Does Credit Affect Deforestation? Evidence from a Rural Credit Policy in the Brazilian Amazon

Romero Rocha, a senior analyst at Climate Policy Initiative, summarizes an assessment of the impact of Brazil's rural credit policy on deforestation. Senior analyst Clarissa Costalonga e Gandour also contributed to this piece.

The deforestation rate in the Brazilian Amazon decreased sharply in the second half of the 2000s, falling from a peak of 27,000 km2 in 2004 to 5,000 km2 in 2011. In a previous CPI/NAPC study [Assun et al. (2012)], we estimated that conservation policies introduced in the mid to late 2000s prevented the loss of approximately 62,000 km2 of forest in the 2005 through 2009 period. We've recently taken a closer look at one of these policies National Monetary Council Resolution 3,545.

Introduced in mid-2008, Resolution 3,545 placed a condition on rural credit, an important source of financing for rural producers, in the Brazilian Amazon Biome. To get credit, borrowers had to present proof of compliance with environmental regulations, the legitimacy of their land claims, and the regularity of their rural establishments. To prove credit eligibility, Resolution 3,545 required borrowers to present a series of documents. Such documentation, however, varied according to borrower profiles, with small-scale producers subject to less stringent requirements. Resolution 3,545 represented a restriction on official rural credit — and thereby on the fraction of rural credit that is largely subsidized via lower interest rates — while other sources of financing for agricultural activity suffered no such restriction.

After quantitatively evaluating Resolution 3,545's effect on credit concession and deforestation in the Amazon Biome, we estimate that approximately BRL 2.9 billion (USD 1.4 billion) in rural credit was not contracted in the 2008 through 2011 period due to restrictions imposed by Resolution 3,545. This reduction in credit prevented over 2,700 km2 of forest area from being cleared. This means that deforestation was 15% lower than it would have been in the absence of the resolution.The resolution's impact on deforestation was only significant in municipalities where cattle ranching is the main economic activity, as opposed to crop farming.

These results help us better understand the economic environment of the Brazilian Amazon. They suggest that there are binding credit constraints for potential deforesters. In particular, cattle ranchers appear to be more heavily dependent on subsidized rural credit for production and for sustaining deforestation activities. In contrast, crop farmers appear to be less dependent on these same subsidies, or, at least, to make use of the subsidies to intensify productivity instead of expanding their production frontier.

Our work has two key policy implications. First, the evidence shows that conditional rural credit can be an effective policy instrument to combat deforestation. In light of the heterogeneous effects captured across sectors and regions, however, conditional rural credit could complement, rather than substitute, other conservation efforts. Our findings also highlight the fact that pre-existent socio-economic circumstances and implementation details matter.

Second, our analysis suggests that the financial environment in the Amazon is characterized by significant credit constraints. Especially in municipalities where cattle ranching is the predominant activity, fewer resources correspond with less deforestation. This is a key finding with relevant implications for policy design. It suggests that policies that increase the availability of financial resources (e.g. payments for environmental services) may lead to higher deforestation rates, depending on the economic environment and existing resources in the area. Our results do not suggest that these policies will necessarily increase deforestation, nor do they advocate against the implementation of payments for environmental services. They do, however, stress the importance of taking into account the nature of financial constraints prevailing in the Amazon into policy design. Effective monitoring and conditionality of such policies could avoid potentially adverse rebound effects.

Romero Rocha is a senior analyst at Climate Policy Initiative. Romero received his PhD in Economics from the Pontificia Universidade Catolica do Rio de Janeiro (PUC-Rio), his Master's degree in Economics from the Federal University of Rio de Janeiro (UFRJ), and his bachelor's degree in Economics from the Federal University of Pernambuco (UFPE). While completing his PhD, Romero worked for two years at the Global Development Network as a research analyst, evaluating the Brazilian Federal Family Health Program. After finishing his PhD, he worked for two years as a consultant in the Human Development Department at the World Bank Brazilian office. Before joining CPI, he also worked as a Senior Analyst at the Instituto Unibanco, coordinating the impact evaluation area with a focus on education projects. Romero's work to date has focused on impact evaluation of programs in areas such as education, health, and social protection, with an emphasis on applied econometrics.

Clarissa Costalonga e Gandour also contributed to this piece. Clarissa received her Bachelor's and Master's in Economics from the Pontificia Universidade Catolica do Rio de Janeiro (PUC-Rio) with high honors, having spent one year as an exchange student at the University of California, Berkeley. During her studies, which focused on Development Economics, she served as a teaching assistant, research assistant, and moderator at the World Bank/SIEF Workshop on Impact Evaluation. At Climate Policy Initiative, Clarissa leads the operational development of the Rio de Janeiro office and works as a Senior Analyst.

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