Government and the Economy on the Amazon Frontier Robert R. Schneider 4 A ~~~f4. '7 RECENT WORLD BANK ENVIRONMENT PAPERS No. 1 Cleaver, Munasinghe, Dyson, Egli, Peuker, and Wencelius, editors, Conservation of West and Central African Rainforests/Conservation de laforet dense en Afrique centrale et de l'Ouest No. 2 Pezzey, Sustainable Development Concepts: An Economic Analysis No. 3 Munasinghe, Environmental Economics and Sustainable Development No. 4 Dewees, Trees, Land, and Labor No. 5 English, Tiffen, and Mortimore, Land Resource Management in Machakos District, Kenya, 1930-1990 No. 6 Meier and Munasinghe, Incorporating Environmental Concerns into Power Sector Decisionmaking: A Case Study of Sri Lanka No. 7 Bates, Cofala, and Toman, Alternative Policies for the Control of Air Pollution in Poland No. 8 Lutz, Pagiola, and Reiche, editors, Economic and Institutional Analyses of Soil Conservation Projects in Central America and the Caribbean No. 9 Dasgputa and Maier, Poverty, Institutions, and the Environmental Resource Base No. 10 Munasinghe and Cruz, Economywide Policies and the Environment: Lessonsffrom Experience WORLD BANK ENVIRONMENT PAPER NUMBER 11 Government and the Economy on the Amazon Frontier Robert R. Schneider The World Bank Washington, D.C. Copyright C 1995 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing August 1995 Environment Papers are published to communicate the latest results of the Bank's environmental work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The complete backlist of publications from the World Bank is shown in the annual Ilndex of Ptiblicationts, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'1ena, 75116 Paris, France. Robert R. Schneider is with the Rain Forest Trust Fund in the Latin America and Caribbean Department of the World Bank. Library of Congress Cataloging-in-Publication Data Schneider, Robert R. Government and the economy on the Amazon frontier / Robert R. Schneider. p. cm. - (World Bank environment paper ; no. 11) Includes bibliographical references. ISBN 0-8213-3353-4 1. Land settlement-Government policy-Amazon River Region. 2. Land settlement---Government policy-Brazil. 3. Land settlement- Environmental aspects-Amazon River Region. 4. Land settlement- Environmental aspects-Brazil. 5. Amazon River Region-Economic conditions. 6. Brazil-Economic conditions-1985- 7. Sustainable development-Amazon River Region. 8. Sustainable development- Brazil. I. Title. II. Series HD499.A45S36 1995 333.3'1811-dc2O 95-23161 CIP CONTENTS Acknowledgments v Executive Summary vi Part I. Government, Equity, and Stability on the Amazon Frontier Introduction 1 Review of Recent Evidence on Farming and Ranching in the Amazon Limited Role of Official Incentives I Reasonably Good Success 3 Relatively High Turnover 10 Summary: The Paradox 11 Part II. The Determinants of Frontier Instability 15 Introduction 15 Cheap Land and Nutrient Mining 15 lImiediatisnio and High Interest Rates 16 The Sell-Out Effect 21 Part III. Government Arrives 33 Introduction 33 Emerged Government 35 "Sustainability" and the Role of Government on the Frontier 37 Imposed and Transplanted Government 40 Annexes A. Calculation of Maximum Number of Cattle on Farms Benefiting From FINAM Incentives and Official Credit, 1980 and 1985 46 B. Review of Studies of Colonization Success in the Amazon 47 C. Mathematical Formulation to Derive the "Break-Even Points" 52 D. Calculating NPV of Land for Figure 2.6 53 E. The Potential for Trade with the Amazon in Greenhouse Gas Reduction 54 F. Expenditure Issues 59 Bibliography 63 . . Tables 1.1 Growth of Cattle in the Northern Region, 1920-85 2 1.2 Cattle in the Northern States: Composition by Size of Herd (1985) and Rate of Growth by Size of Herd 2 1.3 Direct Incentives to Livestock Fiscal Incentives (FINAM) and Subsidized Credit, 197 1-1987 4 1.4 Approximate Number of Cattle on Farms Benefiting from Official Credit, 1980 and 1985 5 1.5 Employment Opportunities for a Rural Laborer 9 1.6 Regional Comparisons of Per Capita Income Distribution 1992 INCRA Settlements 10 1.7 Indices of Concentration of Land Holdings (GINI) (1975-85) 11 1.8 Infant Mortality Comparison--Deaths per 1,000 Births 12 1.9 INCRA Settlement Projects Incomes, Asset Accumulation, and Time on Plot 12 1.10 FAO/UNDP/MARA Data--Relationship Between Economic Performance and Turnover of Settlers 13 2.1 Literature Values for Decay Rates of Yields Following Land Clearing 18 2.2 "Break-even" Ratio of First-Year Income of Sustainable Technique to Income from Unsustainable Technique 22 3.1 The Emergence of Government 36 3.2 Political Support For Various Government Policies and Services 41 3.3 Growing Up? Net Federal Transfers as a Percent of State/ Regional GDP (1975 and 1985) 42 Boxes 1.1 Fiscal Incentives and Deforestation 4 Figures 2.1 Agricultural Exponential Yield Data from Four Different Sources 17 2.2 Sustainable and Unsustainable Yields 19 2.3 Sustainable and Unsustainable Yields, Witlh a Decay Rate of 30 Percent and a Rate of Time Preference of 40 Percent 20 2.4 Economic Rent and the Emergence of Government 24 2.5 Effect of Discounting on Value of Land 25 2.6 Effect of Property Rights on Economic Behavior 28 iv ACKNOWLEDGMENTS Writing this report has been unusually pleasant. we embarked together on a discovery of the role I have benefited enormously from the ideas, of property rights in the Amazon. I thank the advice, humor, and hard wvork of my friends and World Bank Research Conmmittee for the grant colleagues in the Latin American Environment that has made that association possible (the Division of the World Bank. I would especially formal results of that work will be forthcoming like to thank Dennis Mahar, Robert (Andy) shortly). This report has also benefited from Anderson and John Dixon for the combination of insightful comments by Dan Biller, Trudy Ann intelligent insight and good nature that keeps Cameron, Maureen Cropper, Gershon Feder, ideas flowing. I would also like to thank my David Steeds, Andrew Steer, David Hughart, younger colleagues, David Rosenblatt, Maryla Nalin Kishor, and Andres Liebenthal. I am Webb, and Gunars Platais for their long hours sorry that I have not been able to include all of and tough questions. The ideas on property your suggestions for improvement. Next time rights have been stimulated by animated we'll try to do better. discussions with Lee Alston and Gary Libecap as v EXECUTIVE SUMMARY Inexpensive, relatively uninhabited land still economies have special characteristics exists in many Latin American countries. This determined largely by an abundanice of land and land continues to act as a magnet for both a sparsity of people and capital. Frontier squatters and entrepreneurs in search of new governments also have predictable economic opportunity. The current pattern of characteristics, mostly determined by their development often results in violent conflict and economic context and physical remoteness. In wasteful environmnental damage. For this large measure these features condition the reason, governments in Latin America are outcome of government initiatives in frontier increasingly struggling to develop policies to areas. Most of the data and observations in this rationalize the settlement and development of report come from Brazil. Many of the these areas. Should government enforce laws in arguments and conclusions are general, remote, frontier areas? Should it provide however, and rely on the economic logic of schools? Health care? Should it create new frontier settlement rather than on institution- and states and provide representation in Congress? location-specific issues. If so where, and how? These are the sorts of The main messages of the report are the questions many governments are facing. The following: Bank is also involved: in policy development in the forest sector, in land use policy implemented * Settlers in the Amazon do appear to be through environmental and agroecological improving their standard of living zoning projects, and through land tenure and compared to people with the same land registration projects. Through its responsi- education and skills outside the Amazon. bilities in the Global Environment Facility and * Transience and farm turnover on the the Pilot Program to Protect the Brazilian frontier is due to powerful and Rainforest, the Bank is also forced to confront fundamental economic forces. These difficult tradeoffs concerning frontier policies. forces can only be overcome by well- As manager of the Global Environment Facility, organized government policy. the Bank is regularly asked to create mechanisms * Transience, farm turnover, and even to ensure that biodiversity reserves receive long- apparent land abandonmiiient are niot run protection against encroaching development. necessarily linked to degradation of the Similarly, under the Pilot Program to Protect the agricultural resource base. Brazilian Rainforest, the Bank and the Brazilian * More attention needs to be given to the government are attempting to make "sustainable importance of reconciling the needs of development" a reality. local politicians with externally designed This report addresses some of these issues. projects. Particularly imlportanit is the It is a first step only. It illuminates the special need to find ways to develop sustained characteristics of the overall political-economic support for the rural development context confronting frontier governments. The services that encourage small farmer report's motivation comes from concern that too stability. many of the frontier policies currently promoted * Creating a political coalition to support by the Bank and others are not politically policies for orderly frontier development sustainable. More attention must be given to the is difficult. Because the interests in political environment on the frontier and how it more rapid developmlent are largely is conditioned by economic interest. Frontier local and regional, and the benefits from vi Executive Sunumary vii slower, more deliberate growth are economic performance, farm turnover in the national and global, greater political and Amazon remains high. Transience and economic autonomy at the local and instability on new frontiers primarily occurs regional level may tend to undermine because the earliest settlers, those extending the better settlement policies. frontier at the extensive margin, tend to be * Roads are the fundamental determinant relatively disadvantaged in terms of physical and of settlement. An extensive road human capital. People with low physical and network erodes incentives for sustainable human capital, and little opportunity to do well agriculture and silviculture. An elsewhere, are most likely to endure the intensive network of farm-to-market deprivation and health risks associated with roads is the most important determinant opening new lands on the frontier. People with of economic viability of small farmer somewhat higher opportunity costs are likely to agriculture. wait until the frontier is better established before * Allocating land initially to small farmers they take the risk. Those who are fully is not only a good policy from an equity incorporated in the national (or international) standpoint, but in most cases it is the economy will generally wait until government is most efficient and orderly way to settle relatively well established, and until property new lands. rights are clarified and enforced, before they * National governments must define their consider putting life and capital at risk. objectives carefully with regard to As long as new roads are being built, and no establishing government beyond the program of well-articulated, offsetting policies is economic frontier.' Here also, local in place, early settlers will generally sell out to and national interest are unlikely to a better-endowed second-generation of (often coincide. urban-based) buyers. This probability grows These messages and their policy implications with (a) increased availability of new land, (b) are outlined below. widening difference in access to credit between the early settlers and the second generation Standard of Living in the Amazon. A buyers, and (c) the difference in accessibility of number of studies on performance of Amazon government services (education, health, official colonization have recently been completed. They credit, agricultural research and extension, paint a picture of surprising agricultural and marketing, and land tenure services) to the early developmental success. Specifically, they show settlers and the entrepreneurs. Later migrants (a) better results in terms of incomes and asset (entrepreneurs) have lower discount rates due to growth from official colonization projects in the better access to credit, and they are better able Amazon than from any region in Brazil other to take advantage of government services. than the South, (b) evidence of increasing yields These advantages are reflected in the purchase at the farm level, and (c) substantial investment price they are willing to offer earlier setters. in profitable new pasture technologies in These advantages virtually guarantee that the consolidatinig areas. Measured by Gini early settler can be bid off the land by coefficients, land distribution in the Amazon is newcomers. substantially better than for Brazil as a whole and trending toward greater equality. Infant Determinants of Farm Turnover and Land mortality in the Amazon remained higher than "Abandomnent." Popular discussion of land elsewhere, however. abandonment in the Amazon tends to blame "land degradation" and falling yields. Economic Determinants of Transience and Undoubtedly some agricultural land is being Farm Turnover. Despite relatively good degraded in frontier areas: the economics of viii Executive Summary cheap, easily accessible land tends to promote with the individual leaders (e.g., the governor) mining of the nutrients. With land nearly free it the probability of success improved greatly. is cheaper to move the farm to the nutrients than Where this was not the case, the project faced to buy fertilizers and carry them to the farm. the risk of being diverted to fulfill short-term Nevertheless, other explanations are more budget needs or used to pay off political debts. consistent with the available empirical evidence, The challenge to the Bank and to national which shows (a) relatively high income and asset governments is to resolve possible conflict growth combined with rapid farm turnover and between the nature of initiatives most likely to apparent abandonment, and (b) generally increase electoral success, (e.g., infrastructure increasing yields through time at the farm level. development) and activities that lead to the The paradox of rapid farm turnover and land highest quality development (e.g., sustaining abandonment is better explained by changes in recurrent costs of rural education and health property rights regimes than by land care, farm-level agricultural research, improved degradation. rural banking services). Where services In Brazil, there have been two periods of required for stable frontier development cainnot farm turnover and apparent land abandonment. be structured to attract the necessary support, The first occurred when entrepreneurs from the responsibility for these services should be moved formal sector were encouraged by government to to a level of government which faces more prematurely (relative to potential profitability) consistent incentives. establish ranches in new frontier areas. These entrepreneurs became discouraged. They Problems of Formiiig a Coalition for abandoned their claims when they realized that, Sustaiiiable Development. When a frontier due to remoteness, (a) cattle ranching did not economy rests on mininig the natural i-esource pay as well as alternative investment, and (b) the base (i.e., timber, minerals, nutrients), relatively government was not willing (or able) to protect few frontier people have an incentive to see the property against invasion by squatters (who did process slowed. Long-run benefits of "rational" find farming in the Amazon competitive with development tend to accrue globally and to their alternatives elsewhere). future generations. Where offsetting coalitions The second abandonment (a reverse of the for sustainable development cannot be identified, first) is occurring now in many colonized areas the Bank and donors must be realistic about the of Para and Rond6nia. It occurs when property political sustainability of reforms, especially rights become secure enough for urban-based those intended to reduce access to resources, speculators to leave land idle witlhout fear of such as zoning, land use planning, and logging invasion. Because of their superior access to or forest clearing restrictions. Decentralization credit and government services, it is relatively worsens the prospect, especially if it increases easy for these entrepreneurs to bid the earlier untied transfers and reduces the leverage of settlers off the land. central government over states and municipalities (as Brazil has been doing since 1989). Stability and the Needs of Local Politicians. As outlined in an excellent OED Newv Roads and Land as Collateral. By review of the determinants of success in rural putting new land on the market, new roads tend development projects in Brazil's Northeast, to prevent agricultural land prices from rising. support from local and regional politicians for This effect is compounded, if (as is generally the the olutcomtie of the project is a critical case on the frontier) tenure is insecure, land determinant of success. Where project cannot be used as collateral, and (therefore) components could be timed to correspond with credit is not available to bid away economic the electoral cycle, or could be visibly associated rent. This situation creates uneconomically Executive Sunimary ix cheap land; it in turn promotes excessively farm more rationally and profitably, and (b) if extensive use of the land. This result has both they sell out, they can bargain a better price. negative equity effects and negative environmental effects. Negative equity effects The National Interest in Imposing arise because successful smallholders cannot use Government Beyond the Economic Frontier. their proven success to purchase more land on a Generally, frontier governments emerge as collateral basis, while relatively well-off outside economic activity and population respond to new entrepreneurs can use urban collateral or their economic opportunity. In some cases, however, own capital to purchase land cheaply without central governments decide to impose outposts of competition from local smallholders. Negative government beyond the economic frontier, environmental effects accrue because (a) generally for strategic or national security underpriced land encourages resource mining, reasons. Where government expenditure creates and (b) the combination of insecure tenure and the economy, nearly all economic activity underpriced land encourages deforestation, cattle responds to derived demand from the imposed ranching, and other activities that effectively government. The national interest that occupy the land at low cost. established these outpost economies should be kept firmly in mind, and the role of government The Importance of Initial Land Allocation. should be limited to (a) the primary objective for Land allocation policy should promptly grant which the outpost was created and (b) ensuring title to the initial smallholder occupants. This a reasonable quality of life for the population action promotes botlh equity and efficient attracted by the government's activity. occupation of frontier land. It is efficient Investment in "development" in these areas, because the low opportunity cost of initial however, is premature, and almost never a good squatters ensures that they are the first to use of public resources. actually occupy the land. The alternative policy of titling large formal sector entrepreneurs, who Notes will not occupy the land (because it will not pay their higher opportunity cost), leads to inevitable 1. For the purposes of this report the economic conflict and uncertain land security for all frontier is defined as the point where, as one moves involved. This lesson is clearly demonstrated by from developed areas toward the unintegrated years of violent land conflicts in southern Parn wilderness, the marginal laborer could just cover his Allocating to early squatters is equitable because opportunity cost (generally as a squatter). (a) if they stay, land security will allow them to PART I GOVERNMENT, EQUITY, AND STABILITY ON THE AMAZON FRONTIER Initroductioi Review of Recent Evidence on Farming and Ranching in the Amazon Much has changed in the 23 years since Brazilian President General Medici launched the Much of the economic activity in the Amazon project that would "bring men without land to a in the 1970s and 1980s was stimulated by land without people." Partially as a result of government policies, in particular subsidized government's subsequent efforts, between 1970 credit, regional fiscal incentives, and differential and 1990 the population of Brazil's Amazonian taxation (Binswanger, 1989; Mahar, 1989; states doubled to some 9 million inhabitants, Schneider, 1992). From this fact many more than half of whom live in cities. No one observers have concluded that economic activity any longer considers Amazon colonization to be in the Amazon was the result of such a panacea for problems of equity and government activity. More recent evidence, development. In fact, the popular perception is however, indicates that economic activity that Amazon development in the Brazilian (particularly cattle ranching) in the Amazon is context has been an economic, distributional, taking place on a scale larger than can possibly and environmental disaster. This perception not be explained by these incentives policies. The withstanding, Amazon states have developed evidence also indicates surprisingly good increased financial and political autonomy to economic success in agriculture sustained over a pursue economic development as they conceive relatively long period. The following it. In addition, the experience and perception of paragraphs review these findings. leaders of Amazon states is often at variance witlh that of the wider public. Limited Role of Official Incentives The purpose of this report is threefold. First, it reviews the available evidence concerning the Approximately 100,000 km2 of native forest effectiveness of Amazon settlement and have been converted to pasture over the past 30 development in terms of generating incomes, years, allowing the number of cattle in the north equity, and stable growth. Surprisingly good to grow from 1 million in 1950 to more than 5 results are currently being reported with regard million in 1985 (see Table 1.1).' Much of this to colonists' incomes, accumulation of assets, g w aid trends in asse (lnd dsrbto.' growth was encouraged by government policies and trends in asset (land) distribution, in the form of fiscal incentives, tax policy, and Nevertheless, substantial land turnover is.' .' evide 't a.d laildIdegradationandabandonmt land tenure policy. It would seem logical that evident,and land degradatio a abandnent the recent policy changes, which have largely continues to be reported. Chapter 2 analyzes the terminated subsidies to the cattle industry, would forces that romote tovd abanoment, discourage ranching in the Amazon. However, despite the relatively good economic results daafothlstgrctulceu,diusd reported in Chapter 1. Chapter 3 introduces the below ite tast the mosturap growth asc role of government and analyzes the various ' . . taken place in small farms unlikely to have forces that bring government to the frontier. It received government assistance. This finding analyzesthe implon ment as an suggests that other factors besides government investment in the development of the iAmzon, policies are currently likely to be responsible for as wellaser the growth of ranching in the Amazon. frontier land use. 2 Part I: Government Table 1.1: Growth of Cattle in the Northern Region, 1920-85 1920 1940 1950 1960 1970 1975 1980 1985 Head of CattLe NORTH 869,108 999,041 1,020,305 1,234,882 1,706,127 2,129,609 3.989,113 5,358,578 Para 615,481 705,524 735,529 844,740 1,043,648 1,441,851 2,729,796 3,485,368 Amazonas 238,449 270,180 87,440 141,424 263,437 203,437 355,748 420,940 Acre 15,178 23,337 25,020 32,516 72,166 120,143 292,190 333,457 Amapa -- -- 31,010 45,476 64,990 62,660 46,079 46,901 Rond6nia -- -- 2,052 3,475 23,125 55,392 251,419 768,411 Roraima -- -- 139,254 167,251 238,761 246,126 313,881 303,501 Average Annual Rate of Growth NORTH - - 0.7% 0.2% 1.9% 3.2% 4.4X 12.6% 5.9% Para -- 0.7% 0.4% 1.4% 2.1% 6.5% 12.8% 4.9% Amazonas -- 0.6% -11.3% 4.8% 6.2% -5.2% 11.2% 3.4% Acre -- 2.2% 0.7% 2.6% 8.0% 10.2% 17.8% 2.6% Amap6 -- -- -- 3.8% 3.6% -0.7% -6.1% 0.4% Rond6nia -- -- -- 5.3% 19.0% 17.5% 30.3% 22.3% Roraima -- -- -- 1.8% 3.6% 0.6% 4.9% -0.7% Note: Rondbnia, Roraima and Amapa were created in 1943. Previously, the data for the first two were incorporated in Amazonas and that of Amapa was incorporated in Para. This explains the sudden faLL for Amazonas between 1940 and 1950. Source: AgriculturaL Census, 1940, 50, 60, 70, 80 and preliminary census for 85. Table 1.2: Cattle in the Northern States: Composition by Size of Herd (1985) and Rate of Growvth by Size of Herd (1980-85) Rond6nia Acre Amazonas Roraima Para Amapa North Comp.Growth Comp.Growth Comp.Growth Comp.Growth Comp.Growth Comp.Growth Comp.Growth (%) (%) (%) t%) t%) t%) t%) t%) t%) (%) t%) t%) t%) t%) <10 6 154 6 26 4 42 1 160 2 60 2 66 3 72 10 to <20 9 202 7 26 7 20 1 134 3 66 5 26 4 77 20 to <50 20 241 11 35 15 12 4 94 8 52 15 31 10 70 50 to <100 16 254 10 36 15 4 5 42 8 35 16 -7 10 51 100 to <200 13 248 9 28 15 -3 8 -8 12 61 16 -2 12 56 200 to <500 11 130 14 29 20 23 27 3 15 40 19 -11 16 37 500 to <1,000 7 111 10 9 9 18 30 -6 12 20 13 -37 12 , 18 1,000 to <2,000 6 254 10 -3 7 12 14 -36 10 3 15 432 9 6 2,000 and more 11 257 24 -5 9 169 8 26 30 14 0 -100 24 20 Total 100 206 100 14 100 18 100 -3 100 28 100 2 100 34 Addendum: 1985 herd size (head) 768,411 333,457 420,940 303,501 3,485,468 46,901 5,358,678 Source: 1985 Preliminary Agricultural Census. Part ]: Governzment 3 Table 1.2 slhows that for the north as a whole only about 6 percent of the livestock enterprises (far right column of the table) there is a clear in the north received credit from official inverse relation between the size of herd and the sources. rate of growth. Herds smaller than 50 head Based upon calculations in Annex A, Table 1.4 represented (in 1985) 17 percent of all cattle in indicates the number of cattle likely to have been the north, and grew over 70 percent between on ranches benefitting from subsidized credit and 1980 and 1985. Cattle in herds of between 50 fiscal incentives in 1980 and 1985. The and 500 head represented 38 percent of all cattle minimum farm size likely to have received credit and grew at an average of about 47 percent. subsidies is shown in bold. The minimum farm More than 45 percent of all cattle in the north size for FINAM credits is underlined. This were in herds of 500 or more, but these grew by calculation is based on the assumption that fiscal only 17 percent. Only in Rond6nia, which had incentives and subsidized credit go to the largest the highest rate of cattle growth in the region, farms first.2 For the north as a region, the did this inverse relationship not prevail. results are as follows: subsidized credit covered Roraima lost 2 percent of its total cattle 78 percent of cattle in 1980 and 63 percent in population--all from herds larger than 200 head; 1985 (on 13 percent and 6 percent of the the number of cattle in herds smaller than 200 ranches); SUDAM-FINAM incentives covered grew by 80 percent. 17 percent of the cattle in 1980 and 25 percent The two forms of direct government incentives in 1985 (on 0.2 percent and 0.4 percent of the to livestock production in the north have been ranches, respectively). subsidized credit and regional fiscal incentives. In view of the Amazon's future, Table 1.4 Taken together, these have represented on the calculations draw this most important order of US$300 million per year over the conclusion: The government's subsidy policy is period 1970-88 (see Table 1.3). The fiscal unlikely to be currently playing an important incentive takes the form of a tax credit equal to role in the recent rapid growth of the cattle the investment for firms willing to invest in population. While Table 1.2 shows, on the one approved projects in the north. Unlike the fiscal hand, that since 1980 the most dynamic sector of inicenitive, agricultural credit is available the north's livestock industry is farms with throughout tle counttry; the north region receives fewer than 100 cattle, Table 1.4 shows, on the 3-4 perceint of Brazil's livestock credit. other hand, that only in Amapa was it likely that Both forms of incentives are biased toward FINAM credits reached farms under 1,000 head large farms. SUDAM-approved projects of cattle; furthermore, subsidized credit could averaged 13,375 hectares in size in 1989. Para, not be expected to have gone to farms under 100 whiclh received some 70 percent of the SUDAM head. To account for this recent growth of livestock projects in the northern region, had an cattle ranching in the Amazon it therefore is average project size of 9,500 hectares in 1988. necessary to look beyond government transfers. According to the preliminary 1985 agricultural census, 289 of the 11,175 livestock operations in Reasonably Good Success Para were larger than 5,000 hectares. SUDAM- approved projects in 1985 numbered 253-- Mattos, Uhl, Goncalves Paragominas suggesting that nearly 90 percent of the farms Ranchiing Study. It has been 30 years since over 5,000 hectares received incentive payments. cattle were first introduced into the Paragominas Although no comparable data is available for (Para) region of the eastern Amazon. During livestock credit, the large-farm bias of that time there has been much experimentation, subsidized agricultural credit is well established. research, and development and adaptation of Demand for credit exceeds supply, and approval both pasture grass varieties and cattle breeds. practices emplhasize minimizing transaction To assess the economic and agronomic viability costs, thus favoring fewer large loans over of the current state of cattle ranching in the area, numiierous small ones. In 1985, for example, Mattos, Uhl, and Goncalves3 surveyed both 4 Part 1: Government Table 1.3: Direct Incentives to Livestock Fiscal Incentives (FINAM) and Subsidized Credit, 1971-87 (in millions of 1990 US$) Real FiscaL Livestock Interest Year Incentive Credit Total (%) 1971 345 35 381 -5.8 1972 214 72 285 -2.7 1973 131 89 220 -2.6 1974 209 76 285 -16.4 1975 238 151 389 -13.0 1976 265 229 494 -23.0 1977 108 152 261 -17.8 1978 134 164 298 -19.0 1979 88 183 271 -35.6 1980 102 99 201 -38.8 1981 174 97 270 -25.6 1982 250 137 387 -27.3 1983 134 91 225 -36.1 1984 168 53 221 -1.6 1985 153 52 204 -3.8 1986 303 204 507 -35.5 1987 156 100 256 NA Note: DefLated by IGP-DI to 1977. Then converted to 1990 US$. Sources: Central Bank of Brazil and "Anuario Estatistico do Brasil." Box 1.1: Fiscal Incentives and Deforestation A direct measurement of pasture converted under fiscal incentives was carried out by INPE (under contract from SUDAM) for the two states whichi had received the bulk of the fiscal incentives, Mato Grosso and Para (reported in Yokomizo, 1989). Out of the total of 84,000 km2 of land occupied by FINAM-supported projects, 70,000 km2 were these two states. Their study revealed that of the 70,000 km2, 40,000 was approved for pasture use, and in fact, slightly less than 20,000 km2 was actually cleared. Total deforestation in these states since 1975 was on the order of 156,000 knm2. Thus, in the area where fiscal incentives had been most concentrated, they accounted for approximately 16 percent of the deforestation--2 1 percent before 1970 in Mato Grosso and 7.5 percent in Para (excluding deforestation before 1970). For Para they accounted for approximately 20 percent (6,600 kni2) of the growvth of land in pasture over the period. Table 1.4: Approximate Number of Cattle on Farms Benefiting from FINAM Incentives and Official Credit, 1980 and 1985 Distribution of Establishments and Cattle (% of total) Ni tinium Farm Rond6nia Acre Amazonas Roraima Pari Amapa North (head of cattle) Estab.' Cattle Estab . Cattle Estab.T Cattle Estab. Cattle Estab. Cattle Estab. Cattle .|Cattle 1 980 I 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 10 46.6 92.2 43.5 94.3 67.6 96.6 84.6 99.7 60.9 98.5 83.2 98.8 58.1 97.7 20 27.1 82.9 23.5 87.8 45.6 90.2 74.0 99.1 44.6 96.0 64.0 95.1 40.1 94.3 50 10.2 65.0 10.3 78.3 21.7 74.4 60.5 97.2 24.2 89.2 36.2 83.3 20.8 86.1 100 4.4 51.1 5.4 70.2 lO.1 57.5 48.4 93.5 13.8 81.5 17.0 66.1 11.6 77.3 200 2.1 40.1 3.0 62.5 3.9 39.5 34.2 84.8 7.4 72.0 8.2 49.7 6.1 67.1 500 0.6 25.0 1.3 50, 2 1.0 20.7 15.0 59.1 3.1 57.9 2.4 28.4 2.5 51.7 1,000 0.2 14.9 0.7 40.1 4.0.3 Il..ii 4.3 27.6 1.4 45.1 [ 1.0 38.0 2,000 r 0.1 IJ o.4. jf 0.1 4 0.2 4.6 1 9 X 5 1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 10 54.2 93.6 44.2 93.7 61.4 96.0 75.5 99.2 61.7 98.1 78.1 98.0 58.3 97.1 20 32.8 84.3 24.5 86.6 40.2 89.5 59.8 97.7 43.5 94.9 57.9 93.5 38.8 92.6 50 12.3 64.3 10.3 75.3 18.3 74.4 41.4 93.9 22.5 86.7 27.1 78.3 18.5 82.2 100 4.8 48.3 5.2 65.6 8.6 59,5 29.9 88.5 13.1 78.6 13.3 62.6 9.9 72.3 200 1.8 35.7 2.8 57.1 3.8 44.8 21.2 80.2 6.4 66.6 6.1 46.7 4.$ 60.5 500 0.6 24.3 1.1 43.1 1.0 25.2 8.6 52.7 2.4 51.2 1.7 44.7 1,000 0.2 17.4 0.5 33.5 1.9 22.3 1.0 39.2 0.71 15.0 0.7 32.7 2,000 0.1| 11.31 e23R 0.1 | 9.0 | 4EH 8.1 0.4lc 7 0.0 0.0 EE Note: Shaded numbers indicate range where cutotf otf subsidized credit was likely. Numbers inside double border indicate cutoff for FINAM incentives. See Annex A for calculations. a. Establishments. Source: 1985 Preliminary Census, SUDAM (in Yokomizo, 1989), Banco do Brasil, and Ministry of Finance and author's calculations. 6 Part I: Government large-scale and small-scale ranchers in the on plot, and no systematic relationship with soil Municipality of Paragominas. For the survey of classification. The following discussion reviews large-scale ranchers, 27 property owners were this evidence. pic!-Ad at random from a list of 300 ranches furnished by the National Institute of Moran's Stages of Colonization. In a Colonization and Rural Reform (INCRA). review of experience with colonization programs These 27 ranchers owned a combined total of in Latin America, Emilio Moran (1989a, 1989b) 223,200 hectares or 10 percent of the area of emphasizes that colonization is a process of Paragominas. For the small-scale ranches, 22 adaptation to a new environment, of learning by small property holders (less than 100 ha.) were doing. Moran's stages approach (see Annex B, studied in the community of Uraim, located 10 Table B.1) emphasizes three important points: km from Paragominas. (a) it is inappropriate to judge the success of In summary, Mattos, Uhl, and Goncalves find colonization efforts while farmers are still in the that ranching, in a variety of circumstance, is learning and adapting stage of settlement; (b) economically viable in the Paragominas Region production and equity objectives are often of the eastern Amazon. Rather than increasing inconsistent; and (c) the role of government in degradation and abandonment, they find that creating settlement projects is generally negative, ranchers with large and medium holdings are encouraging migrants to act on government rejuvenating degraded pastures, whichi consists promises, too often broken, rather than on the of removinig debris, ploughing, fertilizing, and basis of their own information and strategies.4 reseeding with improved forage varieties. The Poverty and mobility are closely related: cost of pasture rejuvenation is reportedly previous mobility is a strong predictor of future $260/ha. Live-weight production is increased mobility, and crop yields are negatively related fromii 45-65 kg/ha/yr to 150-250 kg/ha/yr. to the number of previous migrations of the Profits are increased from $8-$24/ha/yr to $50- owner.5 $100/ha/yr, and the return on investment is 13- 14 percent. Small property holders are also Ozorio's Longitudinal Study. Preliminary intenisifyinig, focusing on calf and dairy results of a recent study of five settlement production. In this sector the capital projects in the Brazilian Amazon (Ozorio de investmiienits are in the range of $215/ha, Almeida, 1992) provides evidence surprisingly genieratinig profits of $125/ha/yr and yielding a consistent with Moran's description. The study return on inivestment of 16 percent. is based on field interviews in 1981 and 1991. Nearly 400 farmers were interviewed in 8 Colonizationi and Settlement Schemes. colonization schemes established in the 1970s. Recent studies oll settlemenit and agriculture in All of the settlement schemes originated as the Amazoni (also see Annex B) indicate that, in directed settlement. Four in Para were economiiic terms, agriculture in the Amazoni is established as government projects. The other also doinig relatively wvell. Moran's analysis of four are in Mato Grosso; they originated as settlemenit stages warns us to expect a period of private settlement enterprises. Current "learninlg by doing" before judging the ultimate occupants were interviewed, regardless of success of settlemenit. The recent survey of whethier or not ownership had changed. This private and public colonizationi projects by metlhod permitted data to be collected on many Ozorio de Alieida finds relatively good factors, including rate of turnover, yield changes economiiic success. A wider study by FAO finds througlh time, and changes in land values (see Amazoni prcojects competitive with similar Annex B, Table B.2). projects in the South of Brazil and imuclh more Several conclusions emerge: First, consistent successful thanl those in the Northeast. An with Moran's stages thesis, there has been ecenomoletric study in Rond6nia finds no loss of considerable turnover. Overall, 64 percent of incomes or yields associated with length of stay the settlers who were on the farms in 1981 were Part 1. Government 7 still there in 1991. Over a third moved in the on the land--fewer than 80 percent, compared 10-year period. Despite this turnover, a stable with 97-100 percent in the other regions. Even core population exists. The average overall when comparing turnover and economic length of time on the same farm was 13 years, performance within the North, ranking the varying from 25 years in Monte Alegre to 9.5 in settlements in the order of 1990-91 incomes (see Paranaita. Second, also consistent with Moran's Annex B, Table B.5) there is no relationship thesis, yields are increasing. Overall, yields of between incomes and permanency on the plot. rice have increased 29 percent over the 10-year period; corn production has increased by more Jones, et al. Econometric Study of Farming than half. Finally, consistent with this record of in Rond6nia. Jones, et al. conducted an success, land prices have also increased. The econometric study based on a sample of 91 overall (unweighted) average real price increase family farms around the city of Ouro Preto, was 15 percent, but this average masks a large Rond6nia. The sample was drawn from Ouro variation between settlements--from nearly 200 Preto do Oeste, a colonization project begun in percent in Anapu/Pacaja, to rminus 44 percent in 1970 and located along BR-365. Soils in the Alta Floresta. Land prices in the remaining study area are primarily classified as good, but settlements increased between 24 percent and they range from moderate to unsuitable for 100 percent." either annual or perennial crops and from good to restricted for pasture. The study found that FAO/UNDP Evaluation of Settlement the average farm marketed half its output, and Projects. In a study released in 1992, had one third of its area in pasture and FAO/UNDP and the Brazilian Ministry of 18 percent in cultivation, leaving half uncleared. Agriculture review the experience with land The median farm was highly diversified, with at settlement projects carried out under the federal least 6 income sources. Some farms had as land reform agency (INCRA). The study many as 10 categories of income sources. The reviewed projects throughout the country--not median farmer occupied his lot for 10 years, solely in the Amazon. The purpose of the with the longest time being 20 years. The review is to evaluate the success of INCRA following selected sections quote from the settlement projects established between 1985 and study's conclusion: 1989. A population of 440 settlements was identified. Following stratification by state and " Although we have been unable to find a microregion and subsequent random selection, systematic relationship between length of time 44 settlements were chosen for field visits (see on lot and any of our measures of overall Annex B, Table B.3). productivity, the soil classification we use In terms of incomes, settlement in the North predicts 20 years of "good" yields on "good" generated incomes four times Brazil's minimum soils, 10 years of "good" yields on moderate wage--larger than those in any region other than soils, and that yields on "restricted" soils will the South. The ability of settlers to accumulate decrease rapidly within ten years. The household durable goods and productive capital classification also predicts that yields will be (machinery, buildings, etc.) reflects these low from the very first on the "restricted" incomes, with the northern region again soils. We have found scattered evidence of surpassed only by the South. Northern settlers productivity effects on different soil types, but more than tripled their initial assets (increased the effects have been crop specific and have by 222 percent).7 When gifts and loans are not conformed to the rank predictions of the added to initial assets, the overall increase falls classification system. Per capita income is, to 168 percent (see Annex B, Table B.4). ceteris paribus, higher on the "restricted" soils Although the North has the second highest than on the higher grades. In unreported rating in terms of economic performance, it has regressions we are unable to find any by far tho lowest number of original settlers still relationship between gross income per cleared 8 Part 1: Government acre (in either crops or pasture) and time on fundamental to an evaluation of the success of lot, controlling for per cent of the lot cleared Amazon development, but unfortunately they for use and soil type. Dividing the sample of cannot yet be answered. The tentative, partially farms into those occupying their lots ten years subjective conclusion, based, inter alia, on the or less and over ten years yields the same review of indicators and experience which results as the full sample. follows, as well as the settlement data reviewed above (and in Annex B), is this: For a given The fact that our mean and median income and educational level, a hard-working farmers have been on their current lots for a migrant is likely to improve his lot by migrating decade belies the mobility pattern described in to the North. The health risk is high, however, the literature. These reports principally discuss and the deprivation endured in getting an initial, entry effect which involved extensive established is great. clearing;8 what the reports do not suggest is The frontier tends to filter for human capital the possibility that the initial clearing was characteristics. Chapter 2 develops this tieme in accompanied by learning through trial and more detail. The more remote the frontier, the error. However, our data yield a zero simple more likely that settlers will have low correlation between length of time on lot and opportunity costs. This makes comparison of percent of the lot cleared, which belies the indicators at the aggregate level misleading. For pattern of clearing three hectares a year, example, according to aggregate indicators the abandoning previously cleared land, until the literacy and health care standards of Sao Paulo, entire lot is cleared and abandoned. Instead, Rio Grande de Sul, or Minas Gerais are much an initial period of rapid deforestation may be higher than those for Rond6nia or Pard. This followed by a calmer period, closer to an trend reflects both the availability of these equilibrium pattern of farming practices, during services and the human capital characteristics of which some reforestation and regeneration of the incoming population. It does not follow, damaged soils occurs. This possibility bears therefore, that the average unemployed farm examination. worker would get better education or health care in the South than in the North. Virtually the Evidence Concerning Equity and Quality of only way to answer the essential question of Life. Has development in the North created availability to the relatively poor is by substantial new opportunity for Brazilian comparing the experience of people with citizens, particularly for the less privileged level relatively similar characteristics in different of society? The anecdotal literature (and there locations. Fortunately, the FAO/UNDP/MARA is much of it) is replete with stories of abuse of study referred to above provides the basis for a power and exploitation and subjugation of the number of these comparisonls. weak and the poor. Undoubtedly outrages occurred in the free-for-all development of the Income Distribution and Comparison to early-day frontier. We cannot generalize about Alternative Employment. As discussed above, the effect of frontier development on the poor the FAO/UNDP evaluation of INCRA settlement from anecdotes, however. What is lacking is projects found family incomes in Amazonian evidence that can provide the basis for settlements four times the national minimum generalization. Is exploitation and subjugation wage and higher than incomes in comparable the rule, or is it the occasional good story? settlement schemes in the Northeast, Centerwest, When a northeastern landless laborer attempts to and Southeast. Table 1.5 below compares the become a landowner in the Amazon, is he average colonist's income with likely salary in walking into a labyrinth of failure and alternative employment. exploitation, or is he taking a positive step to From Table 1.5 we conclude that on the basis take control of his life through hard work and of salary alone, a settler on an INCRA entrepreneurship. These questions are settlement scheme in the Amazon likely Part J.- Government 9 Table 1.5: Employment Opportunities for a Rural Laborer Salary of an Salary of Skilled Average Monthly Region Average Monthly Monthly Worker' Salary per Worker in Worker (in minimum wages) INCRA Settlement (in minimum wages) Scheme North 1.1 2.0 2.0 Northeast 1.1 1.2 0.9 Centerwest 1.1 2.1 1.7 Southeast 1.1 1.8 1.4 South 1.1 2.0 2.2 a.Average of the salaries of rural manager, foreman, tractor driver and monthly laborer. Source: FAOIUNDP; FGV/IBE (CEA) improves his positioni relative to his alternatives. is the probability of doing well the highest? Comparing his income to either an average According to Table 1.6, it is (not surprisingly) unskilled or semiskilled worker, or a colonist most risky to settle in the Northeast. Here, per elsewhere in Brazil, reveals that only a colonist capita income in 73 percent of settler households in the South receives a higher income. Thus on is less that one half of a single minimum salary, the basis of income alone, INCRA colonists and it is extremely rare for that income to appear to have improved their quality of life. exceed 3 minimum salaries. Clearly the best area (if you can get it) is the South, where the Equity and Distribution. Critics of probability of doing poorly is lowest, and the development in the Brazilian Amazon often probability of doing well is highest. Following argue that development is creating the same the South, the North and Centerwest are close skewed distribution of income, assets, and competitors. The probability of doing poorly is opportunity that characterizes the rest of the slightly higher in the Centerwest than in the country. Highly skewed distributions of other regions, but so is the probability of doing incomes tell us something about the probability well. In contrast, the North has a slightly lower of potential migrants being better off or worse probability than the Centerwest of doing poorly, off. Chapter 2 argues that in the absence of a and it also has a lower probability of doing well. strongly countervailing government policy, skewed distribution of incomes and assets is a Land Distribution. Table 1.7 compares the natural outcome of Brazil's skewed human Gini index of the regions and selected states.9 capital. Available data on income and asset This index of land concentration reveals that distribution is reviewed below. Because of current land distribution in the Amazon is problems with recent Brazilian censuses, the substantially more equitable than it is in Brazil most recent data for regionwide evaluation is as a whole. The index also shows that the trend 1985 for the agricultural data and 1980 for of land distribution in the Amazon is toward demographic data. Again, some relevant data is greater equality than it is in Brazil. The Gini available from the FAO/UNDP study. coefficient for the North has fallen from 0.86 in Incomes. Where is it most risky to be a small 1975 (compared with 0.85 for Brazil as a whole) farmer (settler)? Where is it least risky? Where to 0.79 a decade later. The North's relatively 10 Part l: Government Table 1.6: Regional Comparisons of Per Capita Income Distribution 1992 INCRA Settlements Region Percent Families with less Percent Families Percent Families Percent Families than 0.5 minimum salary with between 0.5 with between I with over 3 per capita and I minimum and 3 minimun minimum salaries per salaries per salaries per capita capita capita All Rural Rural Families Families in INCRA INCRA INCRA INCRA Settlements Settlements Settlements Settlements North NA 42 24 31 3 Northeast 79 73 7 20 0 Centerwest 50 43 17 37 3 Southeast 55 42 23 33 I South 43 31 33 31 5 Source: UNDP/FAO/MARA, 1992 equitable overall land distribution is and only slightly lower than the overall figure predominantly the result of smallholder for the Northeast in 1986. settlement in Rond6nia (Rond6nia's Gini coefficient is 0.65). Other northern states are Relatively High Turnover also showing a substantial trend away from concentration, however, as latifundias, ex-crown The studies reviewed above show relatively lands (sesmeiros), and rubber plantations good economic performance for agriculture in (seringais) all begin to be broken into the Amazon, even when compared to the same economically viable units. types of settlement elsewhere in Brazil.'" Despite this performance, turnover among Infant Mortality. Infant mortality is an colonists remains high and abandonment of important indicator of health care status. The agricultural land continues to be reported. This UNDP/FAO study also included questions turnover has been that declining yields and concerning infant deaths and compared the increasing poverty interpreted by many results with IBGE/UNI('EF studies carried out observers as evidence force settlers to abandon in the rest of Brazil. The results, shown in their farms and seek new lands--in short, that Table 1.8, indicate that (a) overall health care Amazonian soils are unsuitable for sustainable standards in the country improved significantly agriculture. between 1980 and 1986, (b) improvement in the In fact, the available evidence, most of which North was substantially slower than elsewhere in comes from the FAO/MARA study referred to Brazil, and (c) that infant mortality on INCRA above, shows no increase in farm turnover with settlement projects in the North was substantially poor economic performance. As will be higher than INCRA settlement in other regions discussed below, for the data from the Amazon Part 1. Government 11 Table 1.7: Indices of Concentration of Land Holdings (GINI) (1975-1985) Region/State 1975 1980 1985 North 0.86 0.83 0.79 Northeast 0.86 0.86 0.86 Centerwest 0.85 0.84 0.84 Southeast 0.75 0.76 0.77 ! South 0.73 0.73 0.74 Amazonas 0.92 0.87 0.82 Rond6nia 0.62 0.64 0.65 Pard 0.86 0.84 0.81 Brazil 0.85 | 0.85 | 0.85 region alone, there is a statistically significant Summary: The Paradox positive relationship between farm turnover and economic performance. This chapter has established a clear paradox. Tables 1 .9 and 1 .10 show income, asset, and It has (a) provided evidence of surprisingly good farm turnover data from INCRA settlement economic performance of agricultural settlements projects. Table 1.9 compares INCRA settlement and ranches in the Amazon, (b) shown that this projects by region, ranking them by their ability performance cannot in general be explained by to retain settlers as measured by the percent of government incentive policies, and (c) shown initial settlers still on the plot". The results that settlements with higher incomes tend to are inconsistent with the belief that turnover is have higher farm turnover (less stability). The caused by low incomes. Although turnover was income evidence is clearly inconsistent with the greatest in the Amazon (North)--with only 79 popularly held opinions concerning agricultural percent of the original settlers still on their plots potential in the Amazon. Paradoxically the data compared with 98-100 percent in the other on turnover is consistent with popular belief. regions--the North's economic success was The fact that we find the relationship between exceeded only by the South. By far the worst good incomes and high turnover to be a paradox economic performance was in the Northeast, is important for Bank and Government policy. where average income was only 55 percent of It is important because it suggests that we have that in the Amazon, and the rate of growth of been making policy on the basis of a mistaken assets less than one fifth of that in the Amazon. model of the causes of farm instability and Yet 99 percent of the original settlers in the farmer transience. The negative relationship Northeast were still on their plots. between stability and incomes we have observed Table 1.10 isolates projects in the North. suggests that our most popular policy Again, settlement projects are ranked according recommendation--to create stability by to turnover, and the relationship between strengthening incomes--may be counter- turnover and economic success are compared. productive. Without a much better This data shows the same pattern as among understanding of the actual determinants of farm regions--higher farm incomes associated with instability, our policy interventions are doomed higher farm turnovers.'2 to failure. Chapter 2 discusses the determinants 12 Part 1: Governrinent Table 1.8: Infant Mortality Comparisons--Deaths per 1000 Births Rezio 1980 1986 1990 IBGE/UNICEFa IBGE/UNICEFP FAO/MARA North 60 58 73 Northeast 120 75 58 Centerwest 59 41 29 Southeast 54 38 0 South 55 37 0 Brazil 76 53 50 a. Perfil Estatistico de Criancas e Maes no Brasil. Mortalidade intantile saude na decada de 80. IBGE/UNICEF-1989. Source: FAO/UNDP/MARA, 1992 Table 1.9: INCRA Settlement Projects Incomes, Asset Accumulation, and Time on Plot Percent Average Incomes Average Annual Average Region Original (numbers of Time on Rate of Growth of Settlers minimum wages) Plot (yrs) Own Capital (in %) North 79 4.2 7 18 Northeast 99 2.3 15 3 Centerwest 98 3.8 5 15 Southeast 99 4. 1 14 5 South 100 5.6 5 26 Source: Based on data in FAO/UNDP/MARA Part 1: Government 13 Table 1.10: FAO/UNDP/MARA Data--Relationship Between Economic Performance and Turnover of Settlers Percent Initial Incomes Average Annual Settlement Settlers Still on (numbers of Time on Average Rate Land (in sample) minimum wages) Plot (yrs) of Growth of Initial Assets PaS 47 5.51 6 25 Pa4 64 7.27 6 37 Pal 67 5.79 6 22 To l 67 2.77 4 43 Ro2 78 3.08 3 10 To2 91 2.99 5 25 Rol 92 4.03 4 47 Pa2 93 2.62 10 8 Ac 100 2.02 25 6 Pa3 100 1.68 8 46 a a. This high rate of growth reflects an extraordinarily low level of initial assets. Initial assets in this settlement were 4 percent of the mean level for the region as a whole, and 8 percent of the initial assets of the next lowest settlement. These numbers should be treated with reservation. of farm instability and its relationship to 4. This latter point also emerges strongly in an incomes. It shows, inter alia, that the apparent excellent study by Nelson (1973) of settlement paradox of higher incomes associated with more projects on tropical lands in Latin America. instability can be completely explained by 5. This relationship could be explained by a) poor changes in land security and differences in the farmers being forced to move more often, or b) poor characteristics of early settlers and those who farmers being more attracted to capital gains and arrive later. specializing in real estate transaction. It does not seem as if a class of people specializing in land Notes clearing, selling, and moving on develops, however. 6. Alta Floresta, which showed a large loss in land 1. Brazil's Legal Amazonia contains approximately values between 1981 and 1991, was the settlement 3,000,000 km2 of upland dense forest, 1,200,000 km2 area which had by far the highest land values in of scrub forest, and 250,000 km2 of other upland 1981. In interpreting these land values it is forest types (Fearnside, 1987). extremely important to note that a settler in Alta 2. This assumption is made because (a) it is Floresta was buying not only land, but also a range consistent with observation of subsidized agricultural of government and infrastructural services, including inputs (especially credit) worldwide, and (b) it yields tenure security, all paid for by the colonization firm. an upper bound on the number of cattle subsidized. As Ozorio de Almeida notes: 3. "Economic and Ecological Perspectives on "Alta Floresta was initially considered by many to Ranching in the Eastern Amazon in the 1990s"; M. be the jewel of private directed colonization. M. Mattos, C. Uhl, and Delman de Almeida Commerce, church, education, and several other Goncalves; Instituto do Homen e Meio Ambiente da institutions were brought in, together with Amazonia, Belem, Para, Brazil, EMBRAPA, Penn migrants actively recruited almost exclusively from State University; Submitted to Ykirld Development. Parana." 14 Part 1. Government 7. Importantly, asset growth excludes changes in the fact that they all yield the same general the valuation of land. conclusion, however, suggests that relatively good 8. e.g., Fearnside, op. cit., 1984, reports that agricultural success might be quite common. It is clearance was greatest during a colonist's first four important to note that the literature reviewed above years on a lot, levelling off after six years. reflects an exhaustive literature survey of farm-level 9. The Gini index ranges from zero to one. A field studies containing measurement of yield or Gini index of one implies that all land is concentrated income loss through time. No farm-level studies in the hands of a single owner. An index of zero were found showing yield loss. implies that all owners own equal-sized plots. 11. Note that this ranking is influenced somewhat 10. It is possible that the results of some of these by age of the settlement. Everything else being studies are influenced positixtly by selectivity bias equal, older settlements will have retained fewer of and problems of endogeneity. For example, farmers their original settlers. In the Amazon data, however, who settle on the best land may be expected to stay this effect is clearly overwhelmed by other factors. longer. Since they have the best land, their yields do 12. In a simple regression between turnover and not decline through time. Thus long length of tenure incomes, the latter is a significantly negative tends to be associated with non-declining yields. The predictor of the former at the I percent confidence wide variation in methods of the various studies, and level. Assets are not statistically significant. PART II THE DETERMINANTS OF FRONTIER INSTABILITY Introduction meat. As a result, old, mined land is abandoned. The process of nutrient mining The data of the preceding chapter suggests that varies from region to region along the frontier, however difficult life on the frontier may be for depending on the quality of soils, ease of forest many rural-born, uneducated Brazilians, it access, availability of labor, credit, and land probably offers better opportunities than the tenure relationships. Nutrient mining in the alternatives. Despite the evidence of relatively Amazon is a market response to an abundance of good incomes and accumulation of assets, accessible Amazonian land generated by new however, rapid land turnover and land road building. abandonment seems to pose a paradox.' On the Classically, nutrients are extracted through a one hand farmers seem to be well off relative to progression of activities that begin with logging, their alternatives, and on the other hand they which often provides forest access. After seem to be selling or abandoning their farms and logging comes annual cropping and, finally, moving on. This chapter explores the motives ranching. When the ranching activity ends, the behind this demographic mobility at the frontier. land is abandoned for an indeterminate period.' It shows that (a) there is no inconsistency In some cases the cropping stage may be skipped between economic success and the observed if, for example, soils are particularly poor and mobility, and (b) it is not necessary to appeal to markets for low-grade timber (or charcoal) have resource degradation arguments to explain it. evolved. The various stages of production may This chapter also explores three important also be carried out by different actors. Land factors leading to farm turnover, land may change hands numerous times during the abandonment, and economic expansion at the various phases of extraction, or the land may be frontier. These factors are: (a) the effect of exhausted under one owner as part of an cheap land in encouraging the mining of the integrated operation. No matter what economic natural resource base ("nutrient mining"); (b) the activities may evolve, the process is best combined effect of high interest rates, poorly understood as one tending to maximize the value developed credit markets, and a frontier culture of the nutrients mined, net of extraction costs. of imediatismo; and (c) the opportunity cost As with any other form of mining, nutrient effect caused by (i) the difference in education mining is not geographically sustainable. When and other human capital attributes between early the nutrients are depleted beyond a profitably settlers and more recent arrivals, and (ii) the extractable level, the activity must relocate to a changing role of property rights. new area. Complete profitable extraction may take 10-20 years, depending on the initial Cheap Land and Nutrient Mining fertility of the soil. The perpetuation of this system depends on the continued expansion of Nutrient Mining. Nutrient mining is the the road system into new lands. unsustainable extraction of nutrients from the As discussed above, nutrient mining, low forest soil through logging, cropping, and stocking rates, early land abandonment, and low ranching. This process differs from agriculture pasture productivity are all rational, and profit- (and silviculture) because it is fundamentally a maximizing responses to free or cheap land, mining activity; it requires that new land be regardless of the underlying agronomic constantly brought under production as nutrients suitability of the soil. Intensification occurs only are extracted in the forms of logs, crops, and as land prices increase. For example, consider 16 Part 11. The Determinants of Frontier Instability the Mattos, Uhl, Goncalves data reviewed in will probably force him to adapt to a land- Chapter 1. Ranchers are investing $260/ha to surplus economic environment.3 increase live-weight production per hectare by a factor of three. This may represent technical "Imediatismo " and High Interest Rates progress; it certainly reflects increasing land prices. Any rancher who invests $260/ha to The Fanner's Dilemma. A farmer or treble per-hectare productivity either cannot find extractive reservist can choose between resource pasture land for less than $130/ha (giving him uses offering different degrees of two new hectares plus the existing one), or he is "sustainability." Typically, however, in land- a poor businessman making a mistake. In short, abundant frontier conditions, if he chooses the the current intensification reflects the increase in technique that will provide sustained yields in land prices that comes with the closing of the the future, he has to sacrifice income today. frontier in the Belem-Paragominas area. The This tradeoff reflects the fact that higher current land has not improved; the incentive to invest in incomes come from mining the natural resource it has. base. To slow down the rate of exploitation of the resource base and leave some for later, or to The Importance of Road Building. From the incur the expenses required to replace nutrients The~ ~ ~ ~ ~ ~ ~~~~~~ls inotac agiulue would require sacrificin individual's point of view, nutrient mining is a lost in agriculture, would require sacrificing to agriculture in a land-surplus current income for future incomes. Can ratnal apprachssible) economy. Mining nutrie . constancy of yield be traded against immediate (and land-accessilble) economy. Mini ng nutrients ganYe.Tisctoexlrshw will emerge as the most competitive form of Unsustainable" land use initially offers higher agriculture wherever new roads make land annusalnrduto land ps, buti then hitgie abundnt (nd chap).The pice f newland annual production and profits, but then it gives abundant (and cheap). The price of new land way to declining yields, i.e. mining the resource becomes a bargain if we compare the costs of resuts lning factor tit and fertilizer and chemical pest control required to falling profits (assuming the farmer can't move sustain existing land with the natural fertility and to continue mining the resource elsewhere). The relative absence of pests in new lands (especially rate and behavior of yield loss depends on the after burning). With accessible land sufficiently nature of the resource being utilized (e.g., cheap, it is more profitable to move the farm to whether an agricultural field, a fishery, or a the nutrient-rich, pest-free environment, than to forest), certain other environmental factors (e.g., import the fertilizers and pesticides to the farm. soil type), and the type and intensity of use. Similarly, in the timber industry, what are Yield loss through time can generally be commonly viewed by northern forestry experts expressed in terms of exponential rates. Figure as wasteful logging practices are actually a 2.1 illustrates how exponential decay rates fit the rational response to a situation where land is yield data from several studies. Table 2.1 cheap relative to labor. Whether a farmer, presents a review of the literature on crop yields rancher, or forester intends to remain through time on recently cleared tropical forest geographically stable or not, economic forces land for a wide range of crops. Part II: The Determinants of Frontier Instability 17 I -I r . an~~~~~~~~~~~~ I IiO* Figure 2.1: Agricultural Exponential Yield Data from Four Different Sources. 18 Part II: The Determinants of Frontier Instability Table 2.1: Literature Values for Decay Rates of Yields Following Land Clearing' Reference Gristh Tondeurb Nye and Charterb Jordan Popenoeb Fearnside (1953) (1956) Stephensb (1941) (1987)C (1957) (1987) (1960) Crop Paddy Rice Ground- Cas- Maize and Maize Yucca Maize Cattle nuts sava Cassava intercropped witlh pineapple and plantain Location Malay- Zaire Zaire Zaire Ghana Hondums San Carlos Guatemala Eastern sia de Rio Amazonia Negro, Venezuela Yields lb/acre kg/la kg/ha kg/ha _ lb/acre t/ha/yr Head/ha Year 1 1750 2341 1363 45000 x 900 5.1 x 0.4 Year 2 1200 565 191 30000 700 X/2 Year 3 800 500 3.1 0.2 Year 8 X/2 Decay Rate 32% 76 c 86% 33% 9% 26% 22% 50% 30% of Yieldd I . a. These values represent yields following forest clearing with no fertilizer added. b. Cited in Nye and Greenland pages 73-74. c. In Jordan, C.F. (Ed.) Amnazonian Rain Forests: Ecosvstem Disturbance and Recovery. d. Calculated according to: | - I * 100 I Yieldo 1 Consider a farmer trying to decide whether to technique falls at 30 percent a year. If the put in place a sustainable system with low yield farmer has no preference for current income or an unsustainable system withi a high yield.4 relative to future income, a choice for the Figure 2.2 illustrates the expected yield from the sustainable technique will be made, because for two techniques. For purposes of illustration, we every year after year two the income derived assume that the first-year yield of the sustainable from the sustainable technique exceeds that technique is half that of the unsustainable resulting from the unsustainable technique. technique, and that the yield of the unsustainable Time Preference and Interest Rates. Few Part II: The Determinants of Frontier Instability 19 Sustainable and unsustainable yield income (Decay rate is 30%/year) 1 00.00 9 0.00 80.00 7 0.00 .2 60.00 50.00 ,- 10.00 3 0.00 1 0.00 0.00 I 0 1 2 3 4 5 6 7 8 9 10 Years Unsustainable Yield Sustainable Yield | Figure 2.2: Sustainable and Unsustainable Yields. people are indifferent about equal sums of September 1992, while the real interest rate on money at different times, however. The 32-day government bonds was about 3 percent a ubiquitous existence of credit markets (whether month. These monthly rates translate to annual, formal or informal) teaches us that people with real interest rates of about 27 percent and 43 "excess" income require interest to induce them percent respectively. (Note that the real interest to loan it to others. Similarly, those requiring rate on overnight accounts in the first week of extra income are willing to pay interest to September 1992 was considerably higher: 12 receive it. In a world where people loan and percent a month in real terms.) borrow money at interest, the difference between These real interest rates establish the rate the value of the same sum of money at the structure throughout Brazil.5 With relatively present moment versus its value in the future is low-risk investment in government bonds the interest that could be earned by loaning the yielding more than 30 percent, individuals and sum for the time in question. This interest firms needing to borrow money for the relatively differential reflects the combined effect of the high-risk activities of the Amazon typically must amount of money that is available for loans and pay much more. Similarly, a farmer with excess the personal rates of time preference of the capital is unlikely to loan it for less than the population. government yield. Therefore, a reasonable In Brazil, real interest rates are currently discount rate to apply to the income streams of extremely high, as they have been for much of Figure 2.2 is 30 percent or higher. Figure 2.3 the last decade. The most basic interest rate, the has been drawn using a rate of time preference "Referential Rate" (Taxa Referencial), was just of 40 percent. This figure is the same as Figure over 2 percent a month in real terms in 2.2 with the incomes reduced 2.2 with the 20 Part I: 7The Determinants of Frontier Instability Sustainable and unsustainable yields 100.00 (Decay rate of 30% and discount rate of 40%) 90.00 80 00 70.00 *~60.00 50.00a-----a 40.00 30.00 20.00 I10.00 0 00 0 1 2 3 4 5 6 7 8 9 10 Year 2 Unsustainabl Discounted Sustdinable -D Discounted e Yield Unsustainabl Yield Sustaintable _ ~~~~~~~~e Yield Yield Figure 2.3: Sustainable and Unsustainable Yields, With a Decay Rate of 30% and a Rate of Time Preference of 40% incomes reduced by the interest (discount) rate by comparing the two shaded areas (A & B) of 40 percent, roughly indicative of real interest Figure 2.3. If area A is larger the total income rates in Brazil over the past several years. will be higher if the unsustainable activity is Figure 2.3 contains all the elements of the chosen, and vice versa. farmer's decision. The initial incomes of the Albeit a review of the literature on farming two techniques are 100 and 50 for unsustainable tropical forest land has not produced reliable and sustainable techniques, respectively; the rate income data, we can combine the data from of decay of yield of the unsustainable activity is Table 2.1 with the interest-rate information 30 percent, and the farmer's time preference (or given above to calculate the relative first-year interest rate) discounts both incomes at 40 incomes that would be required to induce the percent a year. The farmer's choice between farmer to adopt the sustainable technique. techniques can be visualized by comparing the Although most Amazonian farmers do not area under the discounted yield of the conduct this type of financial analysis, the unsustainable technique curve with that under economic forces that would control how an actor the discounted yield curve of the sustainable in the Amazon would maximize financial well- technique, and then choosing the larger of the being are the same elements highlighted in this two. This choice can be visualized graphically calculation. These elements are (a) the relative Part 11: The Determinants of Frontier Instability 21 incomes of the two alternatives, (b) the discount activities. These are much more achievable (interest) rates available, and (c) the rate of loss ratios. (decay) of yield of the alternatives being considered. Conclusion. In spite of increasing calls for In Annex C, a mathematical formula uses these sustainable development, the mining of natural three variables to equate the two discounted resources still appears to be the prevalent form income streams and obtains the ratio of incomes of resource use in many tropical forest areas. at which both activities are equally profitable Assuming a conservative rate of decay of the ("break-even points"). resource base (10-30 percent), we have found that prevailing interest rates can have a profound Results. The results are given in Table 2.2. effect on whether resource users adopt This table shows how close first-year incomes of sustainable technologies that yield moderate sustainable and unsustainable activities would profits indefinitely, or unsustainable ones that have to be at varying interest and decay rates. initially render good profits but quickly deplete Wheln the return to a sustainable annual income the resource. Given our assumptions about is above this break-even point, the land owner decay rates, high interest rates force farmers to will opt for the sustainable activity. When it is seek quick--albeit unsustainable--profits, unless below, the unsustainable practice is preferred. sustainable activities can offer initial profits that For example, the table shows that at a 20 are 50-70 percent as high as initial unsustainable percent rate of preference for current income profits. Most known "sustainable" activities for over future income (or prevailing interest rate) tropical land use, under current technologies, and a 25 percent rate of decay, the sustainable simply do not offer such high annual incomes. choice would have to render at least 44 percent The implication is that governments wishing to or more of the initial annual profits of the promote sustainable use of the resource base nonsustainable use. have three basic options: (a) take steps to increase the profitability of sustainable activities, Discussion. The box superimposed in Table i.e. support applied research, foster markets, 2.2 shows productivity-decay rates in the range provide favorable credit; (b) decrease the of 10-30 percent and interest rates of 30-40 profitability of unsustainable activities, i.e. percent. At these values, the resulting break- increase taxes and remove subsidies, including even ratios range from 50-80 percent. At favorable credit; or (c) adopt macroeconomic conditions approximating those currently policies that will lower, or effectively lower, prevailing in Brazil (interest rate of 40 percent), interest rates. In particular, governments should net initial annual profits from sustainable use attack underlying fiscal problems that have would have to be at least 80 percent of the forced them to rely on interest rates to attain unsustainable use (if decay rates from activities macroeconomic stability. These measures will are as low as 10 percent). The required ratio of have the additional economic justification of sustainable to unsustainable first-year profits minimizing environmental externalities and falls to 50 percent if decay rates are believed to maximizing the preservation of future options be as high as 30 percent per year. These steep and environmental goods, such as biodiversity, ratios may help explain why the mining of that are now difficult to quantify. resources is currently so prevalent in the Amazon. The Sell-Out Effect Note the profound effect of a change in interest rates. For example, taking a decay rate of 10- So far we have reviewed two motives for 30 percent as a given, but interest rates of 5-10 farming unsustainable land in the Amazon. percent, break-even points decrease markedly, to These were the "nutrient mining" motive, which 14-50 percent of profits of unsustainable relies on land being cheap relative to other 22 Part 11. The Determinants of Frontier Instability Table 2.2: "Break-even" Ratio of First-Year Income of Sustainable Technique to Income from Unsustainable Technique Decay _ Interest Rates Rate | 5% 10% 15% 20% 25% 30% 35% 40% 0% 100.00 100.00 100.00 100.00 100.00 10000 100.00 100.0( 5% 50.00 66.67 75.00 80.00 83.33 85 71 87.50 88.89 10% | 33.33 50.00 60.00 66.67 71.43 75 0(0 77.78 80.00 15% 25.00 40.00 50.00 57.14 62.50 6667 70.00 72.73 20% 1 20.00 33.33 42.86 50.00 55.56 60.00 63.64 66.67 25% 16.67 28.57 37.50 44.44 50.00 54.55 58.33 61.54 30% 14.29 25.00 33.33 40.00 45.45 50.00 53.85 57.14 35% 12.50 22.22 30.00 36.36 41.67 46 15 50.00 53.33 40S 9. 11.11 20.00 27.27 33.33 38.46 42386 46.67 50(.) 50% t 9.09 16.67 23.08 28.57 33.33 37.50 41.18 44.44 60% , 7.69 14.29 20.00 25.00 29.41 33.33 36.84 40.00 700 6.67 12.50 17.65 22.22 26.32 30.00 33.33 36.36 80°5 5.88 11.11 15.79 20.00 23.81 27.27 30.43 33.33 9(0)V| 5.26 10.(0 14.29 18.18 21.74 25.00 28.00 30.77 inputs, and the imnediatismrlo argument, which changing demographic patterns as the frontier holds that it is cheaper to draw down natural matures and a subtle shift in the property rights capital ("borrow from the land") than to borrow regime than it does with loss of productive cash from alternative sources. Undoubtedly a capacity. significant amount of natural capital is being The literature on farming and ranching drawn down in the Amazon. But whether or reviewed in Chapter 1 portrays a picture of not large areas are being left in the degraded relative long-run economic success in the state portrayed in the popular literature is an ranching and farming communities studied. unansered question. One obstacle to the answer Paradoxically, farm turnover was also high, and is the lack of a clear meaning to the popular anecdotal evidence of farm abandonment is term "degraded lands." In many cases the term persistent. This section argues that the data on simply refers to any land that has previously economic success and high farm turnover is not been farmed but is not currently being farmed. only consistent, but that in the absence of strong For the most part, this kind of land is bush government policy initiatives to countervail fallow. This section of the chapter argues that them, fundamental demographic and economic (a) much of what is currently labeled "degraded forces prompt early settlers to sell out and move land" is, in fact, in transition between owners, on as the frontier matures. For simplicity this and (b) this transition has more to do with influence will be labeled the "sell-out effect." Part II: The Determinants of Frontier Instability 23 The sell-out effect results from three simple, Figure 2.4 has been drawn with a few observable facts: peculiarities intended to facilitate analysis of land use change (and the role of government) at * People migrating to the frontier self- the frontier. First, rather than a rent gradient, select on the basis of human capital and the line represents the Net Present Value opportunity cost. That is, people with (excluding the cost of land) of (the highest lowest human capital, and therefore value) economic activity at each distance from lowest opportunity cost, are most likely the urban center. Second, the figure has been to be found furthest out on the frontier. drawn as if property rights were perfectly (and * Farthest out on the frontier property costlessly) allocated. rights can only be retained by physical Consider the extreme right-hand side of the occupation of the land. As the frontier figure. Where NPV reaches zero, transport matures and homesteading is no longer costs prohibit profitable production for market-- necessary, speculation becomes possible. even capitalizing expected income from future * As the frontier matures, a later years. No person integrated into the economy to generation of urban-based capitalists find the left of the figure is tempted to claim land. that ownership of land can cover their This land is in forest because no alternative land opportunity costs, and because of their use is profitable. At some point, as one walks access to capital markets (often due to toward the city, the potential for some people to collateralizable urban property), they make a living on the land begins to look as good can easily bid current owners off the as their alternatives in the fully integrated land. economy.7 At some point formal government arrives. The remaining paragraphs elaborate the Tenure protection, previously performed by theoretical basis for these ideas and show how voluntary associations, becomes the function of they can be used to explain observed behavior. formal government. Police protect property at Figure 2.4 draws on the concept of a rent the cost of government. The role of voluntary gradient most closely associated with the work associations dwindles. With government of Von Thunen (1819). The basic idea is that as certification and protection of property one moves away from urban areas (or markets), ownership, land becomes collateral; titled transportation costs increase. This movement owners of land now have two important has two effects. First, with increasing advantages not available to early settlers. First, transportation costs, the profitability of economic government now assumes the land-protection activity falls. Second, the increase in function; second, land ownership provides access transportation costs selects activities that have to bank credit previously unavailable. high value per unit of transportation costs. With the arrival of formal government, the Thus, as one moves away from urban areas one early settlers become seriously disadvantaged. tends to see a progression of land use with the The human capital attributes that select for the following pattern: suburbs, vegetable and/or sod early settlers are precisely those which limit farming, dairy, field crops (corn, wheat, oats, their ability to take advantage of government-- etc.) and, finally, forest.6 Each of these land illiteracy now becomes a serious handicap. uses tends to be associated with a range of land Perhaps more fundamentally, a general cultural prices. For example, expanding suburbs distance from the urban-based functionaries who pressure land prices and drive dairy farms out of dispense government services puts early settlers Montgomery County (Maryland). Similarly at a tremendous disadvantage relative to urban- rising land prices associated with encroaching based competitors. soybean farming drive cattle from Mato Grosso For convenience (not ideology), we will call (Brazil) to the Amazon. those who arrive with government the capitalists. Theoretical NPV of Economic OpportunityActivity with perfectly (and Capital costlessly) defined property rights Formal A Sector Zone of Conflict Cost (Equilibrium Frontier and the Emergence Price) of Land of Government Cost of Defending Property Rights and Fote Rents Dissipated(mrialbo (D~~~~~~~~~~~~~~~~~~~ z Distance From Markets Figure 2.4: Economic Rent and the Emergence of Government N PaIrt Ii. The Determinants of Frontier Instability 25 This tag emphasizes the fact that, from an at discount rates of 15 percent and 25 percent. analytical point of view, the single most The value of the land to the capitalist is the area important distinction between the early settlers under the 15 percent curve, while the settler and the later, urban-based groups is access to would be indifferent between the income stream capital markets. Why is this so important? from the land and the sum under the 25 percent Consider Figure 2.5. For the sake of curve. illustration, assume that both the capitalist and In actual values, the total under the 15 percent the settler recognize that with improved curve is $105. That under the 25 percent curve transportation, marketing, and technology the net is $23. Remember the only advantage we have value of agricultural income will grow from the given the capitalist in this case is the interest current $10 per hectare at a rate of 10 percent (discount) rate advantage. In actual fact, as per year. Assume also that the capitalist, with Moran's evidence shows, the capitalist generally access to bank credit, can borrow at 15 percent also has a management advantage and, through per year. The settler, who has neither access to better access to government, an advantage with bank credit nor his own capital, borrows from respect to land-protection services. At this the moneylender at 25 percent.8 The two difference in net present values of land, we downward-sloping curves in Figure 2.5 show the should not be surprised to see capitalists buying present value of the future income from the land out settlers. Figure 2.5: Effect of Discounting on Value of Land 70 60 -)K-Returns from land ' 50 -_-Disc. at 15% -X-Disc. at 25% 2 40 IL E O 30 Z 20 10 1 2 3 4 5 6 7 8 9 10 11 12 13 Year 26 Part 11: The Determinants of Frontier Instability The sequence of events described above is fully have already sold their land. According to one consistent with the literature reviewed in Chapter local survey, the sales mostly occur due to a 1. Moran emphasized the characteristics of the lack of infrastructure on the project.'° People settlers, in particular the rapid turnover and leave in search of a better life. urban connection, in his "experimentation" stage. Ozorio de Almeida summarizes: The buyer can be another colonist, a rancher, a politician, or a merchant. In general these High turnover in some locations means that types are the most frequent. Even if buyers some people were willing to move in to lots don't come to occupy the land, in the end, they that were left behind by others. ...these do occupy all of it. "newcomers" were younger and significantly wealthier than "survivors" in high turnover Site PA3: locations... Thus, as real estate appreciation Today the major problem faced is the selling pushed pioneer farmers out of older frontiers and into new ones, the deforested land of lots. For this study a representative of the accrued to a new constituency that was (colonists') association confirmed that a large considerably better off than those who left. part of the settlement is occupied by ranchers, Many were probably not really farmers at all, who have been expelling the colonists from but merchants, public servants, and other city the area. It wasn't possible to find the dwellers.9 ranchers mentioned, but to better understand the situation, we present below the profile of The site descriptions from the the beneficiaries of the project. This survey FAO/UNDP/MARA study carry a strikingly is based on data furnished by the Regional similar message. Three site descriptions for Secretary of INCRA/PA. Para give information concerning the purchasers of land. These findings are reported below: * 40 percent are original colonists. * 59 percent are not original colonists and the Site PAI: lots were acquired from the originals or third parties. The (INCRA) technicians didn't know how * 39 percent of the lots belong to seven owners maniy people have left the project, but it is (one has 12 lots, another has 7 and the rest known that there has been selling of lots, have 6 to 2). accelerating since 1987. One technician from * 4 percent of the owners exploit wood on INCRA confirmed that only 40 percent of the more than one lot. current colonists were part of the original * 54 percent of the beneficiaries don't produce project.... It is calculated that 60 percent sell anything. their lots to ranclhers and new colonists.., in * 42 percent pursue some production of CEDERE III (one of three areas considered in agriculture or cattle. the PA I settlement) there has been less selling * of the 42 percent productive, 30 percent of because it is more distant and access is the owners don't live on the lot. difficult.... It's worth noting that the Prefeito of Parauabas bought II to 12 lots and that he Besides these types of colonists there exists a maintains the laborers--ex colonists--that work diversity of others. Following are a few on his land. cases: Site PA2: * The owner of lot 93 is established on the lot, lives in the city (Paragominas, probably), Approximately 50 percent of the colonialists and owns 4 holdings in the garimpo of Serra Pelada, but he works on the plot. Part II: The Determinants of Frontier Instability 27 * The owner of lot 73 is a radio broadcaster in opportunity costs. Squatters must earn their Paragominas. opportunity cost of 5 units before they will move * The owner of lot 64 is the manager of three to the frontier, and capitalists must have 20 ranches in the region. units. Subtracting the squatter's opportunity cost * The owner of lot 77 is a vereador (town from the yield from the land generates the councilman). squatter's net income line. This line crosses the * Four owners, owninlg six plots, gave their horizontal axis in year 12, indicating that in this lots to a third person to cultivate. year squatters would be as well off farming on * Nine owners, owning 19 lots, are the frontier as in their alternative activities. businessmen in Paragominas (four own Repeating the exercise for the capitalists shows supermarkets; one owns 7 lots and owns an that capitalists will not cover their opportunity auto parts store: one has a construction costs until year 17. materials supply store, one owns a From the top graph, we can conclude that, warehouse; one owns the gas company; and everything being equal, squatters will not want another is a butcher). to begin farming until year 12, and capitalists will want to wait until year 17. There is a clear The Decision to "Abandon Land." Does the risk to waiting however--to wait is to run the evidence of abandoned land support the thesis of risk that somebody else makes a prior claim to fertility decline and loss of agricultural the land. There is in fact a "race for property productivity? It may; however, alternative rights.""2 As we will see, the rules by which explanations are more consistent with the government organizes the race will determine evidence presented above. We can identify two the outcome and the amount of abandonment kinds of abandonmenlt that have nothing to do (see Figure 2.6 and the paragraphs below). with fertility decline. Both are related to the role of government and the cost of defending The middle and lower graphs of Figure 2.6 use property rights. The first is the abandonment of data from the upper graph (see Annex D for large schemes to squatters. This situation occurs data) to calculate the NPVs of land to squatters when government encourages premature and capitalists. Following the discussion in economic activity on the part of formal sector paragraph 30, the calculations of NPV use a agents. such as the fiscal incentive schemes in time preference of 15 percent for formal sector Brazil."' The second type of abandonment is agents (capitalists) and 25 percent for squatters. the reverse of the first. It takes place when The middle graph (government enforcement) formal governmenit begins to effectively pick up reflects a property-rights regime where the the role of protecting and enforcing property government is responsible for ensuring the rights. protection of private property. The lower graph The role of changinig property rights leading to (without government enforcement) assumes that apparent abandonmienit of land is illustrated by it is necessary to actively farm the land to have Figure 2.6. The top graplh of the figure shows property rights respected. The difference in the annual incomes that could be earned from land NPVs of the two graphs reflects the difference on the frontier in different years. In year 1, the in the economic behavior that would be land is too far from market to yield any income. stimulated by the different regimes. From years I to 10, potential incomes grow With government enforcement of property slowly. They rise sharply from years 10 to 20 rights (middle graph) it is possible, by as transportation and services create new purchasing land and not occupying it potential income opportunities. and flatten out (speculating), to buy the positive incomes of soon thereafter as the frontier becomes future years (top graph) without having to incur consolidated. For simplicity, assume that the losses of current years. Thus, to calculate potential incomes for formal sector agents and the NPV under the enforcement regime, we tor squatters are the same but have different ignore the negative values for current incomes 21 cR.Part II: The Determinants of Frontier Instabilitv Figure 2.6: Effect of Property Rights on Economic Behavior Current Incomes From Land (net of opportunity costs) 60 - Year 1 7--current income 60 positive for capitalists Wa40r~'~p _ NPWV ositive for seoatters w1, 0 1 go*t. enforcement (see bottom, gratl o 30 w 20 t E o 10 W ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ _=_-- I l q ncoe -Eof L-arid-tte - 0 land alf M__ _ C- e nofmenNP to Squatter 30 L 5 10 15 20 25 30 Time in Years NPV With Government Enforcement D. Capitalists farm land 200 1 C. Emr-genue of land, title 7i1 50 --se,-rity. cacltaiists buy o l~~~~~~~~~~~~~~~and from, squjatters 1 00- market s gon nt NPV to Capitalist a a i e NPV to Squatter 50 0) 5 1 0 1 5 20 25 30 Time in Years NPV Without Government Land Enforcement 200 -I ~~~~~~~B. Govenme-.r dons not I o~~~~~~~~~~cc,upy on,a,med lane 160 1201 > 40l re 0 t 0- -40+ 5 1 0 1 5 20 25 30 Time in Years Part 11. The Determinants of Frontier Instability 29 and discount the positive values to the present. Para began to have land feuds. First because This pattern is repeated each year to generate the the big businessmen of the south moved to NPV curves of the graph. Amazonia attracted by the incentives. Without government enforcement (lower Second, because the roads made access graph), land must be actively occupied to possible for the waves of migrants forced out enforce claim to ownership, with or without a by the land situation in the north-east and formal title to land. This requires premature south. Third, because the Federal activity on the land. The prospective owner Government created an image that Amazonia must now accept incomes in the early years that was a huge, empty space that should be are below his opportunity cost--that is, that occupied to relieve the land crisis in other correspond to the negative values in the current states. And since there was no government incomes graph (top). To calculate the NPVs policy to help the waves of migrants, huge under this regime, therefore, we perform the problems began to break out. The great same exercise as before, with the difference that companies found their areas already occupied negative values for early years must be included. by early squatters, some of whom had been The history of the large ranches established there for centuries. The squatters were inthe 1970s is consistent with activity that would expelled. But after the areas were cleaned be predicted under the enforcement regime. In out, they were often reinvaded by people an interview with Adrian Cowell (the producer from other states who thought them of the film documentary "The Decade of unoccupied because no work was being Destruction"). Jose Garcia Gasques summarized done.5 the results of a government retrospective study13 of large agricultural enterprises How do these narratives translate into Figure established under fiscal incentives supervised by 2.6? First, capitalists participate in government- the regional planning agency (SUDAM) as sponsored schemes to buy land in the Amazon. follows: Their actual activity on the land is token, and short lived. This is the behavior we should The tax incentives were primarily a means to expect under a regime of government-enforced guarantee the possession of land. The land rights where current incomes are still average size of the ranches we studied was negative--that is, before year 17 for the over 21 ,000 hectares, and some were as large capitalists. Second, capitalists face increasing as 200.000 hectares. So a great part of the pressure from squatters. This implies that the area was not occupied, and could easily be capitalists made a mistake: government was not invaded by squatters. Registration for tax prepared to enforce their ownership rights, after incentives, therefore, was a [legal] method to all. Instead of being on the middle graph. they guarantee possession of the land.'4 are on the lower one, where, in fact, occupancy establishes ownership. The invasion of squatters Ronaldo Barata. the head of the state land implies recognition by squatters that, despite the agency (ITERPA) is quoted by Cowell as fact that they will lower their current standard of follows: living by invading the land, their future looks brighter on the new land than in alternative Tax incentives were for a time very employment--the NPV to squatters reaches zero. prejudicial to the region. When Para was Thus, starting in year 5, increasing numbers of isolated from the rest of Brazil, our land had squatters begin to invade the unoccupied or no value. The occupants of the land didn't abandoned land of the capitalists. This is the even bother with title deeds. But with the first abandonment--capitalists are perceived to opening of the Trans-Amazonica and Belem- abandon their ranches and agrobusiness Brasilia highways, and with the military schemes. In fact it was premature to initiate government's plan of national integration, them as going concerns. The schemes were 30 Part H.i The Determinants of F,ofitier instability primarilv intenidedfor speculation. on management and financial capital if they are By the mid-1980s most of the large capitalist to actively work the land. Holding the land until schemes had been expropriated. Many became the frontier advances is feasible only if the cost the INCRA-settlement schemes reviewed by of tenure security is low relative to expected FAO/UNDP/MARA and discussed above. By productivity gains. Generally, large officially this time, govermnent had established a established ranches were abandoned and later substantial presence and, on the INCRA projects expropriated by INCRA, creating the public at least, ownership was relatively uncontested. settlements reviewed above. The reason was Even if formal titles were not issued, both public that the economic activity was premature and and private agents recognized existing formal waiting was too costly, given the high cost of and informal documentation. This emergence of protecting property rights. respect for property ownership, enforced by the With the advance of the frontier, formal sector police power of the state, moves us back to the agents (the capitalists described in site PA3, para middle graph. Here again, it pays for capitalists 32) can now own land without fear of invasion. to buy land, but prior to year 17 they lose Goverment has picked up responsibility for money if they actively farm it. Thus, as we saw tenure protectioni. Like the premature ranchers. moneyf they ascrtively' ofar it. Thus,as we sraw however, these agents require a higher return on in the descriptionis of niew owners in Moran, thi iaca n aaeet ast ta h Ozorio de Almeida. and FAO/UNDP/MARA, tlaeir ficancial a td nanagehent assets than the many of the new owners are urban-based land can deliver. Although they fully expect the formal sector representatives, with relatively land to produce profit after further development good access to capital markets. Their purchases of the frontier, active farming now would are investments. Thlis is the second represent a loss if opportunity costs are are inveslnients. This itn ls thein tenure considered--it would be "premature" economic abandonment--with improvement i teue activity. " For these form-al sector owners, the securint; capitalists canl safely buy out squatters netprst vl of the lan s higersi the antid let the land stav unused until market - p v o conlditions imTlprove. Note that in either wait to initiate economic activity (or do wlhat is enforcement regime, capitalists will begin to theoretically the same thing, sell to others who activelv farm after year 16, when current do). While the previous abandonment is incomes exceed their opportunity cost. The associated with the recognition by formal sector difference is that under a regime of government agents that government will not carry the costs enforcements they will buy out squatters as soon of protecting ownership, this abandonment as government tenure enforcement is effective, occurs when the opposite happens--formal sector but will not actively farm until year 17. agents recognize that they do not have to occupy Without governmient tenure enforcement, land any longer in order to own it. squatters will stay on the land until year 17, the Policy Implications. The most important period when capitalists will buy them out and overall implication is that pressure for Amazon continiue farming. " In either case, farm developnmeint will conthinue. Even thoughm consolidationi will take place--a process readily urbanization and an aging population have observable in the maturing frontiers of the drbaaticl rud migrator prsureton the Amazon. dramatically reduced migratory pressure on the We can sunmmarize the discussion above as Amazon, the relative econonmic success of follows, Changing or poorlv defined property- settlers will not go uimoticed. Future policy will rights regimes are critical in explaining the have to strike a balance between growth and paradox of relativelv high incomes to colonists environmental protection. Good policy and simultaneous abandonmenlt of land. outcomes will require accurate diagnosis. Occupation only pays for those nienibers of icluding the following strategies: society with the lowest opportunitv cost. Efforts to sell prematurely, or give, large areas of land * Much more field-based work must be done to to select groups, inevitably falter; formal sector identify the determmiants of success and economic agents require their opportunity cost failure in Amazonian agriculture, and to Part H.i The Determinants of Frontier Instability 31 evaluate overall economic performance. This 2. Insufficient attention has been paid to secondary analysis raises serious issues concerning the growth. A broad inventory of the nature of relative importance of socioeconomic and secondary growth in the Amazon and the conditions agronomic factors; these will require giving rise to it would be a key input in developing investigation through extensive field research. a more realistic assessment of both the economic and * The role of government at the frontier needs environmental futures of the Amazon. to be seriously reevaluated, especially as 3. For example, under economic pressure from regards allocation of property rights. From labor shortage and low crop prices, farmers in the point of view of equity, efficiency, and Rond6nia are uprooting tree crops, planted to provide public order, the most serious policy mistake a sustainable income, in order to establish is to allocate indefensibly large holdings. unsustainable pasture. * Allocating initial property rights to first 4. We use the words "yield" and "income" settlers has two important advantages: It interchangeably. In no-input or extremely low-input promotes (a) equity because early arrivers are agricultural systems, yield can be taken as a most disadvantaged, and (b) orderly evolution reasonable proxy for income. of property rights because, unlike formal 5. Rates of return at this level (on low-risk sector agents, early settlers establish a investments) are clearly not sustainable for long presence on the land. By making this policy periods of time. Arbitrage will inevitably close the official, government presence required to gap to levels approaching international norms. In the enforce property rights is minimized. case of Brazil, rates reached this level as a result of * Providing formal title to early settlers extremely tight monetary policy intended to control provides improved access to credit, thereby inflation. Since fiscal policy was not brought under reducing the probability that differential control, however, and many in the business discount rates alone will lead to farm-size community used the treasury bill rate as an indicator consolidation. As long as credit rationing of future inflation, the policy has not been successful. exists, however, banks will continue to The recent run-up of asset values in the Brazilian allocate credit preferentially where transaction stock exchange is certainly consistent with the costs and risks are minimized--to large, expected arbitrage behavior. urban-based, formal sector customers. 6. This sequencing of land use gives rise to the e The two most direct ways to reduce the rate "Von Thunen Rings" for which we best remember of forest conversion are to: (a) increase the Von Thunen. opportunity cost of marginal workers; and (b) 7. We emphasize in the economy because we are control the rate of expansion of the road interested here in those people who consider their network in the Amazon. Increasing the alternatives in the developed economy, not tribal opportunity cost of marginal workers requires isolates. 8. This projection is two fundamental changes in the Brazilian probably a very low underestimate. A larger society. First, sufficient macroeconomic discount rate for the informal sector only strengthens stability must be recovered for the private the results derived below. sector to make medium- and long-term 9. op cit., page 27. investment. Second, primary and secondary 10. Note that the technician in PAI stated that there education, long neglected in Brazil, must be was less, not more, turnover where access was vastly expanded and improved. poorest. This behavior suggests that we should be very wary about accepting a technician's Notes interpretation of events. As we have seen throughout, the demand for land by second generation 1. As will be developed below, land abandonment settlers appears to be a stronger motive for turnover in this context does not necessarily imply the than low incomes. relinquishment of ownership. It may represent the 11. Looking at the map of Brazil, one is struck by current cessation of agricultural activity with the the correspondence between areas of concentrations intent to renew activity in the future. of fiscal incentives and agrarian violence. 32 Part II: The Determinants of Frontier Instability Essentially, the fiscal incentives system allocated lowest opportunity costs (squatters). indefensible property rights. Owners didn't want to 12. I owe this term to the paper by Anderson and occupy the land because occupation turned out not to Hill (1990). cover opportunity costs of labor (management) and 13. Gasques and Yokomizo, op cit. For an financial capital (see Gasques and Yokomizo, 1986), English-language summary of the major findings of and government didn't have the will or the means to this report see Schneider (1992), pages 36 and 37. enforce property rights. The result was invasion of 14. Adrian Cowell (1990). undetensible land holdings (ranches) by those with PART III GOVERNMENT ARRIVES Introduction (see Chapter 2). In this case farmers may farm at a loss (in opportunity cost terms) in order to The role of government in frontier areas win in the "race for property rights"2--that is, to deserves careful analysis. First, government is be the first to lay claim to uninhabited land. a critical determinant of the quality of frontier For a farmer to accept a return on his resources expansion. On the one hand, government below their opportunity cost represents a loss to policies can encourage environmentally society--this is "premature" settlement. Society destructive and economically wasteful mining of would be better off if the farmer would remain the natural resource; on the other hand, in the more developed part of the country government could encourage stable communities (earning full opportunity cost) and move only based on sustainable activities. Second, the cost when be could be made more productive on the of frontier economies created or supported by frontier. This can only happen if occupation is externally financed government must be not necessary to maintain property rights. This evaluated relative to the expected benefits. in turn requires that the government enforce Transfers to support government in frontier property rights for everyone--including those of states is an investment in the development of "speculators" who purchase land and stay in the frontier economies. The eventual quality of that cities waiting for the frontier to advance. development, in terms of employment and quality of life in stable communities, ultimately Thus, one way to prevent premature settlement determines the wisdom of the investment. is for government to guarantee enforcement of property rights. In such a property-rights The Role of Government and Efficient regime, entrepreneurs would buy land and hold Settlement. There are four major classes of it until it would repay economic use. Since the efficiency losses at the frontier. These can be land would remain unused substantially after its classified as (a) premature governrment, (b) present value turned positive, there would be premature settlement, (c) tenure insecurity competition for the land. Government would inefficiency, and (d) environmental externalities. have to enforce the ownership rights of the legal owner. Since this condition requires Premature government occurs when government expenditure, the key question is government's investment in the economic whether the expenditure to enforce property activity of an area occurs too early relative to rights is less than the efficiency losses from the underlying dynamics of frontier premature settlement. We will argue below that advancement.' In its fundamental activities as a well-conceived settlement policy can minimize enforcer of contracts, protector of law and both the size of frontier government and the order, and provider of minimal social efficiency losses from premature settlement. infrastructure, government provides an essential element in the production relations of an area. Land tenure insecurity causes inefficiency In some cases, however, the cost of government whenever it leads a farmer to forgo a profitable is far out of proportion to the current or investment he would otherwise have undertaken. expected value-added of the region. In these Classic examples of such investments are farm cases government expenditure can be considered roads, wells, permanent crops and high-quality premature from an investment point of view. pasture. Premature settlement takes place when labor Efficiency losses from externalities come both and capital occupy frontier land before the from insecurity of tenure and from lack of a returns from the land can repay the factor's market in environmental values, principally opportunity cost. This situation occurs when biodiversity and carbon sequestration. With occupation is a condition of future ownership regard to tenure security, preliminary 34 Part III. Government Arrives econometric results from a study in Para confirm acting on the making of environmental policy in that, all things being equal, titled farmers the several levels of government. deforest less than those without title, although as would be expected those with more security put Characterizing Frontier Government. The more land in pasture and permanent crops. This agricultural frontier is characterized by an behavior suggests that at least some deforestation abundance of land relative to people. It is also is undertaken to strengthen the claim to the area where market-oriented economic ownership rather than to put the land into activity first becomes viable. These simple facts economic use. This practice creates both a condition much of the behavior at the frontier: premature economic activity to the landowner the choice of technology (land extensive, labor and an environmental loss to the larger society.3 saving), the nature of early settlers (low The more important environmental-externality opportunity cost, low human capital), the nature related efficiency losses come through lack of of property rights (weak, increasingly markets for biodiversity and carbon contested), and the quality and orientation of sequestering.4 Although the value of government. information embodied in genetic material is In some settings frontier governments emerge. undoubtedly large, it is impossible at present to This formulation occurs when population growth estimate it. Some basis exists for estimating the in areas beyond reach of formal government carbon sequestration value of moist humid creates conditions where people work together to forest, however, based on the relatively well- achieve common objectives. In other settings known carbon content of the forest and various governments are imposed, sold, or even measures of the value of sequestered carbon. transplanted. Imposed government is typically This estimate is made in Annex E. The the result of military or security considerations. estimated carbon sequestration value of Amazon Government is sold when private colonization forest land is in the range of $600 to $7,000 per schemes provide both land and the functions of hectare. This value compares with its market government (roads, schools, hospitals, tenure value (presumably based on its value in security, and law and order). Finally, in a agriculture) of $2.50 to $300 per hectare. For number of notable cases government arrives at example (see Annex E for calculations), the the frontier transplanted from elsewhere by inability of people in Sweden (who currently pay ethnic and/or Utopian groups (Japanese in Brazil a carbon tax of $45 per ton of carbon released) and Bolivia Lowlands, Hutterites and to transact with farmers preparing to clear land Mennonites in Bolivia Eastern Lowlands and in Brazil represents a global welfare loss of Paraguayan Chaco). more than $4,500 per hectare of Amazon forest In the context of determining the quality of cleared for agriculture.5 frontier growth, the distinction between The remainder of this chapter develops emerging government (at the economic frontier) preliminary policy recommendations for and imposed government (beyond the economic improving settlement efficiency based on an frontier) is critical. While emerged government appreciation of the economic and political setting is a product of the frontier economy, imposed of frontier governments. This analysis is government creates an economy where one preliminary, based on considerable theorizing would not otherwise exist. What government is and relatively little data. But the data that is asked to do in the two cases differs currently available supports the theoretical considerably. What government ought to do conclusions drawn. Hopefully the 1990 census differs also. data, when available, will facilitate a wider The following sections (a) explore the analysis of these issues. In addition, a separate coevolution of economic rent, property rights piece of sector work will be forthcoming from and government; (b) contrast the stylized the World Bank in FY94. It will be based on a characterization of evolved government with the thorough analysis of the political constraints case of imposed or imported governments; Part III. Government Arrives 35 (c) summarize the major conclusions from the costs and potential income streams grow-- analysis; and (d) draw out the major policy relative land scarcity and true economic rent conclusions. emerge, and land becomes an item worth fighting over. Emerged Government Government Emerges. With competition for The relationship between the emergence of land intensifying, settlers must strengthen their economic rent to land and the emergence of the claims to land. Settlers might deforest: Cutting demand for some form of government is nearly timber marks claims clearly, and increases the perfect. In early frontiers, clarifying and visibility of squatters should they attempt to enforcing property rights is one of the earliest invade.6 It is expensive, however, and results functions of emerging government. The need in a dissipation of some portion of the economic for collective action to enforce property rights value that was beginning to emerge. The more increases with increasing value of land as the valuable the land becomes, the more competition frontier moves forward. Understanding this arrives, and the more expensive it becomes for evolution of local government, and its established settlers to protect ownership. In an relationship to central government, can provide effort to reduce these investments, and to important insights into the strengths and increase the effectiveness of land security weaknesses of policy initiatives. measures, early settlers coordinate efforts, forming into cooperatives, associations, and Rent Emerges. Recall Figure 2.4. The point landowners societies--all designed to strengthen on the land rent gradient where the marginal members claims to the land and discourage laborer is as well off as he would be in his best competition. These associations represent the alternative employment (covers his opportunity emergence of government--a government whose cost) can be considered the economic definition costs arejustified by the need to lower the costs of the frontier. It is here that the marginal of tenure security and thereby to allow the laborer begins to integrate the national economy surplus (true economic rent) to accrue to the into previously unexploited areas. Note, landowners. however, that since he only manages to cover As formal government becomes increasingly his opportunity cost, he is relatively indifferent effective the role of voluntary associations in the with respect to his ownership of the land. Since direct provision of services dwindles. These he has no competitors for land (remember he is associations remain important vehicles for the marginal laborer), he can farm unimpeded empowering local populations vis-a-vis formal by concerns over land security. As roads government, however. improve, transportation costs fall, and markets Table 3.1 summarizes this emergence of grow, the potential value of this settler's land increasingly formalized government, with begins to increase. Its net present value (NPV) relatively informal collective actions gradually now exceeds both his opportunity cost and that being replaced by formal ones. Government of other low-opportuinity-cost settlers. services can be roughly divided into tenure- Competition for land begins to emerge. Since related services and community services. formal government is weak or non-existent, the Tenure services emerge first, induced by the rules to manage this competition are established need for early settlers to protect their land from locally. For example, as long as the potential other claimants.8 As experience is gained with income stream is perceived as being low relative collective organization, the transactions costs of to the opportunity costs of potential settlers, the further collective pursuits are lowered and other initial settler may need only to mark his cleared (pre)goverrnent services emerge. As formal area. To a newcomer the land isn't worth a government approaches, with external support, fight--he can always settle on the plot next door. direct protection increasingly evolves into As transportation continues to improve, collective representation in the relevant, yet still however, the difference between opportunity distant, government institution. Table 3.1: The Emergence of Government Function 1 Private Inputs | Associative Inputs | Government Inputs |_______ _ I(Pre-Government) (Emerging Government) l l Ten lure Services Definition Stake, Clear Boarders, Burn, Survey Survey Fence Documentation No formal mechanism Landowners' associations, syndicatos, Government Registry of deeds cooperatives, cattlemen's associations (Cartorio) Adjudication Conflict unlikely, land has no Above groups represent members' Formal legal representation necessary, value interest in (relatively) distant government government represented locally institutions Enforcement Not necessary, land not desired by Above groups, private police and/or Formal police power of government others vigilantes Comm munity Services Ag extension Not performed--settlers use Some groups develop excellent research Private sector may become primary techniques from origin and extension (Mennonites, Japanese) vehicle Marketing Lack of marketing imposes Cooperative or Association builds and Cooperatives commercialize; private subsistence strategies finances roads; cooperative marketing sector moves into most profitable channels may emerge areas; governments become drawn into the losers Education Little education except within Cooperatives hire teachers, Communal Government provides education, family groups (Mennonites, Japanese) develop quality depends much on in emerging teacher from within urban areas llealth No health care Government provides some primary Government provides primary health health care, only communal groups care, some secondary care available develop some secondary health care but quality is low Transportation Settler has no direct road access Association maintains road; road usually Government has primary responsibility constructed by loggers for construction and maintenance of roads. Part III: Government Arrives 37 "Sustainabilitv" and the Role of Govermnent profitability. Extensive roads opening up new on the Frontier areas for exploitation, will, by putting more land on the market, reduce the price of currently Government has much to do with whether or accessible land. not frontier settlements are "sustainable." For Credit policy determines the supply of financial settlerient to be stable, government must prevail resources available to bid the price of new land against the economic forces which tend to to equilibrium.9 Road building on the scale of promote transience. As discussed in Chapter 2, the Transamazonia, Belem-Brasilia, and Br 364 the effects promoting transience at the frontier in Brazil, or the road building associated with are the "mining effect," imediatismo, and the the opening up of the Eastern Lowlands in "sell-out" effect. The mining effect results from Bolivia, put massive quantities of land on the cheap land due to abundance. Imediatismo market relative to the capacity of credit markets results from high rates of time preference to permit the bidding of this land to a market partially explained by credit rationing. The equilibrium price (consistent with eliminating "sell-out" effect results from the fact that people excess profits to all factors). The result is that with low opportunity costs are the most likely to land remains underpriced for long periods of be early settlers at the frontier; these people, in time relative to what it should be at reasonable the absence of specific actions by governrment, discount rates. will predictably sell out to those who arrive later. Ineffective land tenure and collateral policy There are several implications for the role of typically represents the major market failure that government in promoting stable settlement. prevents the rapid convergence of land prices to First, any act by government that increases the "economic" levels (where rent disappears). No supply of new land, or reduces its cost, will bank is willing to accept rural land as collateral increase the mining effect and tend to undermine as long as rural land ownership is not legally the stability of existing communities and documented and undisputed and systems to economic activities. Also, unequal access to adjudicate land disputes are ineffective. government services and credit markets (between Mortgage markets are essential to permit land early arrivers and the more highly educated, prices to be bid to equilibrium, and to permit urban-based population that follows) will access by small farmers to capital for expansion. promote transience and continued expansion of the frontier through both the imediatismo and the The lack of mortgage markets has negative "sell-out" effects. effects for both equity and the environment. It is inequitable because the relatively privileged Policies to Reduce the Mining Effect. If people in society with their own capital or access nutrient mining is caused by cheap land, then the to outside credit can purchase large quantities of most direct way to reduce it is to avoid underpriced land while successful small farmers government policies that lower the price of land. cannot use their proven production record to Three classes of government policies determine access credit for expansion. Negative fundamentally the price of land on and near the environmental effects occur because underpriced frontier--roads, credit, and land tenure policies. land (relative to its economic value) is used too A fourth policy, zoning policy, can combine extensively. In addition, since in areas with elements of the other three. These policies are insecure land tenure ownership of land must be discussed below. ensured through occupation (see Chapter 2), the combination of cheap land and the incentive to Roads policy can either raise of lower the price minimize costs of occupation tends to bias land of land. Intensification of the road network use toward premature deforestation and increases the price of adjacent land through ranching. reducing transport costs and increasing farm 38 Part III: Government Arrives Policies to Reduce Imediatismo. Imediatistas borrow from a moneylender at 100 percent, the (people with short time horizons) can be divided effect on relative rates of time preference is into two groups: those who, whether due to overwhelming. In household surveys the need desoeration or predisposition, have exhausted for money to deal with illness and family crises any possible source of credit and no longer have emerges repeatedly as a reason for selling out any hope of obtaining credit in the future; and and moving forward. Other services also those who borrow (and repay) and who make materially effect the relative valuation. For decisions based on the prevailing interest rates. example, the urban entrepreneur may know that The first group will be insensitive to government he can get secure title, while the settler is kept policies affecting the interest rate; they are likely in doubt whether or not the land titling agency to be found at the extreme limit of the economic will ever deliver the promised title. Similarly, frontier and are likely to rapidly become chronic the extension service may be more comfortable nutrient miners. Credit policy has little or no dealing with well-educated entrepreneur farmers, influence on their activities. The second group, and in fact, the techniques promoted by the on the other hand, faces credit markets linked extension service may be only accessible to the directly or indirectly to the formal credit system. relatively well capitalized. More generally, all For this group any policies effectively lowering these factors combined make the land worth interest rates (implying the attainment of an more to the relatively well-off, educated urban overall macroeconomic balance) would help. businessman than to the uneducated rural settler. Other possible polices that would help include Other government "stabilizing services" reduce encouraging thz- mobilization of savings in rural transience. Stabilizing services, such as health, areas through credit cooperatives or branch education, and community services are important banking, combining the taking of deposits and incentives for families to stay put. It is short-term lending, and developing the capacity noteworthy that these services typically have to to judge the credit-worthiness of smallholders. do with providing health and education to children. Policies to Reduce the "Sell-Out" Effect. The sell-out effect on an early settler will be Zoninig is an attractive mechanism to direct reduced by all policies that reduce the relative government policies to address some of the attractiveness of selling out to a (typically urban- policy issues addressed above. It can be based) late arrival. Two classes of policies can particularly effective in ensuring that new road influence this decision. The first class consists construction is designed to intensify the use of of policies that influence the economic value of existing accessible land, rather than expanding the land to the current owner relative to the the road network. Similarly zoning can price offered by the prospective buyer. The concentrate stabilizing services in development second class consists of provision of "stabilizing areas. If effectively planned and executed, the services." Such services would provide policy should substantially reduce the mining nonmonetary benefits in the current region that effect of cheap land. Unless differential access would unlikely be available if the settler were to to services between the advantaged and sell out and move farther out toward the disadvantaged can be reduced, however, later economic frontier. arrivals will continue to buy out the early settlers. The latter, in turn, although with more Differenitial access to governmilenit services is cash in their pockets, will have fewer options for probably the major factor influencing the relative starting a new life. value of land to the early settler and the prospective buyer. As shown in Chapter 2, the Sunmary. In summary, government can relative rate of time preference is fundamental. promote stability by providing stabilizing If the prospective buyer can mortgage urban services to early settlers--principally education, land at 10 percent while the early settler must health care, and land tenure services, and by Part III: Government Arrives 39 ensuring that other services are at least as states and local government. Extending new accessible to the relatively disadvantaged as they roads is a different issue, however: for the are to the advantaged. This policy is consistent reasons discussed above, road extension into with both an environmental and equity objective. new unexploited lands is generally not in the The environmental objective is promoted national interest. Nevertheless it is likely to because more services to the relatively have widespread local political support. disadvantaged early settlers makes them less Table 3.2 reviews briefly a number of other likely to sell out. The equity objective is environmentally relevant services and policies. achieved because their current incomes are Environmental zoning, for example, is likely to improved, and if they do sell out they demand a be resisted by both the elite and the poor as higher price than they would in the absence of a limiting their economic options. Despite strong favorable provision of government services. support at the national level the prospects for Zoning can be effective in intensifying land use success on the local level would be low. One in developing areas. It cannot be expected to way to develop support is to create winners, prevent buyouts and farm consolidation. through concentrating government services in current high population areas zoned as Decentralization, Popular Participation, and agriculture (preferably including both numbers Institutional Incentives. Decentralization and and local political influence). The voice of the local participation are increasingly popular winners must clearly dominate the opposition of themes among government and multilateral the losers, however. Although this winning policymakers. The popularity of these themes majority may occur at the time of the initiation risks creating a "some's good, more's better" of the zoning project, losers are likely to find a mentality, where more decentralization and more political voice over the medium term.'" popular participation is always considered to be As described above, it is in the national preferred to less. Serious students of interest to improve land tenure services in areas government and public finance know better; where the frontier is expanding. Local support local groups predictably vote their own interest-- is not guaranteed, however. As described in even when it is not in the best interest of a Chapter 2, in the absence of a smallholder larger public. The "not in my backyard" settlement policy, improved tenure services can syndrome is well documented when it relates to be expected to increase speculative holding by citing waste facilities, prisons, half-way houses, outsiders. This trend may be efficient (because etc. The syndrome can be generalized to all it reduces premature economic activity) and issues where local interests are likely to be at environmentally preferable to current policies variance with the interest of the wider public. (which implicitly or explicitly encourage It is possible to use the analysis developed deforestation for purposes of establishing above (and in Chapter 2) to predict the political property claims), but it would not receive local interest in the provision of various government support once outsiders began buying up services. This approach, in turn, predicts the substantial amounts of local land. A policy to likelihood that these services will be preferentially allocate public land to smallholders conscientiously carried out by the various levels (with full tenure services) may or may not be of government. For example, building local supported by local elites, depending, inter alia, roads is an appropriate activity for local on the amount and location of the land. The government (states and municipalities). There policy could be expected to be enthusiastically are no local interests likely to be opposed, the supported by the poor, however, and, as activity promotes the national interest by outlined in Chapter 2, would minimize the intensifying agricultural activity, and there are government expenditure required to establish an substantial advantages in having such activities efficient and peaceful settlement policy. planned and executed locally; it is a natural Increased credit to urban elites is politically activity for the federal government to devolve to popular. Because it puts pressure on the local 40 Part III: Government Arrives land markets, it increases the options of the Imposed and Transplanted Government relatively poor, first-generation settlers (through increasing the probability that a bid will be made As suggested in the previous sections, frontier on their property, as well as influencing the bid growth is often imposed from a relatively remote price). Because it increases the high probability central government, rather than spontaneously that the early settler will be bought out, move, emerging as a response to economic opportunity. and repeat the process, increased credit may not In this section we argue that (a) imposed be in the national interest from an environmental government is likely to be premature from an standpoint." economic investment point of view, (b) unlike in Environmental restrictions on logging and frontier areas, settlement induced by imposed forest clearing (for agriculture) finds few government will be relatively stable, and (c) supporters at the state and local level.'2 decentral-ization of government in favor of Possible future negative environmental effects imposed states (and subsequent induced are generally considered too far in the future and municipalities), may not be in the national too uncertain to justify a loss of current interest. incomes. Because politicians gear their agenda to the electoral cycle, they have every incentive Premature Government. How long should it to encourage current economic activity. For take to show a return on frontier government? them more logging and agriculture means more Central government expenditure in frontier tax revenue (through the ICM), and through government can be seen as an investment in the population groxth a greater share of the Federal future economy of the region. 13 One way to Participation Fund revenue, and more political measure the effectiveness of government as an power. investment is to compare the state or region's The national interest in rationalizing the net (of taxes sent back to the Federal exploitation of forest and land resources suffers Government) expenditure to its overall value- from an inability to argue its case persuasively. added (GDP). Where this ratio is large, Although the economic activity stimulated by government represents the main source of forestry and agriculture is evident in the economic activity. Where the relative size of Amazon, the possible long-run loss due to government is large initially, but falls rapidly, environmental degradation and/or externalities is states are "growing up"--losing their dependency much less concrete. In particular, there is a on transfers from outside the system. States justifiable resentment that the largest benefits where the share of government remains high, from restrained exploitation (greenhouse gas without sign of emerging independence, are restrictions and biodiversity protection) are probably premature from an economic point of incurred long in the future and at the global view. In these states government expenditure level, while the costs are to be borne now by the has failed to create the preconditions for self- local populations. sustaining economic growth, either because their It is likely that government services improving remoteness currently makes the states human capital and quality of life (recreation, economically unviable, or because the mix of culture, health care, education) can do much to government expenditures has been wrong to encourage stability and discourage migration. promote independent, private sector, economic These services are in the interest of all levels of development. government. They create a more productive Table 3.3 presents the share of government in population, raise the reservation wage of the GDP of the Brazilian Amazon states and of potential migrants, and tend to promote a more comparators in other regions. While the intensive land use. intraregional pattern is one of the South and Part III: Government Arrives 41 Table 3.2: Political Support For Various Government Policies and Services Government Service Local Interest National Poor Elite Interest Intensify Existing Road Network Yes Yes Yes Extend Road Network Yes Yes No Environmental Zoning of Land No No Yes Zone and Concentrate Services ?? ?? Yes Improve Land Titling and Tenure ?? ?? Yes Services Allocate Public Land to Smallholders Yes ?? Yes Increase Credit to Urban-Based Yes Yes No Entrepreneurs Increase Credit and Extension Services to Yes No Yes Small, First Generation Settlers Impose Environmental Restrictions on No No Yes Logging Impose Environmental Restrictions on No No Yes Farming Improve Community Services Yes Yes Yes (Recreation, etc.) l Improve Education Services Yes No (Uses Yes Private) l Improve Health Care Services Yes No (Uses Yes Private) Southeast supporting the economies of the included were it not for the artificial support North, Northeast, and Centerwest, there is at the provided by the Manaus Free Trade Zone. As same time considerable evidence that the North Table 3.3 shows, in these states govermnent has and Centerwest are "growing up." The grown faster than the economies, leading to an Northeast, on the other hand, appears not to increase in the share of GDP represented by have reduced its dependency on federal government expenditure. In Roraima, according transfers. '4 to the official statiscics, net transfers to state The Amazon states can be clearly divided into government exceeded the entire value-added of two groups. For states located beyond the the state. In Acre also, the role of government frontier, dependency has grown over the 10-year grew much faster than that of the private sector, period; for those currently on the frontier, with government growing from 46 percent of dependency has decreased sharply. GDP to 79 percent of GDP. In Amapa, the Beyond the frontier are Roraima, Amapa, and share of government was already high in 1975 Acre; undoubtedly Amazonas would also be (78 percent of GDP) and increased to 84 percent 42 Part III: Government Arrives Table 3.3: Growing Up? Net Federal Transfers as a Percent of State/Regional GDP (1975 and 1985) Region/State 1975 1985 States Beyond Roraima 58 109 the Frontier-- Amapa 78 84 Imposed Government Acre 46 79 States on the Rond6nia 21 6 Frontier-- Currently Para 21 6 Government Mato Grosso 21 5 North 24 10 Northeast 1 1 12 Regions Centerwest 6 4 South -3 -2 Southeast -8 -10 Memorandum Item Amazonas 21 1 Source. Governmtent erpenditures and revenues for 1975 and 1985 are from Fundacao Getulio Vargas (FGV); state and regional GDP are from IBGE. of statevalue-added by 1985. increased its dependency from 11 percent of its The frontier states--Rond6nia, Para, and Mato GDP to 12 percent of GDP, despite progress in Grosso--have made substantial progress towards the (largely) Amazonian northeastern state of self-sufficiency, both reducing their dependency Maranhao. The question "how long should it on the Federation from 21 percentage points of take for states to grow up?" cannot be answered. their respective GDPs to 6 percentage points of Clearly a relatively long period of investment GDP.'5 The largely Amazonian state of Mato could be justified if the expected future return Grosso has also dramatically reduced its were sufficiently high. Such performance is dependency, from 21 percentage points of its unlikely for the remote states of the Amazon. GDP to 5 percent of GDP. For the other Amazonian states, however, the This progress in Rond6nia, Para, and Mato decrease in the rate of dependency has been Grosso compares favorably in both direction and rapid and substantial, although from a much level with progress in the Northeast, which lower dependency base. Further analysis should Part III: Government Arrives 43 explore the earlier dependency levels of previous protect/exploit high-value natural resources. frontier states and the rates at which they "grew Because of remoteness, few if any activities are up. "16 economically profitable if not based on either (a) directly or indirectly supporting government Farm Stability. The poor economic (providing food and services for government performance of the imposed states (Roraima, employees), or (b) mining (gold, cassiterite, Amapd, and Acre) has a corollary in farm trees). From the standpoint of economic turnover and agricultural stability. As discussed growth, investment in these regions is in Chapter 1, in consolidating frontiers early premature--growth is limited to derived demand settlers tend to be bid off the land by recent, from government and mining. Government urban-based immigrants with better access to expenditure in these areas should be confined to capital and government services. These recent (a) efficiently achieving the primary, strategic formal-sector-based immigrants, in turn, become objectives, and to (b) efficiently maintaining and attracted to business activity on the frontier only improving the quality of life of those who are when it reaches a critical level of consolidation. consequently attracted to the area. The strategic This description characterizes the consolidating objectives, which justify the creating of imposed frontiers of Rond6nia, Para, and Mato government in the first place, are national. The Grosso. 7 On the other hand, as Table 3.3 incentives to carry them out efficiently and indicates, in Acre, Amapa, and Roraima, the effectively are incentives that rise out of the level of economic activity is determined not by national interest, and which may well be at entrepreneurship but by the level of government variance with the perceived (short run) interests expenditure. In this economic environment there of the local population. The extremely lucrative will be few potential buyers anxious to bid illegal drug industry, timber mining, mercury- settlers off the land, and existing farms are polluting placer mining, unrestrained likely to be stable. Such an effect is a major deforestation--these are activities that the local explanation for the interest in extractive reserves population and its representation might be prone in these states--it is premature for investment in to tolerate, largely out of appreciation for the activities that will later dominate as transport economic activity they stimulate. These costs fall and labor/land ratios increase. In the activities are clearly not in the national interest, FAO review of INCRA settlement schemes however, and any system that relegates control (FAO, 1992) for example, the only settlement of such activities to local authority risks an scheme that had had no turnover was an overwhelming conflict of interest at the local extractive reserve in Acre. It also had the level. second lowest level of income and the lowest Quality of life and human capital expenditure, accumulation of assets (see Annex C). on the other hand, are better allocated at the local level. Decisions concerning the Decentralization, Expenditure Composition, appropriate composition and nature of and Institutional Incentives. Who should make educational, health, recreational, and cultural decisions about imposed government? Does services, are best made at the local level, by decentralization of government functions and those who understand best their own needs and increased autonomy of state and municipio aspirations. It is appropriate that local political governments make sense in economically mechanisms determine the composition and dependent states? Yes, some decentralization nature of these services. makes sense, but much less than it does in states As has been noted repeatedly, investment in with independent and sustainable development economic development in extra-frontier states is sources. a priori a losing proposition." National Government is imposed from without for government that sustains the economic life of ex- strategic and/or military reasons--e.g., to frontier states must be ever wary not to forget establish sovereignty, control illegal activity, or this fact, or else it will be drawn into financing 44 Part III. Governmetnt Arrives local developmental schemes. These schemes 5. It may be that the Swedish tax of $45 has will generate employment and wealth for the revenue objectives as well as greenhouse gas reducing participants, but the chance of economic objectives. An alternative comparison would be to sustainability is minuscule. use the "medium" greenhouse damage estimate of In sum, the following considerations should Prof. Nordhaus. This calculation leads to a welfare determine the federal-state-municipio expenditure loss of $500-$800 per hectare when Amazonian forest is converted to agricultural land. shares and composition: national interest is g 6. This explains why deforestation is so widely dominates In extra-frontier states; quality of life accepted as strengthening claim to title. In general and human capital expenditure is most efficiently these laws have only codified locally established, allocated at the state and local level; and commonsense practices. government investment in local/regional 7. The role of syndicatos and church groups in economic development (as opposed to human organizing squatters in Brazil is well known. capital formation) is unwarranted (premature). Readers may need to be reminded of the U.S. These considerations should be embodied in any history, however. An observer in 1830 described the mechanism that determines the revenue sharing following activity of a land claims association: between the federal govermnent and ex-frontier states. The citizens occupying this land, together with a few others, have held a Notes meeting or convention, and entered into written and solemn resolutions to prevent all, and 1. Sometimes governments are imposed purely for every person, whatsoever, from viewing or exploring the land previous to the day of sale. They have national defense or other strategic reasons (interdicting drug trafficking, for example). This pledged themselves to do this by force of arms, they analysis does notonceniselfwihave further resolved for one individual in each analysis does not concern itself with these cases. Military occupation would probably be found to be township to bid off the whole of the land that they or the least-cost o in analysis of altem,ative any of their body may wish to buy, and the balance means of meeting these objectives rather than of their company to be armed with their rifles and mreanso eting thes-scal e frontiergob es, raThere tn muskets before the land office door, and shoot, creating full-scale frontier governments. There is also a case for well-defined government intervention instantly, any man that may bid for any land that they to protect the land rights of indigenous peoples. want. . . . In consequence of the large body that is While the analysis is based on the assumption that united, and their determined violence, they have, and there are no preexisting ownership rights, the will keep every individual from examining or buying sustainability of this assumption cannot be taken for the land. granted, as evidenced by the belated and costly One resident of Fort Dodge, Iowa, recalled that the recognition of indigenous rights in places such as local association advertised "that any one Maine, Canada, Australia, New Zealand and attempting to Settle on any Lands Claimed by anv Indonesia. 2. This term comes from the title of a paper by Member of the Club Would be dealt With by the Terry Anderson and P.J. Hill, "The Race for Club and his life Would not be Safe in the Community." (From Anderson and Hill, quoting Property Rights," in the Journal of Law andfrmHbad19,anGte,97) Economics 33 (April 1990), which discusses the way from Hibbard, 1939, and Gates, 1973.) land ~ teur poice inlene th .fiinyo 8. In the many cases of invasions of relatively idle land tenure polices influenced the efficiency ofelandholdings (especially frequent in Para), the frontiergsettlemenn the Unvit tatelossissma. formation of a form of government preceded the 3. Arguably the environmental loss Is small, atlselmn. Inhsecesheeter however. Unless sustainable forestry is a competitiw actual settlement. In these cases the settlers land use, lack of tenure security probably accelerates land to de e it from ohrca ants deforestation but does not increase it in the long run. f 4. There are other environmental values not traded 9. Equilibrium price is the price where labor and financial capital just receive their opportunity cost or, on the market, such as amenity and aesthetic values, equivalently, all economic rent is bid away. These values are beyond the scope of this paper. Part 111. Government Arrives 45 10. For example, the agroecological zoning project Government also has important interregional equity of Rond6nia appears to balance these forces. The objectives built into its revenue-sharing formula (see similar project in Mato Grosso does not have the Shah and Larson, 1992). It is fair, however, to same concentration of clearly defined winners. It is evaluate the growth performance of the region harder to imagine local support for this project relative to the size of government transfers. enduring. 15. Amazonas cannot be included in these 11. It is not in the national interest if (a) the calculations because of the high amount of implicit environmental externalities are large, or (b) the transfers through preferential trade policies attached transaction of land is consummated only because of to the Manaus Free Zone. With recent steps toward differences in the rate of time preference between the liberalization of trade, the fundamental dependence of credit-starved settler and the elite entrepreneur--with Manaus is becoming more evident. no underlying productive advantage. 16. Since 1985 the distribution of the Participation 12. Licensing, which creates rents, finds some Funds has been altered by the new Constitution. As favor in the state and federal enforcement agencies. a result, the share of the states in the Legal Amazon Restricling the activity, to a level that affects the local has grown from 21 percent in 1985 to 24 percent in economic activity, finds virtually no support at the 1991. This increase took place at the expense of the state and local levels, however. Southeast and South, whose shares fell from 24 13. As suggested in the introduction, the reasons percent to 20 percent, and 6 percent to 5 percent, for central government investment may be more respectively. strategic (militarily or geopolitically) than economic. 17. This does not mean to imply that there are no Nevertheless, it is fair to evaluate the economic new frontiers available in these states. In fact, each return. of them have considerable land not yet pressured by 14. It is important to note that it is unfair (and development. certainly not the purpose here) to focus only on the 18. This is not to say that private entrepreneurs efficiency of government spending from the point of should not invest in ex-frontier areas. It is the view of promoting self-sustaining growth. business of entrepreneurs to take informed risk. ANNEX A CALCULATION OF MAXIMUM NUMBER OF CATTLE ON FARMS BENEFITING FROM FINAM INCENTIVES AND OFFICIAL CREDIT, 1980 AND 1985 Cumulative % Total Rondonia Ac re Amazonas Roraima Para Amapa North Estab.a Cattle Estb Cate Estab. Cattle Estab. I Catwle Estab. Cattle Estab. Cattle Estab. Cattle 1980 No. of units. 1980 8.906 251,419 7,037 292,190 7.571 355.748 1,345 313.881 29.362 2,729,796 619 46,079 54,840 3,989,113 No. of units, 1985 24,639 768.411 9.036 333.457 9,534 420,940 2,058 303,501 44,175 3,485,468 757 46,901 90,199 5,358,678 Credit contracts, 1980 471 -- 159 -- 1,105 -- 485 -- 4.653 - 64 -- 6,937 -- Credit contracts, 1985 1,044 -- 488 -- 971 -- 327 -- 2,619 -- it -- 5,460 -- Percent with contract, 1980 5.3 53.2 2.3 57.2 14.6 64.0 36 85.9 16 83.0 10 53.6 13 78.4 Percent with contract, 1985 4.2 46.0 5.4 66.1 10.2 61.9 16 68.7 16 8(.9 1 23.7 6 63.3 FINANI projects approved, 198( 2 -- 4 -- 21 -- 1 -- 105 -- 3 -- 136 FINAM Projects approved. 1985h 11 -- 20 -- 31 -- 8 -- 228 -- 29 -- 327 -- Percent witl FINAM incent., 1980 0.0 3.2 0.1 4.4 0.3 9.8 0.1 0.8 0.4 20.6 0.5 21.3 0.2 16.5 Percent vith FINAM inceit., 1985 0.0 5.9 0.2 22.7 0.3 15.0 0.4 8.2 0.5 31.1 3.8 36.8 0.4 25.4 A'ote. The table above is the basis for the calculation for Table 1.4. The method is the following. The number of credit contracts and number of FINAM projects were obtained from Banco do Brasil and SUDANI, respectively. The number of farm establishments conies from the 1985 agricultural census. These data are use to calculate the percentage of farms receivirg official credit and FINANI projects. respectively. AssuLiniiiy that large fairms receive official credit anid FINAM projects before small farms do. a line can be drawn on the cumolative frequency distribution of tairn sizes (from tie agricultural census) to divide the farnis that would receivc transfers from those that would not. Since the census reports the cumulative frequency of cattle by farm establishinienits the percent of cattle receivirs! subsidies catt be estimated from ilic perient of farms with subsidies. For the table above the percent of cattle on farms receiviig subsidies is interpolated from the size categories in Table 1.4. On Table 1.4 the Iine separ.nting those receiving subsidies front those not receivinr them is drawn between the nearest farm size categories. a. Nunmber of establishments. b. Cumulative number of projects approved to date. Source. 1985 Preliminary Census, SUDAM (in Yokomizo, 1989). Banco do Brasil. and Ministry of Finance. ANNEX B REVIEW OF STUDIES OF COLONIZATION SUCCESS IN THE AMAZON 1. In Table B. 1, Moran identifies four stages in the evolution of colonization projects. Table B. 1: Moran's Stages of Colonization Stage Settler/Government Activity Observations Evaluation, Spontaneous settlers generally visit and Moran emphasizes that Planning, evaluate sites; settlers in government settlers trust in government Construction and programs are more likely to rely on is generally misplaced-- Recruitment government's assessment. Moran leading to lower success emphasizes that when governments recruit rates in government projects settlers they ignore serious conflict between than in spontaneous projects social and production objectives. where settlers have more Government promises to build infrastructure complete responsibility have been generally unfulfilled. Early Colonization Adaptational "testing of the past"--settlers Moran emphasizes the loss (0-5 years) attempt to reproduce the forms of of social institutions in new agricultural production they bring from settlements--in particular the areas of origin. Moran argues that this importance of social adaptational period is inevitable and that institutions in risk-sharing, governments fail to recognize settlers' labor-sharing, and land priority of survival over yield and tenure. ',efficiency. " Experimentation Stage of considerable land turnover. Successful diversify, (5-10 years) Unsuccessful 25-75 percent of colonists including into urban abandon land; successful begin to enterprises and urban real experiment--expand operations, buy up estate. Stratification between land, invest in equipment and achieve managers and laborers increasing levels of productivity. increases. Consolidation Govermnent allows local populations to take Role of local taxation and (10 years or more) over all the functions of their new fiscal independence becomes communities. an issue. 48 Annex B Table B.2: Ozorio de Almeida's Evidence on Viability of Settlements Settlement Survivors Rice Yield Corn Yield I Value of Land As g. Kg/ha Kg/ha (US$/ha)a jears on Farm No. % 1981 1991 1981 1991 1981 1991 1991 PARA (Official) PACAL 72 74 1097 1765 859 1500 130 248 14 ANAPU- 32 48 1068 1007 704 902 20 59 ') 3 PACAJA MONTE 35 81 1010 1369 941 1500 70 87 25 ALEGRE MATO GROSSO (Private) ALTA 48 63 1541 1390 1527 1573 460 258 1(1 FLORESTA PARA- 20 56 1244 1861 1230 2400 b b )9.5 NAITA MUTUM 17 68 1244 1861 1092 1500 200 398 1I S.J. RIO 10 53 807 ... 1092 15()() 200 267 13 CLARO TOTA L or 234 64 1166 15(02 10()5 1563 19( 219 13 AVERAGE (% increase) .. 29% 55% 15 a. Land values are weighted average of prices of each settlement. b. Pamaita land values are included in Alta Floresta's means. Source: Ozorio de Almeida (1992) 2. Table B.2 presents critical findings of Ozorio de Almeida (1992) related to the viability of agriculture and permanence of settlement. Annex B 49 3. Table B.3 shows the geographical distribution of the settlements sampled in the FAO/UNDP/MARA study. The major results with regard to economic success of these projects are summarized in Table B.4.' Table B.3: FAO\UNDP\MARA Study: Geographical Distribution of Settlements Surveyed. Area Number Centerwest 6 Goids I Mato Grosso Do Sul 2 Mato Grosso 3 Northeast 16 Bahia 4 Ceara 4 Maranhao 2 Paraiba I Pernambuco 2 Rio Grande Do Norte 2 Sergipe I North 10 Acre 1 Para 5 Rond6nia 2 Tocantins 2 Southeast 4 Espirito Santo I Minas Gerais 1 Rio De Janeiro I Sao Paulo I South 10 Parand 5 Rio Grande Do Sul 1 Santa Catarina 4 Total 46 I The numbers of original settlers on the land in Table B.5 are not consistent with the verbal discussion of individual settlements given in the Annex. The latter states that 60 percent of the original settlers have sold out in Pal, 50 percent in Pa2, 40 percent in Pa3, 25 percent in Rol, 25 percent in Ro2, and 40 percent in To2. 50 Annex B Table B.4: FAO\UNDP\MARA Review of Success of Settlement Projects Average Family Income From All Sources (1990-1991) (in minimum salaries) Region Crop Income Animal Imputed Off-Farm Other Receipts Total Income Subsistence Income Income North 0.94 0.73 1.63 0.32 0.56 4.18 Northeast 0.4(0 0.32 0.81 1).42 0.38 2.33 Centerwest 0.74 0.73 1.24 0.37 0t.77 3.85 Southeast (.89 0.39 1 .77 (0.70 (.38 4.13 South 1. 72 ().58 2.(3 0.53 (1.76 5.62 Brazil 0.82 0.55 1.38 ().41 (0.54 3.7(0 Source. FAO\UNDP\MARA (1992) Accumulation of Assets by Settlers Average Values in lGP/FGV-Dla Region Endowments Assets Acquired Percent Percent Accum- Accun- ulation ulation Relative to Relative to Initial Gifts and Per- Prod- Total Own Capital Loansh Total sonal uctive Total Endots- (initial) Goods Assetsc ments Capital North II] 36 147 1( 237 247 168 22 Northeast 59 28 87 2 54 5h69 95 Centerwest 211 43 254 5 224 229 9(( (8 Southeast 126 20 146 4 13 7 141 9'7 12 South III 40 151 13 27(0 283 187 254 Brazil 1()9 37 146 7 176 181 125 168 a. Appropriate explanation. h. Assumes loans are not continuing liabilities. c. Includes all goods financed by gifts and loans. Source: FAO\UNDP\MARA Summary: Incomes, Asset Accumulation and Time on Plot Region Percent Original Average Incomes Average Time Annual Average Settlers (numbers of on Plot (yrs) Rate of Growth minimum wages) of Own Capital (in %) North 79 4.2 7 18 Northeast 99 2.3 15 3 Centerwest 98 3.8 5 15 Southeast 99 4.1 14 5 South 100 5.6 5 26 Source: Based on data in FAO\UNDP\MARA Annyiex B 51 Table B.5: FAO\UNDP\MARA Data--Relationship Between Economic Performance and Turnover of Settlers Percent Initial Incomes Average Annual Average Settlement Settlers Still on (numbers of Time on Plot Rate of Groiwlh of Land (in sample) minimum wages) (vrs) Initial Assets (%) Pa5 47 5.51 6 25 Pa4 64 7.27 6 37 Pal 67 5.79 6 22 To I 67 2.77 4 43 Ro2 78 3.08 3 10 To2 91 2.99 5 25 Rol 92 4.03 4 47 Pa2 93 2.62 10 8 Ac 100 2.02 25 6 Pa3 100 1.68 8 46a a. This hiigh rate of growth reflects an extraordinarily low level of initial assets. Initial assets in dlis settlement were 4 percent of the mean level for the region as a whole, and 8 percent of the initial assets of the next lowest settlement. These numbers should be treated with reservation. ANNEX C MATHEMATICAL FORMULATION TO DERIVE THE "BREAK-EVEN POINTS" The undiscounted income of the sustainable technique is, n yS (A) r=l where Y, is the (fixed) annual yield. Discounted, the series yields y-= E = Ys(1+r) (B) where V5 is the discounted value of the sustainable technique. For the unsustainable technique the undiscounted income stream is, y (l-d), (C) where Y. is the first year yield and d is the annual rate of yield loss. Discounting, this becomes, ,,GE +r) ] a(r +d) Equating these discounted income streams we derive the ratio of incomes at wlhich botlh activities are equally profitable ("break-even point"). Y (I+r) (l+r) _ = r (E) r u r+d) Yu r+d ANNEX D CALCULATING THE NPV OF LAND FOR FIGURE 2.6 The following tables illustrate the calculations first column (labeled "NPV Time") as will be used to plot Figure 2.6. Tables D. 1 and D.2 explained below. show the value of land with and without The objective of columns 8 and 9 is to government enforcement of property rights, calculate the net income stream for each year, as respectively. The difference in these tables is seen in that year. Therefore future discounted that where government enforces property rights benefits must be calculated from each year the potential landholder need not incur the discounted foreword from that year. Since we opportunity costs associated with "premature" are illustrating the calculation of the NPV for occupation. Everything else is identical. year 10 the "NPV time" is set at 1 and all future Both tables show the calculated NPVs for the years are discounted accordingly. Note that the first 10 years. For purposes of exposition, the NPV values for years 1 through 9 were tables are "frozen" in the values that would be calculated similarly, summing over all future net used to calculate the 10th year's NPV. These discounted values. These values have been are discussed below. converted to numerical values--they are no The yield data were generated by a logistic longer the sum of the net discounted values to curve constructed to reach a maximum value of their left since the discounting stance has moved 50 in 35 years. The output from this curve is foreword. The next step in filling out this table shown in the third column labeled "Yield." would be to convert the NPV values for year 10 From this yield value the opportunity cost of the into constants (they are currently formulas capitalist ("formal") and squatter are subtracted summing all "net discounted" values below to yield the 6th and 7th columns labeled "Net them), and to move the "1" in "NPV Time" to Undiscounted." The 8th and 9th columns year 11. This procedure was repeated, year-by- present the values from the 6th and 7th columns year to generate Figure 2.6. discounting at 15 percent and 25 percent Note that in the actual calculations the respectively. Discounting takes place using the summation was run out to year 100. ANNEX E THE POTENTIAL FOR TRADE WITH THE AMAZON IN GREENHOUSE GAS REDUCTION Growing worldwide interest in the problems of (a) amount of carbon sequestered in a hectare of global warming and the emission of greenhouse forest, and (b) the per-ton value to society of gases has led to a search for innovative ways to reducing carbon emission. The product of these reduce carbon emissions. One approach has numbers is the social value of a hectare of forest been to use international trade based on in carbon sequestration. The value of forest comparative advantage to seek cost-effective land in agricultural use is best estimated by the strategies for carbon reduction. The costs of selling price of forest land.' Comparing these carbon reduction in the developed, industrialized numbers--the value of carbon sequestered on a countries of the North are large and are well hectare of forest relative to the land's selling known. However, there appears to be price--yields the potential gains from trade considerable scope to support carbon between landowners and governments in the sequestration in developing countries in the Amazon and the northern industrialized South, especially in those that have large areas countries. of tropical forests. This approach would serve The value of forest land as a store of carbon several desirable goals: incomiie transfers from can be estimated by: (a) estimating the global the North to the South; income redistribution to damages avoided by not releasing additional poorer, frontier areas within southern countries; carbon to the atmosphere; (b) comparing the and provision of cost-effective carbon value society has been willing to tax itself to sequestration while also yielding biodiversity and reduce further greenhouse emissions; or ecosystem benefits. (c) comparing the costs of alternative sources of This note explores the potential gains from greenhouse reductions. Since proposals for trade between Amazoniia and industrialized carbon taxes are typically based on studies of the counitries of the North. The first section slhows amount of carbon emissions that can be that controllinig emissions in thie Amazoni would controlled at different levels of taxation, (b) and be considerably cheaper than greenhlouse- (c) are reduced to the same concept. Table E.1 emission controls proposed, or in effect, in the illustrates the range of values obtained by industrializedl North. The second section various analysts interested in the amount of discusses potential institutionial mechaniismiis to carbon sequestered per hectare of forest. facilitate trade. It also identifies several Indicative values, based on a range of existing problemiis that would have to be resolved. taxes and proposals, are shown in Table E.2. Based on Tables E. 1 and E.2, the potential Calcitlatiuig tile Potetital Gainis From value of Amazon land in carbon sequestration is Trade between USS245/ha and US$28,300/ha. The low estimate is derived by multiplying Indicative calculations suggest that the potential Fearniside's value of 136 tons of carbon (for the gains from trade in carbon emissions between average hectare of forest in the legal Amazon) industrizil countries and the Amazon are very by Nordhaus' "low" estimate of global warming large. These gains can be calculated by damage costs. The upper bound is obtained by comparing the value of a hectare of forest as a multiplyinig CBO's estimate of US$lOO/t carbon, store of carbon to its value as agricultural land. required to reduce emissions to their 1988 level To calculate the value of forest land as a store of by 2000, by the 283 tons of carbon per hectare carbon requires two numbers: estimated by the German Bundestag. Table E. 1: Total Carbon Storage in Amazon Forest' Forest Type tC/ha (assumes Observations Source carbon is 50% of biomass) l Average for Hilea 225 Estimates 112 t/ha above ground and 80-130 t/ha Sombroek Region below ground (1992) Dense Amazon Forest 160 Represents weighted average of dense forests Fearnside comprising 49.3% of Brazil's legal Amazon (1992) Average for Brazil's 136 Area weighted average based on RADAMBRASIL's Fearnside Legal Amazoll timber inventories (1992) Average for Amazon 160 Above-ground carbon only Houglhton, et al. l____________________ _________________ _________________________________________________ (1987) Closed primiary forest 283 Estimates 167 t/ha above ground and 116 t/ha below German Bundestag l __________________ ________________ ground (1990) a. Carbon stored in above- and below-ground biomass. Table E.2: Indicative Vlues of Carbon Sequestered Basis of Valuation Value US$/Ton of Carbon Observations Source Marginal damage estimate 1.8 "low" estimate Based on estimates of costs and Nordhaus 7.3 "medium" estimate damages to the world economy of (1991) 66.0 "high" estimate global warming. Enacted taxes 6.1 Finland Shah and Larson 45.0 Netherlands and Sweden (1992) Proposed taxes 5 phased to 25 in 1995 Submitted to US Congress Shah and Larson 9 phased to 70 in 2000 Debated in EC (1992) -Penny a gallon of gas 3.5 Required to reduce US 10 in 1991 increases 10 Conclusions of a 1990 study by the CBO (1990) greenhouse emissions to annually to 100 in 2000 Congressional Budget Office | 1988 levels by 2000 56 Annex E Using values for carbon sequestration that Transaction Costs. There are several societies have actually demnonstrated their difficulties which fall in the category of wvillingness to pay generates a narrower and transaction costs. These costs reduce the mo-e interesting range. Using Fearnside's potential gains calculated above--if they exceed average carbon content of dense Amazon forest them, no trade will occur. (160 tC/ha), the US$45/tC tax of the However, the size of the potential gains Netherlands and Sweden yields a carbon-storage suggests clearly that an effort to minimize these value of US$7,200 per hectare, the Finns' tax of transaction costs, thereby creating a market, is US$6.1/tC yields a value of US$976 per justified. The most important transaction cost is hectare, and a tax of a penny per gallon of gas contract enforcement. How can the buyer be would yield US$560 per hectare. This provides assured that, having purchased carbon a relevant range of roughly US$600-US$7,000 sequestration, the land will not be cleared per hectare. anyway, if not by the contractee, then by Tables E.3 and E.4 compare the author's someone else? Similarly, how can the seller be (unsystematic, 1992) observations on the market assured that payments will be made as promised? price of forest land in the Amazon with The second is conttract facilitation. How can estimates of thie value of carbon sequestering potential buyers and sellers be brought in based on the information in Tables E. 1 and E.2. contact? The third is product grading. How The comparison shows that the value of the can the buyer get information necessary to make forest as a stock of carbon, even at the lowest an informed choice concerning the value of his estimiiates, is greater than its "present" value in intended purchase of carbon sequestration? agriculture. Even in Rond6nia's more active Important information would include forest agricultural areas, and usinlg thie most relevant density, the probability that it would be range of implicit values of carbon (US$600- converted in the absence of intervention, and for US$7,000 per hectare), the sequestration value many potential buyers, biodiversity value. of forest land is 4 to 50 times greater than its agricultural value. However, an accurate Moral Ilazard. The major concern over using estimate of the global warming cost of positive incentives to influence landowner deforestation must take account of the carbon behavior rather than negative incenitives (taxes contenit of crops established under subsequent and/or command and control) is that of potential land use. In the Amazonl, economic and moral hazard.2 In this case, moral hazard takes agronomic forces ultimately make pasture the the form of landowvners or governiments taking, mnost likely use. Even after subtracting the value or threatening to take, environmentally adverse of carbon in pasture (Table E.4). the net value action that they wvouild itot otherwise take, in of carbon loss would be 2 to 30 times the order to increase the value of their contracts. At agricultural value of forest land in expaniding the individual level moral hazard is minimilal; frontier areas of the Brazilian Amazon. once the land is burned or cleared, the landowner has forfeited any possibility to benefit Impedimnents to Trade from the program, whichl applies only to intact forest. An additional probleml would hlave to be The numbers above demonistrate that very dealt withl at the governmental level, hiowever. substantial potential exists for gainis from North- Since building a road would increase the South trade in greenhllouse-gas reduction. probability of land conversion, and therefore Administrative difficulties are large, however, increase the value of a contract to not convert, and despite these potential gains, a number of a clear governmental commitment on1 road hurdles will have to be overcome to generate building would be necessary, as would otlher willing buyers and sellers. These are addressed government policies. below. Annizex E 57 Tables E.3 and E.4: Comparison of the Market Value of Forested Land in Brazil to its Value in Carbon Sequestration Table E.3: Table E.4: Expected Value of Amazon Value of Amazon Forest Land Forest Land in Agriculturea in Carbon Sequestrationb Value Value Value Net Location US$/ha US$/ha Carbon in Valuation Basis Pasturec Para, 300 7,200 4,950 Carbon tax in Paragominas Sweden and area, near Belem Netherlands Brazilia Rond6nia, BR364 150 1,168 803 Nordhaus' South of Porto "medium" Velho estimate of marginal damage from global warming Rond6nia, Br364 50 976 671 Carbon tax in West of Porto Finland Velho Rond6nia, 15 560 385 Carbon equivalent Guajara Mirim of one cent a area gallon gas tax Pars, 2.5 288 198 Nordaus' "low" Transamazonia estimate of Altamira area marginal damage from global warming a. Current market price of the land. b. Based on carbon content of 160 tons per hectare (see Table E. 1). c. Assumes 60 tons carbon per hectare (above and below ground). National Sovereignty. Any program to allow Illustrative Mechanisms global interest to influence activity in the Amazon would have to be effectively designed One mechanism to avoid most of the potential to minimize real or apparent impingement on barriers discussed above would be for national sovereignty. government, NGOs, and others 58 Annex E interested in preservation to enter into short-term some areas, to an increase in land concentration. rental conztracts (of conversion rights, for This process may reduce the prospects for example) that allow the landowner to carry out squatters and small farmers. Extractivists, and limited activity consistent with the environmental others interested in sustainable economic activity objective. These contracts would explicitly in the intact forest should benefit, however. In make the landowner responsible for enforcement the past extractivists' meager income has not of environmental restrictions. Ideally, an made it possible to compete with farmers and auction market for short-term rental contracts ranchers for land. These low-impact land uses could be developed to generate rapid feedback to could now operate under the cover of the landowners. Contract values would fall rapidly landowner's contract, or a franchise with the in areas where violations occur, while good municipio. enforcemenlt would be rewarded. Restricted and slhort-term rental contracts would not be seen as Notes a threat to sovereignty, as would outright land purclhases. NGOs, parties to "debt for nature" 1. It is often argued that land speculation overvalues arrangements, and otlher bilateral and multilateral land relative to its value in agricultural use. In organizations (such as tlle Global Environmental general however, one finds that speculators' prices Facility) could participate eitlher througlh a are based on potential future agricultural potential of conicerted strategic program or independent the land, not when any large land ownership confers action. special benefits. More generally, land values often Aniotlher meclhanismii miglht be franclhisinig exceed the capitalized value of farming profits. In agreemnents, entered into at, say, the municipio any case, we will see that whalever is driving the level. Municipios would contract witlh the current price of land in the Amazon, its value in initernationial commiiiiuniity to conitrol the level and carbon sequestration exceeds its value in alternative nature of development in their jurisdiction. market use. Muiicipios, in turn, would be responsible for 2. The reason for using positive incentives in this deter..iiiiiiig t.e nature of incentives aiid case is that negative incentives are probably deeinein the nure to oi cntivites an unenforceable (see Schneider, 1992). Briefly, (a) in the ncelutiicipto levusedl to conipeitol aitlongs at a frontier setting government has little potential to act thle IllUIliCipiO level. Competitionl among in a manner that is contrarv to local interests and muniicipios would ensure efficiency in local incentives--thus getting local incentives interniationial resource allocation. Franchlising consistent with desired international outcomes is appears to be a particularly promisinig way to critical; and (b) clear property rights are essential to deal witlh public lands. establish responsibility for land use. Property rights only emerge where justified by economic rent relative Oller Issiues to transaction costs. Thus, in a frontier setting taxing carbon emissions has two fatal problems. First, A minimumni critical size of conitiguous practically. because it is against the interests of nearly protected area is essential for protecting everyone on the frontier, it is probably biodiversity. This suggests that any meclhaniismii administratively impossible; and second, theoretically, to facilitate trade between the North and the since it would eliminate what little economic rent Soutlh slhould containi a meclhaniismii allowing now exists at the frontier land, it would have no contiguous land-use riglhts to receive a higlher owners to assert responsibility for land use. value tllan those that are isolated. Squatting and natural resource "mining" would If successful. the programii would probably lead become the norm. to pressure to clarify land titles and, perhaps in ANNEX F EXPENDITURE ISSUES This Annex combines the insights from four credit, and marketing services were positively sources to develop operational guidelines related to project success, and these only became concerning good expenditure policy on the significant in the growth phase of the projects. frontier. These sources are (a) the discussion of the determinants of frontier instability from Sunmnary of Conclusions from OED Chapter 2, (b) the public finance theory of Review of Rural Development Projects in ''assignment," (c) the findings from an OED Northeast Brazil. An OED review of rural review of rural development in Northeast Brazil development in Northeast Brazil (1991) confirms (OED, 1991), and (d) the findings from Michael the importance of the guidelines from the public Nelson's classic study of 24 rural settlement finance literature, while at the same time projects on tropical lands in Latin America emphasizing the local political dimension. The (Nelson, 1973). The major conclusion from study found that successful projects were each source is reviewed. This is followed by an projects that were: attempt to draw out the relevant operational guidelines. (a) relatively uncomplicated (e.g., water supply rather than irrigation, because Summary of Factors Contributing to of the more complex decisions Transieiice. From Chapter 2 we conclude that required of irrigation users); the major factors leading to transient behavior at (b) under the full control of the executing the economic frontier are (a) the mining effect, agency; resulting from cheap, abundant land and forest, (c) under the scrutiny of outside (b) the imediatisnzo effect, resulting from high pressures, especially for tasks that interest rates and poorly developed credit were not politically popular, such as markets, and (c) the sell-ouit effect, caused by redirecting services toward the poor, differences between early migrants and using less rather than more capital- subsequent migranits in humani capital and access i n tens i v e tech no 1 o g i e s fo r to governmenit services, as well as changes in infrastructure, or reducing unit costs the rules regulating property rights. and reaching larger numbers of people (pressures came from beneficiaries, Suimiary of Factors Affecting Success in governors, other state agencies, Development of Tropical Lands from Nelson. development banks, municipal In his classic study of 24 rural development governments, nongovernment projects on tropical lands in Latin America, organizations, and the World Bank--it Richard Nelson (1973) identified the factors is noteworthy that withdrawal of affecting performanice. These are reproduced as pressure was clearly identified with Table F.l below. As slhowni, government deterioration of performance); and planninig was consistenitly either neutral (national plans, resource inventories, feasibility studies) or (d) keenly involved wvith local government. negatively related to success (directed settlement, (The local involvement helped reduce colonist recruitmenit, cooperative promotion, costs and delays, made state agencies formulationi of development "packages"). The more accountable, and encouraged use factors positively affecting performance are of local materials and labor. This role those relating to location on the frontier: roads, of local politics is key: proximity to urban concentrationis, and association with commercial enterprises and "Many of the successful experiences agro-industry The availability of a forest owed much to the support by energetic industry was also important to success, allowing governors or state secretaries. colonists to "cash in" the natural resources in the Governors tended to see Bank-supported early stages of establishlmlenit. In terms of the projects as offering a menu of role of governmenit, only research, extension, components for their support. They 60 ANNEX F identified more readily with simple benefit without paying, e.g., national defense), activities that could be planned and the national governrnent must take responsibility executed within the four-year election for the action. Examples are national defense, cycle. Whole projects that had many national educational policy, national pollution components and long execution periods standards, and various "homogenizing" and or did not seem good vehicles for making nation-building actions at the national level (e.g., a political mark; the resources they affirmative action in the USA). Second is provided risked being used to meet demtianid-matching: Everything else being equal, short-term budget needs or pay off services provided locally will be produced more political debts.") efficiently than services provided from more distant levels of government because local Sumrnary of Expenditure Guidelines people know best what they need, and they from Assignment Theory. Thie public finance know best how to provide it cheaply (under local theory of assignment provides several factors conditions). Third, and somewlhat offsetting the important to determine the appropriate allocation demand-matching effect, is econonfies-of-scale: of expenditure authority among levels of Where economies of scale of provision of a government. First is national in7terest: Where service at a state or national level are so great as it is in the national interest to have a function to more than offset inefficiencies due to less- performed (for reasons of national security, than-optimal expenditure composition, it is national standards of performance, or other advisable to move expenditure authority to that national policy) and the interest is not shared by higlher level. the local population (or the local population can ANNEX F 61 Table F. 1: Factors Affecting Performance in Tropical Land Development Stage of development and nature of the performance impact Pioneer Consolidation Growth Elements influencing .___________ __________ project performance Suc- Neu- Fail- Suc- Neu- Fail- Suc- Neu- Fail- cess tral ure cess tral ure cess tral ure Settlement organization Directed X. not applicable not applicable Semidirected not applicable X not applicable Spontaneous X. X. X. Highways Access X. X. X Feeder X. X. X. Maintenance X X X Planning Existence of a national plan X - X X Existence of resource X X X inventory Existence of project X X X feasibility study Application of colonist recruitment procedures X X not applicable Forest industry X. X. X Rural development activities Research X X X Extension X X X Credit X X Marketing services X X Cooperative promotion X X X Titling X X X Housing X X X Water supply X X X Community development X X X Mechanization -large scale commercial enterprises X X X -small holdings X X X Promotion of urban centers (infrastructure and concen- tration of services, industry, X. X. X. and populationi Farm size Establishment of standard minimum unit (10-15 ha) X X X Subdivision in variable X X X sizes X Reorganization and consoli- not applicable X dation of minifundia Balanced development "Package" projects X not applicable not applicable Simultaneous rural-urban development X. X. X. Association of agro- industry and rural development not applicable X. X. Association of conmmercial enterprises and small holdings X X X ' High impact on success or failure. 62 Table F.2: Transience and Prenmature Settlement on the Frontier Lessons from other Sources Lessons Learned From: Problem Causes Nelson (1973) OED (1991) Assignment Theory Transience: Cheap land Roads and proximity to urban Roads have the right There is a national interest in Nutrient relative to labor populations and services are the characteristics to receive preventing nutrient mining; that mining and purchased most critical factors in project support from local and is, to ensuring that the road inputs. Caused by success. A local forest industry regional politicians: they can network is not excessively abundance of land is very important to project fit nicely into the electoral extensive. There is both a local and forest and success in both the initial and cycle, they are relatively and national interest in improving building of consolidation stages, however, simple to execute, and can the local road network. There is extensive Irather suggesting that mining the be built or withheld to also a local and regional interest than intensive) forest substitutes somewhat for influence various in extending the road network. road systems. formal sector borrcwing. constituencies. Transience: High interest Government credit programs are It is in the national interest to (a) Imediatismo rates, lack of neutral with regard to initial control overall credit expansion credit availability, project success and long term consistent with macroeconomic high personal project growth. They do stability, (b) ensure that credit be rates of time improve probability of success allocated efficiently to generate preference. during the consolidation stage, economic growth, (c) reduce however. As mentioned above, inequities in incomes and drawdown of natural (forest) opportunities, and (d) reduce capital may substitute. transience in frontier settlements. Tradeoffs are inevitable. Local authorities probably only share objective (b) Different human capital attributes between early settlers and later arrivals who buy them out. Preferential Research, extension, credit, and Complicated services, Although there is a local interest access to marketing services were found requiring a sustained effort, in these services, in the initial government to contribute significantly to are not well suited to the phase there is not the resource Transience: services by late project success in the growth needs of state-level base to finance them. There is Incentives arrivals. phase. All other government politicians. national interest in sustainable for farm services are neutral or negative agricultural development. sellout in effect. Lack of health These services are not found to Field observation suggests There is a local interest in these care, education, be significant in project success that activities such as services, although given initial and community at any stage. However project building schoolhouses, incomes there is not the services to success is defined as economic health posts and putting in resource base to finance them. "stabilize" early productivity, not stability of electricity poles fits well in There is a national interest in settlers. settlement. the electoral cycle. both stabilizing frontier Recurrent costs of staff and development and improving materials often goes unmet, human capital, however. however. Imposition of Factors related to remoteness National interest creates the Efficiency government are most clearly correlated with settlement (capital city). loss due to beyond the project failure. 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