Cotton Producing Countries Need Urgent Assistance, A Commentary by Rodrigo de Rato, Managing Director, International Monetary Fund

June 24, 2005

Cotton Producing Countries Need Urgent Assistance
A Commentary
by Rodrigo de Rato
Managing Director, International Monetary Fund
Published in Le Figaro
June 24, 2005


These are difficult times for African cotton-producing countries. Historically low world cotton prices—in part a result of industrial country cotton subsidies—are squeezing farmers' incomes and lowering economic growth. The well-being of millions of people in Africa is at stake.

This is a shared responsibility for Africa and the international community. Africans recognize the need to modernize their cotton sectors to compete globally; at the same time, trading partners need to ensure that trade-distorting cotton subsidies, which account for part of the price decline, are eliminated as a part of the Doha trade talks. Moreover, for the international community, including the IMF, there is a responsibility to provide exceptional financing to help cotton farmers in their adjustment efforts and prevent a major setback in the fight against poverty.

What has happened is that record levels of world cotton production and stocks are driving down prices, which have fallen by as much as one quarter in the past year. Although some of the increase in output is from advanced economies, where cotton production is subsidized, it is mostly driven by low-cost developing countries, mainly in Asia and Latin America. Some of these countries are raising productivity quickly, often through the use of genetically modified cotton, but also supported by other reforms. These structural changes in the world cotton market lead most experts to agree that cotton prices are likely to remain weak in the coming years.

The changes in the world market are felt most keenly in the West and Central African countries of Benin, Burkina Faso, Chad, Mali, and Togo, where cotton accounts for up to 60 percent of exports, as well as other African producers such as Uganda and Tanzania. The West and Central African countries alone face a fall of cotton export revenues of about US$300 million in 2005. And their difficulties are heightened because they use the CFA franc, a currency that is linked to the euro and whose strength has compounded the drop in dollar-based cotton prices.

The plight of these countries is only now starting to draw the attention it deserves. The issue should receive added attention because international support is needed to help these countries maintain progress toward achieving the Millennium Development Goals—the targets, agreed by the international community, which center on halving poverty and improving the welfare of the world's poorest by 2015.

A remarkable example of a concerted effort to address the situation was in evidence during a conference organized by the IMF in May 2005 in Benin. There I joined with West and Central African cotton producers, officials from Europe, the United States, the World Bank, and the World Trade Organization to agree on a joint declaration of the policies needed to bring one of the major export successes of sub-Saharan Africa back on track.

What is needed?

The African cotton producers have an important responsibility themselves to adjust to the decline in world market prices. Like all countries, they need to build well managed economies, based on sound budgets and low inflation. This means resisting the temptation to divert budget resources to shore up loss making cotton production, although there may be a need to provide exceptional financing in the short term during a period of adjustment.

It also means that, over time, the prices paid to domestic cotton producers have to be in line with world prices, both to preserve budget stability and to encourage efficiency. This, I recognize is a tricky task because there is also a need to protect the poorest farmers from large income declines. And there has to be consideration of how to trade off the interest of support for cotton farmers against other poverty reduction programs.

African producers cannot afford to ignore the lessons of what has worked elsewhere. Change is needed to modernize their cotton sectors to make them more efficient and to be able to hold their own against other low-cost countries—and, indeed, I was heartened by my first-hand interactions with them in Benin that this is widely recognized by farmers and policy makers in the region.

There are many elements of a strategy to enhance efficiency. They include strengthening producer associations to provide support functions for farmers; and speeding technological progress, including by using high-yielding cotton. Ginning costs also need to come down through increased competition. In some countries, privatization could be helpful in this regard. Progressively developing cross border trade in cotton would also stimulate regional competition and promote cost reductions. Liberalizing the transport sector, including ports, and streamlining customs procedures could also reduce the elevated costs of getting African cotton to world markets.

Africa, of course, cannot do it alone. It is a matter of urgency that trade-distorting cotton subsidies should be removed in the industrialized countries, as part of ongoing discussions at the WTO. These countries should accept the logic of the market, and adjust their policies in parallel with the reforms that are taking place in other, poorer, cotton producing countries. The elimination of cotton subsidies and other price-distorting factors would lead to higher cotton prices and spur production in non-subsidizing countries, such as those in Africa.

The region's development partners—donor countries and international organizations—should also consider expanding support for reforms in the cotton sector, with a view to enhancing efficiency. At the same time, increasing cash support for budgets would enable governments to maintain anti-poverty expenditures in the face of weaker growth prospects. It is important to ensure that donor assistance goes where it is most needed and without having unintended effects that delay reforms to modernize the sector. The IMF stands ready to increase its concessional lending, if needed, to the region.

At the Benin meeting on cotton, Burkina Faso's Prime Minister Paramanga Ernest Yonli warned of the tragedy facing his country's farmers unless things change. Let us make sure they do.


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