-2 June 2000 _ Q _ = ,_, r r D [7 A quarterly newsletter of the World Bank on cotton sector policy reform and implementation issues I The cotton sector in West and Central Africa is currently undergoing a process of reform that will have a significant impact J on its long-term growth. As individual countnes are designing and Implementing these reforms, the World Bank, through the current publication, is seeking to provide a forum to (X) exchange views among interested stakeholders, and (ii) dis- seminate expenences and lessons across countries. The views expressed here are those of the author(s) and do not nec- essanly reflect the views of the World Bank Group, its member countnes, or the other groups mentioned Thne W orld Cotton M arket: though they occasionally import to supply their textile indus- tries. Imports of cotton are more uniformly distributed than ex- S tiructure Recent ports. During the 1998-99 season, the eight largest itmporters Structure, Recent Trends, (Indonesia, Italy, the Republic of Korea, Mexico, Taiwan (China), Brazil, Thailand, and Japan), accounted for over half of and Prospects' world imports, a much less concentrated pattern than with ex- ports. Cotton is produced in many countries, but the northern hemi- During the 1990s, nominal cotton prices, as measured by the sphere accounts for about 90% of global output. During the Cotlook A Index** (see Figure 1), fluctuated between 253 o/kg 1970s and 1980s, cotton production grew by an annual average (115 ¢/lb) in May 1995 and 97 ¢/kg (44 ¢/lb) in December of 1.2% and 3.1%, respectively. During the 1990s, cotton pro- 1999, the lowest level since September 1986. The 1998-99 de- duction fluctuated between 18 and 20 milllion tons, with virtL- cine in cotton prices, one of the sharpest in recent history, is a ally no growth (see Table 1). China and the U.S. each account result of several factors. Chief among these are: for approximately 20% of world output, followed by India (15%), Pakistan (10%), and Uzbekistan (8%) Other signifi- * Weak demand, especially by the East Asian countres affect- cant cotton producers are West and Central Africa*, Turkey, ed by the financial cinss of 1997 (i.e., Indonesia, the Repub- Australia, Greece, Brazil, Argentina, and the Syrian Arab Re- hic of Korea, and Thailand, which account for more than public. 15% of cotton Import public. ~~~~~~~~~~~~~~~~~~~demand). About 30% of cotton production is traded in- Figure 1. Cotlook A Index * High levels of stocks, temationally. The U.S., January 1983-March 2000 which reached a Uzbekistan, and West 300 record 9 8 million and Central Africa ac- tons in 1997-98, count for more than half 250- pushing the stock-to- of the world's exports 200 -Y-'\ i' ,^ use ratio to 0 51, the (see Table 2) Other 150- J highest level since major exporters are Ar- 100- 1985-86. China held gentina, Australia, and 50- an estlimated 40% of Greece Three major 0 . - - , . , , these stocks producers-India, Pak- lb SP C§ istan, and Turkey-do .4- w w w .v f ' * I ow prices for syn- not export cotton, al- thetic fibers, a result * Cotton producing countries in West and Central Africa include Benin, Burkma Faso, Cameroon, the Central African Republic, Chad, c6te dIlvoire, Mali, Senegal, and Togo. ** The Cotlook A Index measures the world price of cotton. It is the average of the 5 least expensive of 14 styles of cotton types traded in North Europe. The index is constructed and published daily by Cotlook Limited, a pnvate information dissemination company based in Liverpool, U K of devaluations in East Asia. Between January 1997 and Jan- duced in countries under some type of govemment interven- uary 1998, the polyester fiber price in the Republic of Korea tion-cotton-producing countries with little or no govemment declined from 166 ¢/kg to 79 ¢/kg, (75 ¢/lb to 36 ¢/lb). intervention included Argentina, Australia, El Salvador, Guatemala, Israel, Nicaragua, Nigeria, Paraguay, Peru, and In recent months, cotton prices have begun recovering, and Venezuela. They also estimated that if free market poltcies for as of May 2000 they were at 133 ¢/kg (60 ¢/lb), a 37% increase cotton were to prevail worldwide, cotton production would in- over December 1999. Cotton has recovered more quickly than crease and prices would decline. other commodities (e.g., coffee, rubber, sugar, and particularly In a more recent study, the International Cotton Advisory cocoa), mainly because of the 1998-99 weather-related shortfall Committee (ICAC 1999) found that government assistance in in the U.S. crop (in addition to the East Asian recovery). In the 1997-98 to the cotton industry topped $2 billion in China, 1998-99 season, U.S. cotton output was a little over 3 million $754 million in the U.S. (of which $156 million went for export tons, compared with an average of 4 million tons in the preced- assistance), $320 million in Greece, $290 million in Egypt, and ing five years. $205 million in Turkey. The cotton sector has also been affect- ed by the Multifibre Arrangement (MFA), an international THE POLICY ENVIRONMENT agreement created under the auspices of General Agreement on Tariffs and Trade (GATT) that allowed industrial countries to Interventions restrict textile imports from developing countries. For decades, cotton has been subject to various marketing and Domestic interventions take the form of taxation or subsi- trade interventions. Townsend and Guitchounts (1994) esti- dization and occur through domestic market activities by state mated that in the early 1990s more than 90% of cotton was pro- enterprises or through controls, in the form of price supports, Tvable 1: World Prodlccion and Stocks oD Coteoo1 (thtousands of tons) 1970-71 1980-81 1990-91 1998-97 1997-98 1998-99 1999-00' 2000-01' PRODUCTION U.S. 2,219 2,422 3,376 4,803 4,092 3,030 3,700 3,900 China 1,995 2,707 4,508 4,100 4,600 4,501 3,900 3,500 India 909 1,322 1,989 2,351 2,450 2,710 2,800 2,750 Pakistan 543 714 1,638 1,800 1,530 1,480 1,800 1,550 U.S.S.R /Uzbekistan 2,342 2,661 2,593 1,198 1,150 1,000 1,160 1,100 West and Central Africa 140 224 562 716 956 897 928 901 Turkey 400 500 655 792 795 871 850 816 Australia 19 99 433 552 681 726 700 650 Brazil 549 623 717 368 370 420 569 580 Greece 110 115 213 400 348 405 390 394 World 11,740 13,831 18,970 19,622 20,015 18,551 19,298 18,620 ENDING STOCKS China 412 299 1,550 4,438 4,198 4,124 3,339 2,289 India 376 59 539 760 811 1,011 1,217 1,217 U S 915 653 510 829 844 849 979 1,034 Pakistan 55 204 313 312 323 353 533 598 Turkey 24 129 256 123 100 269 437 413 Australia 13 61 150 310 326 424 432 382 World 4,605 5,152 6,653 9,419 9,825 9,699 9,702 8,696 Notes The crop year begins August 1 The letters p and f denote preliminary estimates and forecasts Figures in the fifth row refer to the U S S R up to 1990-91 and Uzbekistan afterward Source International Cotton Advisory Committee 2 Cotton Policy Brief import duties, or quotas. Such interventions result in the fol- hence no opposition) to reform. Three years passed before there lowing broad (though not always distinct) types of doomestic dis- was a supply response to the reforms Production in the tortion: 1999-2000 season recovered and reached 20,000 tons, while prices received by farmers rose to 55 to 65% of world prices- Taxaion hrogh astae maketng eterrisetha impses still low but higher than before the reforms. A number of new fixed cotton prices in order to transfer resources from cotton small partic ser an exters) A operatn ne producers to the government This type of intervention has sector. been common In Central Asia, where both domestic market- Zimbabwe followed a similar pattern The state cotton com- ing and international trade are handled by the state. In West and Central Africa, domestic enterprises, along with a French pany went bankrupt (pioducers were not receiving payments on w ' ~~~~~~~~~~time or at the agreed amount), thoughl the event that probably state enterprise, control marketing and trade of cotton. tigered reforms as uth 9 drOugh l the ro - triggered reformns was the 1991-92 drought. Following the re- * Taxation through border interventions intended to tax cot- forms, production increased, and farmers have been receiving ton producers and support domestic textile industries Pak- between 80 ancd 90% of world prices The emergence of private istan, India, and Turkey exercise interventions of this natLre traders, exporters, and ginners has given new dynamism to the rural sector * Support through price interventions aimed at Increasing the In Tanzania, virtual bankruptcy of the state company led to producer's income European Union (EU) cotton producers reforms. However, the outcome has not been as positive as else- meceive support tinder the Commlaon Agricultural Policy, where After output doubled froni 43,000 to 94,000 tons in thc amounting up to twice the world price in some years. U.S. year following the reforms, pioduction dropped back to prere- cotton producers also ueceive a modetate level of support, form levels, forcing an International investment company to which during the 1990s accounted for about one-fourth of close its two ginning operations. In a study of the Tanzanian the market price of cotton cotton sector, Kahkonen and Leathers (1997) attribute its poor * Support through border interventions to increase producer's performance to the lack of competition, high transport costs, in- income In China such support takes the forn of high import efficient ginning operarions, and low pi ices, which were well tariffs. below expected levels after the reforms. Reforrmis of the major players have been less encouraging. The As is common in many commodity markets, the cotton sec- U.S. took a step in the right direction by replacing deficiency tor has been subject to several distortions (especially subsidies) payments with direct income transfers in 1996 (Baffes and in input markets-notably credit, fertilizer, and irrigation. Meernan 1998). But two other forns of support, namely loan rates and the step-2*** payment, are still in place The EU, Recent Reform Initiatives which heavily subsidizes its cotton producers, Greece and During the 1990s, several countlies have undertaken reforms Spain, has recently moved to ieduce support to the cotton sec- Durlg th 190s, everl cuntles ave nderake refrms tor, but the reduction will be effective for the 2000-01 season (Baffes 1999) Leaders In that respect are the East African cot- uon the EU's Concil a l e tfappive fon to 20 seonp ton producers, namely Uganda, Ziimbabwe, and Tanzania. In all ducton above the existing limlt, and the overall budget alloca- three countries, these reforms followed a similar pattern, al- tion to cotton support has no cap. though the strategies differed In Uganda, the state company China may be the most promising case. In September 1999, went bankrupt, largely because of polItIcal Instability and poor the Chinese government announced a number of reform Inca- management, which meant that there was no alternative (and *** The step-2 payment is based on the difference between the U S. and world prices of cotton. It was recently authorized by the U.S Congress as part of the agricultural appropnations bill for fiscal year 2000 The Cotton Policy Brief can be Letters and comments should be addressed to, accessed via the World Bank Cotton Policy Brief Rural Development 2 Group's web site at Africa Region, World Bank 1818 H St., N.W.,J6-121,Washington, D.C. 20433 http:t/www.worldbank.org/afr/cotton E-mail: obadiane@worldbank.org June 2000 3 sures intended to reduce cotton output and make the sector PROSPECTS more efficient. These included the creation of a cotton ex- change that would facilitate domestic spot trading, the reduc- The Short-Term Outlook tion of prices paid to producers, and substantial reduction in According to the most recent ICAC update (ICAC, Cotton This stocks. While it is too early to assess the outcome of the reforms, Month, 2000) global cotton production during the 1999-2000 in some sense the reforms have achieved their stated objective: season Is expected to equal consumption (estimated at about China's cotton production during 2000-01 is expected to be 3.5 19.3 million tons), while stocks will still be at the high end of million tons, down from 3.9 million tons in the current season; the spectrum (estimated at 9.7 million tons, 3.3 million tons stocks are also expected to go down from 3.3 million tons to 2.3 held by China). For next season, the picture is different: apart million tons. from the U.S., all major producers are expected to cut back pro- Intemationally, the MFA effectively protected the textile in- duction, causing a 3.5% reduction in global output. Consump- dustries in industrial countries and distorted the location of tex- tion, on the other hand, is expected to Increase by almost 2%. tile-processing activities. Martin (1996) estimated that the This imbalance will lead to a 12% drawdown in stocks, most of arrangement imposed an implicit tax of about 20% on cotton which is expected to come from China The fundamentals products relative to synthetic fiber products. In 1994, the MFA therefore indicate that the turn in prices, which already started was replaced by the Agreement on Textiles and Clothing at the beginning of 2000, will take a more permanent form. (ATC). Under the ATC, all import quotas are to be eliminated The World Bank (Global Commodity Markets, April 2000) by 2005. Their elimination is expected to encourage the reloca- expects the A Index to average 123 ¢/kg (56 ¢/lb) during the tion of textile-processing facilities to developing countries, re- 2000 calendar year and exceed 130 ¢/kg (59 ¢/lb) during the duce the cost of production, boost cotton demand, and conse- 2001 calendar year. Other forecasts agree: the Australian Bu- quently raise prices. According to The United Nations Food reau of Agricultural and Resource Economics (Gleeson 2000) and Agriculture Organization, trade of cotton is also expected estimates that for the crop year 2000-01 (August to July) the A to increase to an estimated 6.7 million tons by 2005. Index will average 126 ¢/kg (57 ¢/lb). The latest ICAC forecasts Table 2: World Tlade in Cotton (tIhoUsands 0g tons) 1970-71 1980-81 1990-91 1996-97 1997-98 1998-99 1999-00' 2000-01' EXPORTS US 848 1,290 1,697 1,550 1,695 915 1,400 1,750 U.S S.R./Uzbekistan 553 616 397 1,050 950 900 950 1,009 West and Central Africa 137 185 498 690 815 843 866 839 Australia 4 53 329 467 625 650 640 678 China 22 1 202 2 40 147 300 300 Turkmenistan - - - 115 58 210 230 298 Greece 0 13 86 251 200 230 222 274 World 3,875 4,414 5,081 6,076 5,982 5,274 5,972 6,193 IMPORTS Indonesia 36 106 324 475 425 500 555 542 Mexico 1 0 43 161 330 302 390 533 Italy 178 193 336 356 350 330 365 381 Turkey 1 0 46 243 280 250 376 371 Korea, Rep of 121 332 447 284 265 330 360 370 Brazil 4 2 108 493 380 292 284 344 Taiwan, China 160 214 358 300 275 293 322 310 Thailand 46 86 354 298 285 271 295 307 Japan 796 697 634 270 285 270 230 270 World 4,086 4,555 5,222 6,160 5,725 5,429 5,972 6,193 Notes and source See Table 1 Dashes indicate that data are not available 4 Cotton Policy Brief for the A Index are 117 ¢/kg (53 ¢/lb) for 1999-2000 and 134 o The international environment. While the phaseout of quo- l/kg (61 ¢/lb) for 2000-01. tas under the ATC is expected to end the distortions imposed on the location of the textile industries, it is not certain that The Long-Term Outlook its benefits will be fully realized. A number of EU countries have repeatedly sought to impose antidumping duties on tex- A number of factors are expected to influence the long-term tl mot rmAi ntels e er hl h t outlook for cotton. They can be grouped into four categories: tempts been usu s sf the failure refle the at domesic plicis of -najr plyers,the ntemtiona envron- tempt has been unsuccessful so far, the fatilure reflects the fact domestic policies of mnaJor , theminternati r that the EU countries were not united in supporting this issue The World Trade Organization (WTO) will be essen- e Domestic policies of major players. Expectations for further tial in influencing the course of antidumping duties. China is policy reforms from major players subsidizing the sector are also expected to play an important role in textiles, depending mixed. The recent initiatives by the U.S. and the EU are steps on the length of the transition period It is granted to make its in the right direction, but it remains to be seen what shape textile sector WTO-compatible, assuming that it enters the their support programs will take In both cases the programs WTO. Discussions between the EU and China on textiles will be reviewed, but the reviews are likely to be influenced by have taken a heated tone lately. domestic political Interests. China appears to be the mmost. d Profitability of the sector. Following an impressive growth promising case, since early steps indicate that its cotton sector of 3 4% during the 1980s, average world cotton yields have will be exposed to internal and external competition soon. nstagnated at about 570 kilograms per hectare during the the taxation side, not iuch is expected by Uzbekistan any 1990s, and this figure is not expected to change in the future, time soon. In West and Central Africa, where reforms are since there is no major area with irrigation potential to be under consideration, some positive results soon may emerge. brought into cotton production (with the exception of WEST AND CENTRAL AFRICA: A FUTURE SUPERPOWER IN THE WORLD COTTON ECONOMY? It is clear from the brief overview offered In this paper that world cotton trade is going to expand rapidly and that output in a number of major producing countries will, at best, stagnate over the next decade. Furthermore, economic recovery in Asia and the projected faster growth of the world economy are expected to translate into higher world demand for cotton, at a rate of 1 3% per year. The cumulative effect of the above changes is expected to raise world demand over the next five years by about 500,000 tons, more than half of the entire production of West and Central Africa (WCA). Moreover, the anticipated removal of import quotas under the Agreement on Textiles and Clothing by 2005, will lead to better access to export markets for WCA exporters These changes offer real opportunities that, if adequately exploited, should allow the region to signifi- cantly expand output and more than double its market share, currently 15%, over the course of the decade. Unless serious measures are taken to prepare the national sectors, competing exporting regions would capture most of the potential that is described here at the expense of WCA countries. Such measures should seek to: * Sustain productivity in cotton farming. There is a great need to reverse the recent decline in yields in several countries and close the yield gaps across the region. This would require better incentives for investment in improved technologies and greater efficiency in input distribution systems. These are areas where the managed monopoly system has great weakness- es. * Raise efficiency in ginning. The absence of competition and barriers to new entrants in the ginning sector give rise to sig- nificant inefficiencies that would seriously undermine the potential of WCA countries to profit from faster-growing world demand. It is therefore necessary to pursue efforts to liberalize the sectors and attract new investors. * Develop the textile industry and other subsectors. The anticipated changes in the world cotton economy would accelerate the transfer of textile industries to developing countries. WCA countries therefore need to devise strategies to develop the textile sector and considerably raise the share of cotton production that is processed locally. Such strategies are more like- ly to be successful in the context of liberalized sectors and integrated regional markets. June 2000 5 Turkey's Southeastem Anatolia irrigation project). On the when it reached 50%, and it has stabilized at that level since technology side, genetically modified (Br) cotton has the po- then. Currently, a few industrial countries have undertaken tential of reducing the cost of production and hence increas- promotional activities to increase cotton's share in fiber con- ing profitability of the sector. The U.S. is a heavy user of Bt sumption. Early results are favorable, but no similar effort has cotton, which currently occupies about 55% of its cotton taken place in developing countries. On the income growth area. Consumer acceptance of genetically modified products, side, the picture is more optimistic: recent World Bank fore- however, has not been very encouraging, although the resis- casts indicate that world income will grow at 3.5% in 2000, tance is less severe in cotton than in food products. Last, or- 3 1% in 2001, and 3.2% between 2002 and 2008 (Global De- ganic cotton may be a small market niche to be exploited by velopment Finance 2000). This average is higher than the developing countries, which, because of their low reliance on 1981-90 and 1991-98 averages, which were 3.1% and 2.5%, chemicals and fertilizer, can be classified as "organic" cotton respectively. More recent world income growth forecasts re- producers. leased by the International Monetary Fund give an even o Demand growth. Two factors are expected to influence de- more optimistic outlook: 4.2% for 2000 and 3.9% for 2001 mand: the share of synthetics in total fiber consumption and (World Economic Outlook 2000). With an estimated income world income growth. In 1950, cotton's share in total fiber elasticity of 0.4, cotton consumption may grow by as much as consumption exceeded 80%. This share declined until 1980, 1.3% per year during the current decade. I This article was prepared by John Baffes, Economist, Development Prospects Group, Development Economics, the World Bank. Contact the author. For complete references the sources cited in the article (Jbaffes@worldbank.org). Cotton Policy Brief Rural Development 2 Africa Region, World Bank 1818 H St., N.W, J6-121 Washington, D.C. 20433