Understanding the conventional economy of the Pan Amazon

The economies of nations are traditionally evaluated by their gross domestic product (GDP), a metric that measures the total economic output of a nation. The GDP of the Pan Amazon was approximately $US 270 billion in 2017, a modest number in a global economy valued at $US 80 trillion in the same year. By way of comparison, this is approximately equal to the total income of the online retail company that has appropriated the name of the world’s largest tropical forest.

The contribution to national GDP from the jurisdictions located within the Pan Amazon range from a high of 100% (Guyana and Suriname) to a low of 0.2% (French Guiana). The contribution of Amazonian regions to national GDP is small but significant in Brazil (8%), Peru (13%) and Ecuador (10%), less in Colombia (2%), and considerably more in Bolivia (59%), where three major urban centers lie within the Amazon basin.

There are numerous problems with using GDP as an analytical metric; nonetheless, it is the most commonly used statistic for evaluating the economy of a nation. The first priority of most governments is to promote economic growth, and their motivation is as simple as it is obvious: an increase in GDP reflects increased wealth, which can be used to reduce poverty; a decrease connotes a recession, which usually means an increase in poverty. Governments, and their advisors in multilateral development institutions, use GDP and its underlying metrics to identify how fiscal policies, such as taxes, subsidies and public investment impact the conventional economy. GDP is particularly informative when it is disaggregated into component metrics that measure economic production for economic (sub) sectors and organised by subnational jurisdiction.

The GDP metric has limited utility when evaluating the economic health of a society. Its detractors point out five major limitations, all of which are germane to the Amazon: (1) it provides no information on inequality; (2) it underestimates the contribution of the informal sector; (3) it makes no attempt to measure the economic value of subsistence activities; (4) it does not distinguish between sustainable activities, such as the harvest of renewable resources, and non-sustainable business models, such as the exploitation of non-renewable resources; (5) it fails to account for negative outcomes that create a long-term economic liability, such as an oil spill or the loss of a key ecosystem service. In spite of these limitations, or because they are so obvious, a review of the conventional economy using GDP metrics highlights the challenges and opportunities facing the pursuit of a sustainable economy.

Perhaps the most revealing number in the sectoral GDP statistics is the minuscule contribution of the forest sector (< 2%), a paltry sum when considering the intrinsic value of the Amazon’s vast renewable natural resources (Figure 1.6). The most obvious explanation for this low number is the failure to assign value to subsistence activities. Indigenous people and traditional communities harvest food and fiber from natural ecosystems; most forest families grow food for their own consumption. These activities have tangible economic value and are central to the livelihoods of forest families, but they are ignored by measurements of GDP. Additionally, most households complement subsistence activities by harvesting timber, non-timber forest products and wildlife. Some of this production is captured by the statistics, particularly for the commercialization of forest goods with strong export markets, such as Brazil nuts and açaí fruits; however, other valuable products, such as timber and fish, are sold to middlemen who operate within the informal sector of the domestic economy.

Nonetheless, if the real contribution of the forest economy was twice the value of the official statistics, it would still lag the sectors of the economy driving deforestation and other forms of environmental degradation. The low valuation of forest products shines a spotlight on the challenge of using the forest economy as an alternative development strategy to displace agriculture and livestock.

The informal economy in Latin American nations accounts for approximately thirty per cent of total economic activity; that proportion is greater in frontier communities, where ‘cash is king’ and the institutions of the state are weak or absent. This is even more true for smallholder landscapes where subsistence farming is combined with the cultivation of foodstuffs commercialized in domestic markets. Approximately ten per cent of the previously deforested lands in Brazil and Bolivia have been settled by small farmers; although their spatial footprint is limited, they constitute about seventy per cent of rural families and are an important source of basic foodstuffs, such as manioc, rice, beans and a variety of tropical fruits.

In Peru and Ecuador, the predominance of smallholders is much greater, representing about 98 per cent of all landholdings and occupying more than ninety per cent of agricultural landscapes. The production model pursued by the majority of smallholders on frontier landscape is based on slash-and-burn technology, which is used to establish and maintain a forest-fallow production system. Most farmers invest in perennial production systems over time as they diversify their crops and plantations, but they expand cultivation at the expense of remnant forests within their properties. The full value of their production is not incorporated into GDP, which causes the official statistics to underestimate their contribution to the regional economy, as well as the economic forces that drive deforestation by smallholders.

A more significant factor in the underappreciation of agriculture and livestock production is the methodological framework designed to avoid double accounting when compiling the GDP metric. Unlike the underreporting caused by the informal economy or subsistence farmers, this is not a bug (flaw) but a feature of the GDP bookkeeping methodology. The value of the production for any sector is measured only once, and in the case of agriculture, that data is captured at the ‘farmgate’, a term used to describe the price paid to the producer. All subsequent transactions ‘add value’ to the commodity and are accrued to a supply chain participant; for example, the increased value of dressed beef and soy oil are accrued to the manufacturing sector, while the cost of hauling grains to export terminals is allocated to the transportation sector. Similarly, expenditures for inputs made by farmers and ranchers prior to the harvest or the sale of livestock are subtracted from farmgate revenues and assigned to their respective service sectors, which includes veterinarians, seed companies, appliance dealers, fuel companies, and agrochemical venders.

A comparison of the total gross value of farm production in Mato Grosso compared to the value-added metric used to compile sectoral GDP reveals that 45 per cent of the total proceeds are allocated to service providers or manufacturers in the commodity supply chain.

The service sector is the largest component of GDP in seven jurisdictions and the second most important sector in the remaining ten. The predominance of the service sector is not uncommon among nations because it is a basket of many different economic activities. The growth of the service sector is also the consequence of the ongoing urbanization of Amazonian society. More than fifty per cent of the region’s inhabitants reside in cities with populations greater than 100,000, and the overwhelming majority work in the service sector. Many of the services in large cities are environmentally benign and could be easily accommodated within a ‘green’ economy, including telecommunications, information management, health care, hospitality, and finance. Only Manaus has a strong manufacturing sector, an anomalous situation maintained by subsidies and tariff barriers. The other large cities (Belem, Santa Cruz, Cuiabá, Santarem, Porto Velho) are economically diverse, but their manufacturing and service companies rely directly or indirectly on revenues from the extractive industry or the agricultural and livestock sectors. The dependence of mid-sized cities (10,000 to 100,000 residents) on the rural economy is even more pronounced because they are the economic gateway for private sector services to farms, ranches and rural communities.

Mid-size cities and towns are also where rural inhabitants access public services, most importantly health care and secondary education, but also technical assistance and financial credit. The poor quality of rural schools motivates many families to maintain a residence in nearby small towns, one of several factors contributing to rural-urban migration. Urban inhabitants also enjoy access to basic services taken for granted in advanced economies, including sanitation, electricity, access to the internet and higher education. All of these are absent in the rural Amazon.

Government expenditures are relatively large in Brazil and are the leading sector in Acre, Amapá, Rondônia and Roraima, which reflects that nation’s willingness to subsidize its frontier jurisdictions via revenue transfers from federal to state and local budgets. This includes operating budgets for law enforcement and agricultural research and extension, as well as support for a large public university system, environmental oversight and management of protected areas.

Brazil’s generosity contrasts with the nations of the Andes, where small public budgets in Amazonian jurisdictions are a legacy of their centralized governance systems. The somewhat greater contribution in Bolivia is due to the inclusion of its capital city (La Paz) within the Pan Amazon, while Colombia’s is the consequence of the budget allocated to its security forces. Guyana and Suriname have budgets that were historically similar to the Andean republics, but public expenditures will surge after 2021, when offshore oil fields start producing oil and natural gas.

Public budgets provide one of the easiest avenues for channeling financial resources to shift the Amazonian economy away from non-sustainable production paradigms, which is why the jurisdictional approach is gaining popularity as a way to organize the payment-for-ecosystem services. The challenge will be to translate an increase in state expenditures into a modification of behavior by private sector actors. Brazil pursued a version of this strategy from 2004 to 2018 when it successfully reduced deforestation within its Amazonian states by eighty percent; however, this effort has caused a political backlash by landowners opposed to the regulatory measures imposed by the state.

All the Pan Amazonian nations suffer from a deficit in basic infrastructure, a consequence of decades of underinvestment caused by political instability, poor governance and financial austerity imposed by multilateral financial institutions. A surge in construction activity occurred between 2005 and 2015 when the global commodity boom provided national governments with revenues that allowed them to radically increase investments in basic infrastructure. Urban areas benefited most because that was where the need was greatest; however, investments in transportation networks and energy systems were a priority as governments sought to increase economic growth by integrating frontier landscapes into the national economy and harnessing the natural resources of the Amazon.

The contribution of the construction industry to regional GDP is large across all jurisdictions, placing just behind agriculture as a component of the conventional economy. Financing for infrastructure comes from a combination of annual budgets, debt issued from national development banks, government-backed bonds and multilateral development agencies. State-backed entities from China have become a prominent participant in large-scale hydropower projects, while private investors have assumed a leading role in the development of railroads. Large-scale construction projects in Amazonian jurisdictions have been harshly criticized for their environmental and social impacts; nonetheless, they enjoy the support of elected officials from successive governments. The construction sector is an unabashed proponent of investment in transportation and energy infrastructure and views deforestation and hydrological degradation as acceptable environmental impacts.

There is an inherent synergy between expenditures in construction and the value of real estate. Investments add value to an asset, while property values increase following improvements in public infrastructure. The reported contribution of real estate transactions to GDP is approximately the same as that of construction and, likewise, is largely the consequence of investments in urban centers. The declared value of real estate transactions, however, is often under-reported by buyers and sellers in order to evade taxes, a practice more prevalent on frontier landscapes where contracts are executed without the intermediation of banks. This common practice is another example of how the informal economy gives rise to corrupt practices, and its contribution to GDP is underestimated. Real estate markets are further distorted by the highly lucrative activity of land grabbing and, in the Andean republics, money laundering linked to illicit drugs. Reining in land grabbing is impeded by the agencies that administer titles, which are plagued by administrative inefficiencies, a backlog of work spanning decades and functionaries complicit in criminal activity.

The extractive industries in Pan Amazonian jurisdictions are massively important for the national economies of Colombia, Ecuador, Peru, Guyana, Suriname and, to a slightly lesser extent, Bolivia and the state of Pará. All mineral resources in the Pan Amazon are the property of the state, which exploits them via a state-owned enterprise or some type of joint venture with corporations that specialize in mining or the production of hydrocarbons. Revenues accrue to a region’s GDP, even though they do not flow through the local economy; instead, they are deposited directly into the national treasury. This bookkeeping procedure distorts the value of the GDP-per-capita, which is often [mis-]reported by the mass media as a measure of human wellbeing. Forty-five per cent of GDP in Amazonian Ecuador is contributed by oil exports and, if you exclude that revenue from the regional GDP, the per capita value in 2017 would fall from US$ 11,500 to US$ 6,400.

Governments return mineral rents to producing regions as royalties that are included within GDP values reported for public administration. Royalties vary among jurisdictions and across commodities: Peru has the most generous revenue sharing mechanism, which combines royalties with corporate income tax in a system referred to as a Canon. Brazil has the most frugal royalty system but transfers a larger sum of money via the general budgetary system. Like agriculture, the extractive industries generate benefits to regions via the service sector, which vary depending upon the mineral commodity: hydrocarbons pay higher royalties but consume fewer services, while miners pay lower royalties but consume more services. In Ecuador and Colombia, the exploitation of petroleum was a major driver of Amazonian settlement and deforestation, while the development of the iron ore deposits in the Carajás highlands was part of a multi-sectoral development strategy.

The mining sector has an illegal component that is one of the most lucrative activities in the Pan Amazon. Artisanal and small-scale gold mining generated an estimated seven billion dollars in 2017, of which about half was exported via channels invisible to authorities. Most small-scale miners use placer mining technologies that destroy floodplains while polluting watersheds with mercury. The most seriously impacted basins are the tributaries to Madeira (Madre de Dios and Beni) and Tapajós (Crepori), the Caroni River in Venezuela, the Essequibo in Guyana and the Courantyne on the border between Suriname and French Guiana.

Another illegal activity not captured by GDP is the coca-cocaine supply chain that originates in Bolivia, Colombia and Peru. The quasi-legal (or tolerated) cultivation of coca is associated with blatantly illegal laboratories that process coca leaf into cocaine. The coca-cocaine supply chain generates about $US 1.5 billion annually within Amazonian jurisdictions, an amount multiplied several times over as money is laundered in the commerce, construction and real estate sectors. Coca cultivation is an important source of deforestation in the Andean foothills, where it occurs on landscapes surrounding protected areas and indigenous territories.

The Carajás – São Luis Development Corridor

Pará has developed a metallurgical industry, the result of a deliberate national strategy to add value to mineral exports; this has led to investment in industrial mills that transform bauxite into aluminum and iron ore into steel. Aluminum smelting is an energy-intensive process and that has motivated the construction of large-scale hydropower facilities on the Tocantins and Xingu Rivers. Steel mills and pig-iron foundries consume vast quantities of vegetable charcoal provided by landholders who established cattle ranches along the rail line between the mines at the Serra de Carajás and the port facilities near São Luis do Maranhão.

State governments in Pará have a tradition of being ‘pro-mining’, which reflects the economic benefits derived from the mines, including royalties and tax revenues, but more importantly from the economic growth spawned by the goods and services sold to the mining companies. The development corridor between the Serra de Carajás and São Luis do Maranhão has lost more than eighty per cent of its original forest cover.

“A Perfect Storm in the Amazon” is a book by Timothy Killeen and contains the author’s viewpoints and analysis. The second edition was published by The White Horse in 2021, under the terms of a Creative Commons license (CC BY 4.0 license).

Read the other excerpted portions of chapter 1 here:

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