Fiji and the Sugar Protocol
Gerald S. W. Barrack and John May
(Full Text of ECDPM Working Paper Number 17, April 1997)
For related ECDPM publications
Note: It has been brough to the attention of ECDPM's that some parts of this working paper draw on content compiled by researchers based at the Institute of Social Studies, and not acknowledged as such. Readers wishing to consult this original material are urged to read:
Prasad, S., and A.H. Akram-Lodhi. 1998. Fiji and the sugar protocol: A case for trade-based development co-operation. Development Policy Review, 16(1): 39-60.
This paper should be cited as:
Barrack, G.S.W., and J. May. 1997. Fiji and the Sugar Protocol.
(ECDPM Working Paper No. 17). Maastricht: ECDPM.
Contents
Introduction
Fiji is one of the largest of the Pacific island
countries. With a per capita GDP of around US$ 2 330 in 1995,
it is classified by the World Bank as a lower middle income developing
country. Its average life expectancy of 71 years, its infant mortality
rate of approximately 22 per thousand, and its adult literacy
rate of 89 per cent, are all indicators of Fiji's high level of
social development. For most of the period since its independence
in 1970 the country has pursued an employment-oriented development
strategy aimed at making the most of its natural resources. Agricultural
production and tourism have naturally dominated its economic activities,
with the former contributing about one-fifth of the GDP.
Agriculture is also a major source of employment:
more than 75 per cent of all households work on a full- or part-time
basis in crop production, livestock, forestry and fisheries.
Sugar in Fiji's Economy
Despite its long history, sugarcane farming and processing
were only really introduced on a serious scale in the 1980s, since
when the crop has dominated the island's commercial agricultural
activity. The sector is currently worth approximately F$ 300 million
- more than 12 per cent of GDP. The farming side of this activity
now accounts for more than 40 per cent of the total agricultural
sector, and the processing side for almost 30 per cent of the
total manufacturing sector. The combined effects of these two
linked activities is to provide jobs for more than a quarter of
Fiji's work force, making it the largest single source of employment.
Sugar also accounts for 40 per cent of the country's exports and
goes a long way towards mitigating the constrictive effects of
its small open economy. In other words, sugarcane farming and
processing are together the most important component of the Fijian
economy.
In 1995 sugarcane was farmed on 22 430 registered
farms in Fiji. The average size of these farms was 4.6 hectares,
with an average area under cultivation of 3.68 hectares. The average
cane yield was 56 tonnes per hectare, with the average gross revenue
per farm at around F$ 9,500. The majority of sugarcane farms are
small production units operating for most of the year with household
labour. The cane is harvested manually under a complex "gang"
system which involves the farmers themselves working alongside
some 15 000 seasonal harvesters, many of whom are landless migrants.
Cane cutters come from both the Indigenous Fijian and Indo-Fijian
communities.
Sugarcane is processed into raw sugar at mills owned
by the Fiji Sugar Corporation (FSC), a publicly-listed company
in which the government owns 68 per cent of the shares. The country's
four mills, which also have storage and handling facilities, are
capable of producing 500 000 tonnes of sugar a year. The earnings
which accrue to farmers and the FSC from processing are based
on an average price earned from sugar sales in all markets, after
making certain deductions for industry costs (1.92 per cent of
proceeds in 1994). Farmers receive approximately 72 per cent of
the total net proceeds in four payments, with the remaining 28
per cent going to the miller.
The Sugar Protocol
The Sugar Protocol replaced the Commonwealth Sugar
Agreement (CSA) of 1950. The CSA was a preferential agreement
between the United Kingdom and the Commonwealth countries by which
the UK guaranteed to purchase specified quantities of sugar for
a negotiated price. In the period between 1951 and 1973, this
exceeded the world market price by an average of 165 per cent.
The Sugar Protocol agreed between the EC and the
ACP countries came into force in 1975 and was enshrined in Protocol
3 of the Lomé Convention. The Protocol granted to a group
of ACP sugar producers a preferential quota of 13 047 million
tonnes white sugar equivalent at a time when the European Community,
as it was known then, was a net importer of sugar. The sugar imported
from the ACP was intended to meet part of the EU's domestic requirements
but since then, EU beet sugar production has gradually expanded
to cover the shortfall. In fact, the EU has now become a major
exporter of white sugar to the world market. The ACP preferential
quota, however, has remained unchanged since the inception of
the Sugar Protocol.
Under Article 1 of the Sugar Protocol the EC agreed
to import "at guaranteed prices, specific quantities of cane
sugar, raw or white, which originate in the ACP States and which
these States undertake to deliver to it". Under Article 5
the price paid for such sugar is negotiated annually, within the
price range obtaining in the Community.
Fiji currently has a preferential quota of 165 348
metric tons i.e. 12.7 per cent of the total preferential quota.
For the period 1990/91 - 1995/96 Fiji's shipments of Protocol
sugar averaged 41 per cent of the country's total sugar production
and 45 per cent of its sugar exports. During this period, "quota"
sugar brought in 65 per cent of the total sugar revenue.
The Economic Impact of the Sugar Protocol
Fiji has enjoyed two main benefits from the Sugar
Protocol's preferential quota arrangements. First, as the EU's
Common Agricultural Policy (CAP) is designed to support sugar
prices through agreed production quotas, Fiji receives a price
which is usually in excess of the world market price. In the 1990s
the EU price was more than double the world market price. Second,
as one of the CAP's main purposes is to stabilise prices, the
revenue Fiji earns from its sugar exports to the Union is less
prone to fluctuations. In the period between 1975 and 1991 sugar
prices on the world market varied by about 41 per cent, yet the
European Union's prices were subject to a variation of a mere
8.7 per cent (Herrmann and Weiss 1996). The Sugar Protocol has
therefore effectively reduced the instability of export earnings
and has been an important source of both price stability and sales
security.
These two benefits to the Fijian economy can be witnessed
in a range of areas: higher production; increased employment in
the farm and milling sectors; better incomes for landowners, growers
and millers; and the knock-on effects of stable earnings on living
standards not only in the sugar community but throughout the country.
These benefits, to a large measure, arise as a consequence of
the fact that the Sugar Protocol has undoubtedly been, and continues
to be, responsible for the transfer of much needed foreign exchange
from the EU to Fiji. In aggregate, for the period 1980-90, the
benefit to Fiji from the price preference implicit in the Sugar
Protocol has been estimated as worth 3.72 per cent of GDP (McDonald
1994). Over the period 1975-95, the Sugar Protocol has resulted
in substantial annual transfers to Fiji.
Raw cane sugar refiners in Europe also benefit from
the import of ACP sugar. The refiners have recognised and acknowledged
that they have an assured and reliable source of raw cane sugar
supply from the ACP producers. This assurance has enabled the
EU refiners to maintain their maximum capacity utilisation thus
reducing the unit cost of refining. It also provides them with
the confidence to carry out capital investments in the modernisation
of their refineries. Like the ACP sugar industries, the EU refining
industries also provide employment opportunities and generate
social benefits to their respective localities.
In economic terms, then, the Sugar Protocol has been
a model of mutually-beneficial trade cooperation between the EU
and Fiji.
The Social Impact of the Sugar Protocol
The social benefits of the Sugar Protocol have been
widely distributed across Fiji. This has helped moderate the level
of poverty in rural areas and has contributed to social stability
throughout the country. By providing remunerative prices the Sugar
Protocol has maintained social efficiency by promoting production
and employment amongst smallholders. It has thus acted as a poverty-focused
social safety net.
The Sugar Protocol has allowed growers to borrow
money commercially, using crop liens to finance efficiency-enhancing
capital improvements in agriculture. Moreover, long-term resource
flows have been generated which allow farmers to provide for education,
health and housing needs.
Farmers have not been the only group to benefit from
the Sugar Protocol. Wages for the 15 000 seasonal workers in the
Fiji sugar industry depend in a large part upon the ability of
Fiji to sell its sugar to the EU under the arrangements. The ability
of this group to sell their main productive asset - their capacity
to work - and the ability of the industry to pay reasonable wages
depend upon the Sugar Protocol.
In the milling sector, a high level of unionisation
together with a well-established industrial relations framework
has ensured that factory and field employees of the FSC have benefited
from both the preferential prices and sales stability guaranteed
by the Sugar Protocol.
At the same time, the benefits of the Protocol have
not all been focused on one community. Indigenous Fijian land-owning
groups have also benefited. Higher prices for crops drive up the
capital value of the land that is farmed, providing landowners
with reasonable rental earnings. Any decline in sugar prices could
affect land rentals and hence, this revenue. Moreover, sugar provides
an important means of bringing greater numbers of indigenous Fijians
into the mainstream, formal sector, whether through farming or
the milling sector. The proportion of indigenous Fijians in the
formal sector has increased steadily since independence, to more
than 30 per cent by the end of 1995. Much of this is in the sugar
sector. A sharp decline in sugar prices will seriously affect
this trend. Perhaps more importantly, it would also affect relationships
between Fiji's main communities and the use of their resources.
Overall, sugar income has been distributed across
the sugar regions of the economy; no one group in the countryside
has benefited disproportionately. Sugar proceeds have also contributed
towards improving public services like education and health with
benefits well outside the sugar-growing region. Moreover, economic
activity generated by the Sugar Protocol have had widespread multiplier
effects outside the sugar region and across the country: the jobs
and income generated by the Protocol have boosted the effective
demand for goods and services produced outside the sugar sector.
Damage caused by any decline in sugar incomes will,
in other words, extend well beyond production, exports and employment
in the sugar sector. It will affect the level of social development
in the economy as a whole and have an adverse impact on the level
of social efficiency in Fiji's economy.
Trade Versus Aid
Fiji enters into international economic relationships
in order to increase its national income. Such relationships have
the effect of increasing its access to foreign exchange as well
as allowing it to overcome inadequate domestic savings and facilitate
domestic investment so as to promote growth. By relieving the
pressure on foreign exchange requirements, its international economic
relations help the country to purchase necessary capital items,
consumer goods and services which it cannot produce. Welfare is
therefore promoted in ways which are otherwise impossible.
For Fiji, international economic relations can take
one of two broad forms. The first is official development assistance
from bilateral and multilateral agencies; the second is international
trade. Both have the effect of easing the foreign exchange and
savings gaps which hinder the country's economic development.
Controversy exists in some quarters, however, as to whether trade
or aid is the better form of international economic relationship
for an economy such as Fiji's.
If trade or aid to Fiji is designed to enhance investment
and growth, then it would be well to look at the impact of each
in these fields. Aid flows to Fiji are comparatively low and this
serves to discourage already low domestic savings. On the other
hand, Fiji's export earnings make a positive contribution to savings
rates, particularly in the sugar sector. In other words, trade
makes a greater impact on the domestic savings needed to fund
long-term investment and growth. At the same time, Fiji's exports
can stimulate production and bring dynamic benefits in a way that
aid cannot. For example, gains in efficiency resulting from trade
include economies of scale made possible as the total market for
produce increases - clearly evident in the case of the sugar
industry. Economies of scale have also in the past, facilitated
investment. Other dynamic gains from trade include the recognition
that Fiji must produce internationally competitive goods. This
acts as a discipline on domestic producers who must seek to improve
efficiency if they are to remain competitive. The Fiji sugar industry
is without doubt well aware of the importance of the international
market for its growth and development. Another dynamic gain is
the acquisition and dissemination of technical knowledge that
permits efficiency improvements to flow out of investment. The
Fiji sugar industry recognises that efficiency improvements necessitate
the modernisation of the industry, and that this in turn requires
accessing productivity-enhancing international knowledge. Finally,
trade-oriented economies and international trade require greater
adaptability to changes in economic circumstances, another important
spin-off.
Fiji needs to reduce its dependence on sugar by expanding
into new sugar by-products, and by diversifying its manufacturing
base. To generate the resources to diversify, Fiji's farmers need
market access. By warding off third party competition our producers
can obtain the funds needed for diversification and efficiency
improvements and the time necessary to adjust. This is precisely
what the Sugar Protocol currently accomplishes for Fiji. It is
a form of trade-based official development assistance linked to
a commercial agreement. If it is to continue to perform this role,
there is a need to maintain preferential access to the European
market for as long as possible.
The Future of the Sugar Sector
The Sugar Protocol has been an important source of
price stability and sales security for Fiji. However, some people
in the country are arguing that the benefits of the Protocol to
Fiji are likely to be eroded in any case. At the same time, special
market access arrangements like the ones it provides are now vulnerable
to third-party complaints under the WTO. The Fiji sugar industry
is therefore facing a period of significant challenges.
In this light, it is important that our industry
makes an accurate assessment of the issues confronting it from
within and without. The strategic challenges it now faces from
outside Fiji operate in two frames; the medium term and the long
term.
The medium term
In Fiji it is becoming widely accepted that over
the remainder of the decade there will be a reduction in national
welfare as a result of changes in the sugar industry. It is believed
that the main source of this deterioration will be the loss of
the transfers received under the Sugar Protocol.
Some have argued that the EU's internal sugar price
will have to fall because of WTO rules. This will lead to a drop
in the price paid for Fiji's quota exports to Europe. A widely
quoted figure is that the price paid to Fiji's sugar farmers exporting
to the EU will fall by as much as 15 per cent by the year 2000.
It has been estimated that in such a scenario, the
impact of agricultural trade liberalisation under the Uruguay
Agreement would be a net welfare loss to Fiji equal to about 2.52
per cent of gross domestic product.
Our expectation is that this scenario is unlikely
to occur. Barring an unforeseen shock, the EU can meet its Uruguay
Round commitments to reduce both the tariff protection and the
volume of export subsidies received by European sugar farmers
while simultaneously maintaining the level of internal support
prices. Moreover, the EU can cut internal sugar quotas in an effort
to sustain the internal support price. Thus, it is probable that
over the remainder of the decade the internal support price will
remain broadly stable. This means that Fiji will continue to receive
a comparable level of transfers from the Sugar Protocol over the
remainder of the decade.
In the medium term, therefore, the outlook for Fiji's
sugar industry in Fiji is therefore favourable.
The long term
The long term position of Fiji's sugar industry is
affected by two factors. Firstly, the current Lomé Convention
expires in 2000. It is highly likely that a successor convention
will be negotiated between the EU and the ACP countries. In any
event it is widely recognised that the Sugar Protocol is formally
independent of the Lomé Convention. Secondly, as a consequence
of the Uruguay Agreement, agriculture now falls within the purview
of the WTO.
Any follow-up convention as well as the sugar trade
with the EU will be directly affected.
This means that in the long term the outlook for
the Sugar Protocol continuing to benefit Fiji is problematic.
The market access arrangements of the Protocol exist independently
but make no specific provision in favour of Fiji. The main continuing
benefit of the Protocol lies in the price offered for Fiji's sugar.
But we understand that there will be downward pressure on the
EU's internal sugar price, on which the price received by all
ACP sugar producers is based. This pressure will be further reinforced
if or when Article 24 of GATT comes to be more strictly interpreted,
for a continuation of the protocol would depend on its being consistent
with the free trade objectives of a follow-up convention subject
to the approval of the WTO.
So Fiji faces the possibility of losing sizeable
transfers from the EU plus clearly specified preferential access
to the EU market. There is no doubt that, in the long term, the
country's sugar industry will face a major challenge. It has been
estimated that full trade liberalisation will result in a loss
to Fiji of US$ 41 million a year at 1985 prices. Fiji will have
to adjust.
Trade-led Restructuring in the Sugar Industry
Sugar has been a source of social stability in Fiji,
but as we have explained, it appears that the benefits of the
Sugar Protocol are unlikely to continue at their current level
or in their present form in the next century. It is therefore
essential that Fiji's sugar industry undergo restructuring, in
order to become competitive in the world sugar market. A transition
to an environment ruled by free market prices could result in
severe dislocations particularly at a time when Fiji's economic
system is challenged by so many other problems, including the
impending cessation of preferential access and markets for its
other, non-sugar, manufacturing sectors. A highly uncertain future
awaits the sugar sector - and indeed the country - and much will
depend on how well Fiji's sugar sector is able to respond to these
challenges.
Policy makers in our country have long recognised
that in the longer term the country will have to develop an internationally
competitive sugar industry. Attempts at restructuring have so
far been hampered by the problems of distance from markets, by
a complex system of land ownership and distribution, and by escalating
freight and insurance costs. A rapid transition to free trade
will not solve these problems, nor will it be without effect on
social harmony. It is therefore imperative that Fiji manage the
transition in its sugar sector.
Already, at the industry level, major initiatives
aimed at efficiency improvements in both the milling and farming
sectors have been undertaken. The introduction of the bulk loading
system at the two export outlets and the expansion of the crushing
rate at the four mills are examples. In 1992 a fertiliser-blending
factory capable of enhancing farm productivity was established.
Currently, trials are being conducted in several mill areas on
field mechanisation to improve harvesting and delivery of cane.
These efforts need time and support before they can
translate into productivity improvements. In this light, preferential
trading arrangements have an important part to play in managing
the transition that must occur in Fiji's sugar sector. Over the
remaining life of the Protocol, it will be important that its
preferential arrangements be used to prepare Fiji's sugar industry
for open competition in world markets. The challenge is a major
one: we estimate that the farming and milling sectors must try
to boost productivity by at least 25 per cent. A longer term approach
will be essential if the structural reforms needed in the sugar
sector are to take account of the potentially serious social costs
involved in the reform process.
At the farm level, the impact of the Protocol on
expansion into new areas has been marginal. The major expansion
in North-Western Vanua Levu started before 1975 and the increase
in the number of growers (from 15 000 in 1975 to more than 22
000) results mainly from better land use within cane perimeters
through the subdivision of existing holdings, and from the large
numbers of indigenous Fijians utilising their traditional lands
to enter the sector. This process has facilitated social and economic
stability by targeting productivity and efficiency improvements
towards farmers in the indigenous Fijian community. Greater equity
has resulted from preferential trade.
While the need for productivity gains has been stressed,
Fiji must also use the fruits of its preferential trade to start
developing a range of locally-produced sugar by-products with
a higher value added component. A start must be made on developing
niche export markets for these products. This innovation will
be very useful in helping the economy to deal with employment
issues created by the transition to a more open sugar trade environment.
Forward-looking initiatives like these will be vitally important
both to farmers who lose their livelihoods and to rural cane cutters
displaced by trends towards mechanisation.
These policies have resource costs. The challenge
for the sugar industry and for the country as a whole will be
to target part of the revenue accruing from preferential arrangements
under the Sugar Protocol towards ongoing efforts designed to encourage
productivity improvements in the farming, harvesting and milling
sectors. Resources will also be required to cope with the social
costs of restructuring.
If social disruption is to be avoided, research,
industry level support, and central coordination will be required.
Sugar industry institutions must continue to play a major role
in creating an environment in which the longer term needs of the
sugar community are addressed. Sugar industry institutions have
begun serious discussions on the future of the industry. It is
vital for the European Union to be engaged in this process and
for future ACP/EU trade agreements to sustain, during the transition
period, a preferential trade-based institutional framework. These
have worked for Fiji's economy in the past. At all costs, they
must not be replaced by new aid regimes - the last thing that
Fiji needs.
Conclusion
The sugar Protocol has contributed enormously to
Fiji's social and economic development. By providing price stability
and market access, it has helped sustain productivity improvements
in the sugar industry and provided the main source of income for
almost a quarter of the country's economically active population.
While the EU's international commitments over the next five years
will not seriously affect the industry, any further price falls
in the following decade arising from multilateral agricultural
negotiations will expose the industry to global competition without
the prerequisite competitive strength. International competitiveness
in the sugar industry must be the long term goal.
However, in order to move towards international competitiveness
it is vital that the market security and price stability provided
by the Protocol be retained as long as possible so as to sustain
the conditions necessary for productivity improvements and agricultural
and non-agricultural diversification. In the absence of an orderly
process of change social stability and Fiji's economic well-being
are likely to be seriously harmed.
Updated on April 9, 1997