Subsidies for biofuels in China, Malaysia and Indonesia
Three recent reports by the Global Subsidies Initiative (GSI) survey subsidy policies for biofuels in China, Malaysia and Indonesia.
The reports marks a shift in focus for the GSI’s “Biofuels At What Cost?” series, from biofuel subsidy policies in OECD countries—which account for the lions share of global government support for biofuels—to that of certain developing countries that have stood poised to capitalize on heightened interest in these renewable fuels.
Indonesia and Malaysia, in particular, contemplated ambitious biofuel policies several years ago, only to find that high commodity prices over much of 2007 and 2008 put biofuels largely beyond the reach of any but the wealthiest nations that can afford to maintain subsidies, explains the GSI.
Nonetheless, Indonesia and Malaysia have spent public funds on promoting biofuels. According to Indonesian government figures, total government allocations for biofuel development between 2006 and June 2008 reached up to IDR 1 500 trillion (US$1.6 billion). However, the GSI notes that it is unlikely that all of these funds were disbursed. In Malaysia, meanwhile, support has been limited to RM 60 million (US$16 million) in low-interest loans in 2004, and RM 12 million (US$3.3 million) in federal grants for demonstration projects in 2006.
Both countries continue to consider expanding their incentives for biofuels, in particular by instituting blending mandates (i.e., mandating that gasoline and diesel be blended with a certain percentage of ethanol or biodiesel). However, the GSI cautions against this policy, on the grounds that the cost could far outweigh the benefits in terms of reduced GHG emissions or improved energy security, the two primary rationales behind biofuel subsidies.
“Indonesia’s experience with petroleum pricing has clearly demonstrated that fuel subsidies can become a major drain on the economy,” writes the GSI. “Letting fuel prices rise to levels prevailing in international markets would reduce consumption and improve efficiency, resulting in improved energy security. Adding an additional layer of subsidies for biofuels to an already distorted system makes little economic sense.”
Similar advice is offered to China. That country had already backtracked on some of its earlier plans for biofuels, once it became clear that an expansion of certain biofuel stocks would weaken food security. Construction of maize-based ethanol plants has been halted, and the Chinese government is promoting the use of non-grain feedstocks grown on marginal land.
Nonetheless, the GSI warns that converting “marginal” lands for feedstock production could disrupt natural ecosystems, as well as hurt vulnerable rural communities. China should proceed carefully “to ensure that biofuels genuinely do not compete with food or undermine the government’s social or environmental objectives,” says the GSI.
Links to all three reports can be found from the GSI website at http://www.globalsubsidies.org/en/research/biofuel-subsidies
Have US farm subsidies made Americans fat?
A policy brief from the Global Development and Environment Institute (GDEA) at Tufts University examines the link between bloated U.S. farm subsidies and expanding waistlines in the United States.
Consumer advocates have argued that US farm subsidies that lower the cost of corn are a key reason why consumption of high fructose corn syrup (HFSC) has sky-rocketed over the last four decades. Other researchers are more skeptical of the link, however, arguing that the impact that corn subsidies have on the prices of products like soft drinks is not significant enough to have a major impact on consumption.
The GDEA brief, authored by Alicia Harvie and Timothy A. Wise, estimates how much subsidized corn has lowered the cost of HFSC. The GDE estimates that, through 2005, corn was priced about 27% below cost due to implicit government subsidies, and on the basis that corn represents 44% of the cost of producing HFCS, the authors conclude that the wet milling industry saved about US$2.19 billion between 1997 and 2005.
Soda makers, in turn, saved about US$873 million over the same period thanks to subsidized corn, according to the GDEA.
So can low-cost corn be blamed for the obesity epidemic in the United States? While it has not helped, the authors conclude that “HFCS just isn’t a large enough share of consumer prices to be the primary cause of over-consumption.”
The Sustainable Development impact of Investment Incentives, in Southeast Asia and beyond
A network of developing country research institutes that examine trade policies has published two reports that highlight the impacts, negative and positive, of subsidies designed to attract investment.
A “Checklist for Assessing the Sustainable Development Impacts of Investment Incentives”, published by the Trade Knowledge Network, provides a set of questions for government officials and other stakeholders to consider when designing investment incentives, in order to better ensure that they contribute to economic development, as well as sustainable development more broadly.
The author of the checklist, Kenneth P. Thomas of the University of Missouri-St. Louis, notes that while certain investment incentives have been credited with attracting investments, others have left doubts as to whether the investment would have still been made in the absence of the incentives.
Indeed, those studies that have attempted to determine whether investment incentives have contributed to economic development leave some doubt. The report says that “even some of the more optimistic of these analyses estimate that less than ten per cent of apparent jobs were truly due to the effect of the incentive. Moreover, many times job creation in one jurisdiction is soon offset by job cuts at other facilities of the same company, or by cuts at other companies due to their succumbing to subsidized competition.”
The checklist is not the first of its kind, coming on the heels of the OECD’s 2003 “Checklist for Foreign Direct Investment Incentives”. However, unlike the OECD checklist, the TKN considers the impacts of investment incentives beyond economic effects, such as their impact on the environment.
In addition to the checklist, the TKN has recently published a study on investment incentives in Southeast Asia, a region where investment incentives are prevalent. While the region has seen a 15-fold increase in FDI over the last two decades, the degree to which investment incentives actually influence investment decisions is poorly understood, says the author, Heike Baumüller. How particular incentives impact the environment is even less well researched.
The report, “Competing for Business: Sustainable Development Impacts of Investment Incentives in Southeast Asia”, provides an overview of how foreign investment has contributed to development in the region, the various incentives that these countries offer, and the bilateral and regional rules that currently govern foreign investment. The report also sheds light on the regional dynamics with respect to competition for FDI, such as the influence that China’s rapid economic development has had on both encouraging and diminishing foreign investment in other countries in the region.
Baumüller and Thomas both draw attention to potential bidding wars within states (i.e., between municipalities or provinces) or between states, as a potential point of concern.
“Some have argued that competition for mobile capital can be healthy, facilitating the efficient allocation of investment and encouraging governments to improve the investment environment more generally,” writes Baumüller . “More commonly, however, concerns have been raised that competition can lead to ‘bidding wars’ that will leave all bidders no better or even worse off in the end.”
