THE CONTRIBUTIONS OF COTTON TO ECONOMY AND FOOD SECURITY IN DEVELOPING COUNTRIES. P. Fortucci Director, Commodities and Trade Division

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1 THE CONTRIBUTIONS OF COTTON TO ECONOMY AND FOOD SECURITY IN DEVELOPING COUNTRIES P. Fortucci Director, Commodities and Trade Division Cotton is one of the most important and widely produced agricultural crops in the world. In 2000, about 130 countries produced cotton, and it is estimated that the crop was planted on 2.5 percent of the world s arable land area, making it one of the most significant in terms of land use after food grains and soybeans. In developing countries it accounts for nearly 3 percent of the total crop area. Cotton is produced for various purposes. It may meet the basic consumption needs of farm families; it may be exported to earn foreign exchange; or it may provide the raw material for textile production for domestic markets or for export. At the household level, cotton is an important cash crop for millions of farmers worldwide, and the income which it generates contributes to rural household food security, especially in developing countries. Cotton is also a heavily traded agricultural commodity. Nearly 170 countries were involved in the export or import of cotton in In addition, through the export of textiles, cotton contributes to broader national economic growth, as a result of the significant multiplier effects deriving from employment and earnings in the manufacturing sector. Such contributions have become increasingly important for many developing countries as a result of the migration of textile manufacturing industries to them in order to benefit from relatively lower cost structures. Although the importance of cotton is widely known, I would like to take this opportunity to outline a few salient features regarding its economic significance in developing countries. These are mainly of an indicative nature, but they serve to underline the very important role that production and trade of cotton can have for developing countries and for the well-being of large parts of their population. 1. Revenue contributions (a) Contribution to agriculture and economy In 2000, world cotton production amounted to 19 million tonnes. Although growth was rather slow during the 1990s, production continued its upward trend during the decade. Based on average export unit values, the value of world cotton output in 2000 was estimated about US$26.6 billion. In many instances, the importance of the agricultural sector in terms of its share of GDP has declined with economic growth. However, for developing countries, agriculture is still the key sector on which large parts of the population are dependent. And for some of these countries, cotton accounts for a significant share of agricultural production. Among all cotton producing countries in

2 2 the world, there were 16 which had a share of cotton production (valued at export unit values relative to GDP) above 1 percent in Of these, Uzbekistan, Tajikistan, Benin and the Syrian Arab Republic had the highest ratios, ranging from 8 to 12 percent. As shown in Table 1, cotton production contributes substantially to the national economy in some African developing countries and certain transition economies. Even when the share of national income is small, the crop provides very significant returns to areas specializing in production, for example in Brazil, China, Egypt, India and Turkey. (b) Contribution to agricultural export revenue Cotton is one of the important commodities traded in the world market, both in terms of volumes and value. In 2000, there were over 100 countries exporting cotton, of which 85 were developing countries. World export revenue from cotton was US$7.1 billion in This was nearly 2 percent of value of global export revenues from all agricultural products, excluding forestry, fisheries and semi-processed products. By individual product groups, the export revenue from cotton was the 6 th largest following oil and fats, wheat, oilseeds, bovine meat and maize. The level of developing country dependence on cotton exports is similar to that for a few other major commodities, such as coffee, cocoa, banana and sugar. Table 2 shows the share of cotton export revenue in total agricultural export revenue for selected countries where cotton exports accounted for more than 5 percent of total agricultural exports. Of the 28 countries shown, 25 were developing countries and transition economies. Moreover, 18 countries were in Africa. On average, cotton exports accounted for nearly 20 percent of total agricultural export revenue for these 18 African countries. In absolute terms, cotton exports brought more than US$1 billion for these 18 countries in Benin, Côte d'ivoire, Egypt, Mali and Zimbabwe each earned more than US$100 million from cotton exports. Such large revenues obviously have important multiplier effects on national economies and household incomes. Although there are many countries which earn significant revenues from cotton exports, a few developing countries are exceptionally dependent on the crop for their total export revenues. As indicated in Table 2, in countries such as Benin, Burkina Faso, Central African Republic, Mali, Togo, Tajikistan, Turkmenistan, and Uzbekistan, cotton exports accounted for more than 50 percent of total agricultural export revenue. Indeed, cotton was practically the sole agricultural export revenue generator in Benin and Uzbekistan, accounting for 94 and 85 percent respectively of the total in these countries. Over time, the relative importance of cotton export revenues has also increased in many countries. This tendency was particularly pronounced in sub-saharan Africa. Obviously in situations of heavy and often rising dependence on cotton export revenues, the falling prices of the last few years have had dramatic effects on the economies concerned. Between 1997 and 2002 the average world market price of cotton, as measured by the Cotlook index, declined by nearly 50 percent. Over this period, many of the countries heavily dependent on cotton exports saw the value of their exports shrink despite export volumes which either grew or at least remained steady. Although it is not possible to make a direct link to the impact on the domestic economy, it may be noted that the value of food imports remained fairly stable but that of total merchandise imports contracted severely. At the household level, despite devaluation of national currencies, it would appear that the drop in international prices was also borne by growers. In many of the countries heavily dependent on international markets, production in 2001 was substantially below 1997 levels despite continued growth in production at the global level. (c) Contribution to food imports Food import bills of developing countries have been rising steadily, reflecting both higher consumption levels related to income and population growth, but also in many cases the need to

3 3 supplement slow-growing domestic food production through greater imports. If trade flows are based on comparative advantage rather than limitations to diversification caused by technological or policy constraints, the use of resources to produce export commodities rather than food for the domestic market should yield net benefits. Cotton export revenues are obviously among those contributing to food import potential. Table 3 provides information on the ratio of cotton export revenues to total food import expenses for selected countries where cotton accounts for a significant share, above 20 percent. While many of the countries are the same as those shown in Table 2 that are highly dependent on cotton for their agricultural export earnings, there are several countries which do not appear because they derive substantial earnings from non-agricultural exports, such as petroleum. Interestingly, the majority of countries with a ratio above 20 percent was again in Africa. Indeed, among the 18 countries where cotton export revenue accounted for more than 20 percent of total food import expenses, 11 were in Africa and 5 were transition economies. Although the world average of the ratio was only 2.4 percent, it was near 60 percent for these 18 countries. (d) Indirect contributions In addition to the direct impact of fibre exports, cotton is one of the basic materials for textiles, an increasingly important export sector for many developing countries. As shown in Table 4, global export revenues from textiles and clothing in 1999 were US$148 billion and US$186 billion, respectively, or roughly 6.0 percent of the value of world total merchandise trade. Developing countries accounted for more than 75 percent of both of these categories of exports. Although manmade fibres are estimated to account for more than 50 percent of the raw materials used in textile production, the textile export revenue derived from cotton was significant, probably not less than US$100 billion. The multiplier effects from these earnings clearly contributed significantly to the national economies concerned. 2. Employment contribution Although it is well-known that cotton production contributes to employment, especially in developing countries, it is difficult to obtain numbers of farmers actually employed. The range of estimates varies greatly and this is attributable to difficulties of both a definitional and practical nature. The fact that agricultural production is largely of a seasonal nature greatly complicates the assessment of the labour needs, while the extent to which family members are involved is often difficult to define, particularly in developing countries. Differences in farm structures also result in great diversity in the extent of reliance on farm labour in the production process. For instance, in countries such as the United States cotton farmers invest heavily in machinery to work their large farms. In developing countries, cotton is typically produced on small farms with the intensive use of labour. Thus, with 5.3 million hectares planted to cotton in 2000, the United States had some farms engaged in cultivation, while there were around 40 million small farms engaged in cotton production in China on a planted area of about 4.2 million hectares. Farms in the United States are large and highly mechanized while small farms in China, as in other developing countries, rely on labour. In very general terms, it may be said that larger farms, mainly in developed countries, account for around one quarter of world total cotton planted area and one third of world output. However, they only employ a small fraction of the global cotton farm workers. On the contrary, small cotton farms use almost all of the global labour employed in cotton to produce 65 percent of the world s output on 72 percent of the planted area. The labour force directly involved in cotton production at the farm level in the world could exceed one hundred million, although the numbers of persons in rural households benefiting from cultivation

4 4 would be at least double that amount, even though many of these people would work for much of the time in crops other than cotton. Looking in particular at China, which has by far the largest labour force in cotton production, can provide an indication of the magnitude of labour involvement under small farm and low capital input conditions. The average size of cotton farms is 0.1 hectares. Most farms are relatively diversified, with many crops other than cotton also being cultivated for household and cash needs. Almost no machinery is used in cotton production, and labour is the key input. Because of the small size of the holdings, one farmer can manage all of the operations associated with cotton growing during the year. Thus some 40 million farmers are directly engaged in cultivation, and they and their households derive income and food security from the crop. Under similar economic and farm structure conditions, it may be expected that cotton cultivation contributes in an equally significant manner to rural employment in other developing countries. In addition to direct farm employment, cotton production also provides additional opportunities for rural employment in cotton ginning, transport and marketing and, in those countries with textile industries, in textile and clothing manufacture. There are one or two million workers engaged in cotton ginning and marketing in the world, but the textile and clothing industries employ far more. In fact, these industries have contributed significantly to economic development in many countries. In 2000, worldwide installation of spinning machinery reached 165 million units requiring some 10 million workers to operate. Asia has the largest share of this equipment, accounting for 70 percent of the world total. Weaving machines numbered about 2 million units in the world in 2000, and again, Asia accounted for 70 percent of the total. Most fabrics are made into apparel, a process which is very labour intensive. In China alone, some 17 million workers are employed in textile and apparel production. 3. Food security contribution Since the 1996 World Food Summit, the definition of food security used in the Rome Declaration has been widely adopted. It states that food security exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life at the individual, household, national, regional and global levels. Cotton production contributes to food security in several ways. At the national level, export revenue makes it possible for a country to access food through imports. When cotton export revenue is the major source of foreign exchange, its contribution to food security is obviously of primary importance. Table 6 illustrates the role of cotton exports in food security at the national level for six countries where cotton export revenue accounted for more than 10 percent of total national export revenue. Without cotton revenues, the food import bills in these countries could still have been met, but their ability to import other goods would have been severely curtailed. In fact, the declining cotton prices and earnings of recent years have been accompanied by downward adjustments in total merchandise imports. At the rural household level, the contribution of cotton production to food security is mainly through income. When households are specialized in cotton production, there is a direct link between cotton production and their ability to buy basic foodstuffs and other goods. For the diversified small farms, cotton is an important cash crop. Cash income is needed by rural households to acquire health care, more nutritious foods such as meat, milk, fruits and vegetables, clothing, housing and many other services. Field visits in Asia and Africa confirmed that in the cotton producing regions, the crop was a key cash income generator for small farms. For instance, in Malawi, rural households planting cotton relied on almost solely on the crop for their cash income, which was used for buying bread, milk and meat for family consumption. In a major cotton producing province of China, Hubei, the crop contributed about 50 percent of the cash income of diversified small farms. The share reached nearly 85 percent for those households in remote areas

5 5 where farmers had little opportunity for off-farm work. According to the survey, on average, these diversified and basically food self-sufficient households used about 35 percent of their total cash income to buy food, 10 percent to buy clothing, 15 percent to buy production inputs, and 40 percent for many other needs such as medical care, communications and education. For the households with a school age child, nearly 40 percent of the cash income was used for the child s education. Clearly, such expenditures may be regarded as very significant for the food security of future generations. As discussed above, cotton production induced additional employment and export revenue from textile and clothing manufacturing. The export revenue from textiles and clothing and employment opportunities in the cotton ginning, spinning, weaving, processing, marketing and transporting have very important income and food security implications for the country and households living both rural and urban areas. During the World Food Summit: Five Years Later which was just concluded in June, member nations of FAO once again committed their determination to fight hunger and ensure food for all. As an important agricultural commodity, with many dimensions of contributions to revenue and income generation, cotton will continue to play an important role in food security at both the national and the household level.

6 Table 1. Share of cotton output value in total GDP, 1980 and 2000 (Selected countries, by highest shares in Estimated Value of Cotton Output GDP in 1980 US$ Share of cotton value in total GDP ( million US$ ) percent Estimated Value of Cotton Output GDP in 2000 US$ Share of cotton value in total GDP ( million US$ ) percent World Uzbekistan Tajikistan Benin Syrian Arab Republic Burkina Faso Chad Mali Togo Pakistan Turkmenistan Zimbabwe Côte d'ivoire Cameroon Central African Republic Paraguay Guinea Nigeria Zambia Myanmar Source: FAOSTAT; World Bank

7 Table 2. The contribution of cotton to total agricultural export revenue, 1980 and Cotton Total Share of Cotton Cotton Total Share of Cotton Lint Agricultural in Lint Agricultural in Exports Total Export Exports Total Export (.... million US $..... ) percent (.... million US $..... ) percent World Africa Benin Burkina Faso Cameroon Central African Republic Chad Côte d'ivoire Egypt Guinea Mali Mozambique Nigeria Senegal Sudan Tanzania, United Rep of Togo Uganda Zambia Zimbabwe Sub total of above Economies in Transition Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Sub total of above Other Developing Pakistan Syrian Arab Republic Sub total of above Developed Australia Greece Israel Sub total of above Source: FAOSTAT

8 Table 3. Contribution of cotton revenues to food import balance, 1980 and 2000 (Selected countries, by highest shares in 2000) Value 1980 Ratio Value 2000 Ratio Cotton Food Cotton exports Cotton Food Cotton exports Exports Imports to Exports Imports to Food imports Food imports ( million US$......) (%) ( million US$......) (%) World Uzbekistan Togo Mali Zimbabwe Chad Burkina Faso Benin Turkmenistan Cameroon Central African Republic Tajikistan Kyrgyzstan Côte d'ivoire Paraguay Zambia Syrian Arab Republic Kazakhstan Senegal Sub total of above Source: FAOSTAT

9 Table 4. Exports of textiles and clothing, year 1999 (selected countries) TEXTILES Share in total merchandise Value exports Million US $ percentage CLOTHING Share in total merchandise exports Total value of textiles and clothing exports Value Million US $ percentage Million US $ World Africa Egypt 441 * * Morocco 135 ** ** Mauritius Tunisia Latin America Brazil Colombia Jamaica ** Mexico Peru Uruguay 85 * * Far East China Bangladesh 433 * * India * Indonesia Macau, China Malaysia Hong Kong, China Korea, Rep. of Pakistan Philippines Singapore Sri Lanka Thailand Near East Iran, Islamic Rep. of 443 * Turkey Eastern Europe Croatia Czech Rep Hungary Bulgaria Poland Romania Russian Fed Slovak Rep Slovenia * * 1998 data ** 1997 data Source: WTO

10 Table 5. Contribution of cotton export revenues to meeting food import bills, year 2000 (selected countries) Total Export Receipts Cotton Export Receipts Cotton Receipts as share of Total ( US $ million ) (... percent... ) Value of Food Imports Value of export receipts excluding Cotton ( US $ million ) Tajikistan Togo Benin Chad Burkina Faso Mali Source: FAOSTAT