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Over at the Wall Street Journal, John Lyons delves into some of the economic challenges facing Brazil, including the strong real I mentioned yesterday:

But while foreign investment is mostly a good thing, there are downsides. The abundance of cash has helped fund riskier bank loans and fueled a potential real-estate bubble. By some measures, the Brazilian real is now the world’s most overvalued currency, and many local factories aren’t competitive in global markets.

Daily life has become so expensive that movies, taxis and even a can of Coke cost more in São Paulo than in New York. Rio de Janeiro apartment prices have doubled since 2008, and office space in São Paulo is suddenly more expensive than Manhattan. In many cases, investment banks must pay their Brazilian bankers and analysts more than they would get doing the same job in New York.

Some executives in Brazil fret that the cost of doing business has risen so fast that their country may be unable to become the manufacturing power it has aspired to be for generations. “Ever since I was a little girl I always heard Brazil was the country of the future. Now that the future is here, I am starting to fear it will be brief,” said Cynthia Benedetto, the chief financial officer of Brazil’s flagship manufacturing firm, Embraer SA, the world’s No. 3 jet maker. Embraer, a major exporter, says it is investing in equipment to lower its labor costs at home and opening more plants abroad.

If you are interested in Brazil’s economy, please read the whole thing.

 

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Posting has been light in recent weeks thanks to a two-week sojourn in Brazil and a week recovering therefrom.

I mostly turned off my inner economist to get in touch with my inner Darwin. So I have only a handful of economic observations:

  • After arriving in Rio, the car that picked us up was made in China, fueled by ethanol, and just as nice as a Subaru.
  • The weakness of the dollar vs. the real was noticeable.
  • Economic growth often poses environmental challenges. That’s certainly true in Brazil. But we also encountered repeated stories of how economic growth and conservation can be complements. Jaguars, for example, can be worth more alive than dead thanks to ecotourism. And the ease of getting jobs in the formal sector has reduced hunting pressure in some areas, sparking a virtuous cycle: more deer and more jaguars.

Like many first-timers, we visited Rio, Sao Paulo (briefly), and Iguacu Falls. But the highlight was three full days in the Pantanal.

To which you might ask, “the Panta-what?”

The Pantanal. It’s one of the world’s largest wetlands, home to jaguars, giant anteaters, innumerable birds, and the world’s densest concentration of crocodilians (the Yacare Caimans pictured above).

If you are into wildlife, the Pantanal is way more fun than the Amazon. Why? Because it’s easy to see critters when savannah mixes with small forests. In the Amazon, in contrast, many of the best birds and mammals are up in the tree canopy, 100+ feet above your head. In three days in the southern Pantanal, we saw 22 species of mammals and close to 150 species of birds (including Toco Toucans), many more than on a comparable trip to the Amazon.

For those into such things, my wife and I have a travel blog here and posted photos here. No jaguar photos, though. We heard them call at night and saw their tracks. But we didn’t see any (we did see an Ocelot). Clearly we will have to go back.

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Rivers often create important resource conflicts. Downstream cities want clean water to drink. Upstream residents want to make a living, but that sometimes damages water quality. In the highlands above Quito, Ecuador, for example, residents often convert land to farming and ranching; that allows them to raise valuable crops and livestock, but weakens the land’s ability to naturally cleanse water before it flows downstream.

How can we solve this problem? One response would be for a central government to enact laws and regulations that force the upstream folks to take better care of the watershed. Such laws can play an important role in improving water quality, but they raise several practical concerns. For example, regulatory burdens may place undue economic burdens on upstream residents. And the laws and regulations may be hard to enforce, particularly if local communities view them as an unwelcome burden.

Another strategy is for the downstream water users to pay the upstream residents for keeping the water clean. Such payments can make protecting the watershed into a profit center for upstream communities and can encourage them to accept rigorous approaches to monitoring and enforcement. (In the economics literature, this approach is often distributed as Coasian, in honor of Ronald Coase, who emphasized it in his work.)

Last week Esther and I dined with some officials of the Nature Conservancy (TNC) and learned that they are encouraging exactly this approach to water conservation in South America. TNC is helping create water funds:

Water users pay into the funds in exchange for the product they receive — fresh, clean water. The funds, in turn, pay for forest conservation along rivers, streams and lakes, to ensure that safe drinking water flows out of users’ faucets every time they turn on the tap.

Some water funds pay for community-wide reforestation projects in villages upstream from major urban centers, like Quito, Ecuador, and Bogotá, Colombia. In other cases, like in Brazil’s Atlantic Forest, municipalities collect fees from water users and make direct payments to farmers and ranchers who protect and restore riverside forests on their land through water producer initiatives.

“These ‘water producers,’ as we call them, are being fairly compensated for a product they’re providing to people downstream in Rio de Janeiro and São Paulo: fresh water,” explains Fernando Veiga, Fernando Veiga, Environmental Services Manager for the Conservancy’s Atlantic Forest and Central Savannas Conservation Program in Brazil. “They’re receiving $32 per acre, per year, for keeping their riverside forests standing.”

TNC has an informative interactive graphic that illustrates how it works in the headwaters above Quito. (Note to TNC: the graphic would be even better if it involved less clicking.)

Perhaps needless to say, this idea is not unique to South America. New York City, for example, has been pursuing a related approach, buying up buffer land around the upstate reservoirs that supply the city.

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