Hong Kong, December 17, 2005
Indonesia has a national sugar policy that encompasses international policies, such as the Agreement on Agriculture (AoA). The country’s support from the International Monetary Fund (IMF) has led to a massive restructuring of the sugar sector in the last 10 years, which has led to dramatic impacts on consumers and producers.
Sugar is a very important sector of the economy. It is vital as an energy source for the population, and plays an equally marked role in trade.
Indonesia is a net sugar importer. Production is concentrated around the island of Java. Prior to reforms, production was concentrated around small scale Government-owned factories, although there was private sector production as well. Before the reforms there were around 1000 factories processing sugar, and between 1981-1998 the Busan Urusan Logistic Nasional (BULOG) controlled sugar prices. Because production was concentrated in Java, sugar prices there were much lower than those in the other islands, and as a result, consumers in the other islands felt cheated.
When the Rupiah declined sharply, the sugar industry collapsed due to over- dependency on this commodity. The Indonesian Government started an IMF-sponsored structural adjustment programme (SAP), which involved a restructuring of the sugar sector away from public ownership, and towards private sector production. Over a number of stages, the number of sugar processors was reduced from 1000 to 10, with roughly half of the remaining 10 being state-owned enterprises (SOEs).
In Indonesia, the demand for sugar on average increased to 3.2 million tonnes per year during the reforms period. In 1996, production was about 2.1 million tonnes and it decreased to 1.5-1.7 million tonnes in 1998-2002. As a result, annual imports have been higher after 1998, which have been facilitated by increased openness to sugar imports. There were shortages in July-September 1998, and June-July 2000. In the year 1997- 1998, the price of sugar doubled. There has also been a problem of smuggling of the commodity.
What impact has this had on consumer and producer prices? Now that production is concentrated in a few hands, this has given the processors greater control over the prices paid to producers and consumers. Producers struggle to receive a price that is economically viable for them and these low producer prices have generally not led to lower prices for consumers as the importers, processors and retailers have captured the price differential. Also, the reforms have failed to deal with the grievances of the consumers and producers outside of Java.
BULOG still operates, but has failed to remedy these problems and support efficiency gains of sugar processors, two-thirds of which have significant inefficiencies.
It may be observed that the typical commodity market is like an hourglass with numerous farmers at the bottom of the supply chain and many consumers at the top. The narrow middle section represents the importers, processors and marketers, small numbers of which frequently control the supply chain and extract most of the revenues.
Those who control the market have the ability to set prices and standards that farmers must adopt. Three scenarios have been highlighted below:
Corporate role/power leads to international delegation;
Companies set internal standards; and
Information asymmetry results in little transparency in the international commodity market.
The market in many cases is characterised by vertical and horizontal integration. Horizontal integration is when a small numbers of firms control a particular sector, e.g., marketing, and this has been a common phenomenon for quite some time. What is more of a recent but growing phenomenon is vertical integration when one firm controls a large chunk of the supply chain and owns farms, provides inputs to farmers, transports the produce and markets it as well. One example of such a firm is the US firm Cargill.
We therefore, need competition rules to regulate trade internationally, and make sure that the benefits of the supply chain are spread more evenly. Canada is one example of public regulation that has played this role, where a wheat board controls the supply chain and is a non-profit organisation (NGO), the debts of which are underwritten by the Canadian Government. However, the Government has only had to intervene financially on a few occasions and the system has generally worked well.
When we look at the situation in developing countries, these problems become more sensitive, as food security becomes a serious issue. It is very important in this regard to give developing countries the policy space to craft their own development plans on agricultural cultivation, production and marketing, and to develop a regulatory system that pays attention to the interests of all parts of/in the supply chain.
The agricultural sector has to be dealt with quite carefully with respect to market concentration, as many areas of the supply chain, for example processing, are capital intensive and benefit from a degree of market concentration.
Issues From the Floor:
It is important to look again very carefully at the structure of economies in developing countries. For example, Kenya has only 8 percent of arable land. Services account for 60 percent of the country’s gross domestic product (GDP). Therefore, should the emphasis not lie in services, as in many cases, developing countries may never be self-sufficient in agricultural production? Also, given the structure of their economies, their comparative and competitive advantage may lie in other sectors. Perhaps, it is time not to concentrate too much on the agriculture debate at the expense of other issues. Many people in Kenya oppose the import of sugar, however, the country cannot produce enough to satisfy demand, and export restrictions merely work to increase prices for consumers.
In many instances, developing countries have a problem of supply bottlenecks that are due to poor infrastructure development and maintenance. In this light, even if developing countries are granted market access, they would find it difficult to export their products, or what is even more disappointing, they may not have any products to export.
The key question should be whether we want trade, then competition or competition, then trade. Often, countries do not set up the right regulatory framework and therefore, it is of no surprise that trade doesn’t achieve the objectives that it sets out for producers and consumers.
It is important for developing countries to craft their own national development plan where emphasis is placed on economic development, and then, trade policy should be crafted according to this strategy. Trade policy should not be formulated before the development plan.
It is very hard to identify key points in the supply chain where competition legislation can be utilised to tackle these problems, and we need to think more creatively about how we can identify specific areas where competition policy can play a role. This is also quite a sensitive area, as in some cases, tackling the difficulties producers face in receiving suitable prices might lead to price rises for consumers, and this impact has to be weighed against the benefits to producers.
If we look at the way economies develop, there is a movement away from agricultural production towards manufacturing and services, with the agricultural sector playing a reducing role in national income and employment as development progresses. We have to be careful that in tackling these complex supply chain problems, we don’t advocate policies that set back the development process, and that, agriculture is encouraged to become more efficient so that it can support the rest of the economy more effectively. I am concerned that the proposals for sensitive and special products in the agriculture negotiations are going to promote the survival of inefficient farmers, whereas, an increased openness to import these products would help the agricultural sector to orient itself towards more efficient production.
In response to the last statement, the problem many developing countries face is that, in order for farmers to move away from so-called inefficient sectors and encourage the development of sectors outside agriculture, sufficient opportunities are needed outside of agriculture into which they can move. However, many developing countries don’t have the resources, institutions and infrastructure to develop these alternative sectors efficiently. Also, the progressive liberalisation agenda being pushed by the World Trade Organisation (WTO) and other international institutions is making it increasingly difficult for many developing countries, to maintain the policy space, to develop these alternative livelihoods and forms of employment.