Measuring Business Climate for Agriculture and Forest Investments in Angola and Brazil

7/28/2019 Measuring Business Climate for Agriculture and Forest Investments in Angola and Brazil

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ISSN 1413-4969Publicao Trimestral

Ano XXI No 2Abr./Maio/Jun. 2012

Braslia, DF

SumrioCarta da Agricultura

O planejamento estratgicona poltica agrcola brasileira ...........................................3Caio Rocha

Migrao e diferencial de rendimentono setor agrcola brasileiro ...............................................4Francieli Tonet Maciel / Marina Silva da Cunha

Perfis das classes de renda rural no Brasil ....................... 21Ignez Vidigal Lopes / Daniela de Paula Rocha / Mauro de Rezende LopesRafael de Castro Bomfim

Measuring business climate for agricultureand forest investments in Angola and Brazil ...................28

Jose Rente Nascimento

Lucratividade da agricultura ...........................................45Eliseu Alves / Geraldo da Silva e Souza / Daniela de Paula Rocha

Competitividade dos principais produtos

agropecurios do Brasil: vantagem comparativarevelada normalizada ..................................................... 64Rodrigo da Silva Souza / Alcido Elenor Wander / Cleyzer Adrian da Cunha

Joo Antnio Vilela Medeiros

Responsabilidade social empresarialna agroindstria canavieira paranaense .............................. 72Thiago Henrique Moreira Goes / Jorge Augusto Gutierre PonaRgio Marcio Toesca Gimenes / Pery Francisco Assis Shikida / Carlos Alberto Piacenti

Exportaes: motor do agronegcio brasileiro ................ 88Elisio Contini / Marcos A. G. Pena Jnior / Carlos Augusto M. SantanaGeraldo Martha Jnior

Responsabilidade social empresarialno setor sucroenergtico em Gois ...............................103

Jos Elenilson Cruz / Eliane Moreira S de Souza

Determinantes econmicos da produode etanol no Brasil no perodo 19802008...................122Michele Polline Verssimo / Daniel Caixeta Andrade

Ponto de Vista

Realidade agrria e ideologia .......................................139Xico Graziano / Zander Navarro

Conselho editorialEliseu Alves (Presidente) Embrapa

Wilson Vaz de Arajo MapaElsio Contini Embrapa

Marlene de Arajo EmbrapaPaulo Magno Rabelo Conab

Biramar Nunes de Lima Consultorindependente

Hlio Tollini Consultor independenteJlio Zo de Brito Consultor

independenteMauro de Rezende Lopes Consultor

independenteVitor Afonso Hoeflich Consultor

independenteVitor Ozaki Consultor independente

Caio Tibrio da Rocha Mapa

Secretaria-GeralRegina Mergulho Vaz

Coordenadoria editorialWesley Jos da Rocha

Cadastro e atendimentoJssica Tainara de L. Rodrigues

Carla Trigueiro

Foto da capaFrancisco C. Martins

Embrapa Informao Tecnolgica

Superviso editorialWesley Jos da Rocha

Copidesque e Reviso de textoAna Luza Barra Soares

Corina Barra Soares

Normalizao bibliogrficaIara Del Fiaco Rocha

Projeto grficoCarlos Eduardo Felice Barbeiro

Editorao eletrnica e capaCarlos Eduardo Felice Barbeiro

Impresso e acabamentoEmbrapa Informao Tecnolgica


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Representantes e avaliadores da RPA nas Universidades

A Coordenao Editorial da Revista de Polt ica Agrcola (RPA) do Minis-trio da Agricultura, Pecuria e Abastecimento (Mapa) criou a funode representante nas universidades, visando estimular professores eestudantes a discutir e escrever sobre temas relacionados polticaagrcola brasileira. Os representantes citados abaixo so aqueles queexpressaram sua concordncia em apresentar essa revista aos seus

alunos e avaliar artigos que a eles forem submetidos.Profa. Dra. Yolanda Vieira de Abreu

Professora adjunta IV do Curso de CinciasEconmicas e do Mestrado de Agroenergia da

Universidade Federal do Tocantins (UFT)

Prof. Almir Silveira MenelauUniversidade Federal Rural de Pernambuco

Tnia Nunes da SilvaPPG Administrao

Escola de AdministraoUniversidade Federal do Rio Grande do Sul (UFRGS)

Geraldo SantAna de Camargo BarrosCentro de Estudos e Pesquisa em Economia Agrcola (Cepea)

Maria Izabel Noll

Instituto de Filosofia e Cincias HumanasUniversidade Federal do Rio Grande do Sul (UFRGS)

Lea Carvalho RodriguesCurso de Ps-Graduao em Avaliao de Polticas Pblicas

Universidade Federal do Cear (UFC)

Interessados em receber esta revista, comunicar-se com:

Ministrio da Agricultura, Pecuria e AbastecimentoSecretaria de Poltica Agrcola

Esplanada dos Ministrios, Bloco D, 5o andar70043-900 Braslia, DF

Fone: (61) 3218-2505Fax: (61) 3224-8414

[email protected]

Empresa Brasileira de Pesquisa AgropecuriaEmbrapa Informao Tecnolgica

Parque Estao Biolgica (PqEB)Av. W3 Norte (final)

70770-901 Braslia, DFFone: (61) 3448-2418

Fax: (61) 3448-2494Wesley Jos da Rocha

[email protected]

Esta revista uma publicao trimestral da Secretaria dePoltica Agrcola do Ministrio da Agricultura, Pecuria eAbastecimento, com a colaborao tcnica da Secretariade Gesto Estratgica da Embrapa e da Conab, dirigida a

tcnicos, empresrios, pesquisadores que trabalham com ocomplexo agroindustrial e a quem busca informaes sobrepoltica agrcola.

permitida a citao de artigos e dados desta revista,desde que seja mencionada a fonte. As matrias assinadasno refletem, necessariamente, a opinio do Ministrio daAgricultura, Pecuria e Abastecimento.

Tiragem7.000 exemplares

Est autorizada, pelos autores e editores, a reproduo desta

publicao, no todo ou em parte, desde que para ns no comerciais.

Dados Internacionais de Catalogao na Publicao (CIP)

Embrapa Informao Tecnolgica

Revista de poltica agrcola. Ano 1, n. 1 (fev. 1992) - . Braslia, DF :

Secretaria Nacional de Poltica Agrcola, Companhia Nacional de

Abastecimento, 1992-

v. ; 27 cm.

Trimestral. Bimestral: 1992-1993.

Editores: Secretaria de Poltica Agrcola do Ministrio da Agricultura,

Pecuria e Abastecimento, 2004- .

Disponvel tambm em World Wide Web:

ISSN 1413-4969

1. Poltica agrcola. I. Brasil. Ministrio da Agricultura, Pecuria

e Abastecimento. Secretaria de Poltica Agrcola. II. Ministrio da

Agricultura, Pecuria e Abastecimento.

CDD 338.18 (21 ed.)


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28Ano XXI No 2 Abr./Maio/Jun. 2012

Measuring businessclimate for agricultureand forest investmentsin Angola and Brazil1

Jose Rente Nascimento2

Abstract For investments in agriculture to be attractive, they need to be profitable. This profit-ability depends not only on the intrinsic nature of the investment project and the capabilities of thepromoter, but also on the conditions offered by the business climate in the country, sector, and localfactors that influence the costs and benefits of investments. This article presents a model to mea-sure the business climate for agriculture investments and uses the examples of Brazil and Angola toillustrate its use. Although both countries have major opportunities to improve their performanceand become more attractive to investors, Angola faces bigger challenges. The article also discussessome policy issues that affect factors that can improve the business climate for agriculture, forest,and rural investments in Brazil. To be more useful to investors, it is recommended that the detaileddevelopment and calculation of an Agriculture Investment Attractiveness Index, as an internationalpublic good, be undertaken periodically not only for Angola and Brazil, but also for other Sub Saha-ran African and Latin American countries. For the case of large countries with several administrativeand/or geographical regions, such as Brazil, it is also useful to create and calculate a similar indexto measure the business climate at the sub-national level.

Keywords: agriculture, Angola, Brazil, business climate, development, economics, forestry, index,indicators, investment, policy, private sector, rural.

Medindo o clima de negcios para investimentosem agricultura e florestas em Angola e no Brasil

Resumo Para os investimentos em agricultura serem atraentes, eles precisam ser rentveis. Essarentabilidade no depende apenas da natureza intrnseca do projeto de investimento e da capa-

cidade do promotor, mas tambm das condies oferecidas pelo clima de negcios no pas e nosetor, alm de outros fatores locais que influenciam os custos e os benefcios do investimento. Esteartigo apresenta um modelo para medir o clima de negcios para investimentos agrcolas e usa os

1 Original recebido em 17/10/2011 e aprovado em 24/1/2012.2 Forest Engineer from the Federal University of Viosa, Brazil; and Master of Planning and Ph.D. in Natural Resources Economics from the University of

Minnesota, USA. Was Senior Natural Resources Specialist of the Inter-American Development Bank. Is a partner at the RuralProsper Consultoria Limitada.Email: [email protected].


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Ano XXI No 2 Abr./Maio/Jun. 201229

exemplos do Brasil e da Angola para ilustrar o seu uso. Embora ambos os pases tenham muitasoportunidades para melhorar seu desempenho e se tornarem mais atraentes para os investidores,Angola enfrenta desafios maiores. O artigo tambm discute algumas questes de poltica que afetamfatores que podem melhorar o clima empresarial para a agricultura, florestas e outros investimentosrurais no Brasil. Para ser mais til para os investidores, recomenda-se o desenvolvimento detalhadoe o clculo de um ndice de atratividade de investimentos agrcolas, como um bem pblico interna-cional, a ser produzido periodicamente, no s para a Angola e o Brasil, como tambm para outrospases da frica Subsaariana e pases latino-americanos. Para pases de grandes dimenses e con-stitudos de vrias regies administrativas e/ou geoambientais, como o Brasil, til tambm que secrie e calcule um ndice similar para medir o clima de negcios em mbito subnacional.

Palavras-chave: agricultura, Angola, Brasil, clima de negcios, desenvolvimento, economia, flores-tas, ndice, indicadores, investimento, poltica, setor privado, rural.

Introduction

The success of business initiatives dependon several factors, many of which are internal tothe firms. Those conditions are usually underthe control of managers and success or failureof their operations depends on their capabilitiesand decisions. Although such internal perfor-mance is indispensable, it is by no means suf-ficient for the success of firms.

Entrepreneurs also operate within an ex-ternal system that offers varying degrees of con-ditions that favor and facilitate their activities,or not. Individual firms cannot usually controlthose external factors such as the rules of the

game (laws, regulations, tax burden, and theirenforcement), input and output markets, or oth-ers that directly affect their costs, revenues, andprofitability. Firms success therefore will in-crease with the improvement of business climatethat a given country can offer to investors.

Successful agriculture and forest busi-nesses depend on natural resources, productivehuman resources, competitively priced capitaland inputs, and other favorable climate condi-tions for investments. Without such conditions,

investments become too costly and risky whilebenefits too small and uncertain so that profitsare not sufficient to motive entrepreneurs and in-vestors to act.

Even if a country counts with abundantnatural resources such as soil, topography, andclimate, which are the only resources that cannot

easily be created or hired anywhere, it may notoffers other needed conditions to investors. Ag-riculture and forest based businesses, therefore,cannot prosper and cannot generate the benefits

to society that they otherwise could.This paper will first discuss the perfor-

mance of Angola and Brazil in various indexesmeasured by different organizations that seekto compare the conditions that entrepreneursface in different countries to invest successfully.These indexes show the challenges businesses inAngola and Brazil have to face to succeed andprosper.

The second part discusses a model that

tries to identify the factors and relationships thataffect the success of businesses in agriculture,forestry, and rural sector, which are critical fordevelopment in rural areas. To take advantage ofthe substantial natural resources that Angola andBrazil have and allow them to become a sourceof prosperity, the countries stakeholders needto understand such factors. That understandingwould also allow the identification of the criticalintervention leverage points to improve the con-ditions that facilitate the profitable and sustain-

able operation of private businesses. The modelpresents a framework that helps in the develop-ment of strategies and the identification of mea-sures to improve such conditions.

It is beyond the scope of this paper to cal-culate the most recent scores for Angola or Bra-zil can obtain in the corresponding indicators for


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agriculture related investment attractiveness. It is,however, strongly recommendable that such cal-culation be undertaken periodically not only forthis country, but also for other nations. Besidesits use in the design, monitoring and evaluationof interventions, this periodic calculation would

allow several types of comparisons among coun-tries, promote healthy competition among them,and help investors select the best countries toestablish their agriculture and forest businesses.

Nevertheless, the present discussion doesprovide sufficient information for the preparationof a framework that includes the design of inter-ventions to improve the business climate for ag-riculture, forest, and rural investments in Angola,Brazil3 as well as other countries.

Conditions for successfulinvestments in Angola and Brazil

The success of business initiatives de-pends on many challenging conditions that formthe business climate for agriculture investment(DCED, 2008; WORLD BANK, 2005, 2007).Besides the internal firm conditions under thecontrol, investors also have to operate within anexternal environment which may favor or hinder

their chances of success. Individual firms cannotusually control the rules of the game (laws, regu-lations, and their enforcement), input and outputmarkets, nor other external conditions that affecttheir costs, revenues, and profitability.

Table 1 summarizes the performance ofAngola and Brazil in selected indexes created tocompare several countries in terms of indicatorsthat affect businesses. These indexes show notonly the scores that try to quantify the perfor-mance of a country. They also rank these scores

to show the relative performance of a country inrelation to its peers. In a world where countrieshave to increasingly compete with one another,the ranking of countries and how these relative

performances vary in time, become critical forinvestors decision making. Countries have notonly to perform well in a given year. They alsoneed to improve over time the conditions theyoffer more than other countries with which theycompete for investments. This healthy com-

petition leads to a positive feedback cycle thatshould benefit investors and society as a whole(NASCIMENTO, 2009; TOLLINI, [200-?]).

The indexes shown in Table 1 illustrate theconditions investors in most sectors face in An-gola. Even though some of these indexes mayhave an overlap among some variables or fac-tors considered, they do provide a useful indica-tion of the absolute and relative performance ofcountries. Sadly, in all of them, Angola reacheslow scores and ranks among the countries thatface the most challenges in the specific condi-tions measured. Under such difficult contingen-cies, businesses are unlikely to prosper. Thisperformance also demonstrates that the privatesector faces severe challenges to contribute tothe development of the country.

These indexes illustrate the difficulties in-vestors face in Brazil. In many of them, Brazilscores relatively low values and ranks, and isfound among the countries that face substantial

challenges in several of the specific conditionsmeasured. Businesses are unlikely to prosperas much as they otherwise could under a bet-ter business climate. This relatively low per-formance indicates that the private sector facesimportant challenges to increase its contributionto Brazils development.

It is beyond the purpose and scope of thisstudy to further analyze the results of such in-dexes. It suffices here, that they clearly show the

challenges faced by investors to profitably oper-ate in Brazil and Angola as well as the need forthe adoption of strategic measures to further im-prove the business climate of the country.

3 For large countries such as Brazil with substantial regional differences, aggregate number in an Index brings only limited information to investors. Theprovision of more detailed information may improve investors decision making and can be done through the development of state level models of investmentattractiveness and calculate sub national indexes such as the Brazil Index for Forest Investment Attractiveness. (IAIF, 2012).


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Indexname

A

ngolas

sc

oreand

rank

Brazils

scoreand

rank

Briefdescription

Economic

Freedomofthe

World

Score:4.1

o

utof10

Rank:140

outof141

Score:6.0

outof10.0

Rank:111out

of141

Theindex

publishedinEconomicFreedom

oftheWorldmeasuresthedegreetow

hichthepoliciesand

institutions

ofcountriesaresupportiveofecono

micfreedom.Thecornerstonesofeconomicfreedomare

personalchoice,voluntaryexchange,freedomtocompete,andsecurityofprivatelyo

wnedproperty.Forty-

twovariablesareusedtoconstructasummary

indexandtomeasurethedegreeof

economicfreedomin

vebroad

areas:(1)sizeofgovernment;(2)legalstructureandsecurityofproperty

rights;(3)accessto

soundmon

ey;(4)freedomtotradeinternationally;and(5)regulationofcredit,labora

ndbusiness.Source:

Gwartneyetal.(2010)

Corruptions

Perception

Index(CPI)

Score;1.9

outof10.

Rank:158

outof180

c

ountries

s

tudied.

Score;3.7

outof10.

Rank:69

outof178

countries

studied.

TheCorruptionsPerceptionIndex(CPI)isreportedannuallybyTransparencyInternat

ional,aninternational

civilsocietyorganization.TheCPIrankscountriesintermsofthedegreetowhichcorruptionexistsinthe

misuseofpublicpowerforprivatebenetamon

gpublicofcialsandpoliticians.CPI

isacompositeindex

determined

byexpertassessmentsandopinionsurveys.Thehighestrankedcountryisthecountrywiththe

leastamou

ntofperceivedcorruption.Indexunits

,10=leastcorrupt,0=mostcorrupt.D

atacollectedin2011.

Source:TransparencyInternational(2012)

Source:modiedfromNascimento(2009).

Table1.Continuation

.


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Agriculture and forest businesses are alsoaffected by many of the conditions that theseindexes try to measure. However, due to theirspecial characteristics, it is more useful to try toidentify the principal factors that influence busi-nesses in this sector, the relationships among

them, and how they impact investment profit-ability. This modeling helps not only to under-stand the situations better, but also is critical forthe design of actions that can improve the chanc-es for entrepreneurs success. These are the goalsof the next section of the paper.

The model discussed here is helpful tounderstand the current situation of a country,how its performance compare with others, whatits potential performance could be if all factorscould be made to reach their maximum scores,

and how to identify priority areas and actionsto create an action plans to improve such busi-ness climate. To design these plans, however,it is necessary to undertake a detailed and pe-riodic planning process that will systematicallyidentify the priority factors, analyze their currentand potential situations, and design interventionsto move the future expected situation towards adesired future or vision for the sector.

One example of index that tries to mea-

sure the business climate for forest based invest-ments is the Forest Investment AttractivenessIndex (IAIF, from the Spanish acronym). TheIAIFs purpose is to clarify governments, investorsand other stakeholders which are the factors thataffect, lead to success, and attract private directinvestment, domestic or foreign, to the forestrysector.

This Index seeks to measure countries at-traction for direct investment in sustainable for-estry business. The IAIF allows: (i) to compare

the performance of countries in the same yearand the trend over time, (ii) to assist investors topre-identify the countries where sustainable for-est business will most likely be successful, and(iii) to clarify for countries which supra, inter andintra factors most affect their business climate forsustainable forestry investments.

The IAIF methodology considers 80 vari-ables that make up a total of 20 indicators (sev-eral of them, exclusive) that are integrated intoa model that seeks to explain and predict lev-els of direct investment in the sector (NDICE,2005). The IAIF was applied to the Inter-Ameri-can Development Bank (IDB) borrowing coun-tries based on data from 2004 and 2006. Table2 shows the detailed IAIF results for indicatorsand sub indexes for Brazil calculated using 2006data.

Brazil, according to this Index, is the mostattractive country for investment in forest basedbusinesses in Latin America and the Caribbeanregion. However, it is reaches only 60 out of atotal of 100 points possible, implying that thereis much room for improvement in the conditions

that lead to greater investments in the sector. Thiscan best be seen by identifying the indicatorsthat have the greatest potential for improvementwhen one compares the 2006 performance withthe theoretical possible score which is shown inthe last column of the Table 2. For instance, theIAIF indicates that Inter Sectorial factors such asLabor, Licenses and Permits, Property Rights, andCapital and Foreign Investment Flow can morethan double their performance, while Intra Sec-torial factors such as Favorable Support, ForestResources and Adverse Actions can be almostthree times better.

Growth potential for the Brazilian IAIFis 65%, pointing to the existence of substantialroom for implementing policies aimed at improv-ing the attractiveness of forest investment. Thedetailed analysis of the indicators that form theIndex suggests the priority areas for intervention.

The model discussed here is helpful to un-derstand the current situation of a country, howits performance compares with others, what

its potential performance could be if all factorscould be made to reach their maximum scores,and how to identify priority areas and actionsto create an action plans to improve such busi-ness climate. To design these plans, however,it is necessary to undertake a detailed and pe-riodic planning process that can systematically


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Table 2. Brazils performance Forest Investment At-

tractiveness Index (2006).

Indicators / Sub

index / IAIF

Rating

in 2006

Max.

rating

possible

Potential

growth

(%)

GDP Growth rate 75 100 34

Passive real interest

rate97 100 3

Exchange rate

stability100 100 0

Trade openness 58 100 72

Political risk 67 100 50

Tax share of GDP 53 100 90

Supra Sectorial Sub

Index75 100 34

Economic

infrastructure62 100 61

Social infrastructure 79 100 26

Licenses and permits 50 100 100

Labor 39 100 156

Capital market 55 100 82

Property rights 50 100 100

Capital and foreign

investment ow50 100 100

Agricultural policies 57 100 76

Planting and

harvesting restrictions52 100 91

Inter Sectorial Sub

Index55 100 82

Forest resources 40 95 138

Favorable support 37 100 168

Domestic market 95 100 5

FVL 80 100 25

Adverse actions 42 100 137

Intra Sectorial Sub

Index59 99 68

IAIF 60 99 65

Source: Getulio Vargas Foundation and INCAE Business School (2008).

identify the priority factors, analyze their currentand potential situations, and design interventionsto move the future expected situation towards adesired future or vision for the sector.

To be more useful to investors, it is rec-ommended that the detailed development andcalculation of an Agriculture Investment Attrac-tiveness Index, as an international public good,be undertaken periodically not only for Angolaand Brazil, but also for other Sub Saharan African

and Latin American countries. Besides its use inthe design, monitoring and evaluation of inter-ventions to their respective business climates,this calculation would allow several types ofcomparisons among countries, promote healthycompetition among them, and help investors se-lect the best countries to establish their agricul-ture and forest businesses.

For the case of large countries with severaladministrative and/or geographical regions, suchas Brazil, it is also useful to create and calculate

a similar index to measure the business climate atthe sub-national level.

Business climate modelfor agriculture investment

A model has been developed to better un-derstand and serve as the basis to improve theconditions for successful investing in agricultureand forest based sustainable businesses. It as-

sumes that a country will be more attractive foragriculture and forest based sustainable businessinvestments, the more profitable such invest-ments are likely to be. The profitability of thesebusinesses in a country depends on the costs in-vestors have to face and the expected benefitsfrom their operations.

The model shown on Figure 1, proposesthat costs investors have to face and the expect-ed benefits from their operations are affected bythree groups of factors: the supra sectorial, the in-

ter sectorial, and the intra sectorial factors. Com-bined, the supra and the inter sectorial factorsare also called extra sectorial conditions sincethey are variables that are not considered as partof the agriculture or forest based sector. The fol-lowing sections will discuss briefly the principalfactors that constitute each of these three groups.


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Supra sectorial factors

Supra sectorial factors influence the per-formance of firms in all sector of the economy,including the agriculture, forestry, and rural

based ones. They include macro economic con-ditions and political risk. There are six main fac-tor in the supra sectorial group that are found toaffect substantially the conditions for the successof agriculture or forest based businesses: a) Grossdomestic product growth; b) Exchange rate sta-bility; c) Interest rate; d) Tax burden; f) Free trade;and g) Political risk.

There are two hypotheses relating thesefactors and how they affect the profitability of

agriculture or forest based business. The first in-dicates that, as the factor increases (decreases),

then the profitability is also expected to increase(decrease); that is, they move in the same di-rection. Therefore, the model states that prof-itability is expected to increase the faster GDPgrows, the Exchange rate is more stable; and/or

the economy is more open allowing for cheapertransaction costs for import and export. On theother hand, profitability is expected to decreaseas GDP shrinks, the Exchange rate is more unsta-ble; and/or the economy is more closed allowingfor more expensive transaction costs for importand export.

The red arrows with a negative sign at theirpoints (-) indicate the second hypothesis. In thiscase, as the factor increases (decreases), then the

profitability is expected to decrease (increase);that is, they move in opposite directions. There-

4 In this figure, causal relationships between variables were represented in two forms:

1) Variable A (+) Variable B This relationship should be read: if A increases (decreases), then B increases (decreases) more than it would without thechange in A. The variables generally move in the same direction.

2) Variable J (-) Variable K This relationship should be read: if J increases (decreases), then K decreases (increases) more than it would without the changein J. The variables generally move in opposite directions. The rounded shape at the beginning of the Inward flow and the end Outward flow means thatthe model does explain where these flows come from or go to.

Figure 1. Model of factors influencing the attractiveness of direct investments in agriculture and forest businesses.4

Source: modified from Nascimento and Tomaselli (2007).


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fore, profitability of agriculture or forest basedbusiness is expected to increase as Interest ratesget smaller, the Tax burden is less expensive;and/or the political risk reduces. On the otherhand, profitability is expected to decrease as In-terest rates get larger, the Tax burden is greater;

and/or the political risk increases.

Inter sectorial factors

The inter sectorial factors are those that aremanaged by other sectors of the economy butwhich have substantial impacts on the cost andbenefit structures of agriculture or forest basedbusinesses. The model identifies eight of thesefactors: 1) Economic infrastructure; 2) Social in-

frastructure; 3) Credit accessibility; 4) Licensesand permits; 5) Environmental restrictions; 6)Capital treatment; 7) Labor; and 8) Rule of law.Table 3 provides a summary of explanations ofthese factors.

Here too there are the same two hypoth-eses relating these inter sectorial factors and howthey affect the profitability of agriculture or forestbased businesses. Thus, the blue arrows indicatethat, as factors like economic infrastructure, socialinfrastructure, credit accessibility, favorable capi-

tal treatment; competitively priced and produc-tive labor; and rule of law effectiveness increases(decreases), then the profitability is also expectedto increase (decrease); that is, profits tend to movein the same direction these factors move.

On the other hand, the red arrows indicatethat as factor like environmental restrictions andlicenses and permits (decreases), then the prof-itability of agriculture or forest based businessis expected to decrease (increase); that is, theymove in opposite directions.

Intra sectorial factors

The intra sectorial factors are those that aremanaged by public or private actors found in-

Table 3. Brief description of the inter sectorial factors.

Factors Brief description

1 - Economic

infrastructure

Includes availability of economic infrastructure services at competitive prices and quality

such as those provided by roads, communications, energy, ports, railroads, airports

2 - Social infrastructureIncludes availability of social infrastructure services at competitive prices and quality

related to human development such as education; health; water, sewage & waste disposal

3 - Credit accessibilityIncludes the sophistication of nancial and capital markets, availability of credit at

competitive terms as well as other capital markets instruments

4 - Licenses and permitsIncludes bureaucratic procedures and legal requirements to open, operate, and even close

rms and that take much time, efforts, and other resources to comply with

5 - Environmental

restrictions

Unfounded or useless environmental restrictions that increase rms costs without

generating environmental benets

6 - Capital treatmentIncludes barriers and restrictions to the movement of capital into, out of, or within the

country

7 - LaborIncludes the costs generated by labor legislation, the level of general productivity and the

availability of skilled workers at competitive prices

8 - Rule of lawThe existence of favorable legislation, enforcement, and justice services. Includes cleardenition and protection of property legislation; respect to the letter of contracts, and timely

justice at reasonable cost

Source: adapted from Nascimento and Tomaselli (2007).


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side the agriculture or forest based sector of theeconomy. These factors, by definition are underthe control of these actors and can be intervenedmore directly by them. The model identifies fiveof these factors: 1) Agriculture or forest productsdomestic market; 2) Agriculture and forest pro-ductivity; 3) availability of agriculture and forestvocation lands; 4) Favorable supports; and 5)Adverse actions. Table 4 provides a summary ofexplanations of these factors.

Except for Adverse Actions, all other IN-TER sectorial factors move profitability in thesame direction as they move. That is, as thesefactors increase (decrease), then the agricultureand forest based businesses profitability is alsoexpected to increase (decrease).

The bigger the domestic market for ag-

riculture and forest products, including thoseused as input for export products or directly soldoverseas, the more profitable the agriculture andforest businesses can be, ceteris paribus. Con-versely, the smaller the domestic market for agri-culture and forest products, including those usedas input for export products or directly sold over-sees the less profitable. However, the size of thedomestic market is not easily modified by publicpolicy. It can change only if agriculture or forestproducts prices times the quantities consumed

increase. To consume more implies a changeof taste of consumers and/or an increase of in-come, assuming the products are income elas-tic. Especially when markets are small and itsgrowth is not expected to be fast, countries haveto consider the regional and/or world markets as

their targets, and seek to increase export of com-petitive products. This vision of an agricultureor forest products exporting country requiresthe adoption of interventions to increase the at-tractiveness of direct investments in the sector.So policies that seek economic and trade inte-gration or free trade agreements can potentiallyincrease this factor substantially. However, thisis indicator is based on actual exports, whichmeans that domestic producers are competitiveto be able to export.

Agriculture and forest productivity arecritical factors that are important for the com-petitiveness of a country. Among other factors,productivity depends on the availability andadoption of appropriate technology; produc-tion inputs such as seeds, fertilizers, machinery;skilled labor and professionals; and supportingservices. Research, technical assistance, adapta-tion of technologies, and other innovations arekey to increase productivity.

Table 4. Brief description of the intra sectorial factors.

Factors Brief description

Agriculture or forest

products domestic

market

Includes the size of the domestic consumption of inputs and outputs of the agriculture and

forest based sector. It also includes the domestic consumption associated with the export

of outputs from the sector

Agriculture and forest

productivity

Includes the land productivity of agriculture or forest based businesses. It is directly

associated with the technologies used for production in the country

Availability of agriculture

and forest vocation

lands

Includes the size of lands in the country that are arable, or are forest vocation lands.

Agriculture production is often, but not always, more competitive in arable lands than forest

production, while the opposite is true for forest vocation lands. (NASCIMENTO, 2005)

Favorable supportsIncludes policies and measures taken the public or private sectors that reduce costs orincrease benets for investors

Adverse actionsIncludes policies and measures taken the public or private sectors that increase costs or

decreases benets for investors

Source: adapted from Nascimento and Tomaselli (2007).


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Available agriculture and forest vocationlands (FVL)5 are a critical factor for the attractive-ness of a country for sustainable investments inthe sector. The greater the land area a countryhas that can potentially be used for agricultureor forest production, the greater the contribution

of this factor to the INTRA sectorial conditionsthat favor successful agriculture or forest busi-nesses. However, the physical existence of suchlands is not enough. They have to be accessibleto investors through secure and relatively flexiblemechanisms that allow long term investments tobe made as well as easiness of exit if so desired.

Favorable supports are divided in twogroups: those policies, and actions or inactionsby governments that reduce investors costs, andthose that increase benefits. These supports are

identified usually as a result of detailed analysesof surveys of the perceptions of investors, pro-ducers, academics, and other stakeholders.

Adverse actions are also divided in twogroups: those policies, and actions or inactionsby governments that increase investors costs,and those that decrease benefits. However in-triguing, governments mostly good intentionsnot always result in favorable conditions for in-vestors. Using the same methods described for

Favorable supports, it is possible to identify suchsituations which need to be corrected to improvebusiness climate.

Improving business climatecritical factors in Brazil

This section tries to provide a more detailthough short discussion of some of the criticalissues and factors that affect the business climatefor FDI in agriculture and forest sector (CHAD-DAD; JANK, 2006; OECD, 2009). The discussionis structured using the same Supra, Inter, and In-tra classification of factors used in the above.

Improvement insupra sectorial factors

Supra sectorial factors are those which af-fect all sectors of an economy and, therefore,are no likely to be changed just because of theiradverse effect in one sector. However, it is nec-

essary to show society and officials the conse-quences in a given sector of these factors and tocontribute to the corresponding policy debate.

Among the supra sectoral factors that havemost affected investments in the agriculture andforest, the following are highlighted and discussedhere: overvalued Brazilian Real vis a visUS Dollar;very high interest rates; and excessive tax burden.

Exchange rate

Since 1998, Brazil has adopted a flexibleexchange rate, which overcomes the traditionalimplicit taxation on the agricultural sector dueto the overvaluation the national currency withrespect to the US Dollar, and to the currenciesof other major trade partners. The flexible ex-change rate allows for a great competitiveness ofBrazilian agricultural products in the internation-al markets and, as a consequence, exports in-creased and flow of FDI for the agribusiness alsoincreases as shown earlier in this case study. Theabundance of US Dollar at low interest rates dueto the stimulus policies in the USA combinedwith high interest rates practice in Brazil haveattracted investors and resulted in the devalua-tion of that currency. This devaluation, when notcompensate by increases in commodity prices,has adverse consequences of competitiveness ofBrazilian agriculture, reducing exports, and in-creasing imports.

Interest rate

Interest rate in Brazil has been persistentlyhigh as a consequence of an easy fiscal policy,which allowed for huge fiscal deficit in the gov-ernment accounts. After 1994, with the imple-

5 Forest vocation lands are those that, due to their physical site features such as soil, topography, and the rainfall it receives, should be kept under forest coveror other sustainable land use if soil or water related negative externalities are to be avoided. FVL classification does not depend on the type of cover theland actually has, nor does it depend on the requirements it may have for agriculture crop or forest production. Therefore, lands with no forest cover or usecan still be classified as FVL if their physical features so indicate; while lands covered with forest may not be FVL. (NASCIMENTO, 2005).


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mentation of Real Plan in 1994 that drasticallyreduced inflation rate in Brazil, interest rate hasbeen strongly reduced in nominal terms. How-ever, it continues high in real terms due to largespreads associated with the risk premium for pri-vate investment (Box 1). However, in the last ten

years, nominal and real interest rates have beenpersistently declining, which has stimulated in-vestment in the agricultural sector. On a world-wide basis, they are still very high, affecting thecost of doing business, including agriculture, inthe country and reducing its competitiveness.

Tax burden

The tax burden in Brazil has been grow-ing in the last two decades as a result of an easyfiscal policy adopted by the government, mainly

due to increase in current expenditure and theexploding costs of the socio security pensionfund. This situation has been one of the majorfactors also contributing to the loss in competi-tiveness of the Brazilian business. Only to have

an idea, in the last eight years the internal publicdebt has almost doubled, reaching around USD1 trillion. This situation will put a heavy burdenon the next generation and will be a deterrentto international investment in Brazil. Therefore,international investment in the agricultural and

related sectors is also expected continue to sufferfrom this situation.

Improvement ininter sectorial factors

Inter sectorial factors are those that belongto non-agriculture and forest sector of the econ-omy, but affect substantially the profitability ofthese businesses. They usually affect the costs inseveral stages of the value chain. Although these

factors are beyond the mandate of agricultureand forest authorities, they do have a major rolein trying to persuade the corresponding officialsto provide better conditions for the businesses.

Among the inter sectorial factors thathave most affected investments in the agricul-ture and forest, the following are highlighted anddiscussed here: economic infrastructure, socialinfrastructure, environmental restrictions, andenvironmental restrictions.

Economic infrastructure

Economic infrastructure services are anunavoidable cost for most agriculture or forestbased businesses. When they are too expensivethey can reduce profitability to the point thatinvestments are not feasible. Investors are notgoing to create and operate businesses success-fully if economic infrastructure is not availableat competitive prices, in good quality, and reli-able. It is, therefore, critical that entrepreneurs

can count with such services (BATISTA, 2008).With few exceptions, Brazil has neglected

its transportation network be it highways, rail-roads, ports, airports, and waterways. This needis understood in the country but much has yet tobe done to accomplish the goal of having a com-petitively priced transportation network.

Box 1 - Credit Market

BNDES, the government national develop-ment bank, is the primary Brazilian sourceof longer-term credit, and also provides ex-

port credits. FINAME (the Special Agencyfor Industrial Financing) provides foreign anddomestic companies operating in Brazil fi-nancing for the manufacturing and marketingof capital goods. FINAMEX (Export Finan-cing), which finances capital good exportsfor both foreign and domestic companies, isa part of FINAME. One of the goals of thesefinancing options is to support the purchaseof domestic over imported equipment andmachinery.

PROEX, an export credit program financedby the National Treasury offers assistancein the areas of interest rate equalization, ca-pital and other goods exports, and serviceexports).Source: United States (2010).


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Another type of infrastructure that needsto be available at competitive prices is energy.Brazil has a varied energy matrix and count withcommercial bioenergy, hydroelectricity, and hasencountered abundant deposits of petroleum indeep sea deposits. However, population and in-come growth have increased demand to a pointthat requires additional supply if prices are to becompetitive for investors.

Social infrastructure

As mentioned in Table 1, Brazil has a verylow performance in the Human DevelopmentIndex scoring only 0.699 points out of 1 pos-sible and ranking 73rd in a total of 182 countriesevaluated.

This low performance increases costs for

investors that may need to supplement pub-lic provision of health and education serviceswith their own resources. Low levels of healthof works decreases productivity, increases costsand reduce competitiveness. Low levels of edu-cation and training has similar consequences forbusinesses. It is, therefore, critical that policiesbe adopted and investments be made to improvethese conditions.

Environmental restrictions

Forest code, and conservation and forestpolicy in Brazil is in conflict and affect land useand profitability of forest and agriculture busi-nesses. It goes beyond the task of this study toprovide a full discussion of these complex issues.Here it will be briefly presented the case of thedesignation of land for biodiversity Preservation.The obvious conflict here is that more land forbiodiversity protection, less will be available forproduction, however large the country is.

Brazil is known for its important biodiver-

sity resources. Agriculture and, to a lesser ex-tent, forest uses of the land have adverse impactsover the ecosystems where they are located. Ifthese ecosystems themselves, or species withinthem, are at risk of extinction, investors sociallyresponsible will be reluctant to participate. Todo otherwise may bring a reputational risk which

can affect their image and businesses anywherethey operate.

For many reason including these, it is criti-cal that the country counts with an effective bio-diversity preservation and conservation system.The system needs to protect a self-sustaining

ecosystem samples so that species can continueto survive and indeed evolve. That means thatthe size of those samples needs to be technicallydetermined and legally established as a protectedarea, and management plans be developed andimplemented. These units may generate theirown revenues based on ecotourism. However,the main concern here is to assure that there willnot be conflicts between the use of lands foragriculture and forest based businesses and theneed to protect the nations biodiversity resourc-

es. The GoB has the legal means and can take aleadership role to involve third parties, includingthe private sector, to address this concern.

Brazil has 77 million Ha in nature protec-tion areas, 124 million Ha of Federal CommunityForests, 239 million Ha of public forests, and 106million Ha of Indian lands (FLORESTAS, 2009),representing 64% of the total area of the country.When combined with the environmental restric-tion imposed on landowners rights to use theirresources, and the prohibitions of production of

certain crop in the Amazon region, it turns outthat the quantity of land available for investmentis much less. In a recent evaluation, Miranda et al.(2008) has estimated that 606 million hectares areset aside for Indian lands, conservation units, le-gal reserves, and permanent preservation areas,representing 71% of the nations territory. Accord-ing to this estimation, 246 million hectares areavailable for production, cities and infrastructure.However questioned these number may be, it isclear that Brazil needs to reflect on the priorities

and policies for efficiently distribute the availableland resources among different uses.

Most of the biodiversity protection areasare not very effectively managed and protected,and in fact may be excessive for the protection ofthe resource. The system need to be reevaluatedand effectively protected.


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Improvement inintra sectorial factors

Intra sectorial factors are those that belongto agriculture and forest sector of the economy.They usually affect directly the costs, benefitsand profitability in several stages of the value

chain. These factors are under mandate of ag-riculture and forest authorities, therefore, theyhave the power to address them, or at lead thepolicy and other actions. So as to provide betterconditions for the businesses.

Among the intra sectoral factors that havemost affected investments in the agriculture andforest, the following are highlighted and dis-cussed here: Available Agriculture and Forest Vo-cation Lands; and Reconciling Agricultural andForest Uses, and Environmental Protection.

Available agriculture andforest vocation lands

Land in Brazil for agriculture and forestbased businesses investment is becoming in-creasingly more scarce. Prices are rising due toincreased demand, but also because of artificialreductions in supply.

Physical availability of land well locat-ed and with acceptable levels of fertility is not

enough for entrepreneurs to be able to invest inforest or agriculture businesses. Since these in-vestments require time to mature, it is critical thatinvestor have the certainty that they will be ableto harvest the products of their efforts in the fu-ture. This certainty in many countries is derivedfrom a clear and titled property rights regimenthat is protected by the state. It is also importantthat these rights can be traded in market so thatinvestors do not feel trapped into the businessand are able to exit if needed.

Recently the issue of foreign ownershipof land beyond the traditionally limited regions(Box 2) has been raised and the legal systemis addressing it bringing some uncertainty toinvestors.

However, property rights themselves arejust one solution that provides investors with the

assurances they need. These rights have to beprotected by the State as part of the Rule of theLaw that must reign in a society which intendsto promote FDI and other investments in agricul-ture and forest businesses. Uncertainty broughtby invasions of the Landless Movement can re-duce the interest of investors, increase transac-

tion costs for secure titling and possession, andworse scenarios lead to divestment.

Reconciling agricultural and forestuses, and environmental protection

Decisions on agriculture or forest uses onthe same land often generate conflicts not only

Box 2 - Restriction to foreign ownership oflands

A 1995 constitutional amendment termina-ted the distinction between foreign and localcapital in general, yet there are laws that res-

trict foreign ownership within some sectors,notably media and communications, andaviation.

Foreign investment restrictions remain in alimited number of other sectors, includinghighway freight (20 percent) and mining ofradioactive ore. Foreign ownership of landwithin 150 km of national borders remainsprohibited unless approved by Brazils Na-tional Security Council. In October 2009,the Brazilian Chamber of Deputies approved

legislation that would further restrict foreignownership of land along Brazils borders,and within the Amazon. The legislation stillrequires committee review and passage inthe Brazilian Senate, followed by presidentialapproval to become binding. Annex 4

In August 2010, the Nations General Attorneyissued a directive, approved by the CountrysPresident, changing legal interpretation thatindicates limitations to the ownership of landby foreigner of Brazilian firms controlled by

foreigner. The directive limits the size of theproperties that foreigners can own.


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for landowners themselves but also for neighbors,society in general, and even for the internationalcommunity. At a highly competitive commer-cial level, agriculture and forest uses of a givenpiece of land are frequently mutually exclusivealternatives. In many cases, lands covered withnative forests are converted into agriculture landuses, resulting in deforestation. Traditionally, de-forestation in a first steps in the slash and burnagriculture process, which is a major source ofgreenhouse gases that may affect the climate.Misused land often generates erosion, and runoffwhich deteriorate the quality of the environment,reduce natural fertility of the soils, and pollutewaters. All these situations exemplify the needfor clear rules of the game so that the decisionabout land in the country, can be made takingprivate and social considerations into account.

It is, therefore, critical that economic andscientifically sound rules that promote efficientsolutions and clarify roles and procedures be ad-opted. Combined with an effective BiodiversityPreservation System, as discussed above, one al-ternative solution to reconcile these conflicts andestablish clear rules is the adoption of a ForestVocation Land (FVL) policy6.

This policy, briefly discussed above, helpsto avoid the potential conflict of choice among

land uses in a very simple manner. It simpleidentifies lands that are more at risk of erosionand runoff and requires that landowners adoptmeasures needed to conserve soil and water andtheir costs.

It is often the case that the additional con-servation cost make agriculture less profitable inforest vocation lands. On the other hand, forestcovers (which are themselves natural protectors ofsoils) become the most competitive use for thoselands. The natural competitiveness of forest uses

or cover on those lands, gives the policy its name.The lands which are not under such ero-

sion and runoff risks, the so called non-forestvocation lands, can have any use, including for-est uses, land owners opt without the need for

any restriction or controls from the state. OnlyFVL need to be monitored and controlled to as-sure the proper internalization of soil and waterconservation costs into the land use decisions oflandowners.

Under this policy, landowner are free to

use their forest vocation lands for sustainable ag-riculture which does not erode soil or generaterunoff, or for any type of forest cover, such asnative forests, plantation forest, or simply let thenatural regeneration reestablish a forest cover.

Forest Vocation Land policy is intuitive,simple and inexpensive to establish and enforce,and promotes the most efficient use of the land.Its adoption creates conditions and rules that en-able investors to plan, predict costs, and moreflexibly select the most profitable land use for agiven piece of land.

Conclusions

For investments in agriculture to be attrac-tive, they need to be profitable. This profitabil-ity depends not only on the intrinsic nature ofthe investment project and the capabilities of thepromoter, but also on the conditions offered bythe business climate in the country, sector, and

local factors that influence on the costs and ben-efits of the investment over its life time.

This article presented a model to measurethe business climate for agriculture investmentsand uses the example of Brazil and Angola toillustrate its use. Although both countries havemajor opportunities to improve their perfor-mance and become more attractive to investors,Angola faces bigger challenges. It discusses somepolicy issues that affect factors that can improvethe business climate for agriculture, forest, and

rural investments in Brazil.It also provided suf-ficient information for the preparation of a frame-work that includes the design of interventions toimprove the business climate for agriculture, for-est, and rural investments in Angola.

6 See footnote 5.


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To be more useful to investors, it is rec-ommended that the detailed development andcalculation of an Agriculture Investment Attrac-tiveness Index, as an international public good,be undertaken periodically not only for Angolaand Brazil, but also for other Sub Saharan African

and Latin American countries. Besides its use inthe design, monitoring and evaluation of inter-ventions to their respective business climates,this calculation would allow several types ofcomparisons among countries, promote healthycompetition among them, and help investors se-lect the best countries to establish their agricul-ture and forest businesses.

For the case of large countries with severaladministrative and/or geographical regions, suchas Brazil, it is also useful to create and calculate

a similar index to measure the business climate atthe sub-national level.

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Documents

Measuring Business Climate for Agriculture and Forest Investments in Angola and Brazil