RURAL CREDIT AND DEFORESTATION: Evidence from the Brazilian Amazon

An innovative rural credit policy in the Brazilian Amazon has been shown to be effective in fighting deforestation. Resolution 3,545 conditioned the provision of subsidized rural credit to farmers on their submitting proof of compliance with legal titling requirements and environmental regulations. Between 2009 and 2011, the total observed deforested area in the study region was about 60% smaller than it would have been in the absence of the policy’s credit restrictions.

This is the central finding of new research published by Juliano Assunção, Clarissa Gandour, Romero Rocha, and Rudi Rocha in the February 2020 issue of The Economic Journal. Knowledge has been limited about what policies might be effective in reducing deforestation, which is often associated with commercial agriculture in the region and contributes significantly to greenhouse gas emissions. This research illuminates how the provision of rural credit could be used as an effective tool to curb deforestation in the Brazilian Amazon and in other developing countries.

The introduction of Resolution 3,545 by the Brazilian Central Bank in 2008 offered a practical opportunity for analysis because its restrictions for providing rural credit based on titling requirements and meeting environmental regulations were offered solely to farmers with properties located within the Amazon biome. Combining comprehensive contract-level data on credit concessions and satellite-based data on forest loss, the authors compared the deforestation outcomes within the Amazon biome to neighboring but similar municipalities outside the biome to examine the impact of the new policy.

In addition to identifying that the total deforested area was 60% smaller during the examined period than it would have been without the policy, the authors find that this was associated with a sizable reduction in the concession of rural credit. In particular, municipalities where cattle ranching is the main economic activity were affected most; the decline in loans specific to cattle ranching activities accounts for 75% of the effect. The authors also found that only large and medium loans were affected, which was consistent with the fact that the policy’s requirements were less restrictive for small-scale producers. The results suggest that credit constraints exist in the region and indicate that rural credit in the Brazilian Amazon is typically used to expand production, most notably for cattle ranching, into newly deforested areas.

The authors identify two main policy implications from these findings, which shed light on the particularly important settings where both agricultural activities and deforestation clearings are most active. First, the evidence indicates that the conditioning of rural credit is an effective policy instrument to combat illegal deforestation. Yet, differential effects across sectors and regions suggest that this rural credit policy tool should complement, rather than substitute, other conservation efforts. Furthermore, the finding that credit reduction came mostly from a drop in cattle loans rather than crop loans also indicates that the economic environment matters for policy effectiveness as do implementation details.

Second, the findings suggest that the economic environment in the Amazon is characterized by significant credit constraints and financial imperfections. In municipalities where cattle ranching is the leading economic activity, fewer financial resources correspond to less deforestation. This finding has critical implications for policy design. In particular, policies that increase the availability of financial resources could lead to higher deforestation rates, depending on the economic environment and existing resources in the areas. The results do not suggest that these policies will necessarily increase deforestation. Rather, policy design should take into account the nature of financial constraints prevailing in the context to avoid potential adverse effects.

The Effect of Rural Credit on Deforestation: Evidence from the Brazilian Amazonby Juliano Assunção, Clarissa Gandour, Romero Rocha, and Rudi Rocha has been accepted and is available onlineby the Economic Journal.

Juliano Assunção

Full Professor at Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio)

Clarissa Gandour

Head of Policy Evaluation at Climate Policy Initiative – Brazil

Romero Rocha

Assistant Professor at Federal University of Rio de Janeiro (UFRJ)

Rudi Rocha

Associate Professor at São Paulo School of Business Administration at the Getúlio Vargas Foundation (FGV EAESP)