Government monopolies don’t work

I talked earlier of distortions in the rice market due to ill-conceived government policies (“Give the consumer a break,” Opinion, 11/12/15). Today I’ll talk about sugar, where government messed up a successful industry.

The competitiveness of the local sugar industry dropped significantly starting in the 1970s. In fact the growth of Philippine sugar’s gross value added (GVA) declined from 4.8 percent in 1960-1970 to 2.9 percent in 1970-1980, and further to negative 5.3 percent in 1980-1990.

Sugar’s GVA growth improved marginally by 0.6 percent from 1990 to 2000. From 2001 through 2013, it showed some recovery—4.73 percent. But that was from a hugely depressed industry that remained way below its pre-1970 level.

To fully revive the ailing sector, the Philippines needed to emulate the programs implemented by its neighbors, including Thailand. But this did not happen due to some factors: lack of mechanization; monopolization of agricultural input such as fertilizer; the small farmers’ lack of access to financing; and insufficient crop insurance; but mainly the destruction by the Comprehensive Agrarian Reform Program (CARP) of the efficiencies that large plantations provided. This drove up production costs and prices to uncompetitive levels. That’s how it all began.

By breaking up the sugar plantations, CARP destroyed any chance at efficiency and cost competitiveness.

(In Thailand, the average sugar farm is 20.64 hectares. In Australia, a model of efficiency, it’s 100 ha. In the Philippines, it’s five ha. And don’t give me the nonsense about cooperatives, they just add to the costs and headaches.)

So, while the price of sugar in the world market has been declining, that of local sugar has been rising. So local businesses that use sugar as a primary ingredient are suffering, and so are the Filipino consumers.

Philippine sugar sells at around 60 percent higher than its Thai counterpart because its production costs more. An obvious consequence of this is sugar smuggling into the country.

High sugar prices affect the daily lives of ordinary Filipinos. Sugar, just like rice, is almost indispensable to them.

It is safe to say that sugar is as ubiquitous as rice in the Philippines: Filipinos love sugar in just about everything—in their daily diet, in their coffee, in every dessert, even rice cakes. They even add it to their adobo.

As I said earlier, it comes down to who you want to look after—the supplier or the consumer? Does it make sense to make 100 million consumers pay high prices so a few, a very few people, can make good money?

If consumers had the freedom to choose, they would buy their refined sugar at P16/kilogram, not at P54/kg. But they can’t because Congress split up efficient plantations into inefficient plots, while the government intervenes in the market and controls what can or can’t be done in the industry.

The Sugar Regulatory Administration (SRA) is supposed to ensure that no cartel exists to inflate the price of sugar in the market. But still cartels exist. You can get rid of cartels by one, simple act—open up the market; free, open competition destroys cartels.

You can get rid of the SRA, as well.

A Thai consumer pays the equivalent of P33 for every kilogram of sugar. We, as all housewives know, pay almost double that—P54/kg.

Why should Filipinos pay for the inefficiency of sugar producers, and for government’s ineptitude in helping provide an environment where they can be efficient?

Protection fosters laziness. This bad habit must go. Not instantly; this takes some years to remove, but removing it must be an immutable plan or goal of the next administration. Too late for the present administration to adopt this goal; it should have started pushing for  this in 2010 yet.

Allowing unrestricted entry of foreign sugar wouldn’t kill the local industry, instead it would just force it to be competitive. There is absolutely no reason in the world why a Filipino farmer or miller can’t be just as efficient as a Thai or Vietnamese.

Or is the government that represents the Filipinos telling me that its own people can’t be trusted to perform as well as anybody else. What an indictment, what an insult! But, of course, you’ve got to go back to the efficiencies of plantation production. Commonsense must overcome fickle emotions.

Am I suggesting successive governments enacted the wrong policies and failed to provide the necessary infrastructure, services and support? Absolutely yes. It’s either water isn’t there when needed, or there’s too much of it that doesn’t drain away. Roads aren’t there; some seeds are too expensive; and middlemen have the gall to gouge the market.

The rice and sugar industries have one thing in common: a government interfering and screwing up the market. The National Food Administration and the SRA are a major reason for the failure of both crops.

The NFA and SRA can, perhaps, be there to ensure that the market isn’t manipulated, to be a supporter of efficiency, but no more than that. They can help on the technological side to produce better and cheaper rice and sugar, but not for trading.  There should be a free and open market.

Give the consumers a break. Let the market work toward the cheapest prices. And pass the laws to make that happen.

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E-mail: [email protected]. Read my previous columns: www.wallacebusinessforum.com.