Biofuels, Poverty, Food Security and Growth in Ethiopia: A Computable General Equilibrium Microsimulation Analysis

Abstract

Investments in biofuels are booming globally in response to increasing costs of fuels and growing concern over climate change. The high and often fluctuating fuel prices have frustrated development efforts in Ethiopia. This has prompted policymakers to review energy development strategies and search for mechanisms that minimize dependence on high cost imported fossil oils. An important mechanism identified in this area is substituting fossil fuels with domestically produced biofuels. Currently, investments in biofuels with the aim of producing ethanol and biodiesel are underway in the country. This study investigates the impact of biofuel investments on growth, poverty, and food security in Ethiopia using a dynamic computable general equilibrium (CGE) model linked to the microsimulation (MS) model. The CGE model uses the 2005–06 social accounting matrix (SAM) while the MS model uses the 2004–05 Household Income, Consumption and Expenditure (HICE) survey. The simulation results for the before and after shock periods were fed into the household model using distribution analysis (DAD) software that yielded the FGT poverty indices. The results suggest that biofuel investments provide a new opportunity for enhancing economic growth and reducing poverty. Our results also show the complementarities between ‘biofuels’ and ‘food’ production.