xi Acknowledgments xiii Acronyms and Abbreviations xv Executive Summary xvii vii FOREWORD T his study is part of a discussion process regarding the causes and dynamics of deforestation in the Brazilian Amazon. This initiative was launched by the Ministry of Environment in 2000, and the World Bank has been a partner in this process from the beginning. The objective of the debate has been to find coherence and a better understanding of the factors associated with the expansion of deforestation

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... the public policies attempting to arrest it. Two underlying observations prompted this initiative: the first, that although the aggregate information on the deforestation rates of Legal Amazonia, published every two years by the National Institute of Spatial Research (INPE), contributed to the understanding of the evolution of the process, they did not allow for the formulation of short-term policies aiming at immediate interventions; the second, is that the interruption of fiscal and financial incentives prevailing in the 1970s, considered to be one of the determining causes of deforestation expansion, did not produce the expected results. Even in the absence of such incentives, deforestation was still growing. These observations lead the Secretariat of Coordination of Legal Amazonia to invite specialists to debate and stimulate research, oriented towards changes in the policies implemented by the Ministry of Environment. It was necessary to disaggregate the data by States and municipalities in order to understand the dynamics of the different activities expanding in the region, and also to investigate the social and political forces acting in specific contexts, particularly those having greater influence on the growth of deforestation rates. This work-"Causes of Deforestation of the Brazilian Amazon"-appears in this context. The central issue which it attempts to study is the role of cattle ranching-its dynamic and profitability-in the expansion of deforestation. If there are no fiscal incentives, other factors must make the activity feasible, justifying its continuous expansion in new forest areas. To answer this and other questions, the study analyzes the microeconomic behavior of cattle ranching, placing it in the broader context of the expansion of the logging and agricultural frontiers in one of the most important fronts of economic occupation of the region-Eastern Amazonia. In addition, the study compares the economic gains with the associated social and environmental costs, incorporating the socioeconomic dynamics of the social agents on this frontier into the analyses. It must be kept in mind that in the Amazon, agriculture and cattle ranching benefit from indirect gains coming from weak land titling, land grabbing, irregular labor contracts, and the continuous process of opening up of new forest areas. These are carried out at low cost by posseiros and small farmers, who prepare the land for more profitable enterprises which follow them. Even though it started two years ago, the discussion presented in this study is extremely present. According to INPE's projection, between 2001 and, deforestation in the Amazon went from 18,166 square kilometers to 25,476, the second largest increment since 1995. This fact in itself makes relevant the reading and discussion of this study, because of its contributions both to the diagnostic as well as the propositions of public policies. We hope this initiative stimulates new studies, more field work, and studies looking at feasible solutions, capable of influencing decisions not only in the government's environmental area but, more importantly, regional development policymakers. SECOND FOREWORD B razil's natural assets are legendary. The country is home to the largest rain forest biome in the world, the Amazon, containing by far the largest portion of remaining rain forest. The legal Amazon covers 60 percent of the Brazilian territory, with some 21 million inhabitants, or about 12 percent of the population, nearly 70 percent of whom live in cities and towns. Brazil also has the largest freshwater reservoir in the world, with the Amazon region alone containing up to onefifth of the world's freshwater. Sustainable use of this enormous wealth would not only provide resources for the future, but also be a source of greater equity and poverty reduction since natural resources constitute a much higher proportion of the assets of the poor (some 80 percent) than of the rich. The interest in sustainability is heightened by the Amazon deforestation rates. Of the original forest cover, 17 percent has been cleared, although at least a third of that is growing back. Its global value is seen in its rich biodiversity and the possible impact on climate due to its disappearance. Provisional data showing 25,400 sq. km. of deforestation in 2002, compared to an average of 17,340 sq. km. for the preceding ten years, illustrate the rising threat to key ecosystems. The near disappearance of Brazil's unique Atlantic forest earlier brings out the urgency of action. Some experiences worldwide and in Brazil with sustainable use of natural resources could serve as a basis for an environmental strategy with social inclusion. The factors behind unsustainable resource use, however, are complex, and it is important to understand these sources if actions are to be effective. The Amazon region is challenged by a wide range of issues, including lack of consensus on development strategies; lack of adequate social services, infrastructure, and transportation; property right ambiguities and land use conflicts; rapid urbanization and poor quality of life in cities; inability to control deforestation and fires; role of indigenous people in development and environmental management; low institutional capacity and weak governance-and unmanaged expansion of cattle ranching and agriculture. This study is a unique contribution in that it suggests that, in contrast to the 1970s and 1980s, when occupation of the Brazilian Amazon forest was largely induced by government policies and subsidies, much recent deforestation seems the result of medium-and large-scale cattle ranching, which is increasingly profitable and dominated by powerful agents. It emphasizes that it is essential to understand the strong private interests causing the increasing deforestation, and adopt policies that factor them into actions. It would also be essential to promote alternative and complementary business development that is more sustainable and equitable than at present. Controlling open access in the interior, while promoting the sustainable use of forested areas, seem key to avoiding as-yet poorly understood damage that may foreclose future options. By bridging environmental and social policies, Brazil could in some form protect a sizable part of the existing Amazon forest, and improve the living standards and meet the aspirations of the local population. Overall, there is a recognition of the need for better policies and stronger institutions to manage natural resources. A growing domestic constituency supports sound environmental policies. Support for all this could be provided through public and private investments at the federal, state, and municipal governments, as well as policy analysis, knowledge exchanges, consensus building and the promotion of partnerships. A major opportunity for guiding World Bank contributions may be the federal Amazônia Sustentável program, with its linkages to the federal Multiyear Plan, and the Bank's new Country Assistance Strategy. ix xi ABSTRACT T he worldwide concern with deforestation of Brazilian Amazonia is motivated not only by the irreversible loss of this natural wealth, but also by the perception that it is a destructive process in which the social and economic gains are smaller than the environmental losses. This perception also underlies the diagnosis, formulation and evaluation of public policies proposed by government and non-governmental organizations working in the region, including the World Bank. The present work suggests that a fuller understanding is necessary with regard to the motivations and identity of the agents responsible for deforestation, the evaluation of the social and economic benefits from the process and the resulting implications of public policies for the region.