YET ANOTHER SUGAR CRISIS
By Shahid Kardar

[The writer is a former finance minister of Punjab. This article first appeared in The News International on August 22, 2009.]

The sharp escalation in the retail price of sugar in just a few weeks has the media and consumers up in arms claiming exploitation by mill-owners at the expense of the hapless population and castigating the government for meekly surrendering to the same sugar industry that it had blamed for hoarding and of which it made great fanfare through much-publicised raids of their godowns. This is not the first time there is a crisis in the shape of an abrupt upward movement in the price of sugar, complaints of holding back of stocks by the industry and the government's incompetence in tackling the fallout of a poor crop and being easily blackmailed by mill-owners.

This article tries to piece together the facts and also examines the real underlying issue that enables some sub-sectors of the industry to continue to prosper at the expense of Pakistani consumers without any improvements in efficiency and productivity that in cases of other sub-sectors of the industry has enhanced quality and reduced prices in real terms.

When we assemble the facts as to why we find ourselves in this unholy mess that could have been avoided, we discover that there was a shortfall of over one million tons in our sugarcane crop. What made matters worse for the domestic price of sugar was the lower production of the crop internationally, especially in Brazil (the largest producer) and neighbouring India, because of adverse weather conditions. Whereas these outcomes were known, or at least should have been in the knowledge of the government, it simply sat on its haunches allowing the build-up to this chaos, reflecting the sheer disarray in decision-making. Thanks to the revolution in micro-electronics and telecommunication technology information on what's happening in the world is available on a real-time basis. Hence, there can be no excuses for inability to plan for such eventualities on a timely basis. The ECC could perhaps even argue that it had taken a timely decision to import adequate quantities of sugar well before its price in global markets began to rise. That this decision was not implemented could be a combination of a) flawed policy that stops the private sector from importing food products (through high import duties to protect local production or other policy measures that restrict their imports only through the government-owned TCP); b) funds not provided to the TCP for importing sugar on a timely basis (before its international price began to firm up), either because of lack of availability of adequate finances, poor planning or long-winded procedures governing the release of funds; c) the desire to ensure that domestic farmers get a good price for their crop (considering many of the key decision-makers are large farmers themselves); and d) the lobbying efforts of the sugar mill-owners (most of whom are either legislators themselves or extremely well-connected to the corridors of power) who could see the opportunity to make a killing and who were assisted in their designs by the State Bank's instructions to banks that permitted hoarding through extension of credit limits against stocks held.

The media has raised a hue and cry on how the cartel of sugar manufacturers and their dealers manipulated government decision-making to ensure that the bulk of the gains from the higher international price of sugar and the sizeable gap between the domestic supply and demand for sugar flowed into their coffers since most of the farmers, excepting the large and influential ones in parliament or those with clout otherwise, did not get a price significantly higher than its support price. This brings us to the issue of the flawed government policy and its abject failure to perform what should be one of its principal roles, regulation with efficiency and alertness.

The reality is that Pakistan is one of the most inefficient growers of sugarcane -- our yield per acre is only 40 per cent of that of the most efficient producer of the crop worldwide. Against the highest yield of 48 tons per acre ours is a miserable 19, compared with 28 tons in the case of China and 24 tons for India. Whereas our yields per acre in most other crops are also lower, in none of the others is the gap so large, suggesting that we should be growing other crops instead on the same land (like fodder, maize, bajra and lentils or even shift to wheat earlier so that yields improve). Moreover, it is also a heavy user of what is fast becoming a scarce resource, water.

As for the sugar industry it is able to operate as a cartel, like the manufacturers of cement and milk and the assemblers of automobiles purely because of the failure (some would say connivance of successive governments) to allow markets to function and, in its duty as a regulator, to ensure adequate competition in the system. As the sugar industry continues to be heavily protected (hiding behind farmers is a convenient excuse for the retention of high import tariffs) it can form cartels to fleece consumers. The only way to ensure that consumers pay a fair price is by subjecting this industry to competition from imports. The best illustration of what competition can do to prices if markets are allowed to function is the case of the mobile phone operators. Before others entered the market Mobilink (and PTCL) was charging almost monopoly prices. The advent of other service-providers has unleashed a healthy competition. As consumers we have all benefited from the dramatic reduction in prices and better quality service. So, the only way to tame the sugar-producers is to open up our markets and reduce the level of protection that they enjoy. This child has been protected for far too long. It has simply not grown up, and has become an obese midget. It also thrives because it has within its midst powerful political players. Most of them would die when exposed to international competition but no one would turn up at their funeral since consumers would be better off and scarce resources would be diverted into avenues on which the returns would be higher to the domestic economy.

Hence, it is time to re-think the future of our cropping pattern and the need for a sugar industry which continues to be heavily protected from external competition. We should seriously consider shifting scarce resources away from this crop and industry, since importing this commodity would be a much cheaper proposition, especially if we open up trade with India. The first step to achieve this objective, which would also send a clear signal to sugar barons to behave themselves, would be to put sugar on the free list -- allowing anyone to import it -- and reduce the customs duty drastically. [Courtesy The News International]

Regards.