A Model of Amazon Deforestation, Trade and Labor Market Dynamics

This paper develops a dynamic spatial equlibrium model of Amazon deforestation, accounting fortrade and labor markets dynamics. It uses this model to study the impact of local sectoral shocks and policies ondeforestation. Conditional on the assumptions on key parameters, the analysis suggests the following: 1) anincrease in external commodity demand increases deforestation; 2) agricultural productivity gains within theAmazon region likely increase deforestation (but reduce deforestation in the rest of the world) 3) manufacturingproductivity in urban centers in the Amazon region decreases deforestation, especially if manufacturing firms have shortrural value chains and if complemented by investments in education and training and measures to attract skills; 4)reducing transport costs increases deforestation unless it sufficiently supports higher export competitiveness of urbanproduction; and 5) industrial policy focused on raising urban productivity, especially in sectors with short ruralvalue chains, can reduce deforestation. The paper then discusses how policies aimed at increasing local sectoralproductivity in the Amazon region could complement other measures specifically aimed at protecting the forest. Amongsuch measures are incentivizing governments to designate undesignated public forests, enforcing forest protectionlaws (command and control), incentivizing afforestation, and creating alternative livelihoods for farmers in rural andurban areas.