The rise in global demand for ethanol and poverty in Brazil

Brazil has traditionally been one of the most important sugarcane and ethanol producers in the world producing fuel ethanol on a large scale starting since 1975. In the 1990s, however, competition for resources from the sugar producers led to a rationing of ethanol and a decline in consumption. This lasted until 2003, when the scenario changed substantially. Technological developments in the auto industry and the increase in global oil prices granted new status to ethanol as an alternative to gasoline in Brazil. Consumers were now able to choose their fuel according to prices and forecasts point to ethanol demand to reach 73% of the national demand for liquid fuels by 2017. Ethanol exports are also expected to double by this date. While several studies have looked at the supply and demand scenarios for the ethanol and sugarcane expansion in Brazil, the social effects of this change require more attention. The technology used in sugarcane production differs significantly across Brazil's regions, as does the structure of land ownership. This suggests that the pattern of sugarcane expansion will have a large effect on income and wealth distribution. This study aims to identify the effects of the projected sugarcane and ethanol expansion in Brazil on labor demand, income distribution and poverty. Using a General Equilibrium framework an micro simulations, this paper evaluates the changes in labor demand in the agricultural sectors and in the economy as a whole. The study also analizes the effect of the changes in labor markets on income distribution and poverty. Model results show that the expansion in ethanol demand in Brazil would slightly reduce poverty but would increase the poverty gap. Income distribution improves very little due to more capital-intensive methods of production. This raises several points for policy considerations.