Evidence of the empirical relevance of the infant industry argument for the protection of Brazilian ethanol production

Abstract

The infant industry argument for protection of import competing industries has a long and almost entirely theoretical history in the literature. In this paper the empirical evidence of infant industry dynamics in the Brazilian ethanol industry is investigated. In Brazil ethanol has developed into a primary automotive fuel over the past 18 years. This import substitute is attractive because it allows decreased dependence on international oil supplies while at the same time it addresses environmental concerns because it is a clean-burning renewable fuel. While ethanol was initially a high-cost alternative to imported oil, observed cost reductions have led to an increased belief that this industry may in fact warrant the subsidization it has received because of infant industry reasons. The results of this study suggest that there is no empirical evidence of economies of scale and very little technical change. There appears to be no empirical validity to the infant industry argument for subsidization of the Brazilian ethanol industry.