On the current account - biofuels link in emerging and developing countries: do oil price fluctuations matter?

Abstract

Many developed countries promote the use of biofuels for environmental concerns, leading to a rise in the price of agricultural commodities utilized in their production. Such environmental policies have major effects on the economy of emerging and developing countries whose activity is highly dependent on agricultural commodities involved in biofuel production. This paper tackles this issue by examining the price impact of biofuels on the current account for a panel of 16 developing and emerging countries, and the potential nonlinear effect exerted by the price of oil on this relationship. Relying on the estimation of panel smooth-transition regression models, we show that positive shocks in the price of biofuels lead to a current-account improvement for agricultural commodity exporters (resp. producers) only when the price of oil is below 45 (resp. 56) US dollars per barrel. When the price of oil exceeds these thresholds, the effect of fluctuations in the price of biofuels on the current account tends to weaken and become non significant. Under these conditions, our findings indicate that, for agricultural commodity exporters which are also oil importers, the current account is pulled by two opposite forces, making its overall reaction modest or even nil.