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Biofuels, Economic Growth, and the External Sector in Ethiopia: A Computable General Equilibrium Analysis

  • Ferede, Tadele
  • Gebreegziabher, Zenebe
  • Mekonnen, Alemu
  • Guta, Fantu
  • Levin, Jörgen
  • Köhlin, Gunnar

In this study, we assess the economy-wide effects of biofuel investment in Ethiopia, with a focus on the external sector. The Government of Ethiopia has been revising its energy policy to switch from imported fossil oil to domestically produced biofuels, partly in response to climate change and partly in response to rising world oil prices, which leave oil-importing countries such as Ethiopia vulnerable to external oil price shocks. In Ethiopia, the value of oil imports relative to export earnings has increased over time, which has negatively impacted its balance of payments. Specifically, this paper assesses the implications of biofuels investment for growth and the external sector in Ethiopia using a dynamic recursive computable general equilibrium (CGE) model. The study is based on primary data collected from biofuel firms in Ethiopia and assumes that the amount of land is fixed in a given period. The results indicate that the macroeconomic and sectoral effects of biofuel investment in the context of Ethiopia are mixed. Biofuel expansion can help to improve economic growth if such expansion generates spillover effects, with jatropha and castor bean found to have the strongest positive impact on the economy. Without spillovers, the effect of biofuel investment on economic growth is negligible, indicating the importance of technology transfers. The impact on the external sector, especially on exports and imports, is negative, as biofuels expansion affects both the real exchange rate and production of export commodities. This negative effect might be mitigated by policies encouraging biofuels investment to move in a direction that does not compete with the use of land for traditional export crops.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-13-08-efd.

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Date of creation: 19 Jul 2013
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Handle: RePEc:rff:dpaper:dp-13-08-efd
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  1. Sourie, Jean-Claude & Treguer, David & Rozakis, Stelios, 2006. "Economic impact of biofuel chains in France," 2006 Annual meeting, July 23-26, Long Beach, CA 21184, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Bouët, Antoine & Dimaranan, Betina V. & Valin, Hugo, 2010. "Modeling the global trade and environmental impacts of biofuel policies," IFPRI discussion papers 1018, International Food Policy Research Institute (IFPRI).
  3. Arndt, Channing & Msangi, Siwa & Thurlow, James, 2010. "Are Biofuels Good for African Development? An Analytical Framework with Evidence from Mozambique and Tanzania," Working Paper Series wp2010-110, World Institute for Development Economic Research (UNU-WIDER).
  4. Negash, Martha, 2012. "Biofuels and Food Security: Micro-evidence from Ethiopia," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126793, International Association of Agricultural Economists.
  5. Yao, Shujie & Liu, Aying, 2000. "Policy Analysis in a General Equilibrium Framework," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 589-610, September.
  6. Kevin McNew & Duane Griffith, 2005. "Measuring the Impact of Ethanol Plants on Local Grain Prices," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 27(2), pages 164-180.
  7. Arndt, Channing & Pauw, Karl & Thurlow, James, 2010. "Biofuels and economic development in Tanzania," IFPRI discussion papers 966, International Food Policy Research Institute (IFPRI).
  8. Arndt, Channing & Pauw, Karl & Thurlow, James, 2012. "Biofuels and economic development: A computable general equilibrium analysis for Tanzania," Energy Economics, Elsevier, vol. 34(6), pages 1922-1930.
  9. Nin Pratt, Alejandro & Yu, Bingxin, 2008. "An updated look at the recovery of agricultural productivity in Sub-Saharan Africa:," IFPRI discussion papers 787, International Food Policy Research Institute (IFPRI).
  10. Karel Janda & Ladislav Kristoufek & David Zilberman, 2011. "Modeling the Environmental and Socio-Economic Impacts of Biofuels," Working Papers IES 2011/33, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2011.
  11. Birur, Dileep & Hertel, Thomas & Tyner, Wally, 2008. "Impact of Biofuel Production on World Agricultural Markets: A Computable General Equilibrium Analysis," GTAP Working Papers 2413, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  12. Huang, Jikun & Yang, Jun & Msangi, Siwa & Rozelle, Scott & Weersink, Alfons, 2012. "Biofuels and the poor: Global impact pathways of biofuels on agricultural markets," Food Policy, Elsevier, vol. 37(4), pages 439-451.
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