Sugar in the Philippines

Sugar in the Philippines Policy responses to a distorted world market

Gerald C. Nelson

This article examines how changing world market conditions and domestic priorities brought about fundamental changes in Philippine sugar policies. Implementation of new sugar policies to reflect the altered domestic priorities, however, awaited exogenous changes - in US sugar policy and domestic macroeconomic parameters. Rather than implement policies which encouraged efficient use of domestic resources, price and production control policies were used to transfer income to groups with most political power. Dr Nelson is at the Department of Agricultural Economics, University of Illinois at Urbana-Champaign, 305 Mumford Hall, 1301 West Gregory Drive, Urbana, IL 61801, USA. Thanks are due to Cristina David and Ponciano lntal for comments on a related paper, to Mercedita Agcaoili who coauthored an earlier paper, to Laurian Unnevehr for valuable input during the entire paper writing process, and to an anonymous reviewer. Errors of fact and interpretation are the responsibility of the author.

“Free trade’ sugar is that which does not take place under some kind of bilateral arrangement. Simon Harris, ‘Current issues in the world sugar economy’, Food Policy, May 1987, estimates that sugar traded under special arrangements accounts for over 50% of total world trade.

0306-9192/88/030283-10$3.00

The plight of labourers in the sugar fields of Negros Island in the Philippines has contributed to the world’s perception of the disastrous consequences of the excesses of the Marcos government. Popular news magazines have used the story on their covers. While there can be little doubt that personal favourites of Marcos enriched themselves at the expense of the sugar industry and contributed to the terrible suffering of the Philippine sugar workers. many of the instruments used to extract rents from the sugar industry were devised by earlier governments. The Aquino government has retained many of the same policy instruments, but changed the beneficiaries. The Philippine sugar industry provides a fascinating case study of how distortions in world markets result in resource transfers, how an LDC government has chosen to allocate those transfers and the side effects of the transfer mechanism. When an exporting LDC is faced with distorted world markets. the appropriate government response is seldom clearcut. If the international market is such that distortions will remain in place, if the country has no impact on the world price, and if it is not possible to sell at different prices into different markets, then free trade is at least Pareto-optimal and often will maximize social welfare. In many cases, however. the distortions can be negotiable, export prices differ depending upon destination, and quantitative restrictions are implemented by importers. In this context, public policy decision making is much more complex. This complexity can provide policy makers with more degrees of freedom to meet domestic policy goals. but it also provides a congenial atmosphere for rent-seeking behaviour. The transfers foster the creation of domestic interest groups and provide them with resources to influence public decision making in ways that neither are Pareto-optimal nor contribute to social welfare. The international sugar market is notorious for its distortions. A large share of internationally traded sugar is subject to quantitative and price arrangements between buyer and seller and is not sold at free-market prices.’ Domestic sugar production and consumption in many countries arc protected from world price fluctuations by government price control, forcing price adjustment to domestic production variation onto

Q 1988 Butterworth

& Co (Publishers)

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‘The decade of the 1970s provides a good example of the price fluctuations in the world sugar market. From a low of $81 per metric ton in 1970, the world price climbed steadily to a peak of $552 in 1974, and then dropped back to only $171 in 1978. A period of rapid increase brought prices over $600 per metric ton by 1980. An example of this protection is in the European Community (EC), where the Common Agricultural Policy sets a domestic floor price well above the free-market price in most years, purchases excess production, and sells it at a loss in the world market. It also allows over one million mt of preferential imports from previous colonies of member countries. By 1980, the EC had become both the second or third largest importer and the second largest net exporter of sugar in the world. Other important sources of distortion in the world sugar market are US, Japanese and Soviet agricultural and trade policies.

the world market. resulting in large world-market price fluctuations.’ Sugar exports from the Philippines, one of the major trading countries, have been subject to widespread government intervention, both in the Philippines and in the major export market, the USA. With one interruption in the mid-197Os, the USA has protected its domestic sugar producers since the early 1900s. and US prices have almost always been much higher than the world price. In the early 19OOs, US producers were protected by high tariff walls, and Philippine sugar was imported duty-free. The current mechanism, a quota on imports into the USA. has been used since 1934 (with one interruption between 1974 and 1982). and the Philippines has always had a sizeable share of the total quota. Policy-induced distortions in international trade provide the opportunity for income transfers from one country to another and income redistribution within a country. In the case of sugar, recipients of the US quota could sell sugar to the USA at prices that were substantially above the world market in most years. From an efficiency point of view, the optimal public policy would be to auction the quota to producers, realizing the rent implicit in the quota, and incorporating it into the general revenue fund. Successive Philippine governments, including the Aquino government, have chosen instead to use the quota to achieve domestic policy goals that changed over time in response to political pressures at home, often generated by recipients of earlier transfers.

Introduction

to Philippine sugar production

Since the late 1800s. the Philippines has been a large exporter of sugar, and sugar exports have been a major, but declining source of foreign exchange in the Philippine economy. Although the Philippine share of world area devoted to sugar is only 2X, until the early 1980s it was one of the top four or five exporters, supplying about 5%) of all exported sugar. Before the temporary end of the US quota system in 1974, essentially all Philippine sugar was exported to the USA (see Table 1). After 1974, export markets were diversified, and in 1980 exports to the USA were only 25% of total sugar exports. In the early 198Os, Japan imported a little over 20%. and the centrally planned economies bought somewhat less than 20%. Exports of sugar were roughly 22% by value of total exports in the 19SOs, but by the early 1970s had fallen to only 10%. Sugar uses only 3.5% of agricultural land in the Philippines, but more

Table 1. Average annual quantity and value of Philippine exports of sugar” (‘000 mt and million US dollars).

Total sugar exports 1955-59 196&64 196569 197G74 197579 1980-83’

USA

Centrally planned economies

Others

Value

Quantity

Quantity

1 33 95 85

315 338

Japan

Quantity

Value

Quantity

Value

864 1032 984 1383 1427 1292

101 140 144 325 386 476

839 1032 984 1317 711 274

98 140 144 286 179 104

aThls includes both centnfugal and refined sugar ‘NEDA-NCSO, InternatIonal Monetary Fund, lnfernational

Quantity 8 51 243 246

Value

Value

17 -

65 115

2 -

15 163 434

7 47 170

Share of sugar in total exports (%) 25 19 18 21 14 9

Fmancral Statistics, and NASUTRA.

Source: NatIonal Economic and Development Authority (NEDA), Foreign Trade Statrsbcs offhe Philippmes, NatIonal Census and Statistics Office (NCSO), various years

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Sugur in the Philippine

than SO% of sugar land is in the Western Visayas region and most of that on Negros Island (see Table 2). With 13 hectares, the average sugar farm is much larger than the average Filipino farm, but sugar farm land is unevenly distributed. The 25 000 farms with less than 10 hectares cultivate 22% of the total sugar area, while the 5.7% of farms that cultivate more than SO hectares account for somewhat more than 42% of total sugar area. Several large sugar estates exist, such as Hacienda Luisita owned by the family of President Aquino, with more than 1000 hectares. Ownership of these large farms and the income generated from them has been an important source of economic and political power.3 Production of centrifugal sugar grew from 1.3 million mt in 1955 to a peak of about 2.4 million mt in 1975 and then dropped slightly to 2.3 million mt by the end of the 1970s.’ Most of the growth was due to area expansion which took place across the country. The peak in 197.5 was largely due to ill-advised government-encouraged expansion of sugar processing facilities in the mistaken hope that the 1974 price boom would continue. Sugar yields fell in the mid-1970s as production expanded on marginal lands, and then increased as area declined. In 1980, sugar processing services were provided by 42 mills and six refineries. Producers pay millers between 30% and 40% of the milled sugar as a processing fee. From 1974 until the mid-198Os, all sugar was sold at mill gate to a state-owned trading agency (Philex or the National Sugar Trading Agency - NASUTRA) which handled all exports and sold domestic sugar to licensed traders.

Philippine sugar policies

‘See tion:

Alfred W. McCoy, ‘In extreme uncthe Philippine sugar industry’, in Political Economy of Philippine Commodities, Third World Studies Program, University of the Philippines, Diliman, Quezon City, 1983, on this point and for an interesting discussion of the combined impact of martial law and mechanization on sugar workers. 4Between 1983 and 1985, production fell approximately 30%, from 2.5 million mt to 1.7 million mt. The reasons for this are discussed below.

Table 2. Area harvested

and production 1955

Total area (‘000 ha) Western Visayas Other regions

214 129 65

In the post-World War II period to 1980, there were three periods of distinct policy environments (discussed in greater detail below), distinguished by changes in Philippine and US policies. From the end of World War II to 1962, the exchange rate with the US dollar was fixed at two pesos as part of the independence agreement with the USA, and domestic sugar prices for both producers and consumers differed from US domestic prices mainly by transport costs. The primary domestic sugar policy goal was to allow producers to recover from the effects of World War II. The peso was devalued in 1962 and again in 1970, but domestic prices were not allowed to increase by the full amount of the devaluation. Instead, a complicated quota system, based on the prewar regulations, was reactivated. Consumer interests became more important in policy decisions. Finally, after the USA temporarily deregulated its sugar trade in

of sugar.” 1960

1965

1970

1975

1960

1984

194 120 74

328 195 133

344 226 118

513 306 205

425 NA NA

400 NA NA

Production (‘000 mt)

1244

1381

1158

1927

2394

2343

2400

Yield (mtiha)

5.61

7.12

4 75

5.60

4.67

5.51

6.00

‘Area and quantity of centnfugal sugar only Small amounts of non-centrifugal

sugar (panocha and muscovado) are not included.

Sources: Figures for 195575 are from the PhIlIppIne Council for Agnculture and Resources, Da& Series on Sugarcane Statistics in the Philippines, 1980. Figures for 1980 and 1984 are from FAO, Producfion Yearbook, various Issues, Rome.

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‘Ferdinand Marcos was first elected President in 1965 and won reelection in 1969. Accordmg to the Constitution prevailing at that time, only two four-year terms were allowed. However, shortly before the end of his second term, Marcos engineered a revision in the Constitution that allowed additional presidential terms. Before the next election could be held, martial law was declared in 1972. %ee McCoy, op c/t, Ref 3. ‘See Amado Castro, ‘Philiooine-American tariff and trade relations, 1’8’98-1954’, Phi/;pp;~e Economic Jour~af, Vol IV, No 1, 1965, for an extended discussion of the early history of Philippine-US sugar relations. Alfred McCoy provides a fascinating discussion of the development of the Negros Island suqar estates in ‘A queen dies slowly: the rise and decline of Ilo City’, in Alfred McCov and Ed. C. de Jesus, Phiknpine Social’ History: Global Trade and Locai Transformations, University Press of Hawaii, 1982. ‘See Robert Huke, Shadows on the Land: An Economic Geography of the Philippines, Bookmark, Manila, 1963. ‘A small reserve (called the C quota) was also set UD to meet unforeseen needs (and served at’various times to meet Philippine stockholding requirements under the dlfferent international sugar agreements). “See Huke, op c/t, Ref 8. “See the Philippine sugar industry journal, Sugar News, May 1980. “Sugar exporters were required to convert a part of their foreign exchange earnings to pesos at the old rate through 1965. See Robert Baldwin, fore/gn Trade Regimes and Economic Development: The Philippines, National Bureau of Economic Research, New York, 1975. ‘3The world price used in these comparisons is the International Sugar Organization world price. See Appendix 1.

286

197-t. forcing quota holders to sell at world prices, the Marcos g~~~~er~i~i~e~~t took control of both domestic and interIlational trade.” Consumer interests were given more importance, but a primary goal of the new policies was to reduce the financial and therefore political power of the large sugar producers.” These changes also facilitated the exploitation of the sugar industry by Marcos associates. The USA reinstated its quota in 1982, but Philippine policies did not change until after the Aquino government took power, when the production and export quota system was reintroduced. The postwar policy environment was strongly influenced by prewar developments.’ Between 1914 and 1934, Philippine sugar entered US markets duty-free and in unrestricted quantities while most other sugar imports faced a high tariff wall. As a result, Philippine production, almost all of which was for export. grew rapidly. Exports reached a peak of 1.3 million mt in 1934, a level that was not exceeded until 1971.” In 1935, the USA changed the structure of protection given to domestic sugar from high tariff barriers to quantitative limits on imports. Philippine sugar was provided a quota of only X50 000 mt. two-thirds of its previous free-trade exports to the USA. The imposition of the US quota in 1935 led to Philippine regulations both to distribute the export quota for the US market among domestic producers and to maintain the price of domestic sugar. The principal legislation, the Sugar Limitation Law of 1934, set up the basic mechanisms that regulated sugar production, processing and trade for most of the next SO years. Each mill and grower was given a share of the US export quota (called the A quota). A second quantity, the B quota, was set aside for sale to the domestic market.” Initially, both the A and B quotas were maximum amounts that a producer could sell into the respective markets. Each mill owner and producer was free to trade sugar domestically and in the export market up to the limit of his or her respective A and B quotas. The US quota was the sum of all A quotas. The original intent of the B quota was to limit domestic sates to keep domestic prices from falling to world levels. When the USA imposed the quota system. Philippine exports to the USA were about 400 000 mt greater than the quota given to the Philippines. Domestic consumption was only 100 000 mt. so the impact of diverting the excess to the domestic market would have been to cause a drastic fall in domestic prices. I” To prevent this, producers were paid a one-time fee to destroy limits and domestic and part of their standing cane, and production export sales restrictions were imposed. ’ ’

Postwar sugar policies to 1962 Sugar plantations and processing facilities suffered substantial damage during World War II, and immediate postwar production was well below prewar peaks. Furthermore. as part of the provisions of independence. the exchange rate was frozen at two pesos per dollar. a rate that overvalued the peso, discouraging exports in general and sugar exports in particular.” The g~~vernment did not actively intervene in the sugar trade to keep domestic prices down, and domestic prices to both consumers and producers were dctcrmined by US domestic prices (less transport costs). In the LJSA the average price was 73% higher than the world-market price. In the Philippines, consumer prices were 56% higher than world prices. while producer prices were 66% above world prices. ” Philil~pin~ exports to the USA wcrc below export quotas in

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Note: Statistics on the US quota on sugar are complicated in a number of ways. These figures are reasonably close to what the actual quota was, but should not be viewed as exact. “Sugar statistics on raw and refined sugar are reported either in commercial weight or raw value. Roughly 1.03 tons of raw sugar is needed to make 1 ton of refined sugar. Commercial weight is the unweighted sum of both kinds of sugar. Sources: US quota, 195559: Niceto S. Poblador, ‘The Philippine sugar industry: a case study of government control’, The Pbi/i~~ine Review of Business and Economics, Vol 1, No 2, October 1964; 1960-65: Philippine Sugar Handbook, July 1974; 1966-70: Sugar News. February 1972; 1971-73: Sugar Today, 1974 Figures on Philip pine exports to the USA from NCSO.

Tabie 3. US quota for Philippine weight’}.

sugar and actual Philippine

Year

US quota

1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973

864 864 864 864 864 1019 1296 1117 1100 1032 1160 1123 1052 1052 1052 1215 1413 1267

exports (‘000 mt, commercial

Philippine exports to the USA 891 871 631 893 909 941 1039 979 1081 1120 1122 942 943 904 1011 1236 1421 1239 1411

several years during the period, possibly because of production shortfalls in some years (see Table 3), and there were small exports to Japan. During this period, the Sugar Quota Authority occasionally announced target domestic consumer prices. But export (US) and domestic prices were generally close to the target and since the export either quota was not always met, there was no need to enforce production controls or marketing regulations. Increasing production was of paramount importance because sugar exports accounted for over 20% of all export earnings (see Table 1). Relative to later periods, consumer welfare (indicated by the difference between consumer and producer prices) was not given much weight in sugar policy making.

Policies and policy objectives, 1962-74 The gradual devaluation of the peso between 1960 and 1962 raised substantially the peso price of sugar exported to the USA. Furthermore, the Philippine quota in the US market was increased in the redistribution of the Cuban quota following the Cuban revolution, and when exports of other countries fell. Between 1959 and 1962, the Philippine quota was increased roughly 25% (250 000 mt commercial weight) and by 1974 another 200 000 mt had been added. At the same time that increased peso prices for exports and growth in the export quota made exporting more lucrative;growth in population and income increased the domestic demand. .4verage annual domestic consumption (production less exports) was 35.5 000 mt in 1955-60, but increased to 652 000 mt in the 1969-73 period. Substantially higher domestic prices were politically undesirable, and imports at the lower free-market price to keep domestic prices down were not considered an option. In order to meet the convicting goals of more exports and moderate domestic prices, enforcement of the prewar quota system was strengthened. However, instead of using the B quota to support consumer prices, it was used to moderate consumer price increases. The sum of the B quotas was chosen to meet a domestic price goal (usually not publicized). Producers were required to allocate 30% of their weekly production to the domestic market until their B quotas were

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287

filled. If they did not meet their B quotas in a given year, sales in the next year went entirely to the domestic market until the previous year’s quota was filled. In essence, export sales (the A quota) become a residual market and, between 1962 and 1973, exports to the USA were below 95% of the quota in 4 out of 12 years (see Table 3). Domestic prices were allowed to increase gradually, while export prices followed US price movements. Between 1960 and 1962, export unit values (in pesos) doubled while the Manila wholesale price increased less than 50%. A second devaluation in 1970 further widened the gap between consumer and export prices, although an export tax imposed with the devaluation partially offset this effect. I4 During this period, the average producer price was 69% above the world price (almost exactly the same as the previous period). while the consumer price was only 44% above the world price, a decline of 27%.

Policies and policy objectives,

“‘The export tax, originally lo%, was lowered to 6% in 1973. See Romeo Bautlsta and John Power, Industrial Promotion Policies in the Philippines, Philippine Institute of Development Studies, Manila, 1979. “After 1974, the reserve lost any practical significance since control of all sugar was in government hands and its price contribution to the composite price was identical to the export price.

Table 4. Composite

price and export

1974-82

Major changes in Philippine sugar policies occurred in 1974. shortly after martial law was declared. While never stated explicitly. the changes were widely seen as an attempt to reduce the financial power of the owners of the large sugar estates. The trigger was the change in the US system of sugar protection from quotas to tariffs and the surge in world prices beginning in 1973. An important consequence was that. for this period, average domestic prices for both producers and consumers were below world prices. Before 1974, the government allocated domestic and export quotas among producers, but the private trade handled marketing transactions. In 1974, however, the Philippine Exchange Company, Incorporated (Philex), an agency of the state-owned Philippine National Bank (the major financial institution for the sugar industry at that time), was designated the sole buyer of sugar mill output and the sole exporter of sugar. In contrast to the previous system in which each mill and producer was responsible for marketing its export and domestic quotas, Philex bought all sugar at a single ‘composite’ price - calculated by taking weighted shares of the officially determined ‘export’ (A). ‘domestic’ (B), and ‘reserve’ (C) prices (see Table ,).I5 Philex sold sugar for the

unit value of sugar, 1974-84.

Date effective

Pesos/piculb

Pesoslkg

US cents/lb

Average export unit value, calendar year Pesos/kg US cents/lb

25 October 1974 5 May 1975 26 March 1976 2 December 1976 13 December 1976 1 May 1977 1 January 1978 2 April 1979 1 September 1980 1 September 1981 1 February 1982 22 October 1983

14094 115.60 108.75 79.50 81 50 90 00 90 00 123 50 145.00 144.80 168.80 230.62

2 23 1 .a3 1.72 1 26 1 28 1.42 1.42 1.95 2 29 2.29 2 66 3 65

14.9 11.5 10.5 77 7.8 8.7 a.7 12.0 13.8 13.2 14.1 14.9

3.25 4.30 2 17 1.55” 1.55c 1.55 1.30 1.36 2 58 3.50 2.85 3 54

Composite

price’

21 7 26.9 13.2 9.5c 9.5c 9.5 8.0 84 15.6 20.1 15.1 14.5

aBeglnnlng in April 1979, figures Include additional payment to millers and planters as a share of NASUTRA profits bThe picul is the standard measure of sugar weight In the PhIlIppInes. It IS equal to 63 25 kgs. “Calendar year 1977 price Source: NASUTRA.

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FOOD POLICY August

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16The premium duty was 20% of the difference between the &price and a base price originally set equal to 80% of the fob value of exports for February 1974. See Bautista and Power, op cif, Ref 14. “Communication from the Philippine Central Bank, and Armando Armas and Denise J. Crycle, Economic Incentives, Wage folicv and Comparative Advantaqe in Philippke Agricu/f&e, Council for Asian Manpower Studies, Quezon City, 1981. ‘*The loans were reported to total 2.78 billion pesos: 332 million pesos from the International Monetary Fund commodity price stabilization fund, 1.025 billion pesos from foreign banks, 1.3 billion pesos in the form of credit lines from the Philippine National Bank and the Republic Planters Bank, and a 18 million pesos credit line from the Traders Royal Bank. Sugar News, March 1981. ‘%ugar News, March 1981. The president of NASUTRA, Ambassador Roberto Benedicto, was also Chairman of Philsucom and chairman of the Board of Directors of the Republic Planters Bank which took over the bulk of financial services for the sugar trade in 1978. He is often identified as one of the ‘cronies’ of then-President Ferdinand Marcos.

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domestic market to licensed traders and exported the remainder itself. The (temporary) end of the US quota system coincided with record high world prices for sugar and the problems of adjusting to the new situation were postponed. An additional export tax, called a premium duty, was implemented and a temporary ban on exports was declared in late 1974 to protect domestic consumers.‘” However, neither the export tax nor the premium duty were fully paid by Philex. The premium duty was paid only in three years, 1974 to 1976. The export tax was not paid after 1978. Between 1970 and 1977 total revenues from export taxes averaged only 1.8% of the value of exports.” World prices fell rapidly in 1975 and 1976, and the composite price was lowered from 2.23 pesos/kg (14.9 US cents/lb) in 1974 to 1.42 pesos/kg (8.7 US cents/lb) in May 1977 where it remained until world prices began rising in 1979. Despite the reduction of the composite price, export unit values in most of 1977, 1978 and 1979 were lower still. During this period, Philex paid producers a composite price that was above the world price, and borrowed large sums from domestic and foreign banks to do so. ” In addition to the loans, the financial situation of Philex was made worse by perverse government stockholding behaviour between 1974 and 1978. Despite high world prices in 1973 and 1974, domestic stocks of sugar were built up and by 1975176 had reached a 1970s peak of 1.68 million mt (equal to 8% of total world exports). The next two years saw record exports (most of the increase in exports went to the USSR and China) and stocks were drawn down somewhat. Unfortunately, these exports came in years when world prices were at their lowest and export revenues did not increase nearly as much as export quantity. As a result of the substantial losses incurred by Philex, government control of sugar was transferred in 1978 to a newly constituted policy-making body, the Philippine Sugar Commission (Philsucom) and day-to-day operations were given to NASUTRA. Philsucom and NASUTRA were saddled with both domestic stocks that were still large by historical standards and the need to repay the large loans made previously. A fortuitous rise in world prices in 1979 and 1980 ahowed NASUTRA to draw down its stocks profitably (exports in 1980 were the second largest ever recorded), and in 1980 NASUTRA entered into long-term contracts of three and four years to sell half of total exports at roughly 52 US cents/kg (24 US cents/lb). Although that price was only half of the highest price reached in the spot market in 1980, it proved to be a good bargain because world prices fell to about 22 US cents/kg (10 US cents/lb) in 1981 and remained at or below that level through 1987. As world prices began increasing in 1979, composite prices were raised, first in the middle of the 1978179 crop year and then again in the beginning of the 1979/X0 crop year. In general, Philsucom’s price policy was to change the export price component of the composite price in line with changes in the world price, but world price increases were not fully passed through to producers. Fifty percent of NASUTRA’s profits were retained to pay off the loans (changed to 20% in December 1981) and 50% paid to producers. By March 1981, the president of NASUTRA reported that 1.5 billion pesos of the loans (approximately 60%) has been repaid.” Despite the fact the composite price was above the world price for a period of about two years, the average producer price during this period

289

was 20% below the world price. At the same consumer price was 31% below the world price.

Impact of government

time,

the

average

policies

An important effect of the US quota policy (until 1974 and beginning again in 1982) was an implicit income transfer to the Philippines. Philippine price and marketing policies determined how this transfer was distributed within the Philippines. In addition, domestic policies resulted in an income transfer between consumers and producers, the direction of transfer depending upon the social welfare weights given to the two groups in the policy-making process. The income transfers and welfare gains and losses caused by the changing constellation of US and Philippine prices were substantial (see Table 5). The transfer from US consumers to the Philippines averaged $105 million per year in the first period and $190 million in the second period. 2” In the third period, there were no resource transfers from the USA because the US quota system had ended. Philippine price policies in the first two periods gave producers the US income transfers and augmented them with transfers from consumers. The gain in producer surplus was $131 million annually in the first period and increased to $174 million in the second period. Consumer losses averaged $35 million annually in the first period and $13 million in the second. In the third period, the direction of resource transfers was reversed with the government takeover of domestic and international marketing. On average, producers lost $406 million annually while consumers gained $165 million. The $241 million annual difference between the consumer gain and the producer loss includes explicit government revenues on sugar trade and some deadweight loss, but is likely to include substantial diversions by associates of then-President Ferdinand Marcos.

Events after 1980

20All values

are in 1980 dollars.

After 1980, the details of sugar policy in the Philippines become even more complex and are only summarized here. World prices fell from their peak in 1980 while the composite price was not reduced as much and eventually was again greater than the world price. However. the USA reintroduced its quota programme in 1982 and the Philippines received a sizable share of the total. Since the US price. the long-term contract price and the consumer price were above the world price, Philsucom should have had little difficulty in continuing to pay the composite price. Instead, beginning in 1983 or 1981. payments were

Table 5. Annual resource (million 1980 dollars).

Source: Price data from Appendix 1. The Philip pine wholesale price index is used to deflate. There is no income transfer from the USA in 1977-80, because the quota system was suspended.

290

transfers,

consumer

surplus losses, and producer

surplus gains

1955-62

1963-73

1974-80

Income transfer to Philippines from USA

105

190

NA

Producer surplus gain

131

174

Consumer surplus gain

-35

-13

FOOD POLICY August

-406 165

1988

delayed or stopped. Several nominal changes in the government agencies controlling sugar were made. in response to complaints from the producers, but little effective change took place. It is possible that, during the period from 1980 to 1985, the largest illegal diversions of funds took place. Because sugar producers were not paid by the government for their sugar they were unable to repay their crop loans. With the high interest rates that accompanied the economic collapse following the assassination of Benign0 Aquino, interest charges mounted rapidly. Banks were unwilling to make new crop loans until the old loans and the rapidly accumulating interest charges were repaid. Many producers were unable to replant and sugar production dropped from 2.5 million mt in 1983 to 1.7 million mt in 1985.” It was this decline in production, and the resulting unemployment of sugar workers, that led to the widespread suffering in Negros Island. Since the Aquino government took over in early 1986, one of its top priorities has been to put some kind of order back into the sugar industry. With world prices at very low levels, little help was available from the world market. The US quota still provided substantial but its size had been reduced by two-thirds since its transfers, The response of the administration was to return to reintroduction.” the old system of production and marketing quotas for each producer and sugar mill with the sum of all quotas equal to estimated domestic consumption plus the US quota. As a result, domestic prices for both producers and consumers were again above world price levels.

Conclusions

“FAO Production Yearbook, Rome. “The US quota fell from 3.17 million short tons (3.14 million mt) in 1983184 to just over 1 million short tons (0.91 millton mt) in calendar year 1987. During that time, the Philipprne share increased slightly from 12.9% to 14.3% because it was given the South African quota (USDA, Sugar and Sweetener: Situation and Outlook, various issues, Washington, DC). z3See Cristina David, Economic Policies in Philippine Agriculture, Philippine Institute of Development Studies Workrng Paper 83-02, 1983.

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The history of sugar in the Philippines illustrates at least two points about the interactions between distorted international trade and domestic policy responses. First-best policies to deal with intercountry income transfers generated by trade distortions are rarely implemented, because the transfers are easy targets for rent seekers. And once the transfers begin, the inertia inherent in public policy and the additional resources available to rent recipients make it difficult to revise public policy. In essence, the income transfers are viewed as being similar to a property right of the initial recipient. To overcome this bias in favour of the status quo, public policy goals (social welfare weights) must change substantially or an exogenous change in one of the factors determining the rents must occur. In the Philippines, the first postwar devaluation triggered a change in sugar policy, but population growth and increased concern for (especially urban) consumers were the underlying factors that changed the rent-seeking calculus. Nevertheless, despite an overall bias against agriculture.23 sugar producers continued to receive policy-induced income transfers from both US and domestic consumers. The end of the US sugar quota and a sharp rise in world prices were the triggers for the next major change in sugar policies. The government justified its takeover of domestic and international marketing as a means of protecting consumers and producers from a violently fluctuating world price. Price stability alone, however, does not result in average producer prices of only 80% of the world price and consumer prices of 70% of the average world price. A more likely explanation for the policy change is that it allowed the Marcos government to reduce the

291

2*UneOfthe largest sugar producers and strongest

political

also

Controi

lost

opponents of Marccs of his two television

stations, one of the major Manila newspapers, and the Manila Electric Company when martial law was implemented.

financial and therefore political power sugar producers had been able to amass because of the income transfers from the USA and from Philippine c~nsurners.‘~ If the US quota system had continued, the new system would have been a mechanism, abeit imperfect, for capturing; some of the quota premia and transferring it to consumers. Unfortunately there were no more quotas until 1983. Hence the new policies must be seen as a simple mechanism to tax producers, and transfer part of the proceeds to consumers. An important cost of the policy was widespread suffering on Negros Island, the main sugar growing region. The 1986 change in government provided an opportunity to institute new sugar policies. The US sugar quota had been reinstated, providing quota premia again. Furthermore, the principal agent of the Marcos government’s sugar policies was one of those who fled the country. and previous policies might be thought to be discredited. However, by early 198X7, the Aquino government had reverted to a production and marketing quota system similar to that originally introduced before World War II, and domestic prices were substantially above world prices.

Appendix Appendix

table 1. ZWected raw sugar prices @esos per mt).

Year

Exchange rate (pesos/$)

iSO world priceb

1955 1956 1957 1958 1959 1960 1962 1962 1963 1964 1965 1966 1967 196% 1969 1970 1971 1972 1973 1974 1975 1976 1977 197% 1979 1980 198f 1982 1983

2.00 2.00 2.00 2.00 2.00 2.00 2 02 9.81 3.9t 3.91 3.92 3.90 3.93 3.93 3.93 5.31 6.43 6.67 6.76 6.79 7.25 7.44 7.40 7.37 7.3% 7.51 7.90 8.54 11.11

143 154 228 154 131 138 120 234 719 497 174 $56 I66 165 278 479 63% 1069 1407 4438 3255 1897 1325 1267 1571 4747 2954 ?5%5 1832

(IS0 world price in US cehts/lbb) 133:::/ (5.17) (3.49) (2.97) (3.13) I:.;:; (8.34) (5.77) (2.02) I: -z; (1190) (3.21) (3.68) (4.50) (7.27) (9.44) (29.65) (20.37) (:;:;;; (7.80) (9.66) (28,67) (16.96) (8.42) (7.48)

New York

Philippine export

cif =

unit

240 247 253 255 253 256 253 436 633 539 526 54% 572 593 612 950 1114 1258 1442 4258 3567 2171 1791 2268 2533 4902 3429g 37429 5387”

227 223 237 245 237 146 154 447 561 561 614 527 566 573 592 898 1002 1148 1259 3250 429% 2160 1547 1295 1362 2575 3498 284%” 345@

velued

Wholesale delivered Manitae 176 204 261 249 227 221 301 307 350 334 314 45% 395 404 547 6Q2 607 791 787 826 1060 1240 1374 1439 1739 1850 1850 2570 -

Millgate’ 201 215 247 245 231 243 320 367 466 397 377 462 46% 472 565 681

89s

930 973 I584 196% 1710 137% 1423 1820 2066 2291 2608 2637

aFrom IMF, ~fffern~fiona/ Finamial Sfaf~sfics. %-~e International Sugar Organization spot prrce. From Warld Bank, Communes Trade and Price “@ends, 1983-8$ E&f&, Wasb~~gtoo, DC. “8ulk raw sugar landed New York with applicable duties paid. From FAO, MO&J& &Iletin of Sfatisfics, var:ous issues, Rome. dThe value of centrifugai sugar exports divided by the quantity. From NCSO, Foreign Trade Statistics, various years. ‘Wholesale price for sugar (ordinano 97’) basis buyers ex-central, delivered Manila. For 1955 to 1978, from Philippine Council for Agriculture and Resources Research, Data SerieS on %gafC,?ne ~tafi.SfiCS in the f%ilippim?S. 1980 From 1979 to 1982, Domestic Marketing Office, NASUTRA. ‘For 1955 to 1973, B weighted average of the export price for sugar, Victorias ex-warehouse, and the wholesale price. The weights are the share of production being exported and one minus that share. From 1974 ta 1980, the annual average composite price. 4Raw sugar, New York spot price, Contract no 12 From Economic Research Service, USDA, Washingtan, DC. “Export unit value of centrifugal plus refined sugar.

292

FOOD POLICY August t988