Can economic development and forest conservation coexist? Revisiting growth and deforestation in the Brazilian Amazon

Assessing the impact of economic development on the environment depends on a number of factors that have plagued the empirical literature for decades and led many economists to focus on more microeconometric and RCT studies on the underlying forces behind income and environmental quality. The micro-level literature has produced a number of insights on the growth-environment nexus, but its conclusions are viewed with caution in policy making due to the difficulty in accounting for general equilibrium effects that often evade these studies. We take advantage of the recent microeconometric literature on the determinants of environmental quality along the development path to revisit the aggregate relationship between income and deforestation with a focus on deforestation and ecosystem health of the Brazilian Amazon region. Our results indicate a significant, negative, and non-linear relationship that is mediated by factors such as urbanization, poverty, policies to combat extreme poverty, access to both local and national markets and more efficient production in the agricultural frontier. Heterogeneity tests shows that this relationship is significant only in middle- and high-income municipalities, aligning with the Environmental Kuznets Curve (EKC) hypothesis.