japan, Australia and Norway pledged at the 2009 Copenhagen climate summit a total of $3.5 billion to create the “Reducing Emissions from Deforestation and Forest Degradation” program, known as REDD. While the program is not focused on Brazil exclusively, the country has certainly been a major beneficiary. REDD provides resources to support greater enforcement measures (both by indigenous groups and government police) and to provide financial incentives to maintain forest intact and reforest where possible.

The optimism regarding the Amazon may have finally peaked, however, as greater enforcement has led to major pushback within the Brazilian political system. Well-organized farmers and ranchers, known as the ruralistas, have fought for changes in the original forest code in order to blunt the impact of enforcement measures and the REDD program. As in the U.S., the agricultural lobby is well represented in the national Congress,and was able to muscle through aggressive changes to the law in April. The law led to an intense, polemical debate between ruralistas and environmentalists. President Rousseff used a line-item veto last week and returned the bill to Congress after striking the most extreme provisions regarding amnesty for illegal loggers and mandated reforestation along riverbanks.

The debate over the new law may die down during the next month as Brazil hosts the Rio+20 conference on sustainable development, but is sure to resurface later in the year. Although the outcome is uncertain, there is little doubt that the new forest code will prove more amenable to the forest lobby, and thus represents a new threat to the Amazon. This has led to increased fear that deforestation may start to pick up again, washing away any optimism built in recent years.

(More information about the Forest Code revisions can be found here.)

Looking Forward: Long-term Threats

The Amazon debate represents a very complicated question that gets to the heart of the paradox that is sustainable development. As I have written about several times before, there is a very real trade-off that exists between our concepts of economic development and environmental sustainability. Combining the two ideas into a single phrase, “sustainable development”, does not resolve the inherent and difficult conflicts between them. Brazil is torn between its two visions for the Amazon: to protect the rainforest as a vibrant ecosystem on one hand, and to make the area fit for human habitation, reducing poverty among the region’s inhabitants and allowing the country to take advantage of its rich natural resources on the other. This is an issue that human society struggles with all over the world.

The first and most obvious development interest is to make the region fit for agriculture. From the 1960s to the 1990s, Brazil struggled to feed its growing population. Over time, however, due to rapid productivity gains, the country has emerged as an agricultural powerhouse. Brazil is now referred to as the breadbasket of the world, a country that has revolutionized the concept of agriculture in the tropics. This has major implications for human society, as Brazil could serve as a model for a much-needed green revolution in Africa (more on that in a later post). Agriculture is now a major motor for the national economy, especially in poorer areas of the country, and the ruralistas are quick to point out that environmentalists seek to undo this progress by limiting land that can be cleared for farming.

The argument, however, is more nuanced than that. Most of Brazil’s agricultural miracle has taken place far away from the dense Amazon forest, focusing instead on the cerrado savannah in the middle of the country. This is good news for the rainforest, but bad news for the savannah, which has seen a much more intense decline in forest cover and biodiversity over the last several decades. The cerrado has suffered the brunt of the damage so far, but farmers are steadily creeping into the rainforest in search of new lands, forming an “Arc of Deforestation” (courtesy of The Economist):

It is also important to remember that not all agriculture is the same. The most devastation by far has occurred as a result of cattle ranching. As opposed to highly-concentrated soy plantations in the cerrado or small family plots where crops are rotated, cattle ranchers do not exhibit the same care for the land they use. They use much larger quantities of land to produce less food and are notorious for using “slash-and-burn” techniques to clear vast tracts for grazing. The incentives for cattle-ranching are obvious: it requires much less work than traditional farming and guarantees a greater profit. To make matters worse, demand for beef is booming. Brazilians’ appetite for cow is legendary and all-you-can-eat steakhouses (known as churrascarias) are a popular part of local culture. The country is also the top beef exporter in the world, and JBS, a beef company, is one of Brazil’s most famous multinationals.

In theory, it should be possible to promote Brazilian agriculture while preventing deforestation, but this will require a concerted effort to limit cattle ranching and promote more “integrated farming” techniques. This, in turn, would necessitate a desire from Brazilians and international consumers to eschew beef in favor of diets heavier in fruits and vegetables, grains, and poultry. As a former vegetarian, I have to admit that I don’t count on that happening any time soon.

Agriculture is not the only threat to the Amazon, however. Many of the 15 million inhabitants of the region, especially those in major urban areas, work in other sectors and simply want the government to help them develop their local economies. Chief among their demands is the desire for better infrastructure, especially energy and roads. As Brazil has grown wealthier, electricity demand has skyrocketed and is projected to increase on a 5% annual basis over the next decade. Instead of relying more on oil and gas, coal, or nuclear energy, the country has instead turned to one of its greatest natural resources: water. Hydropower already makes up about 75% of Brazil’s electricity generation, and dams across the southeast have allowed the region to develop without dramatically increasing its carbon footprint. The government has hoped to replicate this success in the North and Northeast, commissioning a series of dams along the Amazon to provide a clean source of renewable energy across these more impoverished areas.

The largest of these dams, Belo Monte, has caused huge protests from environmentalists and indigenous groups who complain that the project will flood large parts of the rainforest. Ironically, they also criticize the dam for its limited expected generation capacity, the result of a design alteration intended to constrain flooding. Regardless, work on the dams has already begun and is scheduled to be completed within the next several years. The real question regarding the dams, however, is not about flooding, but rather about the long-term impact of greater electricity generation in the Amazon. More electricity will inevitably lead to an increased amount of economic activity in the Amazon, which will almost certainly have a negative impact on the local environment in terms of air pollution, water contamination and deforestation resulting from expansion of cities and towns.

The same question arises regarding future roads. Greater economic development will certainly require building a modern transport infrastructure between urban centers, but more roads inevitably lead to greater deforestation. In fact, 80% of deforestation in the Amazon takes place within 3 miles of a road, and the Trans-Amazon Highway has long been criticized as an infrastructure project that produced devastating environmental results. Road construction is a particularly complicated issue, because aside from helping to improve economic conditions for local residents, it is intended to serve as a conduit for regional trade, connecting Brazil to neighboring Bolivia, Peru, Colombia and Venezuela. The Amazon stands between Brazil and other South American countries, and building trade routes through the forest is thus crucial to promoting trade ties. But it is difficult to imagine how this would be possible without devastating the ecosystem.

The infrastructure questions thus underscore the fundamental dilemma Brazil faces regarding its Amazon policy. How can it protect and develop the forest at the same time? The only two obvious answers, to depopulate the region or to encourage inhabitants to return to the simpler subsistence lifestyle of the local indigenous populations, do not seem reasonable or necessarily desirable. Alternatives, however, are in short supply.

The Amazon thus goes to the heart of the sustainable development paradox. How can we develop modern, wealthy societies without having a negative impact on the fragile ecosystems around us? Too often, environmentalists embrace a simplistic, back-to-the-cave mindset that encourages us to return to a subsistence lifestyle and leave behind the gains of the last two centuries, while their opponents turn a blind eye to the massive ecological damage human technology has inflicted on the planet, complacently assuming that this will not have serious negative repercussions in the long run. I do not find either of these mentalities particularly appealing. We will have to continue moving forward, placing increased emphasis on developing environmentally-friendly technologies in order to create green economies that can evolve without further damaging the Earth. I am not sure if this will ultimately be possible, and my previous posts as well as this one point out the reasons why one should remain skeptical. Nevertheless, I don’t think we have much choice other than to try and turn sustainable development from an awkward contradiction into a viable reality.

Fighting Corruption in the Tropics

After writing about infrastructure on Tuesday, I want to turn to the one issue that seems to weigh even more heavily in Brazilians' minds: corruption. Most tend to agree that this is the biggest problem holding the country back in its quest to become a world power. However, I am more optimistic on this front. While corruption is certainly a major issue facing this country, the situation may not be as dire as many seem to think.

Corruption, of course, is a problem all over the world. In the U.S., citizens constantly complain about the rot at the heart of politics, public institutions, and businesses. From Indonesia and South Africa to Turkey and Italy, ordinary people fear that those in power are working not to serve the public interest, but rather to line their own pockets. Brazil is no exception to this rule.

Brazil’s Corruption Problems

The situation here is problematic for several reasons. One major issue is the sprawling size of the government bureaucracy. Over the last 15 years, the tax take has risen from 22% of GDP to 36%, leading the government to grow enormously in size and opening up opportunities for rent-seeking. Over the last ten years, the number of national ministries has ballooned from 26 to 38, and a rotten system has developed in which the ruling party must win over coalition partners by promising them the right to run certain ministries, thereby giving each party its own personal patronage network. The larger the government gets, the more opportunities abound for insiders to skim money off the top, or to simply reward themselves directly through absurdly generous “super-salaries”.

Another issue is a long history of leniency toward corrupt politicians. Former president Fernando Collor de Mello resigned in disgrace in 1992 after being charged with running an influence-peddling scheme. He was later convicted, but returned to the political scene in 2006 after being elected to the Senate, where he still serves today. Jader Barbalho, a senator from the state of Pará, was forced to resign in 2001 due to fraud and corruption charges against him. In 2011 he was reelected to the Senate, where he is currently serving a new eight-year term. While politicians are often forced to resign amid corruption probes (as was the case with many of the ruling party deputies found to have participated in vote-buying schemes during the 2005 Mensalão scandal), there is often expectation that by doing this they will be able to avoid public scrutiny and return to power at a later point in time.

The third problem is lack of independent watchdogs. I have been following Brazilian politics through several media outlets recently, and have been struck by the lack of impartiality in many reports. Most sources tend to have a clear bias in favor of one political party or another. This is most obvious when looking at the country’s two major weekly magazines. Veja serves as a mouthpiece for the opposition Social Democrats, while Carta Capital does likewise for the ruling Workers’ Party. Both sides use investigative journalism to expose corruption scandals by the other party while virtually ignoring any blemishes of their own political allies. (The hyper-partisan cable news networks in the U.S., Fox News and MSNBC, make for a good comparison.) This cozy relationship has been underscored by a congressional investigation into Veja’s involvement in a recent corruption scandal involving a number of high profile politicians and businesspeople. While these tit-for-tat measures do have the effect of keeping both sides honest and exposing a large number of illicit acts, they do little to provide a balanced, reasonable assessment of the state of corruption in the country. Instead of sensationalist, accusatory media outlets, Brazil needs more independent, authoritative sources.

A Changing Dynamic?

Despite these problems, there is room for optimism regarding the corruption problem. First off, the situation is not as bad as it may look. This helpful graph (courtesy of The Economist) illustrates that Brazil is one of the countries in the world where people tend to think corruption is much worse than it actually is:

While Brazil scores poorly on the Corruption Perceptions Index, it outdoes many of its emerging market peers on the Bribe Payers Index, coming in at 7.6 compared to 6.1 in Russia, 6.5 in China, 7.0 in Mexico, and 7.5 in India. In fact, Brazil practically pulls even with emerging market star South Korea, ranked at 7.7. The country clearly has a long way to go before it can be considered on par with most developed countries, but it is performing relatively well by this measure.

Several new pieces of legislation, taken together, represent Brazil’s most earnest attempt to stamp out corruption since the country’s return to democracy. The “Clean Record” law (Ficha Limpa) passed in 2010 rules that any public official who is convicted of misusing public funds or resigns to avoid charges is ineligible to hold office for eight years. This law will first take effect with the 2012 municipal elections later this year. Last week the government passed a Freedom of Information Act that will open up government records to the public and allow ordinary citizens to investigate how their tax money is being spent. A law currently making its way through the Congress will seek to hold businesses legally responsible for the illicit acts of their employees, forbid any convicted institutions from receiving government contracts for ten years, and create a national registry of “corrupt firms”. These represent major steps to impose the rule of law and improve Brazil’s public administration.

President Rousseff has also taken an earnest stand against Congress’ machine politics. In the last year, she has sacked six ministers facing corruption charges and cut back on dispersing funds to several ministries. This led to a public stand-off earlier this year when several of her major coalition partners rebelled against her reforms and demanded the immediate release of money earmarked to their ministries. While Ms. Rousseff’s principled stand against the patronage networks won her high praise from voters and led her to record-level approval ratings, she was eventually forced to relent in order to avoid a collapse in her coalition and to pass key legislation regarding pension reform and World Cup preparations.

There can be no doubt that Ms. Rousseff’s willingness to challenge the status quo through her faxina (“house-cleaning”) has changed the nature of the political debate and offers a sharp contrast to her predecessor, President Luiz Inácio Lula da Silva, who was more willing to accommodate coalition partners in order to pass his agenda. Yet there is a limit to how much the president can do. As a technocrat who has never before held political office, she has no natural independent political base and is dependent on her party and its political allies to govern. As a result, she has had trouble confronting corruption in the establishment head-on, instead choosing to adopt a more reactionary posture, purging officials only once allegations against them have come to light in the media. (I will return to this issue in a later post regarding the 2014 elections.)

Slowly but surely, the tide is moving against the entrenched, corrupt elements in the Brazilian political system. Growing public awareness and information technology is empowering citizens to fight back and demand a more just, equitable public administration. Anti-corruption efforts by the federal police and judiciary are getting better. But serious work remains to be done. Organized crime is still a scourge on the country, as evidenced by the continued popularity of the jogo do bicho gambling networks run by criminal gangs. Most importantly, serious reforms are needed to get the bloated government down to size, reducing the number of elected politicians and consolidating ministries at the national, state and local levels. Major reform of the public sector will wipe out many of the existing patronage networks, reduce traditional inequalities, promote meritocracy, and improve the business climate without jeopardizing the government’s ability to provide important services such as education and health care. If Brazilians can do this, they will take a major step in leaving their country’s corrupt past behind them.

Brazil's Infrastructure Challenge

If you ask any Brazilian about the major problems facing their country, one of the first responses (after corruption, of course) will certainly be lack of infrastructure. I have mentioned this issue in previous posts, and there is no doubt that infrastructure has become a major topic of discussion in the national media. With the 2014 World Cup and 2016 Olympics looming (not to mention next month’s Rio+20 summit and the 2013 Confederations Cup), the world is watching closely as Brazil seeks to modernize its airports, roads, ports, and urban transportation systems.

Much of the recent criticism, both national and international, has focused on poor execution and slow implementation, as projects across the country are behind schedule and makeshift solutions such as temporary airport terminals are being proposed. Time is certainly of the essence as the date for the events moves closer. But in fact it is quite normal for infrastructure projects to come in over budget and behind schedule.  In my home state of Maryland, the Inter-County Connector, a major new toll road which finally opened in November 2011, was criticized for years due to ballooning costs and a slow construction schedule. South Africa heard many similar critiques regarding its infrastructure projects in the run-up to the 2010 World Cup. While preparations may not be ideal, I am confident that they will be adequate for Brazil to fulfill its responsibilities as host country for all these events in the years ahead. And if insufficient preparations end up causing Brazil significant international embarrassment during the World Cup, that should serve as a powerful incentive to improve execution of infrastructure projects in the future.

Long term, however, Brazil faces real challenges regarding its infrastructure. At its heart, the issue is not execution but rather financing. Simply put, Brazil needs to come up with a lot of money if it is to pay for the massive reforms needed to update the entire country's infrastructure system and put it on a path to achieve higher rates of economic growth. This represents a major challenge for a country that currently invests only 19% of its GDP.

China serves as a useful foil for Brazil in this regard. Having recently reached middle-income status after years of urbanization and large scale, low-wage manufacturing, China is trying not to hit a wall but rather to unlock a new era of growth to transition from middle-income to high-income country over the next several decades, following in the path of its East Asian neighbors Japan, South Korea, and Taiwan. To achieve this end, the country's leaders have invested massively in infrastructure, creating a new high-speed rail system in addition to numerous other projects. As a result, investment reached 48% of GDP last year. While this extraordinarily high rate was temporarily inflated by the government’s $586 billion stimulus plan to counteract the 2008 financial crisis and has led many to cry panic about an investment bubble, it is not far off from the roughly 40% rates of investment of Japan in the 1970s and South Korea in the 1990s, suggesting that China is following a historical development path that will pay dividends in the future.

Unfortunately, Brazil does not have China’s ability to finance large-scale infrastructure improvements. It has a low domestic savings rate, equivalent to 17% of GDP over the last decade compared with 50% in China. It also does not have a large trade surplus. Whereas China ran extremely large current account surpluses averaging nearly 6% of GDP over the last decade, Brazil ran a deficit averaging -.5%. (Source: tradingeconomies.com) In other words, China saved up the money it made from exports during the last ten years of rapid economic expansion, whereas Brazil spent its earnings. Now, China is able to fund huge infrastructure projects all over the country, whereas Brazil is struggling to find the cash it needs.

President Rousseff’s aggressive focus on reducing interest rates may help in this regard, as falling rates are already lowering the government’s borrowing costs, freeing up money for investment that would otherwise be spent on servicing the debt. However, this step alone will not solve the problem. The Brazilian government’s drive to lower interest rates should improve the country`s macroeconomic fundamentals, but expanding the credit supply will do little to improve the savings rate.

A more important step forward in financing infrastructure projects has been the recent wave of privatizations. Recognizing that the government simply did not have the money to finance much-needed airport reforms, Ms. Rousseff turned to the private sector for help. Infraero, the country’s airport authority, began last year by selling the concession to operate the airport in Natal, a small World Cup host city in the Northeast that has been the most behind schedule in preparations. This February, the agency auctioned off concessions to operate public-private partnerships for three major airports in São Paulo and Brasília. Two more auctions are expected to follow for the airports in Belo Horizonte and Rio de Janeiro. If these projects turn out well, privatizations may become an increasingly important tool in updating the country’s infrastructure.

The downside to privatizations is that investors expect to earn a commercial rate of return, and often end up charging a hefty price tag for use of the infrastructure. I was astounded by the tolls on a recent car trip from Belo Horizonte to the coastal city of Cabo Frio. The road was of remarkably better quality than anything else I had seen in Minas Gerais, but we ended up paying 45 reais in tolls over the course of seven hours in the car, and the price tag was significantly higher for trucks and other large vehicles. Similar fears abound regarding the airline privatizations. After the winning bid to operate São Paulo’s main airport came in at five times the government’s asking price, many have started to worry that the high costs of the concessions will be passed on to airlines and consumers. Private money is desperately needed to improve Brazil’s infrastructure, but the government will have to figure out ways to keep fees from spiraling out of control.

It could start by improving its auction processes. Outside of the problem of keeping bids under control to prevent future spikes in fees, the government should adequately vet proposals at an early stage to ensure that the consortia have the necessary expertise to operate efficiently. The government caused a stir several weeks ago when rumors leaked that it was worried about some of the winning operators’ lack of expertise in operating large airports and history of accumulating unpaid debt, although the transfer of the concessions is still proceeding as planned. In addition to the issues regarding the airport auctions, the proposed high-speed rail project linking Rio and São Paulo has been postponed several times, after three auctions in 2010-2011 failed to yield a single proposal from a national construction firm. The government is currently revising the auction rules, but the project, which was originally supposed to be ready for the 2016 Olympics, now looks to be at least ten years away.

Ironically, Brazil’s ability to attract infrastructure financing may depend on its emerging market foil mentioned above: China. As it has done across the developing world, China is investing huge amounts of money in securing access to Brazil’s export market, due primarily to its appetite for steel, oil, and foodstuffs. China’s massive savings are being used to improve Brazil’s electrical grids, rail systems, and ports. The biggest symbol of Chinese investment in Brazil is the Açu Superport, nicknamed “The Highway to China”, a $2.5 billion project set to open this year that will become one of the main conduits for trade between the two countries.

Yet even with lower interest rates, privatizations and foreign direct investment, it is difficult to see how Brazil will reach the investment levels needed to spring the middle-income trap and become a wealthy country without fundamentally learning to save more and consume less. Brazil has become increasingly reliant on consumer spending, not investment, to finance its economic growth. These three graphs illustrate just how poorly Brazil fares against its BRIC peers in this regard, as it invests little, relies more on consumption, and has experienced a drop in its capital stock per person over the last three decades (courtesy of the Angry Bear Blog):

There is hope that the coming oil boom will flood the state’s coffers, creating a large trade surplus that can then be invested not only in a massive infrastructure program, but also in new health, education, and scientific research and development initiatives. Spent wisely, oil money could be the key to Brazil’s long-term economic success. But the chances are equally high that oil could feed Brazil’s vices, encouraging a bloated public sector, commodity dependence, and lavish, inefficient spending sprees without promoting the key investments needed to put the economy on a more dynamic path. If that becomes the case, Brazilians may have to come to accept dirt roads and sky-high tolls for a long, long time.