The poverty-reducing power of ethanol

A refreshing piece on how ethanol can reduce global poverty appeared recently in the New West Network. Granting countries from the South tariff-free access to the US and EU biofuel markets would reduce illegal immigration, benefit the environment, help the poor (in the South and in the North), make both fuel and food less costly, and reduce the West's dependence on imported oil, he says. This a line of argumentation that comes closes to that of the Biopact.

Ethanol expansion may boost prices for poor farmers in the developing world (in Africa, more than 50% of all people make a living in agriculture). The author gives the example of prices for coffee beans that have been low for years. Efforts like 'fair trade' coffee that guarantee smallholders a better price have been modestly successful but haven't changed the fundamental problem, namely that of overproduction and low world prices. By diversifying into energy crops, these prices may at last improve and lift small farmers out of poverty:

Expanding worldwide demand for ethanol has caused Brazil to rapidly increase ethanol production. Land previously used for coffee and other crops has been transferred to sugar cane to meet ethanol demand. As any socially conscious coffee drinker knows, coffee growers are often confined to poverty because of low coffee prices. The Economist has frequently pointed out that coffee prices are low because of a worldwide glut of coffee beans. Reduction in coffee bean supply in Brazil, which is the world’s largest coffee producer, would improve worldwide coffee prices, and with it, the lot of coffee growers.

The exercise could be repeated for a whole range of other cash crops, on which so many in the South are dependent.

Expanding ethanol supplies would impact worldwide petroleum prices as well. The Brazilian Government estimates that it can easily produce ethanol equivalent to about 10% of worldwide petroleum consumption. Some experts have even shown that the country could replace all global gasoline demand (earier post). In Africa, the potential is equally large, if not bigger (see projections). The effect would be lower fuel prices, which is of major benefit to the poor, because they spend a higher proportion of their small budgets on energy than wealthier people:

To put this in perspective, about 5% of the world’s petroleum comes from Iran. Oil and gasoline prices are profoundly sensitive to changes in supply and demand. This is why cartels from Standard Oil to OPEC and the Texas Railroad Commission have worked hard to limit worldwide oil production. A surge in worldwide fuel supply would likely reduce gas prices in the United States. High energy prices disproportionally hurt the poor, and lower in gasoline prices would be most helpful to the poor. This is true in the United States and other countries. The vast majority of the world’s poor countries are net oil importers. Money spent on oil is unavailable for food and other necessities.

Brazil is not the only Latin American country with the potential to produce ethanol. The vast majority of Latin American and sub-Saharan African countries are located in the (sub)tropics, which give them a natural competitive advantage for the production of biofuels. The creation of an ethanol industry there can curb the dramatic problem of illegal immigration, because such an industry is relatively labor intensive and may create a large number of jobs:

Countries from Peru to Mexico could eventually be major ethanol producers. The most painless and least controversial way to reduce illegal immigration is the creation of jobs in Latin America. In Brazil alone, it is estimated that 1 million people work in the ethanol industry.

For Europe, the same logic holds. If a biofuel industry were created in Africa, the massive and dramatic influx of illegal immigrants, who risk and often lose their lives in their attempts to reach the EU, could be reduced (Senegal's president, Abdoulaye Wade, has been promoting biofuels with this perspective in mind, see here).

Lifting tariffs on Latin American ethanol would offer a broad range of benefits, he thinks:

The poor in the U.S. and Latin America would benefit from lower corn prices, jobs, cheaper fuel and higher cash crop prices. Energy security would improve if fuel came from friendly countries like Colombia and Brazil instead of the Middle East, Russia and Venezuela. Lower oil prices would weaken defiant anti-American leaders in Iran, Venezuela and elsewhere.

This is not to say that ethanol production in Brazil is without problems. Sugar cane cutters are only required for a few months out of the year. Increased ethanol production may speed deforestation. However, the best defense against deforestation is prosperity. According to a Finnish study described in the Economist and published in the Proceedings of the National Academy of Sciences, forest density is increasing in every country with a gross domestic product per capita of over 4,600 dollars per year:
bioenergy :: biofuels :: energy :: sustainability :: ethanol :: biodiesel :: tariff :: subsidies :: poverty alleviation :: Africa :: Latin America ::

But on the US tariff and subsidies to corn farmers in Iowa, the author is very clear: you can't win presidential elections:

The best explanation for the persistence of the ethanol tariff is that Iowa is a very important state in Presidential politics. Iowa receives more farm subsidies per capita than any other state. Conveniently, the Iowa State Caucus is the first binding contest in the race for the Presidential nomination. Iowa is also one of the tightest swing states in the general presidential election. In 2000, Al Gore carried Iowa. With the help of generous expansions in farm subsidies, George Bush carried Iowa in 2004. In each of these contests, the margin of victory was well under 1%. Anyone aspiring to become or be re-elected as President would be unwise to upset Iowans.

Tariff-free access to the U.S. market would be a carrot for reform throughout Latin America. Basic poverty-fighting measures like women’s rights, property rights for the poor and transparent, democratic government could all be prerequisites to dropping the current ethanol tariff. In Europe, the hope of access to the common market of the European Union helped democratic, transparent governments spread throughout former Communist states. Ethanol markets could have a similar impact on Latin America.

Brazil is a good US neighbor, the author says. Brazil’s center-left President, Lula da Silva has committed to paying Brazil’s international debt, helping the poor and being a responsible member of the international community. Brazil has contributed thousands of soldiers to the U.N. stabilization mission in Haiti. Other Latin American countries, including Colombia, Honduras, and El Salvador have been staunch U.S. allies in recent years.

Granting these countries tariff-free access to the U.S. ethanol market would reduce illegal immigration, benefit the environment, help the poor and reduce our dependence on imported oil. President Bush will never face another Presidential election or Iowa Caucus.

For all of these reasons, the author thinks, it is time to begin phasing out ethanol tariffs.

Image: a Rwandan coffee farmers, struggling against low prices for his product. A global switch to biofuels would allow farmers to diversify their crops and to access the new market, which would prop up prices for their cash-crops.