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Biofuels as an Engine for Growth

Posted by Yvonne Siu on December 22nd, 2006

IPC Policy Associate Kara Laney has contributed the following post, outlining the existing opportunities and challenges that biofuels hold for rich and poor countries alike, concluding that the best way for biofuels to be an engine of growth is for the sector to advance in step with trade liberalization.

The Doha Round and biofuels appear to be on opposite tracks. While world leaders still say they want to spur economic growth by liberalizing trade, the political will devoted to the negotiations has waned considerably over the past few years, finally sputtering to a stop in July. Over the same period of time, not only has enthusiasm for biofuels grown in the US and EU, but support for biofuels as an economic development tool has also taken off. Attending a conference on biofuels markets in Africa held in Cape Town, South Africa, in early December, I was struck that biofuels, at least in some circles, seem to have replaced trade liberalization as the vehicle for growth in the developing world.

Biofuels certainly hold much potential for developing countries reliant upon agriculture, which applies to most African states. The energy sector represents a new market opportunity for farmers; furthermore, introducing market competition may increase returns in the agricultural sector. Depending on the climate and feedstock used, biofuels may also provide a risk diversification strategy for farmers by allowing them to branch out into non-traditional crops, such as jatropha, or by creating an incentive for them to introduce more crops into their planting rotations. It is possible that the economy as a whole may benefit, as biofuel feedstock production may present the opportunity for a value-added processing industry to develop. And producing fuel domestically may, in turn, reduce expenditures on imported oil.

However, there are still many open questions as to whether biofuels can truly live up to this potential, as outlined in a recent IPC Discussion Paper, “Biofuels: Promises and Constraints.” The paper raises salient questions, such as:

  • Will the competition between food crops and fuel crops increase food insecurity?
  • Will companies invest in domestic processing facilities, or will biofuel feedstock be yet another raw commodity export from Africa, a development strategy that has not served its countries well so far?
  • Even if investment capital is available for biofuels, will countries be able to utilize it? After all, the production of biofuels feedstock faces the same supply-side constraints (lack of transportation infrastructure, inadequate access to agricultural inputs, poor water management) that currently impede investment in agriculture in Africa today.

Moreover, the biofuels industry cannot get started without significant government assistance. Questions are beginning to be raised about the large levels of support given to biofuels in OECD countries; arguably, there are more pressing needs, as suggested by a UNDP/World Bank (ESMAP) report, for limited government funds in developing countries. Introducing subsidies may spur investors’ interest, but is this financial support sustainable, especially in developing countries?

A clear set of trading rules that transparently lay out the place of biofuels within the agriculture and energy sectors would better serve the investment and development interests of developing countries than expensive subsidies. Without trade liberalization, the export of biofuels or biofuel feedstock will be subject to the same debilitating obstacles that hamper agricultural development in Africa today. Tariffs and non-tariff barriers will create production inefficiencies, distort prices, and, in general, deter investment in the industry. Therefore, if biofuels are to be an engine of economic growth in the developing world, they need to be advanced in cooperation with, rather than instead of, agricultural trade liberalization.

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