Modeling the Relationship between Government Policy, Economic Growth, and Deforestation in the Brazilian Amazon

This paper develops a theoretical as well as an empirical model of deforestation and economic development in a tropical forest economy. The empirical model is estimated using panel data for 316 municipalities in the Brazilian Amazon during the period 1970-1985. The effects of controversial Brazilian policies, such as road building through the Amazon and subsidized credit to agricultural establishments, are evaluated both in the theoretical model and in the estimated empirical model. The paper concludes that subsidized credit, while certainly causing deforestation, is so beneficial for economic growth that the benefits seem to outweigh the environmental costs. This does not hold for road building, however, because the opening up of new land by federal road building tends to promote a wasteful use of land