1 Executive Summary, December Socio-economic impact of the sugar sector in the Colombian economy December 2009 Executive Summary 1 p The Colombian sugar industry plays an important role in the global market. According to data from the International Sugar Organization (iso), the production of 2.28 million tons of sugar in 2007 ranked Colombia as the thirteenth producer, and with exports of 716 thousand tons the country ranked that year tenth on the list of main exporters of this product in the world. p What is the socioeconomic impact of the sugar sector on the Colombian economy and on its region of influence? This document is the executive summary of research carried out by Fedesarrollo between June and December The study identifies and quantifies the socioeconomic impacts generated by the activity of the sugar sector on the Colombian economy and on the economy of the geographic valley of the Cauca river. 1. National Impact p The assessment of the nationwide socio-economic impact of the sugar industry was estimated by quantifying the contribution of the operation of the sector to the country s economic activity, considering the effects directly caused by the production of the mills, and the effects generated indirectly through linkages with other sectors of the economy. 1 The study can be consulted through Fedesarrollo web page (www.fedesarrollo.org.co). 1
2 2 Socio-economic impact of the sugar sector in the Colombian economy p These later effects of the sugar mills on the economy arise from their economic relations with the other sectors of the economy, with households and with the government. Technically, these interrelationships are measured using the economic input-output matrix (d a n e) and the Social Accounting Matrix, s a m (d a n e, d n p). p This methodology quantifies the stimulus generated by the sugar mills on the production of its direct suppliers, and by the latter on their own providers, households and the government. These effects are known as backward linkages of the production process (see Figure 1). p For the study we used the latest official information corresponding to the 2007 Annual Manufacturing Survey (a m s ) from d a n e, with a sample of ten sugar mills which accounted for 92.9% of the production for that year 2. p The results show that sugar mills contribute significantly to the country s economic, not only directly but also by the effect its operation generates in other sectors and agents, i.e., through high multiplying effects in the economy. Its most important effects take place in employment, intermediate production, taxes, gross domestic product (g d p) and wages. p In particular, the figures indicate that in 2007 the supply of goods bearing the mark of the mills was $ 2.5 billion pesos (US$ 1,229 million), 3 representing 0.7% of total assets provided by the domestic industry and 0.3% of total assets offered in the economy of that year. p In 2007, the ten mills that were analyzed used 5,809 employees only for the industrial operation of sugar and ethanol production. The mills demand a large amount of goods and employment from employmentintensive sectors. For that reason for every job generated by the mills 2 Sugar sector includes 13 sugar mills average exchange rate was $ pesos per US dollar.
3 Executive Summary, December the economy has generated 28.4 additional jobs, totaling 164,863 jobs. Considering the thirteen mills (6,643 workers) and the forward linkages, which include those sectors that consume the mills products, in 2007 the sugar industry generated a total of 265,402 jobs (see Figure 2). p The number of jobs generated by the mills and their suppliers, known as the direct effect of the productive activity, amounts to 93,787 (sum of the first two bars in Figure 2). Of these, the mills providers generated 62,568 jobs, while the mills generated 31,219 jobs from which 25,410 were associated to non-industrial work and 5,809 to industrial work (see Figure 3). The latter figure would rise to 32,053 if it had taken into account information for the thirteen mills. p In 2007, the aggregate contribution of the sugar mills to the payment of production taxes was 1.63% ($159,804 million pesos or US$ 77 millions). For each peso of production taxes paid by sugar mills, a payment of 10.3 additional pesos was generated in the economy. p The sugar mills generate added value to the economy of the region and the country. The total contribution to g d p was 0.54% of total g d p ($2.3 billion pesos or US$1,117 million), while the direct contribution was 0.14%. For every peso that the mills contribute to the national g d p, a near four-fold effect is generated in the economy. Table 1 shows the multiplier effects of the sugar mills in the economy for the variables analyzed in this study. 2. Regional Impact p The regional analysis measured the social and economic impacts the sugar sector had on its area of influence in the Cauca river valley. To do this, a descriptive and comparative analysis was performed at the municipal level, differentiating the social and economic situation of the municipalities in the mills area of influence from other municipalities, and also making comparisons to other municipalities with significant
4 4 Socio-economic impact of the sugar sector in the Colombian economy presence of other agricultural activities such as coffee, rice, banana and floriculture. Similarly, causality was verified, as was quantified the impact of the sector in economic and social variables such as g d p per capita, education and the Quality of Life Index (q l i), using cross section econometric estimates. p Identification of sugar cane municipalities was made by a selection of municipalities whose economy depends primarily on sugar cane cultivation. The municipalities in the other sectors were identified from reports made by the various federations or unions. Additionally, we excluded from the analysis the departmental capitals and oil and coal municipalities, as they have dynamics very different from those of the agricultural municipalities. p The social analysis shows that based on the q l i as aggregate measure of social development, this is on average higher in sugar cane municipalities than in the rest of agricultural municipalities (see Figure 4). This shows that in municipalities with presence of sugar cane crops the population has, on average, better housing characteristics, greater access to public services, more years of schooling, higher school attendance and less overcrowded housing. p Similarly, the indicator of Unsatisfied Basic Needs (u b n) in the sugar cane municipalities appears on average lower (see Figure 5), indicating that more basic needs are covered in those municipalities with presence of the sugar industry than in those where there are mainly other crops. p The study also found that sugar cane municipalities have on average better relative conditions in terms of education (higher literacy and school attendance rates, and more average years of schooling) and health (lower mortality and morbidity rates). p Is it possible to attribute the relative socio-economic welfare of the Cauca river geographic valley to the activity of the sugar industry? The
5 Executive Summary, December econometric analysis shows that there are positive causal relationships between the sugar sector productive activity and the quality of life, the educational level and the economic growth of municipalities and departments in its area of influence. In particular, the analysis shows that, compared to other municipalities, a sugar cane municipality has a quality of life index between 2 and 4 points higher on average, 0.5 additional years of schooling on average, and 1.5 million pesos more (US$ 722) of per-capita g d p. If in the municipality there s also a mill, it has a 1.8 million pesos (US$ 867) higher per-capita g d p. p The analysis of the fiscal figures also shows that the greatest relative development of the sugar cane municipalities has occurred even though that their fiscal performance, in terms of spending in public investment, hasn t been among the best (see Figure 6). Indeed, public investment is low in per capita terms and as percentage of g d p, despite comparatively higher tax collection. p The results of econometric analysis and tax numbers allow to hypothesize that the relatively higher development of municipalities in the area of influence of the sugar industry is determined by the private sector investment and, in particular, the sugar sector given its high importance in those municipalities. p Direct investments in Corporate Social Responsibility (c s r) of the sugar sector show a dynamic which coincides with the sector s productive activity. Between 2003 and 2008 the resources allocated for investments in CSR activities, measured as a percentage of the mills operating profit, increased 75.3%. In 2007, for example, investment in c s r by the sugar mills fell to 15.7% of their operating profit (see Figure 7). And the indirect effects in this aspect also play an essential role. For example, regarding taxes, on average during % of total tax revenues of the municipalities was provided by the sugar industry.
6 6 Socio-economic impact of the sugar sector in the Colombian economy 3. Conclusions and recommendations p This study shows that the sugar mills are great driving forces of the Colombian economy, especially in employment (28.4 multiplier), taxes (10.3 multiplier) and g d p (3.9 multiplier). p The municipalities where the sugar industry has significant influence have better socio-economic indicators compared to other agricultural municipalities in the country and to the national average. For its part, the effect of public investment does not show conclusive results in terms of causation with respect to the development of municipalities with influence from the sugar sector, which suggests that the development of the sector s area of influence is tied to its economic activity. p The importance of the results presented in this study leads to two important policy recommendations. On the one hand, the study suggests the need of the sugar industry in terms of a quantification and a more detailed and systematic monitoring and evaluation of the shares in c s r. On the other hand, it is recommended the strengthening of public institutions in sugar cane municipalities. Thus, private investment would be accompanied by public investment in an attempt to benefit the municipalities in the region.
7 Executive Summary, December Figure 1. Sugar mills backward linkages TOTAL EFFECT Sugar mills INDUCED Providers DIRECT Providers providers INDIRECT Source: Fedesarrollo. Figure 2. Effect of 10 of the 13 mills in generating employment in 2007 (# of jobs) Industrial jobs Non-industrial and direct providers' jobs Indirect providers' jobs Net induced jobs Total jobs Source: d a n e, a m s supplied by the mills. Calculations Fedesarrollo.
8 8 Socio-economic impact of the sugar sector in the Colombian economy Figure 3. Jobs generated as a direct effect of the mills by industrial activity in 2007 (93.787) Jobs generated by providers ( %) Jobs associated to industrial work (10 sugar mills) ( %) Jobs associated to ther works in the mills ( %) Source: d a n e, Asocaña. Fedesarrollo calculations based on available information from 10 of 13 mills. Figure 4. Quality of Life Index (QLI) Sugar cane Banana National Flowers Coffee Rice Rice Coffee Flowers National Banana Sugar cane Source: 2005 Census, d a n e, d n p, c e d e-uniandes. Calculations Fedesarrollo.
9 Executive Summary, December Figure 5. Unsatisfied Basic Needs (UBN) National Rice Banana Coffee Flowers Sugar cane Sugar cane Flowers Coffee Banana Rice National Source: 2005 Census, d a n e, d n p, c e d e-uniandes. Calculations Fedesarrollo. Figure 6. Average public investment as % of GDP (2002) 100 (Percentage) Sugar cane Banana Rice Coffee Flowers (Municipality Category) Source: 2005 Census, d a n e, d n p, c e d e-uniandes. Calculations Fedesarrollo.
10 10 Socio-economic impact of the sugar sector in the Colombian economy Figure 7. Investment in CSR as a percentage of operating profits of the sugar mills 22,00 20,00 18,00 16,00 14,00 12,00 10, ,05 15,97 17,97 14,17 15,78 21,12 Source: Supersociedades, Asocaña. Calculations Fedesarrollo. Table 1. Multiplier effects of the mills on the economy Variable Multiplier effect Employment 28,4 Intermediate production 10,5 Production taxes 10,3 Remuneration to employees 6,8 g d p 3,9 Source: d a n e, a m s supplied by the mills. Calculations Fedesarrollo.
11 Executive Summary, December Qué es Fedesarrollo? What is Fedesarrollo? La Fundación para la Educación Superior y el Desarrollo (fedesarrollo), fue creada en Dentro de sus objetivos iniciales se destacan algunos que han sido pilares para su éxito a lo largo del tiempo: Independencia, Rigor, Credibilidad e Impacto. fedesarrollo is a private, independent, non-profit foundation dedicated to non-partisan research in the fields of economics, political science, and public administration. The Foundation aims to contribute to the development of economic and social policy and to provide a forum for the discussion of national problems. La independencia ha sido posible gracias a la consolidación de una opinión crítica y objetiva sobre la situación económica del país con base en un análisis técnico y riguroso al margen de posiciones partidistas y de escuelas de pensamiento económico. El alto nivel académico de los investigadores, su flexibilidad para abordar nuevas temáticas y líneas de análisis, la utilización de fuentes confiables de información, y la actualización permanente en torno a los avances de la ciencia económica han sido elementos fundamentales para garantizar el rigor y la calidad en las investigaciones. fedesarrollo goza de una gran credibilidad entre los diferentes agentes de la sociedad. La continuidad de su trabajo, la productividad de sus investigadores, las múltiples publicaciones, y el prestigio alcanzado en la comunidad académica internacional han contribuido significativamente al logro de este objetivo. fedesarrollo publishes two journals: Coyuntura Económica, which provides macroeconomic analysis and is Colombia s leading economic journal, and Coyuntura Social, which focuses on social issues. fedesarrollo maintains a position of strict neutrality, to guarantee its researchers intellectual freedom. Fedesarrollo is the leading economic research center in Colombia, and one of the best in Latin America. As such, it is the point of entry for outsiders Malcolm Deas, Oxford University. "Fedesarrollo has been the intellectual home for an incredibly large number of policymakers in Colombia" Sebastian Edwards, University of California, Los Angeles.