|San José State University
Department of Economics
& Tornado Alley
The Jari Project was an attempt to create a tropical tree farm in Brazil for producing pulp for paper. It was conceived and funded by Daniel K. Ludwig, an American entrepreneur, who made his billions in shipping. In the 1950's Ludwig realized the forests of the temperate zone had been essentially completely developed so the supply of wood pulp for paper was fixed yet the demand for paper was continuing to grow.1 In areas where the timber is harvested the replanting and regrowth of trees takes decades. Ludwig felt that the expected future increase in the price of paper would create a good investment opportunity for developing the only place where trees were not being grown for profit, the tropics. Much of the natural forest timber of the tropical rainforests is unsuitable for commercial use. Ludwig believed the natural forest would have to be replaced by trees grown systematically, a tree farm. He recognized that he would have to start his tree farm decades ahead of time to have the production ready when the price of paper was driven up.
Ludwig had two key decisions to make: 1. Which type of tree to grow 2. Where to grow it. With his financial resources Ludwig could do a thorough search to investigate the alternatives. His agents searched the world and found a type of tree grown in Nigeria for producing structural supports in mines called the Gmelina (may-line-uh). This tree which was a native of East India and Burma was brought by the British to Nigeria because it was extremely fast growing. It was reputed to grow as much as a foot per month and Ludwig decided the Gmelina would be the tree for his tropical tree farm. Ludwig wanted to site his tree farm in a country with a stable government and access to the sea. He favored Costa Rica or Panama and had some experimental planting of the Gmelina made in Panama. It grew well there. Ludwig however abruptly changed the site for his tree farm.
The military government that had assumed power in Brazil in 1964 was looking for foreign investors to help develop the Brazilian economy. When the Brazilian military leaders heard of Ludwig's plan for a tropical tree farm they contacted him to try to get him to locate in Brazil. Ludwig met with the Brazilian President Castello Branco and reached an agreement. The Brazilian leaders were impressed with the fact that Ludwig would not need any financial assistance from them. They arranged for Ludwig to buy a parcel of land on the lower reaches of the Rio Jari, a tributary of the Amazon River.
Ludwig paid $3 million to the Portuguese owners of the 4 million acres, a parcel as big as the states of Connecticut and Rhode Island combined. Through the Amazon River the site had access to the Atlantic. It was about 300 miles from the city of Belem (bay len) on the coast of Brazil.
Much was made of the fact that Ludwig purchased the land for about 75 cents per acre, but the price was paid to private land owners who probably had no other offers. Only about a thousand people lived on the parcel. This small population in an area of 4 million acres points up the fact that the Amazon jungle is very sparsely occupied. Only the harsh climates of the arctic, the deserts and the high mountains are less sparsely settled than the jungle. And there is a very good reason the Amazon jungle is so sparsely occupied; there is very little it can be used for economically. The price of land is low in the Amazon jungle for the same reason that the price of land is low in northern Canada, it is not of much economic value.
The purchase price of the land was only a minuscule portion of Ludwig's investment. He originally expected to invest $300 to $500 million in the project but cost overruns and mistakes drove the figure up to $1 billion. By 1979 Ludwig was counting on the project producing 1500 tons of paper pulp daily and considerable amounts of saw timber to bring in an annual revenue of $300 million. Instead in 1979 the revenue was about $70 million. The operating costs in 1979 were about $110 million. In addition to those costs Ludwig was still spending an enormous amount on new construction, about $50 million in 1979. Further the payments on loans secured by Ludwig for the project were about $60 million in 1979. In 1980 there was some improvement. The revenue rose to $90 million, and the operating costs were apparently reduced to $100 million although the reduction may have been due to accounting changes rather than actual reductions. The debt payments were still very large, $64 million in 1980. Thus Ludwig had a serious cash flow problem for the Jari project. And the problems were not all financial. The plantings of the gmelina were not enough to supply the pulp mill to its capacity. Some cuttings from the native forest were used to try to make up the short fall. Sadly the native forest cuttings were simply burned in the early days of the project to make room for the gmelina plantings.
Another chronic problem for the project was a labor supply. Originally Ludwig planned on using minimal labor. For example, he planned on clearing the land using bulldozers. However the heavy bulldozers so compacted the thin layer of soil that the gmelinas would not grow in it. Ludwig then turned to crews of men using chainsaw to clear the land. Initially he relied upon labor contractors to recruit labor in the poverty-stricken areas of the northeast. These labor contractors often abused and exploited the recruited workers resulting in many of these workers not staying on after their contract period was up. This created multiple problems for Ludwig. First there was the bad publicity of Brazilian workers being exploited at a project owned by a foreigner. Second, new laborers required costly training.
Ludwig tried to avoid the problems involved with the labor contractors by seeking to recruit labor directly and giving the workers significant incentives to stay, such as housing, medical care and education programs. This was partially successful but it involved the additional major expense of building a town, Monte Dourado, with all of its infrastructure. Ludwig was not able to keep up with the demand for housing so many of the workers lived across the Jari River outside of the project in a shanty town called Beiradão (bay rah don).
Ludwig was always on the lookout for an investment opportunity. He commissioned a side project to create rice fields from mud dredged up from the swamp lands. He made it into a highly mechanized rice-growing operation. Everything that could be was mechanized from the planting to the harvesting. Insecticides were spread by small aircraft which were called in when the insect population of the fields reached critical levels. The rice crop yield rates were impressive, being several times that of rice yields elsewhere in South America. However it is uncertain whether the rice operation brought in profits.
A deposit of a fine white clay called kaolin was discovered on the project. Kaolin can be used to coat paper. Ludwig authorized the commercial development of the kaolin deposit. The project was achieving production but it was uncertain when, if ever, the cash flow would be positive.
However, after an investment about $1 billion in the Jari project it looked like it might be a success. At that point the kleptocratic politicians of various collectivist persuasions began trying to find ways to share the rewards of Ludwig's investment in Jari. They talked about nationalizing it. The Brazilian government began saying that Ludwig did not really own the land and that instead of 4 million acres he had purchased only 1.5 million acres.
Jari, in fact, was not a success and Ludwig desperately needed to borrow additional funds. It was not easy to find lenders for a project that was still uncertain. When the land ownership was placed in doubt it became impossible. No lender was willing to risk funds on a project whose ownership was not certain.
Ludwig gave up and turned Jari over to a consortium of Brazilian businessmen, generally from the São Paulo area, led by Edmundo Barbosa da Silva. The principal figure in the consortium is Augusto Antunes, a personal friend of Ludwig and a successful entrepreneur with experience in Amazonia. Ludwig did not receive any cash in the transfer, the consortium merely assumed responsibility for the several hundreds of millions of dollars of debt of the Jari Project.
After it was apparent that the Jari Project was a failure it was easy to point to management errors. Ludwig was so rich that he could carry out projects in much the same way that governments do; i.e., throwing money heedlessly into them. He also had overwhelming confidence in his ability to solve problems ingeniously and he did come up with some ingenious strategies such as building a state-of-the-art pulp mill in Japan in the form of a ship and floating it to the Jari Project. But bold action is not typically the way to solve economic problems. Instead what usually works best is systematic trial-and-error. Normally it is best to start projects in the form of small scale pilot projects and scale up while revising on the basis of what was learned in the smaller version of the project. The competitive market economy does this naturally. Government projects generally err in creating catastrophes while pursuing economies of scale. Consider for example the British groundnuts scheme in East Africa in the 1940's or the Virgin Lands Program in the Soviet Union in the 1950's. A project in the hands of one man in a hurry is in danger of creating catastrophic mistakes.
It is notable that the Jari Project, the Groundnuts Scheme and the Virgin Lands Program had in common that the building of roads and housing were a part of the cost of the project. Projects carried out in already developed areas do not carry the burden the cost of roads and housing.
The Jari Project in the course of 15 years had 29 different directors on site while Ludwig far away in the U.S. was making all of the crucial decisions. Because of the erratic changes of top management on location the middle management began to build independent kingdoms with wasteful duplication of functions. With Ludwig emphasizing the achievement of his goals regardless of costs the managers on site ignored costs as well. This led to the purchase of items from the U.S. at prices that were enormously larger than the prices of those items from local sources in Brazil.
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