Can Biofuels be an Engine for Growth in Small Developing Economies – The Case of Paraguay

This analysis examines the feasibility of setting up a biofuels sector in Paraguay.As a small agriculturally-based country, Paraguay can serve as an interesting test case for the feasibility of creating ethanol in other small developing countries, such as those in Central America.Our analysis is inspired by previous work on the remarkable success of Brazil's ethanol industry (Hira, 2009).More than 80% of Brazil's cars can run on a spectrum of gas and alcohol blends based on local sugarcane supply and processing.Ethanol reduces dependency on politically volatile and expensive petroleum imports.The International Energy Administration, along with other recognized international energy institutions, states that while demand will continue to increase over the long-term, prospects for supply meeting that demand "are extremely uncertain (IEA, 2008, 3)."A viable biofuels sector could help Paraguay to improve energy security and reliability, spur economic growth and reduce external dependence, improve employment and rural development, possibly create a new export industry, and reduce greenhouse gas emissions.We focus here on sugarcane ethanol.Sugarcane ethanol is the most attractive option, the only feedstock currently providing an economically feasible substitute at an estimated oil price of $70/barrel, and is more environmentally friendly than other feedstocks as waste is burned for electricity cogeneration.Sugarcane ethanol also produces less carbon emissions than petroleum.As a recent report states, there is no explicit policy at present for biofuels in Paraguay (IICA, 2007, 54).This report is based on secondary analysis and field research conducted during July 2009.We note here the severe constraints on primary data, requiring a more qualitatively-oriented approach.We organize our analysis around an examination of the following factors: agricultural, economic, and governance.The problem of sustainability must be addressed by any plan along with economic/financial feasibility, however, we believe that this question is adequately answered in a number of analyses that demonstrate that sugarcane ethanol, if conducted with safeguards, is a net reducer of carbon emissions (Goldemberg, 2007). TheParaguayan context: pressures for economic change 2.1 Political context Paraguay's geographic isolation and lack of mineral wealth left it in the periphery of Spanish colonialism.Paraguay also has a history of military dictatorship, with some www.intechopen.comEconomic Effects of Biofuel Production 106 exceptional periods of stability around central leaders marred by long periods of instability.Modern Paraguayan history begins with the ascension of Alfredo Stroessner through military coup in 1954.Stroessner ruled the country until his overthrow by coup in 1989.While dictatorial, he also presided over rapid economic growth in the 1970s led by increases in agricultural production and the construction of the large binational dam projects, Itaipú and Yacyretá.Stroessner used the Colorado Party and the military as the key institutions for Paraguayan political power.Economic decline during the 1980s, including the end of Itaipú construction; drops in agricultural export prices; and ongoing concerns about corruption fed growing political opposition led by the Church and eroded support for Stroessner.There was also concern about the development of large agro-businesses and the purchase of large swathes of land by foreign, mainly Brazilian, interests (Lewis, 1991, 264).These issues, Stroessner's age (72), and uncertainty about his successor, precipitated his top assistant, General Andrés Rodríguez, to overthrow him and begin the present phase of democratic rule.After several elections and other sidesteps, Paraguay's nascent democracy seems to be maturing at a rapid pace.The current President, Lugo, is a social reformer who is the first opposition (to the Colorados) candidate to peacefully win election in Paraguay's history.Lugo's coalition government is a fragile one, reflecting difficulties in developing a strong economic vision and policy for the country during a period of transition.For democracy to survive, economic conditions have to be ripe for the inclusion of more of the population in economic activities.Lugo's government has been chastened by widespread land protests, reflecting the tense situation of inequality in the country. EconomyEconomic growth in recent years, however, has tailed off considerably, including negative growth rates in 2001-2003.The economy has become more liberalized under the new governments, with openness (% of exports and imports/GDP) increasing from averaging 27% in 1961-70 to 82% from 1991-2000!Curiously, the government share of the GDP has also slightly increased, moving from 12 to 17% over the same period (Hira calcs from PWT).The heavy reliance on the public sector, going back to the Stroessner days, is accompanied by a heavy external debt.External debt as a percentage of gross national income increased from an average of 26% in 1960-70 to 38% in 2001-7 (Hira calcs from WDI).The current economic situation shows other causes for alarm.Unemployment has shot up, from an average of 4.1% in 1971-80 to 8.7% between 2001-7.The new democratic governments have not been able to attract significant amounts of foreign direct investment, the expected engine of growth after liberalization, which increased only slightly from an average of 1% in 1960-70 to 3% from 2001-7 (Hira calcs from WDI).The problem is particularly pressing for the long-term.While Paraguay has a population of just 6.2 million, the growth rate by decade has remained high since the end of World War II, reaching 28% from 1991-2000 (Hira calcs from PWT).This means considerable pressure for employment is occurring.Indeed, Paraguay has one of the youngest populations in the region, with 26% of the population under the age of 10, leading to an incipient bulge in the work force (IDB 2008, 5).Paraguay has a major blessing in terms of the steady revenue and cheap electricity provided to it through the Itaipú and Yacryretá binational dams.Yet, there are serious impediments to economic growth.There is a low level of overall competitiveness, related to corruption, lack of finance, weak export diversification, income distribution concentration, and a low www.intechopen.comCan Biofuels be an Engine for Growth in Small Developing Economies -The Case of Paraguay

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