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2014-03-27 | Research Brief

While Biofuels Expansion Can Help Improve Economic Growth, It Can be Harmful to the External Sector

Ferede, Tadele, Zenebe Gebreegziabher, Alemu Mekonnen, Fantu Guta, Jörgen Levin and Gunnar Köhlin. 2014. “While biofuels expansion can help improve economic growth, it can be harmful to the external sector” EfD Research Brief 13-08
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Biofuels have received a great deal of attention globally, and many countries have embarked on producing biofuels, given the volatility and the recent all-time high of world oil prices.

Because Ethiopia has a tremendous potential for biofuel production, the Government of Ethiopia considers this an opportunity for enhancing food and energy security. In particular, development of biofuels has been considered key in terms of meeting the growing energy demand in the country and reducing the dependence on imported fossil fuel, which consumes close to 70% of export earnings. Therefore, it is imperative to investigate the growth and external sector effects of biofuels. This is especially important for a low-income, fuel-importing country such as Ethiopia, which has both a food deficit and a balance of payments deficit. This research investigates the economy-wide implications of the country’s involvement in large-scale biofuels investments. The study involved collecting data from 15 biofuels firms and dynamically modelling the structure of the Ethiopian economy, including the biofuels sector, agriculture and other sectors of production, and import and export activities in the Ethiopian economy. Key questions include: will biofuels investment contribute toward economic growth? What are the likely effects of biofuel investment on the country’s external sector?