Intricacies of cotton politics
By Shahid Javed Burki
World cotton politics matters for Pakistan. Cotton, in terms of world prices, is the country's largest cash crop, bringing in terms of value over $2.5 billion to the country's economy. This is equivalent to 3.5 per cent of the gross domestic product.
The crop is very important for Pakistan's countryside. About 2.8 million hectares of cultivated land - or one-sixth of the total - is committed to the cultivation of this important crop.
Its share in total value added in good years is more than that of wheat. In the year 2000-2001, it contributed 30.2 per cent of the total value of all crops, compared to wheat's share of 30 per cent.
It is a labour intensive crop to care for and to harvest; as such an expansion in its area and an increase in productivity of the land producing it has important implication for alleviating rural poverty.
Cotton also sustains the textile industry which employs more people working in the large-scale manufacturing sector than any other sub-sector of the urban economy. Raw cotton exports and exports of cotton fibre, cotton fabrics and cotton finish products account for three-fifths of the country's export earnings. For all these reasons Pakistan should be watching very carefully the way international politics are shaping up.
Not only should Islamabad be watching; it should be a keen player in the negotiations that are currently underway in Brussels, Geneva, Washington and other capitals of the world where the politics of cotton are taken seriously.
After all, Pakistan is among the five countries in the world that produce more than a million tons of the crop. Total world output of lint cotton is about 21 million tons.
China, with a production in 2003 of 4.9 million tons, was the largest producer with the United States at 3.7 million tons coming in at the second place. India had the third largest output with 2.3 million tons.
Pakistan in 2003 produced 1.7 million tons, while Uzbekistan's output was just over a million tons. Pakistan has the same share in global output of cotton and global area devoted to the crop - about nine per cent.
Among the world's five largest producers of cotton, two - China and India - are net importers while the other three - the United States, Pakistan and Uzbekistan - are net exporters.
Given the way cotton production is spread around the globe and the demand for cotton is growing across the world, Pakistan could - in fact, should - adopt two different strategies in improving its own position.
Pakistan is the only large exporter of cotton that sits right next to the two countries that, on account of their size and the rapid increase in the purchasing power of their large populations, are seeing significant increases in their domestic demand for cotton and cotton products.
Distance matters for the export of a bulky item such as cotton. Pakistan's proximity to both China and India should help it enormously to exploit its geographical advantage.
If the current thawing of relations with India results in increasing trade between the two countries, cotton will figure in an important way in this expansion. To fully take advantage of the large and rapidly expanding markets in India, Pakistan should seriously examine ways to develop its physical infrastructure - roads, railways and ports - in order to become a major supplier to India.
Pakistan's cotton belt that stretches from central Punjab to northern Sindh is not very far from the main textile centres of India in the states of Gujarat and Maharashtra.
The second strategy for Pakistan is to improve the returns available to cotton growers. This is where world cotton politics enter the picture. With the exception of China, Turkey and Egypt, none of the major developing country producers of cotton provide government assistance to their growers.
According to the International Cotton Advisory Committee that watches over the various aspects of production and trade of cotton, the United States provides by far the largest amount of subsidy to the growers.
In 2003, the country's farmers received $2 billion worth of government subsidy, or $534 for every ton produced, not much less than one-half the price at which lint cotton is generally traded in international markets.
In the European Union most cotton is grown in Greece and Spain but subsidy is provided on the basis of formulas worked out in Brussels. The European farmers received $2,015 a ton in terms of government assistance, almost four times that of the farmers in the United States and almost twice the traded price of the commodity.
China, that provides an estimated $750 million of government assistance to its cotton producers, does much less well in terms of the average. Its farmers receive only $153 of subsidy for every ton of output.
Turkey provides even less - $93 per ton - and Egypt, at $114, a bit more than Turkey. India, Pakistan and Uzbekistan do not provide any government assistance to their cotton producers.
Subsidies by rich countries to their cotton farmers have the effect of lowering international prices by wide margins. According to data compiled by Oxfam, US cotton subsidies cost African nations some $300 million a year in lost export earnings and far outweigh the amount of foreign aid that the US provides poor nations such as Mali and Chad.
But the US is not the only country causing distortion in the international trade in cotton that end up hurting the poor. France, in spite of having given up political control of West Africa decades ago, continues to dominate the region's economy.
Much of the cotton produced by West Africa's poor cotton farmers is sold to French middlemen who then supply it to its textile producers at a price much higher than that paid to the poor farmers.
All this hurts the poor growers, particularly those in Africa and Asia. This was one reason why in September 2003, four African nations turned the question of subsidies into a cause celebre at the Cancun meetings of the WTO.
These countries maintained that the reluctance of rich nations to cut government handouts to their farmers was an evidence that they were not serious about using trade to alleviate poverty.
A lot of pressure was put on the African nations by the big players in the international trading system to change their stance.
The Africans stood their ground and contributed to the collapse of the Doha round of talks at Cancun. "If you want to lift the quality of life in poor countries, you have to lift these subsidies," said Chebet Maikut, president of the Ugandan National Farmers Federation in Kampala. "Even with our low production costs, we can't compete with those subsidies."
What Maikut said about the economies of cotton production in Uganda applies with equal force to Pakistan. Any lowering of subsidies by rich countries would help Pakistan's cotton growers and should contribute significantly to the country's efforts to alleviate poverty.
Any favourable adjustment in the economics of cotton will have a profound impact on poverty in Pakistan. It is one economic activity in which women, as pickers, have a large presence.
An increase in the price of cotton should help them. As suggested in my March 20 article, Pakistan must seriously address the problem posed by the prevalence of poverty among the country's women.
Given the pressure some developing country cotton growers have exerted on Europe, some relief may be on its way. European Union agricultural ministers have been discussing for a year a new programme of assistance to its own cotton producers that would overhaul the handouts they pay to cotton farmers.
The main element in this programme is to de-link subsidies from production - 60 per cent of government support would no longer be linked to cotton output. While the farmers would still get the same amount of money, it would not be based on how much they produce.
The remaining 40 per cent of the European Union's aid to cotton farmers would be given on the basis of the acreage they plant, not on output.
The International Cotton Advisory Committee estimates that if this plan is adopted and fully implemented by the EU, European cotton production would decline by some 10 to 20 per cent.
A 20 per cent decline is equivalent to about one million tons of foregone production, the entire output of Uzbekistan. While the United States already has the proposed European style subsidy plan in place, the large amount of subsidy it provides its cotton producers influences international prices.
This subsidy is received by only 25,000 farmers who control more than 40 per cent of global cotton exports. This is the basis of a landmark case brought by Brazil against the United States at the World Trade Organization.
There was much speculation in the international cotton markets as to how the WTO would rule. Developing countries took comfort in the fact that countries bringing cases to the WTO historically have won more than 90 per cent of the time.
It was not a surprise, therefore, when on April 26, the WTO ruled in favour of Brazil and against the United States. Pakistan was one of the several cotton producing countries that had formally supported the Brazilian reference to WTO.
Cotton subsidies by rich countries amount to just over $3 billion a year - only one percent of the $300 billion that is provided in aid of the small number of farmers who are still engaged in agriculture in these parts of the world.
That notwithstanding support provided to rich cotton farmers has taken on huge significance in global track talks. Poor countries have argued with great passion that these subsidies have driven down global cotton prices and leave their generally poor growers non-competitive in an industry that could provide a major source of income to them.
Even developed countries don't dispute this argument but they point to the political difficulties they face in making radical changes in their farm support programmes.
In most markets - particularly in commodity markets - marginal changes in supply have a huge impact on prices. A 10 to 20 per cent decline in the American and European output should result in a significant increase in the long-term price of cotton, by perhaps as much as a third.
This would be of enormous help to a major producer and exporter of cotton such as Pakistan. A 30 per cent increase in the price of traded lint cotton could add one per cent to Pakistan's GDP, improve average agricultural incomes, particularly for those engaged in caring for the crop and harvesting it.
My rough guess is that if the US and Europe give up subsidizing their farmer, some two million peasants in Pakistan could climb out of poverty. A large number of them would be women.
Cotton is one crop where the oft-repeated slogan advanced by many practitioners of development that trade is better than aid makes a great deal of sense. Pakistan stands to gain enormously if this slogan is turned into public policy and if the politics of cotton finally begins to work in its favour.