Tax Reform and the Manaus Free Trade Zone – 06/10/2023 – Samuel Pessôa

The governor of Amazonas, Wilson Miranda Lima, in an interview this Sheet last Thursday, he defended the maintenance of the Manaus Free Trade Zone incentives as a public policy to generate jobs and, consequently, keep the forest standing.

The governor pointed out the beneficial effects of the standing forest —for all Brazilians by maintaining the various ecosystems associated with the Amazonian rivers and, therefore, the water balance in South America, mainly—, in addition to reminding us that 97% of the coverage original plant of the State is still standing.

The governor’s argument is that, if the benefits of the ZFM (Zona Franca de Manaus) are eliminated, the population will not have jobs and will deforest the forest in the state.

It doesn’t seem to me that there is such a clear relationship between the ZFM and the standing forest. On the one hand, a good portion of the people who live in Manaus today were not born there. There they migrated to work at ZFM. On the other hand, the region’s soil is not suitable for agriculture, unlike other areas in the North Region. Thus, it is not clear that there is a causal relationship between the benefits of the ZFM and keeping the forest standing.

In any case, it is possible that the governor’s argument is correct. I’m not convinced, but I could be wrong.

Even considering that it is the jobs generated by the ZFM that keep the forest intact in the state, it seems to me that there is a cost problem. According to the representatives of the state of Amazonas, the ZFM generates 100,000 direct jobs and 500,000 in total (direct and indirect).

As pointed out by the governor, the cost of ZFM incentives is R$ 50 billion per year, or R$ 100 thousand per year for direct and indirect jobs generated, or R$ 500 thousand per year if we consider only direct jobs.

The cost is very high. The reason is that ZFM specializes in very capital-intensive activities. And the capital income generated in the ZFM ends up going to the shareholders of companies that, in general, do not live in Manaus, and therefore do not generate income there. There is a lot of leakage of income. Thus, there must be cheaper ways to generate jobs of the same quality in Manaus and, consequently, maintain income generation there. And hopefully keep the forest standing.

Ideally, the policy should look for specialization in more labor-intensive activities with higher qualifications, such as, for example, technological centers in general, research centers linked to the Amazonian environment, in addition to the software production activity. We can also think about incentives for call centers to be located there, given that it is an activity that can be carried out anywhere without increasing the country’s logistical costs. The Brazilian workforce is still, unfortunately, relatively unskilled. Thus, policies for this qualification range also make sense.

It is important for the federal government to make an effort to seek, together with the state of Amazonas, solutions so that the tax reform does not disrupt productive activity in the Metropolitan Region of Manaus. But this objective must be sought without making the approval of the tax reform unfeasible, with the many beneficial effects that it will generate for the entire national productive system, including for the Amazon region.

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