Forest Fallow Ecosystem Services: Evidence from the Eastern Amazon

With tropical deforestation a major contributor to greenhouse gas emissions and biodiversity loss, the land-use decisions of small-scale farmers at the forest margins have important implications for the global environment. Farmers’ incentives for maintaining forest fallow in a shifting cultivation agricultural system depend upon the market and non-market services it provides to them. This study estimates the value of those services, including hydrological externalities that may affect other farms downstream. The analysis uses cross-sectional farm-level survey data from the Zona Bragantina in the Eastern Brazilian Amazon to assess the value of forest fallow to farmers and test whether it provides local externalities. I estimate production functions for crops and forest products to determine the contributions of on-farm and off-farm forest fallow to income from these two activities. Instrumental variables and spatial econometric approaches help address issues of endogeneity and variation in unobservable factors over space. I use geographic information on the location of farms to obtain data on external forest fallow and to model the hydrological externality as an upstream-to-downstream process. The results indicate that fallow does contribute significantly to productivity both on-farm and downstream, boosting income from both crops and forest products. In addition, most farms appear to allocate sufficient land to fallow, accounting for both the value of hydrological spillovers and the opportunity cost of land left out of cultivation. These results suggest that farming communities may have some self-interest in preserving forest cover locally—a finding that may bolster policy efforts aimed at conserving tropical forests.