Dear Editor,
Tarron Khemraj’s article entitled ‘President Jagdeo and the notion of productivity’ in the Stabroek News of November 26 presented a plethora of issues that can be debated; however, in the interest of time and space I will focus on two of the issues, firstly on sugar and secondly on productivity.
Mr Khemraj predicts the demise of sugar in Guyana and presented two main arguments in support of this position. Firstly, he claimed that the price of sugar has not done well over the decade because of the number of substitutes, and secondly people – Caricom nationals, etc – do not consume more sugar in proportion to their increase in wealth. I think both of these arguments are seriously flawed.
First the price of sugar: I guess he is referring to the world market price of sugar which has ranged between 7-10 US cents in the last decade.
This price is not the best yardstick to measure sugar since more than ninety per cent of sugar is traded at a price over the world market price in a protected market and represents the price of residual or dumped sugar. Further, despite the fact that only twenty-five per cent of global sugar production was traded internationally, sugar remained the most traded of all commodities. Sugar like other commodities has been the victim of the vagaries of the global commodity boom-bust cycle. True, sugar has been volatile due mainly to a complex mix of production and direct subsidies to given producers, mainly in the United States (US) and European Union (EU) that distort prices, however, I will not go into details on that price structure at this time.
On the issue of price and substitutes, the high fructose corn syrup (HFCS) or artificial sweetener was the answer to the high sugar price in the ’70s. However, Borrel and Pearce pointed out growth in artificial sweeteners had reached its limits in Europe, US and Japan and was now significantly curtailed and absorbed. Almost ninety-five per cent of sweetener is dependent on sugar. It is also why the US has even violated its own NAFTA commitment to prevent its neighbour and NAFTA partner Mexico from exporting sugar freely to its market.
Mr Khemraj argued that people as they get richer do not necessarily consume more sugar in proportion to their increase in wealth. Borrel and Pearce research (1999) shows that the consumption of raw sugar has increased in developing countries from 66 per cent in 1980 to 76 per cent in 1998. They further pointed out that gains from the liberalization of the market will see a global gain of $6.3 billion. It is anybody’s guess why the EU is the largest importer and exporter of sugar. Further, even Brazil that went to the WTO tribunal on production subsides provides over one billion dollars in subsidies to its consumers and there are many others that also distort market prices.
With regard to Caricom, the single market gives Guyana sugar a clear comparative advantage, not only because of the CET 35 per cent tariff but because of a low and competitive freight rate of $25-$30 per tonne, and if Haiti is added to the market with its demand of 80,000 tonnes, even better. There is even the Caricom demand for 160, 000 tonnes of white refined sugar that is also up for grabs since the closing of the Caroni refinery in Trinidad and Tobago. A refinery will benefit manufacturing industries in Guyana.
Former CEO Brian Webb identified some clear-cut strategies for bringing down the cost of production from 17 cents to around 8 cents in the 1998-2008 plan with economies of scale. That is, the doubling of input will more than double output.
There would be production of over 400, 000 tonnes that can find ready markets under the plan. I do not have any information on the new Skeldon factory with its current teething problems, so I will not comment or pass a judgment on something I have no information on. However, based on all the studies I have seen so far, sugar still has what economists call the best “Domestic Resource Coefficient” (DRC), and even the study by the ACP identifies Guyana among the highest percentile group in sugar production for the ACP region, and sugar remains a viable option even with the demise of the preferential market. I will not touch on higher value-added products from sugar – molasses and bagasse that make it an even more viable option.
Colonial sugar enjoyed a preference in the UK market since the earliest times. In the years 1830-1840 that preference was ₤39 and since then beet sugar was experimented with to replace cane sugar.
In the literature, opinions are divided on the benefits of the preferential access; for instance, the study by Esteban Perez of the United Nations Economic Commission for Latin America and Caribbean (ECLAC) (2003) shows how preference kept countries in a state of underdevelopment under different restrictions. Professor Thomas in his regular weekly column in Sunday Stabroek pointed out that any administered quantative restriction on market access for a commodity with or without a guaranteed price, creates an economic rent and raises its price in the relevant market so the guaranteed price is by no means a hand-out by the EU. Further, a process of tariff escalation was nicely crafted by the EU and US to discourage value-added products from sugar, cotton, cocoa and even bananas from being exported by the ACP countries.
Finally, centuries ago Adam Smith in the Wealth of Nations (1776) wrote, “it is commonly said that the sugar planter expects that rum and molasses should defray the whole expense of his cultivation and that his sugar should be clear profit.” Cane sugar has always been a viable option to beet sugar and artificial sweeteners that enjoyed generous financial support. I have been able to deal with most of the issues raised by Mr Khemraj in a simple letter, but I will come back to it later, or when we meet again in person. Finally I make no apology nor excuse for those responsible for bringing the sugar industry to its current state, but I strongly feel it is still a viable alternative with its backward and forward linkages.
Yours faithfully,
Rajendra Rampersaud
Dear Raj,
Did you read this or know about it? “GuySuCo plagued by run-down equipment” -Interim Board (By Stabroek staff | November 30, 2009 in Local News)
The deplorable state of field and factory assets within the sugar industry has been blamed by the Interim Board as a factor responsible for the current troubles plaguing GuySuCo.
The corporation has been unable to expend capital for the past four years, the Board said in a turnaround plan earlier this year, noting that this resulted in very low expenditure for replacement of the assets. The board observed that currently many assets are over their economic lives, and said this is impacting on production and operations.
The Board noted that a concerted effort has to be made to increase the level of capital spending within the industry and improve the state of its assets. The issues raised in the turnaround plan are that the run-down assets are increasing the length of time taken to complete tasks within the industry, such as longer transport routes due to inaccessible roadways and bridges. It is also blamed for increased fuel and material costs as well as low productivity. Additionally, the plan said the poor state of the assets is impacting on the ability to improve programme targets, and also resulting in the de-motivation of staff.
For the period 2009 to 2011, factory capital for the industry has already increased as per the indicators agreed between the government and the EC delegation to an average of US$9M annually, according to the turnaround plan.
Thereafter, factory capital will be as per the factory review concluded in 2007 that assessed the industry’s needs over a 10-year period.
The plan also noted that the MOU signed by GuySuCo with the Government of Guyana on December 31, 2008 agreed to defer US$8M annually on SSMP interest/loan repayments from 2009 to 2011. However, the plan said this increased expenditure is required by the EU to be placed in additional factory capital expenditure. Thus, it observed the deferral involves no significant cash saving for the corporation.
According to the Interim Board, the capital programme will require a Project Management team to plan and implement the expenditure programme for both the fields and factories. It pointed out that agriculture capital requirements were determined based on a detailed assessment of the state of agriculture assets and their useful lives. Based on this, it said, high levels of capital are needed from 2009 to 2011.
The Skeldon factory is currently contributing around 14% of the industry’s sugar, according to the plan. It is expected to generate 26% by 2013 but this hinges on cane supply that is currently inadequate. The plan envisages that the industry will produce some 312,000 tonnes of sugar in 2011 and 410,000 tonnes in 2013.
The refinery, which the Interim Board said is now on the back-burner, is not being considered at present because of the reduction in production, among other factors. The Board said the significant reduction in the industry sugar production means that any refined sugar sales will not erode sales in another market.
It said also that the refinery would be a distraction from rehabilitation, noting that managing the construction of a refinery in the same period when concentration would be on rehabilitation is problematic. “The Interim Board considers it wise to concentrate on rehabilitation of the core business before embarking on the construction of a refinery.
A refinery will therefore not be included in the forecasts from 2009 to 2013,” the plan explained. It said too that it could be difficult to produce an investor friendly prospectus before the industry shows sign of a turnaround.
The refinery appears to be an unprofitable venture based on current economic assumptions, the plan said, and it also called for a review of this project based on an updated feasibility study.
Like President Bharrat Jagdeo, Rajendra Rampersaud is a trained economist. Like the late President Cheddi Jagan, Rajendra Rampersaud grew up in Port Mourant and inhaled the sweet smell of burnt sugar cane and the salty smell of sugar workers’ sweat practically from birth. And, as the contents of the letter above shows, Rajendra Rampersaud has steeped himself in a deep study of the sugar industry. I respect his considered assessment of the ongoing situation in the industry and share his optimism on its future viability. Professor Rampersaud should continue to write more enlightened letters in answer to the prophets of doom and darkness among us.
Yasuman71:
You have certainly fallen into the apologist camp and I’m very disappointed. This government has had 17 years to bring prosperity to Guyana but have failed miserably on several fronts. Corruption is rampant, graft is endemic and yesterday Guysuco blamed some of its troubles on silting of the Demerara river. Excuses and lack of accountability are hallmarks of this government. The only Minister to get a passing grade is Minister Ramsammy. The others are embarrassments and unworthy of their positions.
Economists who are far better trained, knowledgeable and experienced than President Bharrat Jagdeo and Rajendra Rampersaud were responsible for the recent global financial crisis. It takes a lot more that a romantic attachment to the (your) past to shape the future. How can the construction of a refinery make Guyana sugar industry more competitive globally and give economies of scale when the lands under cultivation are decreasing (thanks to the “development” in the housing sector)? People like Rajendra Rampersaud can write as many “enlightened letters” as they like, and even impress Guyanese at home and in the Diaspora, but that doesn’t guarantee a quality product, at a competitive price which can be supplied in sufficient quantities to meets the demands of potential buyers.
Randolph, when he was an infant Rajendra Rampersaud probably uttered the sound “GAWU” before he could say “Grandpa.” As a qualified economist with his navel string tied to a sugar factory, the professor’s job is to interpret and explain economic realities, not to make “a quality product.” I don’t agree that economists were responsible for the recent global financial crisis. The people responsible were those greedy top honchos in the banks, insurance companies and other related corporations,i.e., managers, not economists. Back to the letter above, any analyst who skillfully blends a spicy quotation on the economic reason for rum into his presentation deserves a drink today.
Yasuman71:
I’ve been living in the UK for ten years now. I always buy cane sugar, but only once have I seen sugar which originated from Guyana in any supermarket. Many times I have seen packets labelled “Demerara Sugar” on the front, but when I read the label at the back I see “product of Mauritius.” I’ve had the same experience in other parts of Europe I’ve visited.
I can assure you that the reason sugar from Mauritius saturate supermarket shelves in Europe has nothing to do with the number of Mauritian economists working in their sugar industry, whose
navel strings are tied to sugar factories. If I am wrong, then solving Guysuco’s problems is simple: the government just have to ensure that many economists’ navel strings are tied to sugar factories and “everything is going to be all right.”
Professor Rajendra Rampersaud is certainly an intelligent man and I respect his opinion. I do, however, hope that his understanding of the global financial crisis is a lot deeper than yours.
Rajendra got the same ‘economics’ training is command type economies at Patrice like Bharrat…we are not talking of ‘chalk and cheese’ but rather ‘chalk and chalk’ so what difference can he make over his leader….if he could, then it shows the confidence Jagdeo has in him….he should have awarded him the Ministry of Finance or Minister of Development…afterall he has an inside track…. What ‘Professor’, such a title does not come out of the central committee of the PPP yasuman71. These are the same “ECONOMISS” who are now realizing that Guysuco is in trouble after reading TK’s last piece on the relationship between sustained GDP growth and a TFP where investments/capital formation is the embodiment technological change (see my contributing blog on TK’s piece) which you don’t have the intellect to understank Yasuman71…..this is no propaganda issue but the livelihood of your fellow PPP supporters.
Don’t you find the timing of the revelation at guysuco in todays edition suspicious?
Evan Thomas, I “don’t have the intellect to understank?” You have one over me there, man. You see, I must confess I never went further than Furst Standurd at Monkey Mountain Primery Skool.
Good, we understand each other…..only monkey mountain primary was not opened on all fools day.
Y’assu
While Mr. Jagdeo is a “trained economist”, Dr. Khemraj has been educated as an economist. There is a difference between education and training.
Russian trained, too? Well, wake up Commies, your variety went out with the Ark.
…yasuman71 ,, i have never since the advent of this forum — thanks David[rip] — made ,, said ,, or in any way inferred ,, asserted ,, anything on ur comments as i consider u an unsung hero ,, in the struggle for intelligent progress of our motherland that flies the “ARROWHEAD” ,, this aside ,, i will say very briefly ,, that for the sake of progress ,, and nat’l development ,, sugar production in GUYANA should be scaled down to the limit that will supply the demands of GUYANA ,, since it is lucid from every facet of research that it’s no longer a viable industry ,, relative to the economy of GUYANA ,, i admire ur steadfast allegiance to ur ideals ,, but ,, in the same breath ,, u must know when to fold and move away from the table that spells doom ! the cards have been played from the same deck for too long ! a new pack is required ! TK is a young and progressive thinker on the block ,, as such ,, the old worn out theories like from 1776 does not have the impact now ,, that it had then ,, since ,, the evolution of mechannisation ,, and human input has given rise to all industries for consumer products a diff colour and smell !
no one here or in GUYANA wants anything but the best for all in GUYANA ,, more for the poor ,, kids ,, the aged ,, the sick and ,, the infirm ,, the sugar industry is cheating them of their right to a better life ! in all that is required to produce a pound of sugar !…. it is bcos of sugar that we know and herald the name of the illustrious son from Port Morant BERBICE His Excellency President Dr.CB Jagan and his friend turned foe LFSBurnham ,, Burnham by himself has destroyed a whole country and dem wah ‘e had in his “illegal regal regime” by example were the pall bearers of all the industries an infrastructure in GUYANA ! those who dare to take the wool from their eyes like Taron Khemraj ,, is de new breed of progressives ,, who not only is qualified to condem ,, but is making salient suggestions relative to the failure and subsequently the collapse of an industry that the PPP caonsider the spine of the economy for centuries ,, which is a nat’l shame since ,, we have not only TK ,, but many others who can ,, diversify the economy and release the humans in the sugar industry from the new age slavery !!!!!!!!!!!!!!!
Mike, for Raj and the PPP, GAWU has to remain viable, at least for political reasons. Could you imagine the PPP going to sugar workers – the bane of its support base – and asking them for votes in 2011 but between now and then the sugar industry collapses and workers are laid off?
The PPP regime could have afforded to sever ties with bauxite because bauxite workers generally vote PNC, but the regime would be committing political suicide to sever ties with sugar industry. It has to keep pumping money into the industry until something magical happens and the regime no longer needs sugar workers as voters.
Michael thanks for the vote of confidence.
Like President Bharrat Jagdeo, Mr. Rajendra Rampersaud is another economist trained under communist dictatorship in a command and control economy. To them the free-market economy is foreign, hence all our economic problems.
Rajendra,
Of course the sugar industry is still viable; but not for the reasons you have given. You have not addressed the viability of the Demerara estates. And in any case, I would point out the various elasticities of sugar versus the alternatives…ethanol, paper from bagasse, etc.
Thanks for the letter though. It is a good letter.
You are the only PPP person who does not need to use the name Elizabeth Daly…keep writing Rajendra. I would write a response to your letter soon.
viable under the PPP? what are you going to tell me next that the PPP is a democratic government? please people give me a break.
There are several studies, some that are used by USAID for projections, that agree with Mr. Rampersaud’s position. One of the studies that I recall reading over half a decade ago was done at…I believe Louisiana State University…predicted that nations who can weather the turmoil in the industry, that will result from the changes in the EU sugar protocol, beyond 2013 will eventually become profitable in the long term. According to the study, production will be consolidated in fewer players in the industry, production costs will go down as there are efficiencies created in industry, demand will increase as population increases and global wealth increases, and prices will follow with an upward trend. The expansion of trading blocks will have a positive effect on sugar prices for producers. If any strategic planner were to do a Porter Strategic Plan it would confirm this.
Maybe Guysuco should consider investing in a Porter Strategic Plan for the global industry and for Guysuco.
Don’t be fooled Raj i was working with the sugar union GAWU and at every General Council and EX-CO meetings since the PPP/C took power in 1992 the cry was that the corporation was highly corrupted.Why you think that the IDB recommended that the Demerara Estates be closed and to estates become one.The simple reasons the Corporation was not making a profit and they were borrowing money to keep it alive.Some corruption like private contracts,fat salaries,etc.
For a business that has been in existence as long as Guysuco has been in existence then the viability of that business should be determined through a break even analysis, decision three analysis or similar. I am not sure why are we quoting academic papers here, Guysuco is a business in operation that needs to determine if it can go on with the current cost structure or with a modified cost structure. If it can’t with either then it should be wound down.
I am saying if Guysuco can’t break even at 200,000 tons then it is a pointless and a money wasting effort to try to get that value higher. The corporation can’t sustain the cash burn required get it to that point.
Frankly, Guysuco needs to be a smaller business to even stand a chance to succeed
The sugar industry is viable if the gov’t sees it as a business and not a place just to give jobs to party supporters. Guysuco balance sheets in ruins, admin cost including wages have become a burden, sugar workers striking and equip run down. In this environment viabilty is an illusion
There should be a Commissioner of Inquiry into this.
Which Guysuco big one’s children get sweet wuk at GuysuckU widdout advertising? Fuh a wuk dat never exist befo d chile get am?
Taken on the whole, a very encouraging letter from Rajendra which has now opened up the debate on sugar and its tells of the thinking of a senior PPP policy ‘king-maker’.
If only because he is on the defensive, his arguements seems accurate. But they are very weak arguements which can be classified as ‘fending and proving’. I have dealth with the long term fiscal sustainability of Guysuco before in these blogs from a strategic policy perspective given its importance to the GDP of Guyana and from an industrial policy position after TK’s last piece. I am not interested in an academic discussion on the verasity of research evidence but rather using the evidence to identify the problem and clearly define the issues and provide pragmatic guidance on policy actions. I was not surprised when I read today about the deficit in capital spending and what it means for the future of sugar.
Here are some of my observations to Rajendra’s letter.
1. Rajendra seems to contradict a government position. He argues that world market prices are not a true gauge of sugar prices since 90% are sold at preferential prices. I thought that world market price was used as the benchmark from justifying Skeldon’s $0.09 per lb by 2013 making the arguement tha we can produce lower than world prices. And that we can sell our excess of EU quotas on the open market at a profit.
2. To continue to argue that sugar like most commodities are traded at the vagaries of the markets contradicts his before mentioned point that world price is not the best yard stick. After all 90% of our sugar are traded at prices greater than market prices.
3. Of course Borrel and Pearce are correct but the countries which would enjoy the benefit from increased cane sugar consumption are the efficient producers such as Brazil. I am not looking at the US subsidised farmers….that’s another kettle of fish.
4. Brian Webbs plan is the kind of short sighted plans which have us in this broblem and the Hanoman plan is doing the same…about economies of scale…doubling input to get more than double output. This is a cock eyed assertion.
Look guys, you need to look at sugar as a business and not a ‘milking cow’ of the PPP. The PNC did the same with bauxite.
As a viable business enterprise, Guysuco cannot continue to carry its diverse and unprofitable cost centers. Guysuco has to be trimmed to a viable scale business to engineer efficiency in the short term and cost savings in the medium to long term.
I do not dispute your research evidence about the DRC and by its application and where Guyana places in the studies you saw. However, DRC (domestic resource cost coefficient instead of domestic resource coefficient)is an attempt be economists to give empiricism to the theoretical notion of that principal concept of trade theory, namely, comparative advantage. It helps to measure from a counrty-wide perspective whether the implemented policy is sound. It similar to shadow exchange rate. Did we make the right investment decision given fluctuating prices; over time will it cost us more in domestic resources to earn foreign exchange. It hard for me to see how this concept applies to the discussion or are you pulling one out of the hat to match TK’s TFP? Or are you telling us that President Jagdeo had based his policy decision on sugar without an appreciation of commodity market price volitility which surely would affect the other 74% of sugar production which would be produced far in excess of $0.09 for 26% of total production at Skeldon.
Good points Evan. As you have done said above, we have to look at the alternative. In other words, they are dealing with accounting profit…you and I are talking about economic profit. I shall develop this point at a later point.