South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Lessons from sugar crisis
Published: The Kathmandu Post, 12 November 2004
By: Ratnakar Adhikari

In the year 1999 leading sugar industrialists approached the government to increase tariff on sugar import from 10 percent to 40 percent. Their justification was that Nepal already had sufficient domestic capacity to produce sugar, hence, imports were redundant and a higher tariff was necessary to protect the ‘infant’ sugar industry. Reacting in a typically hasty and careless manner, the government increased the import duty on sugar without calculating the real demand and supply situation.

When the government raised the tariff, the tightly woven cartel of the domestic industries, stopped supplying sugar in the market and pressurised the government to increase the selling price of sugar. The government instead of clamping down on cartel by utilising the provision of Consumer Protection Act (CPA), 2054 succumbed to the latter’s pressure. Interestingly, this move was timed by the cartel in such a manner that the government was forced to bow down, as it was towards the beginning of the festive season.

Who were supposed to gain from this move and who actually gained? The powerful sugar industry lobby, having crony relations with the government was the major gainer, not only through protection but also through the cartel they were able to solidify – thus putting the losers in double jeopardy. The industrialists had made use of several powerful arguments to convince the government. They even mentioned that unless imports were curtailed and profitability of the domestic sugar industries ensured, it would not only be difficult for them to continue providing employment opportunities to their workers but also fair return to the sugarcane farmers, who supplied them with the required raw material. While protection did save jobs, the irony is that the sugar farmers’ livelihood continues to be threatened.

Who lost in the process? The exporters of sugar from the most efficient sugar producing countries like Brazil and Thailand – who never provided any donation to the Nepali political parties for contesting elections – were one set of losers. But their losses were relatively minimal as they probably found buyers in other countries to import their sugar. However, the major losers were none other than Nepali consumers, who neither had the resources nor clout to exert pressure on the government not to raise tariff on sugar or to rollback the same.

The above case study gives us three clear messages. First, this is a classic example of political economy – concentrated benefits and dispersed costs. The perceived benefits to a handful of sugar industries was so huge that they found it worthwhile to lobby the government, but the perceived losses to the consumers (majority of whom might not even be aware that the rise in sugar price was due to unreasonable protection) were so dispersed that they did not bother to lobby.

Second, this also represented a classic example of public choice theory. Due to limited number of industrialists and homogeneity among them, it was easier for them to get organised and exert pressure on the government to raise tariff. Since consumers were dispersed as well as heterogeneous and individual losses to them were so limited, there was no incentive for them to get organised. Even if some enlightened consumers wanted them to be organised, the benefit they would derive would not be higher than other ‘free riding’ consumers who make no effort at all to get organised. Therefore, the possibility of consumers being organised was extremely limited.

Third, it was easier for the industrialists in the country to convince the politicians by making use of all sorts of emotive arguments like proving livelihood security to the poor workers and sugarcane farmers. Given the capacity and record of the government to conduct a “follow up”, industrialists were dead sure that they were not going to be questioned even if they did not make any effort to protect the livelihood of their workers and farmers at a later date. However, it would have been extremely difficult for the sugar exporters based some 10,000 plus miles away from Nepal to convince the Nepali government to allow the import of their sugar with a nominal duty into Nepal.

Be that as it may there seems yet another problem, which is not only chronic but also deeply rooted in our society, namely apathy of the government towards the concerns of the masses. Every government knows very well that there is bound to be landslide at Krishna Bhir during every monsoon season, but does not take any remedial measures during non-monsoon seasons. Similarly, every government knows that there has been a systematic attempt from the sugar mafia to create scarcity of sugar just before Tihar, but does not make any plan to prevent the crisis. I cannot offer any solution to remedy the problem at Krishna Bhir, but I can offer some suggestions for remedying the problem of sugar crisis. However, what the government requires is a blend of public spirit and political will.

First and foremost the government needs to understand that there is no point in protecting the sugar industry by imposing a high tariff (which is 25 percent at present, but temporarily reduced to 15 percent) at the victimisation of the consumers. One of the objectives of our entry into the WTO is to provide relief to the consumers by infusing a brisk dose of competition to the private operators, who take pride in colluding. In keeping with this policy, the government should rollback the tariff.

Second, the government should put in place a mechanism to estimate the demand for and supply of sugar in the market which it currently lacks. One way of doing this is to get the estimated sugar production from each factory well in advance and allow the import of sugar only by obtaining a certificate (as opposed to license) from the Department of Commerce (DoC). While issuing the certificate the DOC should clearly stipulate three things – the quantity and quality of sugar to be imported and time within which it would be imported. Some over smart business persons and even government officials might consider this as retracting from our WTO commitment and may try to convince the government not to initiate this process. However, the fact of the matter is that our WTO commitments do not prevent us from instituting a certification system for the importation of sugar as long as the certification is automatic, the criteria for issuing such certificate are transparent, and it is administered in the non-discriminatory manner.

Last but not the least, given the fact that cartel is a major problem among our business enterprises – not only in the sugar industry but also in other sectors, the government should exercise its power under the CPA as well as enact a competition law as soon as possible to check such menace. It is worth reminding our valued readers that our government has already missed the deadline of 31 July 2004, committed at the time of WTO accession. The government has, however, made a renewed commitment to enact such a legislation by mid-January 2005.

Finally, I would also like to make a humble plea to our enlightened business community not to use the WTO as an excuse whenever it suits them, and blame the same organisation when its rules do not suit them.

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