Economic Issues Relating to Rural Development

Biofuels have often been seen as a way to enhance the agricultural sector. This is especially the case in the developed world, where locally produced food crops find it increasingly difficult to compete at a global level because developing and underde­veloped nations produce the same at a much lower cost. In these cases, governments provide considerable subsidies, promote low-interest loans and impose various trade barriers to incentivize farmers to produce these crops at a competitive price and thereby sustain their agricultural sector. Given that biofuels, especially first-gener­ation biofuels, rely on edible crops as a feedstock, they create an alternative market for such agricultural products as a valuable input for the energy sector. In this sec­tion, we look at the degree to which rural economies, where farming is the livelihood for most people, are influenced by the burgeoning biofuel industry.

One of the central arguments in favour of biofuels is its contribution to rural development through increased employment opportunities and higher income. It has been estimated that the biofuel industry requires approximately 100 times more labour than the capital-intensive fossil fuel industry to produce the same energy output (Renner and McKeown 2010). This is because there is a wider array of jobs associated with biofuel production. These positions can relate to farming through to biotechnological research. Scaramucci and Cunha (2007) estimated that more than 5 million jobs could be generated in Brazil by the year 2025 if 5 % of global gasoline demand is replaced by sugarcane-based bioethanol from Brazil. Jobs also result from indirect employment, such as those involved in the sales of biofuels and transport of biomass. In 2006, all types of biomass operation in the United States employed about 136,999 people directly and another 310,000 across the supply chain (Domac et al. 2005). While the numbers are substantial, rational­izing pro-biofuel policies simply based on potential job creation can be problem­atic. This is because the net economic benefits depend on a multitude of factors.

For example, production capacity and level of mechanization can influence the scope for job creation. While a heavily mechanized production system increases labour productivity, it also minimizes employment opportunities. Likewise, a large refinery may achieve higher economies of scale, but the number of workers required per unit of output is low. Brazil’s policy to control the rate of mechaniza­tion and provide support for small-scale refineries has assisted with controlling unemployment and poverty in the region (APEC 2010). In 2006, 351 plants were able to provide employment for approximately 700,000 people to produce 17,900 million litres of ethanol from 5.9 million hectares of land. In this context, the Brazilian Social Fuel Seal (Selo Combustfvel Social)[6] initiative, which supports biofuel producers through tax incentives, is worth mentioning here as it promotes diversification of jobs within biofuel-producing regions and encourages the ongo­ing participation of family-based feedstock production firms in the nation’s biofuel industry (Padula et al. 2012). However, large-scale production is crucial for biofuels to compete with fossil fuels (DfID 2007). This may negate the expectations of regional development emanating from the biofuel industry. Indeed, potential bene­fits from new or expansion of existing biofuel facilities are often overestimated. This is because refinery building or expansion provides construction-related jobs to those generally living outside the local area. As a result, most of the initial impact is not felt locally (APEC 2010; Hillebrand et al. 2006; Moreno and Lopez 2008).

Net employment may also vary depending on the land displacement effect. Switching from existing food crops for biofuel production does not always result in additional employment (Jaeger and Egelkraut 2011). Rather, it simply exchanges one market for another. With regard to the impacts of biofuel policy on employment, analysis based on dynamic and long-term general equilibrium adjustments, includ­ing shifts in jobs in agriculture among biomass-producing regions, has found that biofuel policies would not provide any additional economic activity. This is because the increase in bioethanol output would be offset by a reduction in livestock pro­duction (Dicks et al. 2009), especially because land-use changes take effect. Furthermore, de Gorter and Just (2010) claim that higher fuel prices induced by bio­fuel subsidies magnify the inefficiency of the preexisting wage tax by reducing real wages and thus discouraging work. This would reduce labour supply and generate deadweight costs because the tax base becomes eroded as consumers move away from the taxed good and use substitutes. On the contrary, if the land used for bio­fuel production was not in use or was abandoned, any job created would potentially increase net employment and foster economic growth (Diop et al. 2013).

As with employment expectations, it is perceived that biofuels increase the income levels of those engaged in the industry. Parcell and Westhoff (2006) found that, in 2006, the average annual salary of ethanol-related salary was much higher than the average US salary. However, this may not always be the case as earnings and job security can vary significantly across a number of factors. Skilled labour working in technical roles has a much higher income potential than unskilled labour working in the field or in the refinery. In fact, there are fewer white-collar jobs compared to blue-collar jobs. Depending on the type of feedstock, employ­ment opportunities may vary. In the case of Brazil, the high seasonality of sug­arcane production means that the ratio between the number of temporary and permanent workers is significant (DfID 2007). As a result, many workers do not have a biofuel job throughout the year. Failures of biofuel projects are becoming increasingly common, and these failures adversely affect the livelihood of many vulnerable farmers in regional areas (APEC 2010).

While one objective of biofuel policies is to help farmers, landowners stand to benefit the most from increases in crop prices. Crop growers who lease land there­fore only benefit until higher profits associated with rising feedstock prices are captured by higher land values and land rents. Take corn for example. Though dis­puted by Ajanovic (2010), as corn prices rise, domestic pork and poultry producers reliant on this crop to feed their livestock will potentially reduce their international competitiveness, thereby causing a reduction in production levels if higher prices are not absorbed by consumers (Brown 2008). Although the flow of profits from these facilities may initially stimulate rural economies, a rise in crop prices over time owing to demand has the potential to minimize these benefits. There will also potentially be a reduction in livestock farming in these same areas (Dicks et al. 2009), especially as land-use changes take effect. This could eventually work to offset this advantage.

To understand how the biofuel industry has influenced rural development, we look at the employment data of three major biofuel markets, these being the United States, Brazil and the EU (it must be understood, however, that income may vary significantly within the sector itself). If one takes into account that abso­lute numbers of employment may only tell part of the story, unemployment and employment data in the agricultural sector are presented in the form of percentage of total labour force and of total employment, respectively. As can be observed from Fig. 4, bioethanol production/consumption does not seem to have increased employment in agriculture in the United States. Employment in agriculture is relatively stable during the observed period, despite the substantial increase in domestic biofuel production, and has even slightly declined. With respect to the overall impact on employment, the unemployment rate has increased in recent years. Figure 5 illustrates the case for Brazil. Once again, bioethanol production/ consumption has not had the effect of increasing employment in the agricultural sector. Indeed, the employment in agriculture has declined significantly in recent

Подпись: • Employment in agriculture (% of total employment) • • • • Unemployment, total (% of total labor force) Подпись: bioethanol consumption ('0000 barrels per day)Подпись: Fig. 5 Bioethanol production/consumption and employment trends in Brazil (US EIA 2013; World Bank 2013) (annual bioethanol production/consumption data from 2000 to 2011 are sourced from the US EIA (2013). Employment data are sourced from the World Bank (2013) and are only available at present up to 2009)image011


bioethanol production (‘0000 barrels per day )

times, even though biofuel production/consumption has increased sharply. The reason may be that a greater use of mechanical harvesting has resulted in fewer jobs being generated. Yet there seems to be some positive impacts on overall


Fig. 6 Biodiesel production/consumption and employment in agriculture trends in the EU (US EIA 2013; World Bank 2013) (annual bioethanol production/consumption data from 2000 to 2011 are sourced from the US EIA (2013). Annual employment data from 2000 to 2011 are sourced from the World Bank (2013))

employment as a drop in the unemployment rate has been observed since 2006. As in the United States and Brazil, biodiesel production/consumption does not increase employment in agriculture in the EU. Like the United States, employment in agriculture has also slightly declined, despite a significant observable jump in biofuel production and consumption. Furthermore, biofuels seem to have a neutral impact on overall employment (Fig. 6).

So, despite the fact that first-generation biofuels use crops currently grown by farmers within the respective domestic biofuel markets investigated, there is no clear overall benefit with respect to the number of people employed in the agricul­tural sector. While jobs are obviously being created in terms of biofuel processing, the same positive effects do not seem to flow through to the agricultural sector in the economies discussed.

The observations made above have significant implications. As it is eventually realized that more sustainable forms of biofuel production beyond first-generation processes are necessary, this will arguably also have significant impacts on local or regional economies reliant on the growing and processing of particular feed­stocks. In many cases, food crops currently being used for biofuel production will not be optimum for later-generation bioethanol production, which can use all man­ner of biomass (Blottnitz and Curran 2007). Once demand for biofuels grows, the cost equation of producing biofuels from these less energy-intensive crops will undoubtedly force producers to look for crops that can produce the most energy at the least cost (McCormick-Brennan et al. 2007). In many cases, this might mean that regions currently producing biofuel feedstocks will not be well placed to grow the preferred types of biofuel crops. This will clearly have detrimental impacts on economies that are closely tied to long-held agricultural traditions, especially if market conditions continue to militate against their ability to compete with other economies in the open food market. Yet this might be precisely the reason why governments continue to support first-generation biofuels, for moving to later — generation processes brings with it the spectre of moving from labour-intensive to more technology-based production.

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