Tag Archives: Mexico

The Sugar Swamp

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(June 25, 2017)
As the US, Mexico and Canada get ready to begin talks on the re-negotiation of NAFTA – possibly as early as August – governments are giving a lot of attention to one particular product:  sugar.   The outcome will predictably be a sweet deal for the US sugar industry, quite the opposite of Trump promises to “drain the swamp” of disproportionate influence in Washington by special interests.

It’s an old story, in the US as in other industrialized countries.  The politically powerful sugar producers receive protection in the form of tariffs and quotas on imports, to keep the domestic price of sugar far higher than the price in such low-cost supplier countries as Brazil, Australia, the Dominican Republic, the Philippines, and Mexico.

Sugar in NAFTA

As part of NAFTA, the US was supposed to open up the American sugar market to Mexico.   Indeed sugar was one of the few products in which free trade meant the removal of high US barriers, whereas the Mexicans had high barriers on many US products that NAFTA required them to remove.  But the required sugar liberalization was delayed long after NAFTA took effect in 1994.

Mexican sugar exports to the US did not rise strongly until 2013.  Then when they did, American producers and refiners lost no time in seeking protection.  The Commerce Department decided to give it to them:  tariffs up to 80%. This threat forced Mexico to agree in 2014 to limit its sugar exports and to explicitly prop up the US price.

Mexico this month apparently agreed to extend the limits.   According to Commerce Secretary Wilbur Ross, “The Mexican side agreed to nearly every request by the US industry.”  (The recent agreement apparently has as much to do with protecting American refiners per se by tightening the limits on trade in raw sugar, as with any adjustment in the overall level of protection of the sugar industry a whole.)

Why is sugar protection bad?   Consider some cost/benefit analysis.

Let’s start with the benefits, because the list is short.  The beneficiaries are American sugar growers – particularly a small group of wealthy cane producers concentrated in Florida plus sugar beet farmers in places like Minnesota and the Dakotas.  They have a long history of generous campaign contributions to the relevant politicians.  For example the famous Fanjul brothers, Alfonso and Jose (who incidentally are Palm Beach neighbors and friends of Secretary Ross), reportedly gave a half million dollars for the inauguration ceremonies of President Trump in January.  Another company, US Sugar, has been donating equally generously to Florida Governor Rick Scott.

Economic costs of sugar protection

The costs of measures to protect the sugar industry are far more numerous than the benefits.

  • As with trade barriers in most industries, American consumers are hurt by the high price of US sugar, which has been double the world price on average over the last 35 years.  The cost to consumers has been estimated at $3 billion a year.
  • Candy and ice cream companies of course use sugar in their production and so are also hurt by the distortedly high price. They have been shedding employment for years, as confectioners move their factories offshore where their chief input is less expensive.   (Outsourcing of manufacturing jobs, anyone?)  The International Trade Agency of the US Commerce Department found that “sugar costs are a major factor in relocation decisions” and estimated that “For each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.”
  • One might think that making sugar expensive would at least have big benefits for Americans’ health. But no.  For one thing, the artificially high price of the white crystals was partly responsible historically for the explosion in the production of high-fructose corn syrup as a substitute and its use in a startlingly wide variety of foods.  HFCS is at least as bad as sugar health-wise.
  • Sugar cane in Mexico is produced by hundreds of thousands of small, mostly poor, farmers. Depriving them of their livelihood is bad foreign policy.  Think of the undesirable alternatives to which those farmers might turn.  Or think of the larger message that is sent to the world when our actions are seen to contradict its lectures about the virtues of the market system.
  • Limiting imports is also bad for our exporters. The macroeconomic channels may not be obvious.  But if Mexicans can’t earn dollars by exporting to the US, they won’t have dollars to spend on US goods; the dollar will appreciate against the peso and so render US exports uncompetitive.  More tangibly, if the US were to ratchet up tariffs against Mexican sugar as  we threaten (which we would do in the name of fighting dumping and subsidies), the Mexicans would immediately respond by raising tariffs against our exports (again in the name of fighting dumping and subsidies).
  • The taxpayer is on the hook as well. Besides import barriers, another way that the US government protects domestic sugar farmers is a policy of putting a floor under the price via non-recourse marketing loans (from the USDA’s Commodity Credit Corporation).   When the domestic price dips down near the floor, as it did in 1999 and 2013, the government in practice subsidizes the producers at taxpayer expense (despite “no-cost” promises to the contrary).

Environmental costs of sugar protection

  • If the US hadn’t historically blocked sugar imports from countries such as Mexico and Brazil, it could have used sugar-based ethanol in auto gas tanks, at lower cost to both the environment and the consumer. (This policy failure was worse before 2012.  The American taxpayer paid directly to subsidize corn-based ethanol produced in Iowa, under an incorrect claim of environmental benefits.  At the same time, the US maintained a tariff of 54 cents per gallon on imports of sugar-based ethanol from Brazil, which is indeed good for the environment on net. Even after those egregious features were removed five years ago, an inefficiently high fraction of corn production is still diverted from food use into ethanol.)
  • Speaking of the environment, the last negative effect on the list brings us back to the topic of swamps.  The Everglades – the unique system of wetlands in southern Florida that includes a National Park – have suffered environmental degradation for a century.  They have shrunk to half their original size because the incoming flow of water was diverted by federal water projects early in the last century (by the US Army Corps of Engineers).  Furthermore, phosphorus run-off has altered the eco-system (choking out  sawgrass, feeding algae blooms).  In recent years, plans to reverse the damage to the “river of grass” legislated by Congress in 2000 have been delayed.   The main problem all along has been the nearby sugar cane industry, which demands the diverted water, supplies the phosphorus run-off, and lobbies politicians with some of the resulting profits.  Most recently, sugar interests have posed financial and political obstacles to efforts to build a reservoir (south of Lake Okeechobee) as part of the year-2000 Everglades restoration plan.

Under a free market, it would not be profitable to grow so much cane on valuable South Florida land, if any.  But Trump’s idea of “draining the swamp” in Washington is evidently to artificially stimulate the sugar industry through import protection and subsidies, and to let everyone else bear the cost:  consumers, candy manufacturers, Mexico, and the environment.  That includes draining the Everglades.

[A shorter version appeared at Project Syndicate.  Comments can be posted there or at Econbrowser.]

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Escaping the Oil Curse

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Libyans have a new lease on life, a feeling that, at long last, they are the masters of their own fate. Perhaps Iraqis, after a decade of warfare, feel the same way. Both countries are oil producers, and there is widespread expectation among their citizens that that wealth will be a big advantage in rebuilding their societies.

Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and Uganda is about to do so as well. Indeed, from West Africa to Mongolia, countries are experiencing windfalls from new sources of oil and mineral wealth. Adding to the euphoria are the historic highs that oil and mineral prices have reached on world markets over the last four years.

Many countries have been in this position before, exhilarated by natural-resource bonanzas, only to see the boom end in disappointment and the opportunity squandered with little payoff in terms of a better quality of life for their people. But, whether in Libya or Ghana, these countries’ current leaders have an advantage: most are well aware of history, and want to know how to avoid the infamous natural-resource “curse.”

To prescribe a cure, one must first diagnose the illness. Why do oil riches turn out to be a curse as often as they are a blessing?

Economists have identified six pitfalls that can afflict natural-resource exporters: commodity-price volatility, crowding out of manufacturing, “Dutch disease” (a booming export industry causes rapid currency appreciation , which undermines other exporters’ competitiveness), excessively rapid resource depletion, inhibition of institutional development, and civil war.

Oil prices are especially volatile, as the large swings over the last five years remind us. The recent oil boom could easily turn to bust, especially if global economic activity slows.

Volatility itself is costly, leaving economies unable to respond effectively to price signals. Temporary commodity booms typically pull workers, capital, and land away from fledgling manufacturing sectors and production of other internationally traded goods. This reallocation can damage long-term economic development if those sectors are the ones that nurture learning by doing and fuel broader productivity gains.

The problem is not just that workers, capital, and land are sucked into the booming commodity sector. They also are frequently lured away from manufacturing by booms in construction and other non-tradable goods and services. The pattern also includes an exuberant expansion of government spending, which can result in bloated public payrolls and large infrastructure projects, both of which are found to be unsustainable when oil prices fall. If the manufacturing sector has been “hollowed out” in the meantime, so much the worse.

Another pitfall is excessively rapid depletion of oil or mineral deposits, in violation of optimal rates of saving, let alone preservation of the environment.   

Even if high oil revenues turn out to be permanent, pitfalls nonetheless abound. Governments that can finance themselves simply by retaining physical control over the oil or mineral deposits located within their borders often fail in the long run to develop institutions that are conducive to economic development.  Such countries evolve a hierarchical authoritarian society where the only incentive is to compete for privileged access to commodity rents. In the extreme case, this competition can take the form of civil war. In a country without resource wealth, by contrast, elites have little alternative but to nurture a decentralized economy in which individuals have incentives to work and save. These are the economies that industrialize.

What can countries do to ensure that natural resources are a blessing rather than a curse?  Some policies and institutions have been tried and failed. These include, in particular, attempts to suppress artificially the fluctuations of the global marketplace by imposing price controls, export controls, marketing boards, and cartels.

But some countries have succeeded, and their strategies could be useful models for Libya, Iraq, Ghana, Mongolia, and others to emulate. These include: hedging export earnings – for example, via the oil options market, as Mexico does; ensuring countercyclical fiscal policy – for example via Chile’s kind of structural budget rule; and delegating sovereign wealth funds to professional managers, as Botswana’s Pula Fund does.

Finally, some promising ideas have virtually never been tried at all: linking bonds to oil prices instead of dollars, to protect against the risk of a price decline; choosing Product Price Targeting as an alternative to either inflation targeting or exchange-rate targeting, to play the role of anchor for monetary policy; and distributing oil revenues on a nationwide per capita basis, to ensure that they do not wind up in elites’ Swiss bank accounts.

Leaders have free will. Oil exporters need not be prisoners of a curse that has befallen others. Countries can choose to use their resource bonanzas for the long-term economic advancement of their peoples.

 

[This column originally appeared at Project Syndicate.  Comments can be posted there.]

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Some Big Ideas from Small Countries

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     Two decades ago, many thought the lesson of the 1980s had been that Japan’s variant of capitalism was the best model, that other countries around the world should and would follow it.   The Japanese model quickly lost its luster in the 1990s.  

     One decade ago, many thought that the lesson of the 1990s had been that the US variant of capitalism was the best model, that other countries should and would follow.   The American model in turn lost its attractiveness in the decade of the 2000s.   

     Where should countries look for a model, now, in 2010?  Many small countries on the periphery have experimented with policies and institutions that could usefully be adopted by others.  

     A panoply of innovations has helped Chile to outperform its South American neighbors.   Chile’s fiscal institutions – structural budget balance with the parameters estimated by independent expert panels — insure a countercyclical budget.  They are among the mechanisms that are particularly worthy of emulation by other commodity exporting countries, to defeat the Natural Resource Curse.  

     Costa Rica in Central America and Mauritius in Africa each pulled ahead of its peers some time ago.  Among many other decisions that worked out well for them, both countries have foregone a standing army. The result in both cases has been histories with no coups, and financial savings that can be used for education, investment, and other good things.  Singapore achieved rich country status with a unique development strategy.  Among its many innovations were a paternalistic approach to saving and use of the price mechanism to defeat urban traffic congestion (now emulated by London). 

     Some small advanced countries also have lessons to offer.   New Zealand led the way with Inflation Targeting, along with many liberalization reforms in the late 1980s.   (Perhaps its Labor Party should even be given credit for pioneering the principle that left-of-center governments can sometimes achieve economic liberalization better than their right-of-center opponents.)   Ireland showed the importance of Foreign Direct Investment.  Estonia led the way in simplifying its tax system by means of a successful flat tax in 1994, followed by Slovakia and other small countries in Central/Eastern Europe and elsewhere (including Mauritius again).   

     Mexico pioneered the idea of Conditional Cash Transfers (the OPORTUNIDADES program — originally PROGRESA, launched in 1998).  CCT programs have subsequently been emulated by many developing countries.  This was two revolutions in one:  (1) the specific idea of making poverty transfers contingent on child school attendance (which has been emulated even in New York City) and (2) the methodological idea of conducting controlled experiments to find out what policies work or don’t work in developing countries (which has fed into the exciting Randomized Control Trials movement in development economics).  Also in the 1990s, largely thanks to the leadership of President Ernesto Zedillo, Mexico adopted non-partisan federal electoral institutions that were subsequently in 2006 able to resolve successfully a disputed election.   (In contrast, it turned out in November 2000 that the United States had no mechanism to resolve such disputes, other than the preferences of political appointees.)  Mexico undertook health reform in 2004.  More recently, President Felipe Calderon has shut down the entrenched electric utility and pursued much-needed reforms in tax, pension, and other areas.

     In highlighting some very specific institutions that could be usefully applied elsewhere, I don’t mean to suggest that they can be effortlessly translated from one national context to another.   Nor do I mean to suggest that these examples are entirely responsible for the success of the economies identified.  (Indeed a few of these countries have recently been wrestling with severe problems.)  But a country doesn’t have to be large like the United States to serve as a model for others.  Small countries tend to be trade-dependent, and open to new ideas.  They are often more free to experiment than are large countries. The results of the experiments include some useful lessons.

[TV interview on BNN.]

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