Fri | May 26, 2017

Editorial: Kellier’s focus on wrong problem

Published:Friday | May 1, 2015 | 5:00 AM

Derrick Kellier, the agriculture minister, says he wants to close a loophole through which tariff-free refined sugar competes with semi-processed sugar in Jamaica's retail market. At the same time, he wants to provide protection and subsidies for the island's sugar industry.

To achieve those objectives, Mr Kellier and his advisers contrived a novel solution: ruin manufacturers, at least those who make products with sugar as an input. In the process, Mr Kellier and his advisers ignored the immutable logic of the market, of which they, perhaps, are unaware.

The environment in which Jamaican manufacturers operate ought to be well known, but is worth recounting in brief. Inappropriate economic policies and weak public investment in infrastructure, over several decades, hiked factory costs, thus making the sector uncompetitive against regional and global competitors. This manifests itself in the decline, over the last three and a half decades, of the manufacturing share of national output and in the country's huge visible trade and current account deficit.

It is against this backdrop that the Government allows refined sugar, which is not produced in Jamaica, for use in manufacturing to be allowed free of duty. That strategy, supported by other reforms that are under way, helped to improve the competitive position of firms and contributed to a wave of investment by food processors.

But the Government maintains a 128 per cent duty on refined sugar used by non-manufacturing consumers, in an effort to protect domestic manufacturers of unrefined sugar, who have lost preferential markets, including quotas, in Europe and face a collapse in prices. According to Mr Kellier, that initiative is being undermined by the leakage into the retail market of some of the sugar imported for food processing.

Mr Kellier has offered nothing compelling in support of his case. It is, however, not beyond the realm of imagination that, in the circumstance of a Government-sanctioned price differential for the same product, there will be people who will attempt to leverage this to their personal benefit. These are the kinds of situations from which black markets are made, like what happened when Jamaica operated multiple exchange rates. And such problems are resistant to bureaucratic fixes.

 

effects of the cess

 

Nor is the case, and, therefore, not a viable solution, as Mr Kellier seems to believe, that a ministerial hand is better than the market's at the allocation of resources. In the event, Mr Kellier wants to pick a winner by raiding manufacturers for more than $320 million to be used to subsidise the sugar industry, without saying for what, and how, and with what outcome. But we already have a fair idea what will be the outcome for manufacturers: loss of competitiveness, if not ruination, and the shedding of jobs.

If Mr Kellier thinks clearly, therefore, he will appreciate the illogic of weakening one sector to provide crutches to another, as well as realise that the primary problem is the Government's maintenance of a regime of multiple tariffs for the same good, which provides an incentive to cheat and a bureaucracy to enforce, or silly schemes like the one he contemplates.

In the end, Mr Kellier may have profound arguments in favour of subsidies for sugar producers, but it can't be that you tax another set of manufacturers.