EC 304: Economics of Development Project
Topic: Importance of agriculture for economic development
Subtopic: Sugar Industry in Fiji
Group Members
Name (ID #): Jacinta Butafa (s11025189)
Komal K Chand (s11065674)
Willy Gulu (s11027666)
Tutorial: Monday (9am – 10am)
Table of Contents
1.0 Abstract 2
2.0 Introduction 3
3.0 Literature review 4
4.0 Methodology 8
5.0 Brief overview of Fiji Sugar industry 9
6.0 Theoretical underpinnings of the issue 10
7.0 Findings and discussion 10
8.0 Strategies and reform programs 14
9.0 Conclusion 15
10.0 Recommendation 16
11.0 Bibliography 17
1.0 Abstract
There is a considerable amount of decline in the output produced by the agricultural sector. The major focus of this assignment is on the contributions of sugar industry towards economic development. The Sugar Industry namely Fiji Sugar Corporation is faced with a lot of problems. The industry has failed to gain the support of the European Union (EU) which was the biggest support for the industry due to the fact that Fiji Government did not fulfill its commitments to the European Union. There is a continuous decline in the milling efficiency since the mid 1980’s. Along with this, the output produced by farms is insufficient to meet the demands for global markets as such the economy is reasonably behind in international competition compared to other countries that also engage in export of sugar. In order to keep pace with the growing competition and achieve economies of scale, the manufacturing of sugar needs a significant increment growth rate to seventy five percent compared to the current level of production in Fiji. The identity of many towns on the two major islands of Fiji (Viti Levu and Vanua Levu) would have been nothing in absence of the Sugar Industry due to the fact that many households rely on the industry for their survival. Keeping this factor in mind, a decline in the confidence on this sector will bring in profound effects on the entire country. A lot of problems will be generated due to any downturn in the industry including political instability along with severeinferences on the social and economic status of the economy.
The Report on The Sugar Industry in Fiji
... Sugar Industry in Fiji The sugar industry has perceived as the backbone of the Fiji economy. It was started as a colonial strategy to promote economic growth. The sugar industry ... to sugarcane farmers not to grow sugarcane and declined production of sugar. The level of sugar is currently very low and thus the ...
Keywords: Agriculture, Sugar Industry, Import, Export, Labor Market, Intercropping, productivity
2.0 Introduction
The contribution of the agricultural sector to the economy of Fiji is highly remarkable. It plays a vital and a central role in shaping the economy’s structure. Since political independence, Sugar and Rice are the most important cash crops in the calendar of Fiji’s economy till date.
However, many farmers have moved into substitute ventures due to a sharp decline in domestic rice production as a result of the deregulation of the rice industry since in 1990s. The sugar sector, on the other hand, has quite distinctive characteristics. Fiji Sugar Corporation has been operating as a monopoly industry for the last 125 years in Fiji’s economy. Starting under the supervision of Colonial Refinery Company to enhance economic performance, the sugar industry has developed over the recent decades and has reached new height under the new name Fiji Sugar Corporation and has become the prime industry for the country’s economic development outlook. Straight after independence in 1970, the Fiji government recognized inward-looking import-substitution strategy for improvements in agriculture and processing sector as a whole for the betterments of the economy and its people.
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Looking at past records, sugar production was the backbone of Fiji’s economy as it was the major export and foreigner earner for the nation. As a result of an increase performance of sugar industry in the 1970s, the level of export increased resulting in a significant level of growth in the economy of Fiji.
The major reasons for doing this paper is to find the importance of the sugar industry i.e. the contribution of Fiji Sugar Corporation to the economy of Fiji in terms of employment and export earnings, the trends faced by the sugar industry, reasons for the trend, and what the sugar industry and the government can collectively do to improve the performance of Fiji Sugar Corporation.
Section A of this paper will look at the Literature Review. Section B focuses on the all brief history of the sugar industry in Fiji followed by the theoretical underpinnings in Section C. section Dcovers the discussion on the findings has been placed. Moving on, the paper focuses on the strategies and structural reforms in Section E followed by conclusion and recommendation in Section F.
3.0Literature review
Factually, hardly any subjects have appealed the thoughtfulness of economists regarding agriculture in economic development and decline in poverty rate, upbringing a massive literature of both theoretical and empirical studies. Therefore, these paper troughs light on the procedures of structural transformation of economies, giving a clear picture of development in less developed economies where economic activity is largely agricultural based developed nations where manufacturing and service industries dominate the economy. Many economies are facing a downturn in the contribution made by the agricultural sector in GDP says Byerlee, (2009).
However from the perspectives of Kuznets’s (1965) who used the classical analysis, states that the contribution of agriculture to the economy and the growth rate covers a wide range of areas which are as follows: it supplies excess labor to processing and service providing industries. It also takes care of the provision of savings and capital resources that are needed for investment in other industries which is necessary for any economy to boost. Kuznets in turn dispute that increase in productivity in agriculture is a requirement for economic growth and structural change and from this, then agriculture can create a surplus and be in a position to achieve economic development tasks.
The Essay on Agriculture, Solution to Nigerian economy
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On the other hand, Lewis (1955) strongly believes that the process of development simply caters for redistribution of factors of production from the agricultural sector to that of modern sectors. He viewed agriculture as inefficient and classed it with low turnover and favored that productive resources should be allocated to modern sectors like the manufacturing sector of the economy as he considered it to be highly productive compared to the agricultural industries.
Many Governments all over the world take Lewis’s theory as an encouragement and a justification for designing policies that protect domestic industries (mainly the infant industries) by unambiguously or tacitly taxing the agricultural sector (Kirkpatrick and Baronets, 2004).
The theoretical implications for above policy are disregarded by many economists and is considered to be a discriminating factor for agricultural sector especially in nations where agriculture has the largest contribution in the development of the economy. (Anderson and Valenzuela, 2008) states the importance of agriculture in developing nations and also state that agriculture sector is given more priority as discrimination against the industry which has lessened to some extent.
It has been noted that the contribution of agricultural sector towards economic development is considerably decaling over a past decade or so (Cheney& Syrguin, 1995.) The declining trend has been observed at global level. Looking at the rate at which nations are developing, the contribution made by the agriculture towards the growth rate is significantly decreasing and accounts approximately for only 6% of global GDP which is very less compared to the contribution made by other sectors of the economy.
Empirical findings
From the influential study published in mid- 1970s, the ILO estimated that developing countries would need a long term economic growth rate of 7% to 8% per annum (ILO, 1976.) The researches carried out recently gives a clear indication that growth in agricultural sector is necessary to curb poverty related issues. This is due to the fact that poverty is mainly a problem in rural areas where the majority of the population engages in agricultural sector and is the major source of income for rural population (World Bank, 2008. Christiasen and Demery, 2007. Ravallion and Chen, 2007).
The Essay on Korean Agriculture Agricultural Sector Rice
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Agriculture continues to gain marked importance in many developing nations especially in aggregate terms by many households and even by the nation as a whole. Due to cultural, social and economic importance of agriculture, the treatment of agriculture in global economic is quite controversial. Currently, more than forty percent of the world’s working population engages in agricultural activities (FAO, 2005.)
Within the pacific island countries particularly in Fiji, agriculture is the largest contributor to the growth and development of the economy. For instance, agricultural sector accounts for 43.1% of Fiji’s foreign earnings. Agriculture sector itself provides 50% of the country’s total employment and generally contributes 19% to Fiji’s GDP. The development in agricultural sector provides a positive indication towards the development of the country. However with the rice industry, it grows close to half the amount of rice it needs, that is 70% of rice is grown locally. Copra industry has a net value of more than $20m and around 40000 households rely on coconut as a source of cash income. Kava for instance is also one of the foreign earners as the country’s Kava is one of the major export commodities.
In Fiji, improving and maintaining agricultural productivity is a major and ongoing challenge, which requires technologies on farming system, high crops yields, high quality standards and appropriate sustainable land use practice. Sugar continues to dominate as the largest foreign exchange earner contributes almost $401m of total exports over the last three years.
Agriculture is now experiencing a decline in its importance as it only accounts for only 8.9% of the nation GDP, which is more than three quarter of the all Fijian households engaged in agriculture- related activities. This is why many farmers have turned to service or manufacturing industries instead. Sugar cane along with copra, bananas, pineapples, watermelons, cereals and rice are the major commodities of agriculture which is traded along the borders that brings in foreign earnings giving a plus point to the balance of payment for the economy.
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DFID (2004) produced a document that shows that forty percentage decline in poverty is as a result as of the contribution made by the agricultural sector. According to this document, the growth in agricultural sector and poverty reduction is highly associated with each other and. Growth in agriculture sector always brings about positive changes , the impact of which is highly recognized by developing nations.
The writer of the document sees the relationship between agriculture and decline in poverty rate through four transmission mechanisms. These transmission mechanisms are as follows. Firstly, the effects of improved performance of agricultural sector on the wages of the rural population. Secondly, the effects of less expansive food for both the city dwellers as well as those living in villages and isolated regions of any island. Thirdly, the influence that the agriculture sector as on other sectors such as it impacts on the manufacturing and service sectors of the economy. Finally, agricultural sector enables excess to service and manufacturing sectors of the economy. Agricultural sector is the essential agent in motivating and supporting economic changeover such as the living standard of poor people. To note a considerable amount of decline in poverty, it is important that the above mentioned transmission mechanisms work in coordination and give the maximum increment in the agricultural productivity.
A large number of economists are engaged in finding the connection between agriculture and poor living standards. According to Bresciani and Valdes (2007) labor markets, farm income and food prices are the major elements that depict the true picture of how poverty and agricultural growth are inter-related. It has been noted that agriculture contributes relatively more to improve the welfare of people compared that to the impactit has on the gross domestic product of a nation. According to the research paper carried out by the above writers, it is has been found that growth in agriculture sector is boosted from the labor markets. They restraint that such an implication can also bring about a misconception that the growth in agriculture sector is an attribute of saving made that is accumulated by the labor market despite the fact that there are so many technical changes taking place in the labor market.
The Report on Sugar Industry 1
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Ligon and Sadoulet (2008) conducted a research paperto estimate regression coefficients connecting consumer expenditures by deciles to agriculture and non-agriculture GDP. They found that agricultural development is an integral part for the enhancement of the rural population as many households in rural areas are heavy dependent on agriculture to meet their expenditures.The paper also showed inverse relationship between the growth in agricultural sector and urban dwelling. The urban population prefers an increase in the performance of manufacturing and service sectors of the economy as many people are involved in paid employment.Christiaensen and Demery (2007) also have the same view as the above writers. According to these writers, improvement in the agricultural sector has a greater proportion of positive spill over in the economy compared to that of any other non-agricultural sector.
Furthermore, looking at the empirical facts, a larger proportion of the ideas are in favor of growth in agriculture. Writers carrying out research papers on the importance of agricultural growth in any economy strongly favor that development in this sector is necessary for the betterment of any nation.
4.0 Methodology
There is no field work done to collect information, however most of the information we obtained are done through the following sources
* Internet- annual reports and some other articles regarding Fiji Sugar Industry
* Library – journals and newspapers based on sugar industry in Fiji
EC304 texts book has also been used to derive information on the topic of agriculture. From all these sources, we were able to successfully compile this research paper.
5.0 Brief overview of Fiji Sugar industry
The early European explorers and colonizers were the first people to discover sugar cane in Fiji and by the year 1862, on the island of Wakaya, the first sugar was grown by a man named Mr. David Whippy. In years 1870 and 1883, sugar has taken over copra as Fiji’s main export and this then increases the sugar industry’s output which was initiated by Ratu Cakobau in December of 1871 through offering of five hundred (500) pounds to farmers who produced the first and most excellent crop of twenty (20) tons from home grown cane. As such, plantation systems were used to grow Fiji’s first sugarcane and as a result from this several small mills were constructed but were unsuccessful mainly because the content of sugar cane was really small and human capital for the plantation work was limited. Due to the unsuccessfulness of the small mills, the Colonial Sugar Refining Company (CSR) continues to operate which was a widely recognized Australian company that begins its operations in Fiji in the year 1880 and later established its mill in Nausori in the year 1882 and was unsuccessful so it stops its operation in year 1959. CSR then increased the number of its mills by establishing two mills which are SR-Rarawai mill on the bank of Ba River in the year 1886 and Labasa mill on Vanua Levu in the year 1894. It also took over of the Penang Mill in year 1926 which was started by the Wilmer brothers at Rakiraki in the year 1881. As well as that CSR was responsible for the cane breeding Agricultural Experimental Station at Rarawai in year 1904 and later was transferred to Lautoka way back in 1958 which left a sub-station in Rarawai and the opening of two sub-stations at Penang and Labasa.
A Fiji subsidiary, South Pacific Sugar Mills Ltd was created in 1961 by CSR Company Ltd purposely to help the people of Fiji through means of shares in which 2% were obtained by the public. In March 31 of 1973, the Government buys CSR’s interest in the company for $10 million due to CSR’s Ltd withdrawal from the Fiji sugar industry. As a result of this, the Fiji Sugar Corporation was created through an Act of Parliament in year 1972 by obtaining the milling activities and started its operations in April 1, of 1973. Of the 399,998 shares, Fiji government owns 30,239,160 fully paid shares while the rest is held by constitutional organizations, resident municipal enterprises andother personals showing that government has more control over this industry has it holds the largest number of shares.Furthermore, FijiSugar Marketing Company Ltd came into existence in 1976 because the government wants the company to be in charge with the promotional activities. As well as that the Government takes heed of the matters raised by farmers and formed three new organizations as follows, the Sugar Commission of Fiji which is the overall managing body, the Sugar Industry Tribunal which looks after the contractual dealings between farmers and FSC and also conflicts and disparities within the industry and the lastly the Sugar Cane Growers Council which take into consideration the farmer’s interests (Fiji Sugar Corporation Limited, 2009).
6.0 Theoretical underpinnings of the issue
Sugar industry plays a vital role for development process for the Fiji economy through its operation, it enhances the labor mobility and improves the social welfare of the rural people who are involved and employed in the farm industry. The industry creates employment opportunities ever since it was started that is almost 23% of the total population of the country was engage in the industry. The industry provides incentives to the workers with wages and salaries and allows individual farmers to increase their farms size, and at the same time increases their savings for future of their children’s education.
7.0 Findings and discussion
Over a period of 125 years, The Sugar Industry has captured the attention of many people and has been an area of interest. Over the recent years it has been noted that the industry’s contribution to foreign earning has been 22% along with a 22% to the nations GDP and a 25% commitment in employing the labor force. Looking at the current, the industry’s contributionto the economy’s production level stands near to 7% which accounts for 22% of export earnings. 8.5% of the foreign earnings come as a result sugar export. The industry also has significant contribution in the labor market as it provides employment to 51,000 people of which 40,000 people are directly employed (Government of Fiji, 2002).
The Government is engaged in the restructuring program whereby it will address issues that are contributing to the flaw of the industry.
The major aim for the government at hand is to bring about a decline in the cost of production. This is only possible if the authorities along with farmers use strategies such as using high yielding varieties, increasing area under plant-cane, intercropping other crops with sugarcane and improve mill efficiency. The following section looks at the trends in the sugar cane sector. Data shows that there has been a declining trend over the past years. The reason for the declining trend as well as solution to it is mentioned below.
Figure 1.1 Shows the Sugar Production in Fiji
Source: Fiji bureau of statistic.2011
This graph shows the production of sugar over a period of ten years. The graph clearly shows the variations in the production of sugar. In year 2000 the amount of sugar produced has increased at 341,000 tonnes whereas in year 2001 it decreased to 293,000 tonnes. In year 2002, it increases again with the amount of 330,000 and again decreased to 294,000 in 2003. It slightly increased to 314,000 in 2004 and later decreased to 289,000 in 2005 whereas it increased to 310,000 in 2006 and decreased in 2007 with the amount of 237,000. In 2008 and 2009, the production of sugar decreased with the amount of 208,000 and 168,000.
The declining trend in sugarcane production and sugar output is mainly due to factors like, the expiry of lease agreement of many cane farmers, the intending expiry of preferential prices from the European Union (EU) and the rising level of inefficiency in sugar production, milling and transportation (Narayan, 2003).
This trend has continued and may exist in years to come given if solutions are not located as soon as possible. To address this issue, government (owner the four sugar mills in the country) together with the stakeholders, have to put in place a plan for restructuring the industry. The plan should include methods of increasing the sugarcane farms efficiency, transportation system and milling which will boost Fiji’s effectiveness in the global market.
Moving on, exports are expected to be reduced by 2.1 % while imports will be reducing by 1.7 percent. Looking at this trend, it can be stated that the balance of payment for Fiji is going to reach a deteriorating state.
Figure 1.2 shows the trends of the Fiji Sugar exports.
Source: Fiji bureau of statistic. 2011
Evaluating the trends depicted from the graph above shows that, since 1978 to late 1998, the export of sugar has increased by its unit value of FJ$ per tones which result to high production in sugar cane output during the period. Improvement in new technologies and labor mobility is highly concentrated in the industry. The increasing trend contributes positive gains to the country’s overall GDP and also the individual farmers are encouraged to increase their savings. However there was a decline trend since year 2000 to 2004 and 2010 which reflect the very low productivity where the industry itself was experiencing varies problems during this period.
If the sugar production declines, which is the current trend; it is also going to affect the amount of tax revenue for the government. Based on the amount of profit earned by the industry, the government imposes the tax. The amount of profit earned by the industry is entirely dependent on the level of sugar production. It is estimated that if the level of production declines, and there is a one percent reduction in value added tax, there will be about three percent decline in income tax revenue.
It is estimated effects of a decline in sugar productivity of about thirty percent will have numerous effects on the economy .The effects are evaluated and is represented in a tabular for later.
According to Narayan (1999), the sugar industry has a greater multiplier effect on the economy as a whole compared to other industries in the economy. It is projected that any shock in the sugar industry will have direct impact on other sectors of the economy.
It is estimated that any decline in the sugar production will have numerous effects on the economy of Fiji. As a result of a 30% decline in sugar production, there is an expected decline in the real gross domestic product of the economy by 1.85% while data shows that the mean growth rate for Fiji’s economy stands at 2.5% over a few years. The decline in sugar production will also affect the level of gross domestic product as well as the export and income generated from it. The effects of any such reduction in sugar productivity will also be felled by the employment sector.
Figure 1.3(a): Labor market effects for Fiji from a 30 percent reduction in sugar output
Variables | percent change |
Net after tax rural wage rate for unskilled labor | -1.8776 |
Net urban wage rate for unskilled labor | -1.0763 |
Wage rate for informal sector labor | -7.1587 |
Aggregate demand for informal unskilled labor | 3.7379 |
Source: Ministry of Finance and National Planning
Figure 1.3(b): Macroeconomic effects for Fiji from a 30 percent reduction in sugar output
Variables | percent change |
Private savings | -2.6796 |
Balance of payments | -F$703,043 |
Total government consumption | -1.8761 |
Total government investment expenditure | -0.8924 |
Total government savings | -26.5760 |
Imports | -1.6652 |
Exports | -2.1434 |
Consumer price index | -1.0763 |
Investment price index | -0.8237 |
Private disposable income | -2.6796 |
VAT revenue VAT revenue -1.0436 | -1.0436 |
Income tax revenue | -2.9898 |
Company tax revenue | -3.0141 |
Production tax revenue | -6.2675 |
Excise tax revenue | -2.5254 |
Tariff revenue | -1.5425 |
Real GDP | -1.8467 |
GDP deflator | -0.7160 |
Real consumption | -1.6466 |
Real national welfare | -1.4690 |
Source: Ministry of Finance and National Planning
8.0 Strategies and reform programs
The government is in the process of designing policies and plans that will help curb the problems that exist in the sugar industry. Do to so, the government in its strategic development plan for 2003-2005 has placed some measures that can bring about a change in the sugar industry. The plans are: reform the sugar industry into a well-organized and commercially sustainable industry, enhance the milling competence and implementation of a standard cane payment system, incrementing productivity, diversifying sugar products in a wide range of by-products and implementing reforms that makes local sugar more attractive in the global market(Government of Fiji, 2002).
In addition to that, the Government should also provide subsidies to the local farmers to enhance their productivity, which is in terms of quality use of biological packages and financial assistance that to some extent will encourage local famers to improve their farm sizes. The government also tries to take into consideration reform programs, for instance the land reform of local customary lands. This helps to identify the property rights in a form of land tenure system. Be ensuring that reforms under review must have an incentive for rural farmer to invest in the land. The responsible authorities should ensure to provide possible solutions for the use of land with special reference to Native Land. Also establish a more effective and reliable Research and Development initiatives to support the crop production
9.0 Conclusion
The industry is faced with lots of problems which need to be addressed for the industry to succeed in coming years. Looking at the trend it is following, it is evident that the importance of the industry to the economy is deteriorating.
Sugar industry is no longer the backbone of Fiji’s economy as it is mentioned literature review. On the completion of this paper it has been found that tourism industry has taken the place which the sugar industry once had. The evidence found still favor the sugar industry as the dominant provider of employment in Fiji. Empirical evidence also shows the strong correlation between the sugar industry and other sectors of an economy. As already mentioned above, sugar industry has multiplier effects on the economy of Fiji.
Therefore, it is in the best interest of the economy as a whole to work collectively to free the sugar industry with the many problems it faces for the best interest of everyone. Any reflectance to improve the overall performance of the sugar industry will cause the collapse of the industry in years to come.
10.0 Recommendation
The significance of the sugar industry has been declining. For instance, the industry only contributes three percent to the economy’s development whereas it used to make a ten to fifteen percent in previous years. Since 1961, the lowest sugar level of sugar production as a last year. To improve its status in Fiji’s economy, there are certain measures the industry has to take heed of. Firstly, FSC should solve all its financial disputes as quickly as possible. Secondly, some precautionary measures are necessary to deal with mechanical problems such as the breaking down of machines. Other factory problems need to be dissolved as well. Moreover, the company has to effective design policies and plans that will increase sugar productivity. There is also a need for extensive large scale commercial farming to boost the financial status of the economy. Finally, diversification of sugar product is necessary to boost the yield from the industry due to unstable local and global markets. There are other ways in which the industry can attain its position back provided that effective measures are implemented.
11.0 Bibliography
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