The paper examines how recent trends in agricultural productivity in Brazil, occurring both inside and outside the Amazon, affected deforestation and agricultural incomes. The analysis uses a computable general equilibrium model adapted to capture regional economic structures, and accounts for uncertainty concerning productivity improvements. Due to countervailing effects on deforestation of innovation inside and outside the Amazon – respectively, increasing and decreasing it – innovation in Brazilian agriculture in the period from 1985 to 1995 has not altered substantially deforestation rates. However, innovation inside the Amazon has to be reckoned as a driving force behind the continuing high levels of deforestation rates.

Innovation rates for livestock activities, inside and outside the Amazon, prove crucial in determining deforestation and agricultural income. Technological improvements outside the Amazon for small farm production systems and for farms in general in the North-East increase agricultural income, improve income distribution, and limit deforestation rates.