The sugar industry has long been a major source of exports and foreign exchange earnings to the Philippines. However, poor industry policy and reduced production have resulted in its recent performance being well short of potential. The country has good natural resources (soils, water and climate) and has much to gain from reforming the policies of its sugar industry. This can only come from an improved understanding of the economic structure of the industry and how policies affect production, consumption and trade.
In 1986, the World Bank outlined the debilitating problems caused by bad agricultural policies in developing and developed countries alike. Input subsides, food subsidies, implicit export taxes, the monopoly powers of marketing boards, stabilisation schemes, producer support programs, trade restrictions and quantitative controls can cause costly distortions in resource allocation. In many developing countries, including the Philippines, the net effect is a discrimination against agriculture. Agriculture uses fewer resources than is optimal for the economy, and trade opportunities and incomes are reduced.
Australia is one of the world's most efficient and largest sugar exporting nations and has a history of rigorous economic analysis of agricultural export industries. An Australian initiative through ACIAR to assist the Philippine sugar industry is therefore logical. Moreover, the world sugar market and sugar trade issues are important to Australia. Australia and the Philippines are similarly affected by the adverse consequences of US, EC and Japanese policies on the world market. Philippine interest in ACIAR research support is strongin government, industry and academia. The Philippines has been a significant force in the world sugar trade in the past. From Australia's point of view as a sugar trader and a country keen to see less intervention in world agricultural trade generally, a comprehensive economic study of the Philippine industry is timely.
The commissioned organisationthe Centre for International Economics has demonstrated a capacity to manage economic research projects around the world, to undertake economic modelling and to transfer technology as required. In addition, the Centre has recently completed a similar study of the Australian sugar industry. Centre staff will collaborate with a competent team of economists in the Philippine Department of Agriculture.
The collaborators will develop a comprehensive empirical model of the industry's supply and demand. On the supply side, the model will depict the input-output structure of cane production, transport and milling in terms of important economic and policy variables, such as input and output prices and quantities, taxes, subsidies, resource availability and technology. The profit function or dual approach method will be used. On the demand side the model will account for domestic and international influences, including prices, the exchange rate, marketing quotas, taxes and subsidies.
The team will calibrate the model on industry data and conduct simulations to estimate the effects of changes in industry policies. In particular, they will analyse the effects of:
. changes in regulated cane payment arrangements on mill investment in crushing and transport;
. changes in farm size due to land reform;
. changes in technology due to increased spending on R&D;
. changes in input and output prices due to alterations in customs tariffs and subsidies;
. changes in quantitative restrictions imposed on the allocation of water and other resources; and
. various world demand scenarios.
The Centre's staff will coordinate the project. They will have significant input into defining the problem, specifying the model and providing guidance to the Philippine collaborators on collecting data, calibrating the model, conducting simulations, and interpreting and publishing the results. During the project there will be exchange trips, seminars and workshops to assist in information exchange.
Two very important benefits can be expected from such a detailed economic study of the Philippine sugar industry. The first is an increase in awareness and understanding of the effects of existing policies on the industry and a better understanding of the broad effects of policies. The second benefit relates to the technology transfer between the two countries.
Similar studies of other sugar industries have demonstrated that economic gainshundreds of millions of dollars a yearare possible from policy reform. While the results of this project will provide a basis on which to reform Philippine sugar policy, implementing reform is not easy, and there can be no assurance that it will be achieved.
Australia will benefit from information/technology transfer, and possibly by action the Philippines may take to support its trade initiatives.
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