Sugar’s way forward: (Other proposals 2 & 3) – ‘privatization and devaluation’

Privatization

 

This week I shall continue with the presentation of the second and third ‘other proposals.’

The call for the privatization of GuySuCo is probably the most widely recognized and indeed contentious proposal ever put forward for the future of the sugar industry. This call always evokes intense political controversy, if only because sugar workers are widely perceived as one of, if not the leading political constituency for the ruling PPP/C administration. Not surprising therefore, it is well nigh impossible to assess this proposal outside of a contentious context.

There is an ideological aspect to the privatization proposal, which provokes this controversy. This is revealed in the axiomatic position taken by those who believe that state enterprises (and more so those based on agriculture activities) could never operate efficiently. The call for privatization therefore, seeks a drastic reversal of this fundamental commercial heresy, which GuySuCo embodies.

Since an ideological debate has no rational resolution, a priori positions are taken on both sides of the divide. It is my view though that the fundamental objection to privatization lies in the observation that those who propose it do not tie it to guidance on how the agricultural and other assets released from selling GuySuCo are to be steered. Surely such an asset sale in a small fragile capital market like Guyana’s can be way disruptive.

20131215cliveRecall that sugar production performs multi-functional roles in the provision of livelihoods in Guyana. Therefore, despite sugar’s much reduced share of Guyana’s GDP, export earnings and investment (since the mid-1970s), it nevertheless remains the largest single provider of jobs. And this feature alone means that privatization and reliance on the automatic workings of an underdeveloped political system and markets cannot be reasonably expected to generate solutions for sugar’s predicament.

Mainly because all privatization proposals are based on the expectation that a substantially larger share of cane cultivation would be undertaken by private farmers, I examine some important aspects of this in the section below.

 

Private cane farming

In all formulations that I have seen so far, the call for privatization requires a substantially expanded role for private cane cultivation. Indeed as originally framed, the SSMP had envisaged the promotion of a “cadre of independent private cane farmers,” who would help shape the design and implementation of this programme on lands leased by GuySuCo. In this regard, particular emphasis was placed in the SSMP on the design and layout of Skeldon’s water management system.

From a commercial standpoint the success of private cane farming depends crucially on how the contract price for private cane supplied to factories (which the farmers do not own) is determined. Three controversial considerations arise.

First, because it is not practical in processing to separate any given farmers’ cane supply from that of other farmers, or more importantly from non-private farmers cane supply delivered to a particular factory for processing, determining the quality of a specific lot of cane sent to a factory is a complex consideration,

Second, there is also the issue of determining when payment to farmers for their cane should be made. Is it at the time the cane is accepted at the factory? Or, is it when the sugar the factory processes from the cane is sold?

And, thirdly, if the latter, who should carry the cost and risk of the deferred payment, bearing in mind that time is money?

From these three observations it is clear that the benefit to be received from private cane farming would be highly contingent on the cane-pricing formula that is functionally applied to cane farmers’ supply to factories that they do not own.

 

Other proposal 3: Devaluation

 

The third ‘other proposal’ is the call to devalue the Guyana dollar. Unlike the two ‘other proposals’ earlier considered, this call deliberately leaves the structure and organization of the sugar industry and GuySuCo intact or ‘as is.’ It is premised on the expectation that, with a massive injection of funds to the coffers of GuySuCo, its existing plans and programmes can be afforded and executed. This is another way of arguing that GuySuCo’s ultimate constraint lies in the income it earns.

How would devaluation augment GuySuCo’s income? The answer is that if the Guyana dollar is devalued in relation to other currencies (for example, the US dollar and the European Union’s, euro) this would increase the Guyana dollar income for every unit of raw sugar GuySuCo sells to the United States or Europe for which it will receive payment in US dollars or euros. (In truth, Guyana’s raw sugar exports are usually sold at prices denominated in US dollars and euros.) The amount of gain in Guyana dollar income that the industry receives would depend on the size of the devaluation of the Guyana dollar.

As I have argued before this proposal is not as esoteric as it might at first appear. For most of the 1990s decade there was a substantial devaluation of the Guyana dollar, (from G$39.5 for one US dollar in 1990 to G$177.7 in 1999) based on the average yearly mid-rate conversion. This boosted GuySuCo’s performance in that decade.

There are two major technical/economic considerations, which are attached to this proposal. First, a substantial devaluation of the Guyana dollar could lead to severe macroeconomic dislocations. Thus for example, it could lead to price inflation, as the price of imports such as oil, manufactured items, and foodstuffs (which are fixed in external currencies) rise, thereby increasing the domestic cost-of-living and consequently wage and salary demands, setting in train a wage-price spiral.

The second concern is that devaluation would shift relative prices of the traded sector against the domestic sector. In a small open economy like Guyana this could be severely problematic.

Next week I shall address the fourth of the ‘other proposals’ and commence afterward with the presentation of mine.

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