Role of Comparative Advantage in Biofuel Policy Adoption in Latin America

Abstract

The primary objective of this study is to evaluate whether renewable energy initiatives recently developed and implemented in Latin American and Caribbean countries are consistent with their national resource endowments, policy goals, and the general postulates of economic theory. Most classical and neoclassical theories suggest that international trade enhances economic efficiency and welfare of both parties involved in the exchange when they focus on producing and distributing products and services in which they have a comparative advantage. To achieve this goal, we analyze ethanol policy drivers using panel data from four major economies—Argentina, Brazil, Colombia, and Mexico. Since there is no universally accepted measure of comparative advantage, three separate models with different indicators—relative feedstock price, comparative export performance, and revealed comparative advantage—along with control variables, including the availability of production resources such as land and farm labor, are estimated. As expected, results show that the comparative advantage in feedstock production was one of the crucial factors in determining biofuel policy development and implementation in the four countries.