Successful Green Industrial Policy – Brazilian biofuels

May 11, 2010

     By Duncan Green     

bioethanolThe highly polarized debate on the role of industrial policy in development is dominated by discussions of the East Asian tigers, so good to see a discussion from another continent on what makes for successful state intervention – Brazil and biofuels. Here’s the highlights from a recent article by Tarun Khanna of the Harvard Business School and Santiago Mingo of the University of Miami School of Business Administration:

“Brazil’s experience at promoting renewable fuels, beginning in the 1970’s, is directly relevant to today’s polarized views of industrial policy. A 10-year industrial policy program called Pro-álcool was crucial in the development of the industry. Today, Brazil is the world’s most competitive producer of renewable fuels, based primarily on bioethanol. Ethanol accounts for more than 50% of current light-vehicle fuel demand in the country, and Petrobras – Brazil’s energy giant and one of the largest companies in Latin America – expects this share to increase to more than 80% by 2020.

Our research shows that industrial policy was successful in promoting a competitive bioethanol industry in Brazil. A massive stimulus package, prompted by the 1970’s rise in oil prices, gave rise to an entirely new industry. But it would not have worked without the crucial role played by competition.

Brazil was attempting to become energy self-sufficient in a manner similar to modern efforts by other countries. But, as opponents of bioethanol 2industrial policy are right to remind us, freebies never lead to a good outcome. The aftermath was the key. As world energy prices collapsed, Brazil fortuitously turned off its subsidy tap, whereupon a brutal Darwinian free-for-all ensued. This competitive rationalization was the key to the policy’s success.

The government did not bail out the underperformers, allowing market forces to restructure the industry during the post-subsidy phase. Certainly, the beneficiaries of Pro-álcool’s subsidies lobbied the state to continue the protective policies even after their usefulness – inducing the development of the industry – had expired. Fortunately, the government was not persuaded.

Brazil’s experience offers three important lessons for nations implementing renewable energy initiatives: (1) government policies must be consistent, simple, and long-lasting, providing assurance to would-be entrepreneurs that they can invest for the long haul; (2) picking winners, the familiar weakness of overenthusiastic bureaucrats, must be kept to a minimum; and (3) the state must have the discipline to dismantle subsidies when the need for them has passed.”

And sugar-based ethanol is also much better at reducing carbon emissions than the corn-based stuff being churned out in the US and elsewhere.

For a somewhat less green energy/industrial policy check out this recent Economist piece on China’s electricity boom.

May 11, 2010
Duncan Green