Tuesday, July 26, 2005

Sugar, the WTO and discipline

A few months back, we thought it would be a good thing to stock up on sugar. Ukrainians like to can and my wife is no exception and since the price of sugar tends to go up in the summer, we thought we could save a little by buying it then and buying in bulk.

So we bought two sacks of 50 kilos each. The price was about 125 hryvna per sack or about $25. We got a bit of a break by buying bulk so we saved some over the price at that time.

Today, however, that same sack of sugar costs 250 hryvna. That’s $50 American. So the price has doubled in about three months. That’s a steep rise in the price of sugar. Why such a steep rise? What’s going on here in the sugar market?

There’s a shortage of sugar on the market right now and producers aren’t producing more; they’re at capacity they say. Some of it has to be the canning season. Women are buying sugar to make sure they can preserve their strawberries, cherries, currants, etc. But we have never seen as steep a price rise as this in the past.

So I don’t really know what is behind it. I suspect that production capacity is part of it. It might be that consumption is increasing too. Wages are up here and people are buying more. That means they are buying what might be considered more discretionary items like candies and other sweets. So that could be a part of it too. It is too steep a rise to be accounted for by inflation alone so it can’t be that. This kind of price rise in such a short period of time would seem to be only possible with supply limits of some kind.

The thing is that some of the candy factories are hurting right now because of the price. One in particular had to shut down production because they couldn’t get the sugar they needed. The biggest maker of candies says they will have to increase their price by 20% because of this. I find it hard to believe though that a sophisticated company like that company is would get caught flatfooted like this. I suspect that they have the supplies to tide them over and that the price hike on their products is opportunism, but who knows. All companies are going to have to increase their prices by about that same percentage—20%--they say. And some do export products so that will make their exports less competitive at that price.

But the problem is really the fact that Ukraine protects its sugar industry. Sugar beets are what are processed to make sugar here and that crop is not the most efficient at sugar production. Sugar cane is better but that means imports and the importation of sugar is not going to happen. There was some talk about it the past couple of weeks by the government but the decision was no. They felt that there were sufficient stocks in the country to tide them over but I think that they really didn’t want to uncork the bottle and let the genie out. It might be hard to put him back in when the people see the price of sugar decline dramatically.

Sugar of course is protected in the US because of a small group of well connected producers in the south. They have been able to prevent competition from foreign sugar for a long time. And they continue to be able to do it. This means that people in the US pay about twice what is being paid internationally. But this constitutes a tax on the people of the US and it is a tax on the people here too. Businesses do not pay the increased costs; consumers always do.

There is though the argument that Ukraine needs to go slow, that it cannot completely open up its markets because that will cause a lot of economic dislocation. The point is that people would lose jobs and there would be a lot of them out of work if the doors were thrown open. This is true. The only question would be in what numbers this would happen. So there is a lot to be said for that position. The problem though is that it is going to have to happen some time in all markets here. To say they need to go slow should not be a cover for really not wanting to do it. It will have to happen. If they keep saying no for every industry it just means not that they are going slow, but that they are not going at all.

That is why WTO entry looks appealing. First of all, it tends to give some structure to the governments policies, something that the government is lacking right now. It also gives those policies a coherence that is also lacking right now. Focusing on the WTO gives them just that, focus.

Secondly, it commits the government, the whole government, to a policy of liberalization, not only of the economy but of institutions. It hasn’t been clear whether the government was for liberalization or not. There have been a number of people speaking with a number of voices on the subject so it has been difficult to tell. Commitment to WTO entry signals government intentions to liberalize.

Thirdly, there is a stick that goes with the carrot. If the country does not join the WTO, they cannot get trade privileges. No trade privileges means an inability to compete internationally in the end. And if Ukraine enters the WTO and fails to keep its commitments there, sanctions would result. This would provide a discipline for the government in economic and trade matters that it might not be able to generate on its own.

These are reasons why it looks so appealing.


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