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WEEKLY
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| Sugar and political power |
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Part I
Saturday, September 12, 2009
Dr Adeel Malik
In his famous book, Coffee and Power, Jeffrey Paige provides a vivid illustration of how a single commodity, coffee, is sufficient to explain the power structure of Central America. Despite the varying political complexions of its regimes, Central America has one thing in common: they are all ruled by coffee elites. For decades, Central America's coffee elites have thrived on state patronage, rent seeking, and distortion of private markets. As Jeffrey Paige concludes, these elites have generated in this process "unprecedented wealth for the few at the expense of the general impoverishment of the many". Despite this, the coffee elites have been remarkably resilient in Central America, surviving periods of both revolutions and authoritarian rule.
In terms of its links with political power, sugar is Pakistan's parallel for coffee. Sugar industry is Pakistan's second largest agro-based industry. Its linkage with politics, patronage and protection sets it apart from other industries. Available evidence suggests that it is economically inefficient, enjoys one of the highest rates of protection, and is dominated by a small number of political influential owners, making it an excellent illustration of the interconnection between business and politics. The analysis of sugar markets in Pakistan, and their manipulation therefore opens up a fascinating window into how the economic interests of our political elites are strongly entrenched in the current power structure. The operation of sugar markets in Pakistan offers a telling story of how both markets and public policy are routinely captured by vested political interests.
Ostensibly, the current sugar crisis has its immediate origins in the mismatch between supply and demand. Sugar production in Pakistan has fallen to around 3.7 million tonnes this year, a reduction of nearly 1 million tons compared to that of last year. This is further complicated by rising sugar prices in international markets. This raises four important questions: despite sugar being a profitable industry, why has there been a short fall in sugar production? Why was sugar not timely imported in anticipation of this shortage? Why is the impact of every global commodity shock amplified when it hits Pakistan? And, finally, why do these sugar crises tend to have a recurring nature? I shall try to address these questions in a series of articles in the hope of informing the public debate and steering it in the right direction.
As it happens, answers to these questions are rooted in the domain of politics, not economics. This is because the genesis of Pakistan's recurring sugar crises is essentially political. If there is one industry that best reflects the underlying power structure in Pakistan, it is sugar. The role of politics is central; from the sanctioning of a sugar mill to its financing and operation. It is instructive to take a look at the ownership structure. Of the nearly 78 sugar mills, at least 50 per cent are owned by politicians or their family members. They sit on all sides of the political divide, represented in cabinet, treasury and opposition benches.
The list of owners includes such influential political figures as President Asif Ali Zardari himself, Speaker National Assembly Dr Fehmida Mirza, Sind Provincial Minister Zulfiqar Mirza, Jam Mashooq Ali, the Chaudhrys of Gujrat, Pir Pagaro, Humayun Akhtar, Jehangir Tarin, Manzoor Wattoo, Nasrullah Dareshak, and members of the Sharif family. To comprehend the nature of political stakes involved, consider just two illustrations. President Zardari has financial stakes in the following sugar mills: Sakrand Sugar Mills, Nawabshah; Ansari Sugar Mills, Hyderabad; Pangrio Sugar Mills, Thatta; and Bachani Sugar Mills, Sanghar, and Mirza Sugar Mills, Badin. His main political contender, Mian Nawaz Sharif's family owns Ittefaq Sugar Mills, Ramzan Sugar Mills and Brother Sugar Mills.
But political leadership can't be squarely blamed for this state of affairs alone. The sugar cartel has also operated with impunity under military dictators. The nation has witnessed at least two sugar crises when our self-proclaimed father of good governance, General Pervez Musharraf, was safely ensconced in power. The last time we had a similar sugar crisis was in 2005-06. Clearly, the sugar tycoons have their moles in bureaucracy, political parties and parliament. They have often been willing supporters of dictatorial regimes. The presence of Humayun Akhtar, the son of another military general, Jahangir Tarin and other stalwarts of the PML-Q in General Musharraf's cabinet ensured a smooth sailing for sugar interests.
The politics of sugar has its roots in the late 1980s when sugar mills were sanctioned through political connection and state-owned commercial banks extended money to finance these. This political patronage reached its new heights in the 1990s when successive regimes sanctioned sugar mills to politicians and their kith and kin and offered them generous credit lines from public banks. The bulk of these loans were later written off in what modern analysts term as daylight robbery of public resources. Many of our current sugar barons are beneficiaries of the infamous debt write-offs of the 1990s.
In Nawaz Sharif's first government, when sugar related corruption reached its apogee, the Heavy Mechanical Complex (HMC) was barred from producing sugar plants, making Ittefaq Foundry as the main provider of sugar plants. A controversial aspect of these dealings was the way in which the unit pricing of sugar plants was systematically increased to benefit Ittefaq Foundry, whose over-priced sugar plants were now being financed by commercial banks. This was indeed a clever way of transferring public resources into private pockets. As is clear from the above discussion, the sugar industry is founded on the very notion of political corruption. The act of both sanctioning and financing of sugar mills required political connections. It was not a level playing field in which ordinary businessmen could compete in a free and fair manner. Majority of sugar mills were thus set up not by aspiring entrepreneurs, but by politicians presenting themselves as businessmen. Clearly, far from generating new business opportunities, public money was actually dished out as a way of transferring resources to political incumbents.
No wonder, profit making through healthy competition is not their operating principle. They thrive by exploiting farmers and by capturing public policy in their favour. Today, Pakistan's sugar industry is one of the most economically inefficient in the region. The industry will find it hard to survive in the absence of state support. Industry insiders reveal that there are at present more mills than required. Had it not been for this state patronage, the more inefficient mills would die their natural death. The sugar sector enjoys one of the highest nominal rates of protection. It is sheltered from international competition and has remained largely untouched by nearly two decades of trade liberalization. The sugar lobby manipulates trade policy to their advantage. When sugar prices fell in international markets, the sugar cartel convinced the government to impose additional regulatory duties, denying the benefit of this price fall to ordinary consumers. Ironically, the reverse happened when sugar prices recently soared in global markets. The mill-owners were now quick to pass on the price increase to consumers.
Apart from being insulated from foreign competition, the industry faces limited pressure to increase its efficiency. It has made few attempts, for instance, to slash its costs by developing other by products of sugar, such as molasses, beet pulp and cane wax. As has been tried in other developing countries, the sugar industry can also be gainfully used for the generation of electricity. Few such market-driven pressures exist in our sugar market. Perhaps, it is far more profitable to manipulate the market and derive uncompetitive rents than to engage in domestic and foreign competition. This might offer one reason why the sugar industry faces persistent shortages and lives in a perpetual state of crisis. In subsequent articles, I shall describe the structure of agrarian incentives, the defective nature of policy responses and implications for the wider society.
(To be continued)
The writer is the Islamic Centre lecturer in development economics at the University of Oxford and a research fellow at St Peter's College, Oxford. Email: adeel.malik@qeh. ox.ac.uk
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ISSN 1563-9479 
