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SHARE OF SUGAR INDUSTRIES IN PAKISTAN FOREIGN TRADE Sugarcane shortage was foreseen last year in this meeting which

was estimated to about 9.0 million tonne lower than 2003-04 crop, a fall of almost 20%. Beside the shortage of the crop the sugar industry faced the pressure for the early start of crushing. The Mills in Sindh zone were being forced to start as early as the 1st week of Oct04, while the sugarcane supply was no where in sight. Twice negotiated, the crushing date was finally set for the 1st of November04. Ironically only few mills in Sindh zone could hardly continue beyond end February even with the intermittent stoppages, crushing almost 5.0 million tonne less sugarcane than the year 200304 i.e. 40% lower. The anticipated shortfall in the sugarcane supply encouraged the sugarcane growers to demand higher price for their product. This trend immediately started to reflect in the price of sugar in the market. The retail price of sugar had hardly moved out of its lowest ebb of three years in a row of depressed prices, when Government expressed its concern and in an effort to arrest the upward move announced import of Raw as well as the Refined Sugar. Simultaneous to this the International Sugar Prices started escalating due to a major crop failure in India for the second year in a row. This encouraged the millers to procure sugarcane at almost double the sugarcane price to break the cartel formed by the sugarcane growers. With the situation still slipping out of hand, Government allowed duty free import of refined and raw sugar. At the first announcement the import of raw sugar, which was blocked by few importers, was now released to the millers. This was done too late resulting in the most sugar mills who wanted to refine raw sugar decided not to import raw sugar as the crushing season was coming to an end. To bring the sugar prices to a desirable level the ECC in its subsequent meetings took further steps including steady release of sugar from TCP stocks through Utility Stores and doing away with the withholding tax on the import of sugar. Further to the imports by traders TCP was directed to call for international tender and procure additional 200,000 tonne sugar to supplement the sugar already floated in the market by the importers. In an effort to attempt importing cheaper sugar the sugar import ban imposed on the Indian sugar was also relaxed despite PSMAs advise regarding its high sulphur content which could be hazardous for health. Till the preparation of this report import of 622,040 tonne of refined sugar and (partly utilized) 282,200 tonne of raw sugar has taken place. Sugar retail price upward surge has subsided as shown in the following table. Month Jan'2005 Feb'2005 Mar'2005 April'2005 May'2005 June'2005 July'2005 Av. Retail Price 24.35 27.00 26.33 26.27 26.15 26.60 28.54

Aug'2005 27.85 Sept.'2005 26.65 Due to the seasonal effects and the shortage of the crop, the shortfall in the sugar production is a common and regular phenomenon. After every 2-3 years consecutive good harvests our crops falls under the low production cycle that remains effective for an year or two depending on the return of the heavy rains. Unmoved by the rising sugarcane prices and sensitive to the rising sugar prices, the attitude of the Government representatives was aggressive and scornful towards the sugar industry. Ignoring the ground realities it was rather easy to blame the sugar industry for the price hike and the short production. Ignoring the past data, the crop condition, the lack of research and development work and the seasonal effects on the crop, the Government officials stuck to their assumed high yields and the desired results. Even after the early end of the crushing the sugarcane production, estimates were inflated by the Agriculture Ministry and during meetings with PSMA the industry was blamed by design for the following deeds. 1. Sugar mills utilized a low percentage of sugarcane. 2. Sugar mills must have crushed more sugarcane, which is not on record. 3. Sugar prices were increased through cartel. On the basis of the above assumptions the image of the sugar industry was regularly tarnished through media campaign, uncalled for threats were given through the media and cases were initiated against sugar mills. While reviewing 2004-05 we shall also discuss the facts on the above-mentioned accusations. The year under review 2004-05: As forecasted last year, the sugarcane & sugar production ended well below the projected domestic consumption and the milling capacity. As per data provided by the MINFAL sugarcane plantation Area was reduced to 966.6 Ha in 2004-05 against 1074.0 Ha. for 2003-04 crop. Low Crop Yield & Causes Beside a noticeable reduction of 10% in the crop area, weather conditions i.e. winter and monsoon rains, irrigation water supply, both have been below normal due to which a lower yield was expected. Though reports from the MINFAL claim the sugarcane yield for 2004-05 crop as high as 49.0 tonne / Ha, PSMA crop estimate does not indicate yield exceeding 45.0 tonne per ha. The exaggerated sugarcane production adjusted upwards after the crushing campaign caused a lot of controversies and misleading basis for the sugar production 2004-05. Seasonal changes always had dynamic effects particularly on the sugarcane crop that has been observed in the past. On the contrary insufficient rains and low water supply had severe adverse effects on the crop. 1995-96, 1996-97, 1999-00, 2000-01 & 2004-05 fell under the low cycle of unfavourable weather conditions, which can be matched with the meteorological reports. Sugarcane requires a huge quantity of water for its survival. It is cultivated on irrigated land and requires 60-80 acre-inches of water from plantation to maturity. Water shortage severely affects the quality of sugarcane crop. According to statistics provided by IRSA (Indus River Authority)

the canal head withdrawals were decreased by 10.3% for Kharif and 26.7% for Rabi 2004-05. The short supply in the irrigation system shows acute shortage in Punjab and Sindh provinces. (Economic Survey of Pakistan 2004-05) Pakistan has a well-known irrigation system that provides security to the cropping intensity and diversity. The system is dependent on rainfall, snow and reservoirs etc. Our monsoon and winter rains supplement the irrigation system and it contributes directly and indirectly by about 15 MAF annually. The sugarcane crop in Pakistan alone draws almost 10 million-acre foot of water, which is about 10% of the total water requirement for different crops in the country. Sugarcane crop 2004-05 faced shortage of the irrigation water as well as the low rainfall. Based on the last 25 years data, the rainfall in winter and monsoon is established as Normal when the rainfall measures 70 mm in winter and 137 mm in monsoon as a benchmark. Keeping this in mind let me inform you that the rains feeding 2004-05 sugarcane crop were as low as 42mm in the winter and 86mm in the monsoon season, this makes the total rainfall 38.5% lower than normal. With the above information along the low canal withdrawal report, no further reason is required to believe the fact for the low yield of sugarcane 2004-05 which is estimated by PSMA to as low as 45.0 tonne/ha. Low Percentage of Utilization The sugarcane production, yield & percentage of utilization by the mills during the above mentioned years are tabulated hereunder for a quick glance. Low Sugar Production Years You will observe that the plantation area during the abovementioned years was not much different and the utilization of sugarcane by the mills during these low yield years ranged 62% to 68%. So assuming 80% utilization during 2004-05 is merely a wishful thinking. You will also observe that during the low sugarcane production years the percentage (%) of other utilizations of sugarcane i.e. (seed, fodder, gur etc) remained high. The diversion towards Gur production has always been more attractive during the short supply of sugarcane. High prices of Gur with no sale tax have encouraged the production of Gur. Surprisingly the market Gur price remained 30% higher than the refined sugar. Sugar Production:( 2004-05) Sugarcane plantation area decrease together with the low yield caused 25% reduction in sugar production in comparison to 2003-04, which was a record production of 4.0 million tonne. Pakistan ranks 5th in the sugarcane plantation acreage and has 15th position in the sugar production because of the low yield and recovery percentage. The statistic reveal that after high production years a low production year is always bound to follow with a severe blow in the absence of a significant improvement activities in the irrigation system and research and development work. During this year 32.10 million tonne of sugarcane was utilized by the mills to produce 2.92 million tonne of cane sugar at the recovery rate of 9.10 % Beet sugar production was also down by 50% with a production of only 11,400 tonne. A limited quantity of raw sugar was utilized by the mills to supplement the sugar production by 182,300 tonne. Thus the total production stood at 3.12 million tonne, the availability of sugar raised to 4.55 million tonne with the inclusion of carryover stock and import of 622,000 tonnes of refined sugar resulting in a carryover stock of 577,650 Tonne.

The sugarcane supply to the mills in Punjab was down by about 6.0 million tonne resulting in 21.28 % less sugar than 2003-04. Sugar Mills in Sindh faced the severe impact of the sugarcane shortage inspite of record utilization of crop to 84.6%. the sugarcane utilization was down by 5.0 million tonne in comparison to 2003-04 and thus sugar production from cane was 38.2% lower than the previous year. NWFP mills faced the traditional diversion to gur making. Though the cultivation area and the sugarcane production indicated minor improvement, the utilization by mills remained under 30%. The production of sugar was down by 31.33%. The overall zone-wise scenario is presented hereunder for a quick assessment. Domestic Consumption Domestic consumption as well as the per capita consumption has been on the rise during the past three years. Consumption that was once 10.70 KG per capita in 1987-88 has alarmingly increased to over 25kg per capita. Past two years consumption shows that at least 200,000 tonne of extra market supply was made over and above the projected estimates, part of it was accredited to the Afghan Refugees returning home. Based on the available supply / sale data, the domestic consumption for the year 2005-06 would not be any less than 4.0 million tonne. The unexpected sudden increase in the consumption that made an obvious impact on the supply is one of the causes contributing the bullish trend in the sugar market. Other Events of the Year Ministry of Industries and Production on the directive of the President and the Prime Minister of Pakistan initiated to formulate policies to add value to the sugarcane by-products such as bagasse and molasses. PSMA was actively represented and presented the initial project summaries in the two separate committees constituted to prepare a project study for: i. Formulation of National Policy on Indigenous Fuel Ethanol / Gasohol production & use programme in Pakistan. ii. National Policy for Power co-generation by the sugar industry. Rigorous PSMA inputs and discussions were made during the separate meetings called for the above projects by the Ministry of Industries & Production during the past seven months. Sugar industry was always blamed in the past for the lack of initiative on the use of the byproducts as been practiced in the rest of the World. The industry having initiated nearly ten ethanol-manufacturing projects with huge investment was glad to see Government support on the use of ethanol. During several meetings on the formulation of blending ethanol with petrol and the required legislation for this affect, the sugar industry observed a very tough resistance from the oil companies whose vested interests were involved. They took a strong plea on the basis of already surplus petrol available in the country. To derail the formulation of policy they went to the extent of a special presentation to the Prime Minister in the absence of the representatives of Ethanol Manufacturers. Efforts are now being made by the PSMA to put the project back on track. In the mean-time due to high production and export of Ethanol from Pakistan, the European Union has levied high import duties and is considering Anti-Dumping Measures as well, against which the Government of Pakistan has been approached for prompt action.

Similarly a number of meetings took place at the Ministry of Industries for the formulation of National Policy for power co-generation by the sugar Industry. In this case representatives of WAPDA, NEPRA, Sui Northern and Sui Southern participated. For a regular supply of Electricity the basic requisite of Power Co-generation by sugar mills was the supply of gas during the period when the mills are non-operative. The representatives of the gas companies came-up with their own problems of shortage of gas. After detailed deliberations during the meetings chaired by the Minister for Industries certain condition and criterion were laid out for the initial start of the setup for power co-generation by the mills. The basic criteria for consideration included the crushing capacity, self-sufficiency in bagasse, the financial performance of the mill and the most important, the location of the mills in relation to the access distance from the main gas supply line. The recommendations were to be forwarded to the Inter-ministerial Committee for evaluation purposes. During March2005 PSMA delegation held meetings with the Chairman CBR and discussed the various issues of sales tax, further sales tax, audit procedures and other problems in documentation. CBR also explained the general complains they had regarding the low sales tax collection in 2003-04 which was due to the low sugar prices and elimination of additional sales tax. The chairman CBR was informed that low collection of sales tax was not due to tax evasion as been stated in the print media referring to the CBR reports. Production 2005-06 Initial reports indicate a further decrease in the plantation area for the sugarcane. Against 967,000 Ha last year the plantation is reduced by 7% to 900,000 Ha. PSMA estimates slightly higher cultivation as the farmers are being encouraged by the high price of the sugarcane. Water supply has been in abundance and is likely to continue during the maturity season of sugarcane. High winter rains snow and moderate monsoon has assured an above normal irrigation supply for the rest of the year which may result a higher yield of 50-51 tonne per Hectare. Sugar production 2005-06 is not foreseen any better than the last year though diversion for fodder consumption may be at its lowest. Sugar production is foreseen at 3.0 million tonne, against the estimated consumption of 4.0 million tonne. Carry forward stocks at mills including TCPs reserved stock stands at 577,650 tonne while the import is still in progress for utilization in the month of October and November. With the balance stock of 577,650 tonne on 30th Sept05, the estimated production 2005-06, the availability of sugar would be around 3.6 million tonne, which needs to be supplemented with the in-time import and refining of raw sugar to a considerable quantity. Research and Development The soaring sugar prices in the domestic and global market with expanding demand is a wakeup call for the industry and the Government. There is fresh warning and demand for research, development and innovation today more than ever, unless the country is let to future consumer market. It is high time to develop and extend the applied research services to the growers and the mills for the enhancement of sustainable production of sugarcane and its products. Comprehensive and extensively involved sugarcane varietal research with specific targets are urgently required with special emphasis on the sugarcane varieties of less water dependency. To increase the per acre yield there is also need to adopt new means and methods for water

conservancy and controlled irrigation system like drip and sprinkle irrigation. The proposal for implementation and extensive use of drip irrigation system was put up in the meetings with the Ministry of Food in the presence of scientists & irrigation experts called in on the occasion. As indicated earlier the per hectare sugar production in Pakistan is 4.5 tonne, where as in our neighbourhood India has achieved 50% higher production i.e. 6.5 tonne, Thailand at 6 tonne, Egypt at 12.5, Brazil at 10 and above all Australia at 14 tonne are the examples in front of us that we need to follow to achieve at-least self sufficiency based on the economic growth of the farmers and the millers both. Continued depressed prices of sugarcane and sugar will never lead to any growth vital for an agro-based industry. Economic survival of the growers and the millers should never be forced to depend on the short supply of the commodities. Whenever interest of the growers and the miller is sacrificed to offer favour to the consumer the option is short lived and the commodity ultimately suffers. International Scenario Sugar production 2005-06 is indicated as deficit for over 2.0 million tonne. The world consumption is projected to 151.3 million tonne against the production estimated of 149.1 million tonne. Though various agencies have minor difference for the shortfall forecast has alerted the international market with visible activity. The annual growth in consumption is catching up with the production and nearly half the deficit is due to low production forecast in Pakistan. Brazils sugarcane and sugar continues playing a leading roll in the world. It is expecting a jump of 35% in the sugarcane production in the next five years from 420 million tonne to 565 million tonne. The ethanol production is also expected to move along from 16.7 billion litters to 26.5 billion litters for which 50 new ethanol and sugar refineries are under construction. Brazil will continue dominating the sugar exports in the world as the sugar production in 2005-06 is indicated 6% higher than 2004-05. Brazil has another credit of reaching 63% of the light vehicles market share using flexi fuel and pure ethanol cars besides exporting ethanol to many countries. India alone buys around 1.0 billion liters of ethanol from Brazil. China is expecting increase in the demand as per capita sugar consumption is moving to 8.0 kg from 7.0 kg few years back. With its sugar production expected to 9.6 million tonne China will be looking for import of over 1.0 million tonne. Sugar reforms proposed to the European Union, which were formally presented by the European Commission in July, demands 39% cut over guaranteed sugar prices in two years. This could bring significant reduction in the domestic production and export availability of sugar. CONCLUSIONS

After three consecutive high sugarcane production years 2004-05 was a low production year with a shortfall of at-least 10.0 million tonne in comparison to 2003-04. Sugar production was low by 1.0 million tonne in comparison to 4.0 million tonne produced in 2003-04 The shortfall was well with in the PSMA estimate discussed in this meeting last year.

Reduction in sugarcane plantation and low yield due to the below normal rains & water supply resulted in high sugarcane prices, high sugar production cost and consequently a bullish trend in the sugar market beyond expectation further encouraged by the climbing international prices.

Mishandling of the sugarcane crises by the Government triggered further rise in the sugar prices. By over stating the magnitude of the crises market players were taking advantage. As suggested by PSMA an import of 500,000 tonne of raw sugar should have been allowed to supplement the shortfall and at the same time keep the sugarcane prices down to an affordable limit. It is observed that misleading data, subsequent ECC decisions for unlimited imports and zero rated duty did not bring the desirable results as the reports on the increase in the sugarcane prices was totally neglected which was the major factors for the start of the sugar crises. The decisions at higher level are always made adversely to the data & advice conveyed by PSMA during the sugar crises, both, in the case of surplus and in shortfall. Instead of taking corrective measures the industry faces a punitive tune and threatening decisions. Due to shrinkage in the plantation area the 2005-06 crop is expected around 45.0 million tonne and the sugar production may also remain under 3.0 million tonne. The consumption of sugar has dramatically increased with in the last two years and thus the consumption in 2005-06 could be more or less 4.0 million tonne. To fill the gap, import of at-least 700,000 tonne raw sugar is unavoidable which should be made at the early stages to supplement the sugar demand and keep the sugarcane prices at a level to promote the sugarcane crop meet the future demand. In addition to the delay in the legislation for blending of ethanol in petrol the distilleries are faced with the loss of their preferential access to the European Union alcohol market. Import duty plus Anti-Dumping Measures by the European Union is seen as a serious threat to the ethanol manufacturers in Pakistan. The High P.O.L. prices can only be countered by introducing Alternate / Renewable source of energy. The Government of Pakistan should immediately announce its policy on co-generation using bagasse as fuel. Dedicated zones must be announced to give incentives to the sugar mills to develop good varieties of cane increasing the growers yield and the mills sugar recovery. The price of sugarcane must be linked with the quality of sugarcane by giving incentives to the growers to grow high yielding and high recovery cane. Similarly growers growing the low yielding and recovery cane must be penalized by the cane pricing system. Government should take up extensive research and development work with participation of PSMA to achieve higher yield, recovery and development of less water dependent varieties. All out efforts be made to make this valuable crop viable.

2005-06 The Year Under Review Production

Unaware of the severe effects of the frost in the coming months, PSMA was optimistic in forecasting sugar production of just over 3.0 million tonnes against the domestic consumption estimated of 3.9 million tonnes. Continuation of the last years short production, the frost attack further deteriorated the situation. As usual, the sugarcane price immediately sparked the situation, with the result that sugar market started reflecting the production cost, which had always been a sensitive issue for the Government. Right in this meeting last year, a million tonne shortage of sugar was forecasted based on the official information for production of sugarcane crop. The need for the import of raw sugar was also ascertained to supplement the production. The severe frost attack on sugarcane crop in Northern Punjab and NWFP further disturbed the supply of quality sugarcane. Beside the above loss the lucrative business of Gur making flourished as the demand was high at home and Afghanistan seriously hurting the milling sector. Overall situation remained below average as 30.00 million tonnes of sugarcane was utilized by the mills to produce 2.58 million tonne of sugar, supplemented by 372,500 tonnes refined from raw sugar and a marginal addition of only 8,700 tonnes from beet. Thus the total production was registered at 2.964 million tonnes, apparently below 50% of the production capacity of the mills, thus Pakistan experienced second crop disaster in a row. Sugar Price Structure & Crises The Government of Pakistan supports the cane production by setting a market support price announced before or after planting. The local demand is always above the minimum price fixed as a result mills renegotiate the procurement price. Provincial Governments in 2005/2006 increased the official cane purchase price for 40 kilograms to Rs 45/- for Punjab & NWFP and Rs. 48/- for Sindh. Sindh Government later revised this price to Rs. 60/-. However, during the entire season the price fixation remained a volatile issue between the growers and the millers. The growers refused to sell the cane at the official price and millers in some areas of Punjab and Sindh were forced to delay the start of crushing season. The milling sector ended up bearing the bulk of the risk when the circumstances changed. While the support price varies significantly when there is shortfall during a particular harvest, there is no similar level of adjustment when the harvest is good and cane is in abundant supply. With intermittent stoppages the seasons cane price averaged to Rs. 80/- in Punjab and up to Rs. 95/- in Sindh province resulting in a significant rise in the production cost to above Rs. 32/- to 34/- per kg without addition of 15% sale tax which was immediately reflected in the market sentiments and retail sugar market shot up to Rs. 38/- to Rs. 40/-. The unprecedented increase in the minimum support price in the province of Sindh triggered the situation in the whole country. Increase of sugarcane price twice in the same crushing season by about 50% encouraged the growers to further dictate cane prices and cartel supplies. As a result of the situation the sugar market immediately started reflecting the trend in sugar prices, the sugar production was also termed as deficit by about a million tonne. The disturbance in the sugar market was immediately noticed by the Government concerned authorities who labeled the millers as profiteers involved in cartel under declaring the sugarcane procurement and production of sugar.

The Government was candidly informed of the situation and the deficit of sugar for the season to arrange import of the required quantity of the sugar, who beside allowing duty free import of raw and refined sugar approved import of about 850,000 tonnes of sugar by TCP for sale and distribution through Government managed outlets, with an obvious objective of subsidizing the sale to bring the market prices down. The unlimited import of refined sugar to the tune of 1.5 million tonne along 0.5 million tonnes of raw sugar already refined has now converted the 1.0 million tonnes deficit year into a million tonne surplus year. The situation thus developed hampered the economy of all concerned and the over sensitiveness has resulted the year ending with large stocks held by TCP, Mills and by the traders who imported sugar at high price. Ironically the international prices started subsiding as soon as Pakistan had enough of selfdumped sugar. The sugar crises during the year caused the industry face the blame game with all Government agencies actively involved. In this connection few actions are being mentioned without going in to details.

Monopoly Control Authority charged the sugar mills for cartel of sugar and registered cases against mills for their sale being below the desired assumed percentage by the MCA. National Accountability Bureau was asked to investigate corrupt practices leading to the sugar crises in the country. The investigation was later withdrawn. CBR appointed custom-armed staff at the mills gates to supervise and monitor procurement of sugarcane and the sale of sugar looking for tax evasion and sale to unregistered buyers. The monitoring was withdrawn with the end of crushing. State bank of Pakistan imposed 50% margin restrictions for financing against the security of sugar stock and instructed for immediate adjustment of all advances against the security of sugar stock. The final date for adjustment was later extended from 31st July to 31st Oct2006.

After the hectic meetings at PSMA and with the concerned Government officials some of the restrictions have eased down. Government intervention through bringing down the import duties, subsidizing the supplies through its outlets and blaming the industry hardly matters without taking necessary measures to support production of a better crop in a competitive environment. Past experience and record shows that the sugar price has been moving up and down inversely proportional to the quantum of the sugarcane and same was the affect on the price of Gur where no factories are involved, contains impurities and remains tax free. The graph hereunder clearly indicates that the factor controlling the sugar price is the quantum of sugarcane, the main raw material. Sugar production totally dependent on the sugarcane production has always reflected the weak link in the overall value chain.
Pakistan Sugar Mills Association Sugarcane Production & Av. Sugar Retail Price Years Sugarcane Av. Retail Sugar Av. Gur Retail Price

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Production 38,058,900 44,427,000 47,168,400 45,229,700 41,998,400 53,104,200 55,191,100 42,000,000 43,620,000 48,041,000 52,049,000 53,800,000 43,533,000 44,312,000

Price 12.62 12.80 14.36 17.86 21.44 18.75 19.63 22.85 26.73 21.97 20.12 19.26 25.34 35.00

10.03 10.49 11.07 14.54 18.67 18.91 17.19 19.81 26.31 23.31 20.45 19.79 23.98 30.26

OUTLOOK 2006-2007 Per data provided by the MINFAL there is 14% increase in the plantation area of sugarcane. Cane production had dropped significantly in the past two years in a row limited to 44 million tonnes. The increase in the plantation area along promising weather conditions i.e. supply of irrigation water & rains sugarcane production is expected to over 50 million tonne which ensures increase in the sugar production to about 3.5 million tonnes. Though cane production in 2006-07 shows better prospects yet the utilization of sugar mills will remain around 50% capacity provided 40.0 million tonnes supply is made to the mills. Government of Punjab has already announced indicative minimum price of sugarcane as Rs.60/40 kg, which means that delivered price at the mill-gate with the inclusion of transportation, cess and price competition would be around Rs.70/40kg on average. Sindh Government has also recently announced Rs. 67/40kg and NWFP Rs. 65/40kg. With such enhanced sugarcane price the production cost of sugar cannot be less than Rs.34/kg ex mill i.e. retail price expected to a minimum Rs.38/kg. Confusion prevails over the price structure due to the following reasons, which have been brought to the attention of Government of Pakistan at a higher level I. 2005-06 a deficit year of sugar production by one million tonne ended with a surplus of over one million tonnes. II. Crushing season 2006-07 starts with a carryover stock of 1.3 million tonnes. III. 2006-07 producing 3.5 million tonnes will have availability of 4.8 million tonnes against a consumption of 3.9 million tonnes. IV. Major stock held at the end 2005-06 belongs to TCP which Government intends to off load at a highly subsidize rate to the market threatening the domestic sugar price. V. International sugar market prices are down where as Government of Pakistan has yet to clampdown any import duties to stop further inflow.

Whereas the industry bears a strong feeling to pay better sugarcane prices to ensure a better sugarcane crop in future there is confusion as how to maintain a balance in the minimum indicative price and a matching production cost. Government has been approached at several occasions explaining these issues of utmost importance. Despite these hurdles government of Sindh has already issued directions for an early start of crushing on 1st Oct2006. As a regular phenomena every year millers are pressurized for an early start of the crushing with the plea to vacate some portion of the land from sugarcane for the sowing of wheat, whereas the millers resists to accept the plea for the reason that the sugarcane quality at the early season is of very low recovery, the fact is very well known to the all concerned Ministries and the growers as well who irrespective of the facts force for the early start as the payment system of sugarcane has still continued based on the weight and not the quality. Per our estimates early start of the sugar mills with the low recovery is causing a loss of minimum 150,000 tonnes of sugar costing mills billion of rupees, which is a phenomenal loss to the industry and the country. Overlooking the technical and the positive aspects in favour of the late start, the main cause can be spelled out as the row between the Growers and the Millers over the price hike and the nonavailability of the crop. Shortage and the immaturity of the crop in the beginning normally results the early closure of the season at the higher recovery period. An adverse step for achieving the optimum production. International Scenario: - The leading analysts had been changing stance on the world sugar production and consumption and as the year went by the deficit gap was closing. On average remained within 148-150 million tonnes against the consumption of 149-151 million tonnes. The continued deficit and imbalance in demand and supply kept the prices significantly stronger during the year (See table below) While the high white sugar prices deterred its import more and more attention was diverted towards the raw sugar, which prompted a higher premium and soon the import of raw sugar for processing was no more profitable. Instead the exporters who could export both the refined as well as raw started giving preference to exporting refined sugar. Brazil and Thailand both switched to more attracted option by increasing the export of more white sugar. Later the Sugar prices in the International market started sliding down due to big global supply and soft demand. The prices sunk by almost 25% since July06 after touching US$ 490/- a tonne down to US$ 370/- in Sept06. The prices started ascending in Nov05 right at the beginning of the season 2005-06 from US $ 288/-, apparently over Speculations and sudden large demand. London white sugar featured peak in July when it hit record US$ 498/- a tonne. Raw sugar had its 25 years peak price of 20.46 US cents/lb at New York market in February with the news of drought in many sugar producing countries. The prices rose and tumbled sharply during the year. 2006-07 Global production estimates for the year 2006-07 shows a surplus of about 3.0 million tonnes against a similar amount of deficit last year (2005-06). The global stock/consumption ratio which has always played a pivotal role over the global sugar prices will remain low and could cause price rise in the future year for the 10% estimated production fall in Australia due to smut and the ongoing drought in the Central and South Brazil,

which might reduce the seasons output as well as cane supply for sugar production. India is expecting its record sugar production of over 23.0 million tonne in the year and is about to lift ban on export of at-least 2.0 million tonne out of its surplus, unhappy over the fall of international prices now matching its production cost. EU sugar output is expected to fall from 22.0 million tonne down to 16.5 million tonne in 200607 due to E.U sugar regime reforms suggesting price slashing. Presently the world production is expected around 2.5 million tonne higher than the consumption for the first time since 2002-03. Consumption and stock ratio is expected to grow nominally to about 38.5% having significant affect on the prices. Conclusions

Sugarcane plantation area (906,988 Ha) for the year 2005-06 was the lowest in the past decade after 1992-93 when the plantation area was 885,000 Ha Low plantation area coupled with the frost attack resulted in low yield, the sugarcane production was limited to only 43.5 million tonnes Sugar production for the year remained below average producing 2.58 million tonne of cane sugar supplemented by refining of raw sugar and a small quantity of beet sugar. The total output remained within 2.964 million tonnes i.e. 50% of the production capacity For millers & growers both, the year was the second crop disaster in a row. Low sugarcane production increased the demand and the high cane price caused the sugar production cost to a record high. Duty free import of unlimited raw and refined sugar was allowed to fill the gap and bring the domestic prices under control. By the end of the year 1,581,000 tonnes of refined sugar and 454,000 tonnes of raw sugar has been imported. Such a large quantity import had significant effect on the international prices while the year was considered as global deficit. At the same time the year ended with a glut like condition. End September stock at mills were at around 445,400 tonne, at TCP godowns 660,000 and other importers holding about 200,000 tonnes, with further supply of 128,000 expected shortly by TCP. Domestic sugar falling price, release of stock by TCP at subsidize rate, duty free sugar import condition along SBP new financial restrictions jeopardized the start of new crushing season. After challenging meetings at the concerned ministries and SBP the Prime Minister of Pakistan was approached through a letter apprising him with the total scenario. Details were further discussed at the Federal secretaries meetings seeking stabilization of domestic sugarcane and sugar prices and fixing appropriate crushing dates practically possible.

Following the discussion between the secretaries committee of Government of Pakistan comprising Secretary MINFAL, Secretary Industries, Secretary Finance, and Secretary Commerce held on 3rd and 4th Oct.2006, the main points resolved were as under:

All sugar mills in Sindh province will start crushing in the 1st week of Nov.2006 while

Punjab & NWFP will start the crushing campaign after mid of Nov.2006

The minimum indicative price of sugarcane were approved as following ? Sindh Rs. 67/40kg ? Punjab Rs. 60/40kg ? NWFP Rs. 65/40kg Government of Pakistan will issue directive to the State Bank of Pakistan to ensure that the banks provide financing to the sugar mills without undue and additional security margin conditions While it was agreed that TCP will continue to play its interventionist role to guard against escalation of sugar prices in the domestic market, the Government of Pakistan will take necessary steps to clamp measures to control & guard against disruptive dumping of imported sugar in the domestic market. Quality Premium applicable in Sindh was suspended for the season 2006-07. Further decision for its removal through the system of sugarcane payment on quality basis will be worked out for adoption throughout Pakistan. Last but not the least, it was decided that all issues pertaining to the sugar industry will be resolved by the Government in consultation with PSMA, and the Industry to ensure that the retail price in domestic market remains stable.

With the start of the new sugar year 2006-07 we hope that Government of Pakistan and the Provincial Governments will take extensive research and development work for the sugarcane crop with the participation of PSMA to develop better yield & recovery and improve the economics of sugarcane growers by increase in per acre yield while the industry will be more competitive in producing more sugar due to the increase in sugar recoveries to meet the national demand. 2006-07 The Year Under Review Production: Blessed with the favourable weather conditions, availability of irrigation water and 14 percent increase in the plantation area of sugarcane, the sugarcane production showed considerable positive affects. Out of 54.9 million tonnes of sugarcane, supply to the mills was limited to 40.47 million tonnes, i.e. 73.75%. The production of cane sugar as forecasted, ended at 3.52 million tonnes, nearly 1.0 million tonnes in excess to the production 2005-06 the deficit year. The carryover stock of 1.3 million tonnes, stored mainly at the TCP reserve stock and mill godowns made the total availability to 4.93 million tonnes with the inclusion of about 100,000 tonnes of imported sugar as against 1.6 million tonnes of sugar imported last year. Production estimates and availability against the domestic consumption remained exactly within the forecasted figures of PSMA discussed at this meeting last year. Though sugarcane crop promised better prospects, the recovery was marginally higher than the last years as 8.70 % against 8.60%. It could not achieve the sort of recovery of 9.15% and 9.10 % as in 2003-04 and 2004-05 that could make a significant affect on production. Unfortunately the sugar recovery, the most important factor has been ignored by the Government concerned Ministries particularly at the time of forcing the early start of crushing campaign each

year. Length of the crushing season is misquoted from an obsolete document the Sugar Factory Control Act ignoring the maturity of the crop. Due to the pressure from the Government and the growers, recovery losses in the month of October November could be as much as 2% followed by the height of a miserable joke, that at the period of achievement of high recovery the sugarcane crop is exhausted due to early start and thus a minimum of 250,000 tonnes of sugar is lost. Based on the fortnightly production reports of PSMA for the last five years, the recovery percentage in Punjab though accumulated, shows a vast variation that confirms the magnitude of the loss in production.

Periodic Recovery of Sugar Mills in Punjab (Accumulated) End Crushi ng 15-25 2002-03 15-25 Nov 6.97 7.71 8.06 8.29 8.47 Apr. 15-30 05-25 2003-04 7.50 8.37 8.72 8.94 9.09 Nov. Apr. 15-30 2004-05 1st. Nov. 6.88 7.87 8.41 8.67 8.91 8.96 March 15-30 2005-06 15-20 Nov 6.85 7.45 7.71 7.83 8.05 March. 10-15 2006-07 25-30 Nov 7.32 7.84 8.08 8.24 8.50 Apr. Although the domestic market was fully supplied with the commodity, small quantity import, leakages of sugar import through Afghan Transit Trade and its reported unauthorized sale within the territory of Pakistan, kept destabilizing the domestic market prices already under pressure. Years Start Crushing Nov 15th Dec 15th Jan 15th Feb 15th April 15th Sugar & Sugarcane Price Situation (2006-07) Before the start of the sugar year 2006-07 Prime Minister was apprised with the sugar crises and the reasons for the fluctuating price situation, who constituted Secretaries Committee to look into the affairs of the industry with an effort to bring an amicable and workable policy. The committee in its meeting held on 3rd & 4th Oct2006 agreed on the following few points for the crop year 2006-07.

Marc h 15th

All sugar mills in Sindh province will start crushing in the 1st week of Nov.2006, while Punjab & NWFP will start the crushing campaign after mid Nov.2006 The minimum indicative price of sugarcane were approved as following Sindh Rs. 67/40kg Punjab Rs. 60/40kg NWFP Rs. 65/40kg Government of Pakistan will issue directive to the State Bank of Pakistan to ensure that the banks provide financing to the sugar mills without undue and additional security margin conditions

While it was agreed that TCP will continue to play its interventionist role to guard against escalation of sugar prices in the domestic market, the Government of Pakistan will take necessary steps to clamp measures to control & guard against disruptive dumping of imported sugar in the domestic market. Quality Premium applicable in Sindh was suspended for the season 2006-07. Further decision for its removal through the system of sugarcane payment on quality basis will be worked out for adoption throughout Pakistan. Last but not the least, it was decided that all issues pertaining to the sugar industry will be resolved by the Government in consultation with PSMA, and the Industry to ensure that the retail price in domestic market remains stable. Since the agreement the whole year was spent negotiating and requesting the implementation of the decisions. Several breaches were notified to the concerned Ministries such as: TCP was to intervene against the escalating prices, but it continued intervention during falling prices causing further decline in the domestic market. Government of Pakistan did not take necessary measures to stop the import of sugar to the extent that Indian surplus sugar started pouring in Pakistan without consideration of quality control standards. No Provincial Notification was issued for the suspension of the quality premium in Sindh Province. Sugarcane payment system based on quality is yet to come to replace the system.

Sugar Retail Market Average Price (2006-07) Month Rs. / Kg October 32.87 November 33.15 December 30.86 January 31.55 February 30.74 March 30.63 April 30.25 May 29.85 June 28.38 July 29.20 August 30.03 September 29.77 Average 30.61 Domestic sugar prices remained continuously under pressure due to over supply whereas Government of Pakistan did not make any effort to stabilize the situation, even through the above noted pre-agreed steps. The millers had to pay the notified sugarcane prices in-spite the fact that market sugar prices did not match the announced sugarcane prices. The retail price structure is given hereunder for record and reference. With the gradual fall in the domestic market, the sugar price ended with a minimum loss of Rs. 4/- per kg against the price of Rs. 34/- per kg assumed as a base at the time of fixation of the sugarcane prices for the season, causing a

minimum loss of Rs. 12.0 billion to the mills and Rs. 4.0 billion to the ex-chequer through loss in Sale Tax. Sugar & Sugarcane Price Situation (2007-08) After continued negotiations, meetings were held at the Ministry of Industry & MINFAL and finally with the Secretaries Committee on 18th Sept2007 with fresh decision and promises. The committee was informed by PSMA representatives candidly about the non compliance in implementation of the decisions made last year and the losses faced by the Industry as a result. On presentation of a resume by the Secretary MINFAL the following was agreed upon as minuted by the Finance Division.

PSMA would ensure production of sugar by 1st week of November in Sindh and Punjab to raise the total availability of sugar to 0.7 to 0.8 million tonnes in the month of November 2007. The provinces will be requested not to change minimum price of sugarcane from the last year level i.e. Rs. 65/- per 40 kg in NWFP, Rs. 60/- per 40 kg in Punjab and Rs. 67/- per 40 kg in Sindh. MINFAL will take action in this regard. The Ministry of Commerce and MINFAL in consultation with PSQA and PSST will take steps that the quality and standard of sugar is checked. TCP will continue to off- load the old imported stock of sugar, and will purchase fresh sugar from PSMA to replace the old one. TCP will maintain strategic buffer stock of 400,000 tonnes. It will purchase 300,000 tonnes sugar from PSMA on open tender basis with a quantity of 25,000 tonnes each tender on weekly basis during the months of November, December 2007 and January 2008 by adding to the leftover strategic stock with TCP to make it total of 400,000 tonnes. The stock shall remain within the premises of sugar mills and will be replaced with fresh stock. These reserves will be increased to 500,000/ 550,000 tonnes, if needed, for which approval of the ECC will be sought. Sindh Government will be requested to defer implementation of Quality Premium in Sindh till a consensus on uniform formula is developed. MINFAL will take action. TCP will not import sugar if the price per Kg remains within Rs. 31/- per Kg in the market. Class B sugar from the positive list is to be deleted.

PSMA in response reminded for an amendment in the minutes to add a point already agreed for recommendation i.e.

The recommendations must include exemption of sugar from the Special Excise duty of 1% levied vide Finance Act 2007, missing from the memorandum. TCP was to maintain & improve its buffer stock at 550,000 tonnes regularly by purchase from sugar mills. Contrary to the decisions Sindh Government has already issued the levy of quality premium like last year. Concerned authorities are informed of the action.

International Scenario: -

World production and consumption 2006-07 crop year was the year of recovery from long consecutive deficit to a surplus year, estimated up to 3.0 million tonne that ended with an average of 10.0 million tonne. The world market remained under bearish pressure due to the sizeable surplus. High production expectations for 2007-08 has further put the international market prices under pressure and is likely to continue for the year. The sugar glut in India is the main cause of the depressed sugar prices in the world. The production 2007-08 in India is likely to overtake Brazil as world top sugar producer. International Sugar Organization forecast Indias production as 33.0 million tonnes raw value against Brazils 29.20 million tonnes, both struggling hard to get rid of the surplus to the international market. The world sugar is facing heavy surplus for the second consecutive year in 2007-08. The latest forecast of the world sugar suggests production at 163-173 million tonnes consumption at 157160 million tonnes with the surplus forecast for over 10 million tonnes. Thus the distinctive excess in the global production over consumption and the high export availability is expected to have direct impact on the sugar economy. Consumption and stock ratio is to grow considerably. Its affect on the domestic process would be significant and particularly in the case of the good harvest expected. Outlook 2007-08 (Domestic) For the second consecutive year the prospects for the sugarcane crop have been highly favourable as the weather conditions and availability of irrigation water remained optimum for the sugarcane crop. The plantation area of sugarcane crop has shown increase of 11 % to 1.147 million hectare. Province of Punjab and Sindh both, have shown equally the area increase. With such an increase and the expected yield of 50.6 tonnes per hectare the production of sugarcane is expected in excess of 58.0 million tonnes, which itself would be a record production of the sugarcane in Pakistan. Per statistics the sugarcane utilization by the mills remains on higher side to around 80% when the production is on higher side as the requirement for seed and fodder is low. In case the supplies to the sugar mills exceed 47.5 million tonne the sugar production is expected to reach around 4.2 million tonne with a recovery of 8.75 % i.e. With a carryover stock of 1.0 million tonne the availability of sugar for the year 2007-08 would be around 5.2 million tonne or even higher. The consumption projected to 4.20 million tonne the end stock on 30th Sept2008 could be repeatedly 1.0 million tonne or more enough for the desired buffer stock for the period prior to the start of the new crushing season 2008-09. In short there would be no room for import of sugar throughout the season and the prices are to remain stable with a bearish trend due to global surplus, low prices and high availability in the neighboring India and internationally. Diversification of by-Products remained untapped 1: Use of Ethanol Blended Petrol Encouraged by the Government and the formulation of the policy on the use of ethanol being actively persuaded, the sugar industry promptly responded by establishing more ethanol refineries. At present the annual production capacity of ethanol at 21 refineries in Pakistan has

reached 400,000 tonnes. With the advent of high crude oil prices in the global market, ethanol is increasingly seen as an alternative, renewable and environment friendly fuel of the future. However, in the absence of a prompt legislation for the use of locally produced ethanol blended with petrol in Pakistan, ethanol producers had to face anti dumping measures by the European Union. Pakistan State Oil and Hydro Carbon Institute of Pakistan on instruction from Government of Pakistan last year launched a pilot project to introduce and encourage the use of 10% ethanol blended petrol. PSO started the introduction in three of its petrol pumps, one each at Karachi, Lahore & Islamabad. Instead of straightforward legislation for the use of 10% blended petrol, as is being done worldwide the initiative was handed to the oil lobby who succeeded in proving the experiment unsuccessful. As long as the policy for fuel ethanol is controlled by the oil sector the substitution process will remain slow. Pakistan imported petroleum products worth US$ 3.10 billion in 2006-07 that constitutes major chunk of its deficits, likely to increase in the current situation, shift to use of ethanol blended fuel could save considerably keeping its environmental aspect of importance. Despite the potential advantages, progress in promoting bio-ethanol lacks policy impetus. The oil refining companies in collusion with the ministry of Petroleum have managed to keep a lid on private sector involvement. Rather than enjoying incentives, the private sector is burdened with domestic taxes on industrial alcohol sales. Such domestic policy biases have been compounded by import restrictions abroad, which have compromised the countrys export potential. 2. Re-consideration of Power co-generation by the Sugar Mills Under the policy 2002 for independent Power Plants incentive were available for the power Cogeneration units including the sugar mills and it was decided that the power generated by the sugar mills will be purchased by NTDC or DISCO concerned at agreed rates approved by NEPRA. The proposed project was delayed since the acquired gas was not available. Being a major shift the alternate fuel use was studied. In recent meeting consideration was given to the Power Co-generation of sugar mills establishing independent power projects based on duel-fired system of bagasse and coal. PSMA urges the Government to decide an upfront tariff. Hence the main potential in the diversification of the Pakistans sugar industry still remains untapped and needs to be promptly addressed to take advantage of the developments in the field where sugarcane is increasingly seen as an energy crop. Though the sugar industry in Pakistan has come of age, it faces formidable exciting challenges in the foreseeable future. PSMA has always expressed hope that Government of Pakistan will start extensive research and development work on sugarcane crop and its optimum utilization. Sugar year 2007-08 heralded happy tidings by setting a record production volume of sugarcane at 63.920 million tonnes, sugarcane crushing at 52.757 million tonnes, sugar production at 4.737 million tonnes, similarly extending proportionate increase in production of its four main byproducts, namely, bagasse, molasses, filter mud and crop wastes. From each of these four by-

products, as many as 40 plus derivatives can be made. No other crop or commodity offers scope for such a sizeable number of derivatives. From bagasse can be made 20 derivatives, including generation of renewable energy, paper and board, packing materials etc. Molasses processing can give 15 derivatives, inclusive of ethanol as energy source, cattle feed, viscose yarn, bakers yeast etc. Filter mud is useful as fertilizer. Crop waste useful to make five derivatives, including power generation. Exploiting these resources into value-added products is awaiting attention. A record production has indeed been a gratifying feature of 2007-08 season. This deserves analysis both on national and zonal levels, for comprehension so as to evolve more material input for solving problems. We look at 10 years record of sugarcane production in Pakistan, in terms of area under the crop, yield and recovery which represent sugar production trend. Crop area, yield and in effect sugarcane production portray fluctuating fortunes. Area fared in range from 907 thousand hectare (2005-06) to 1241 thousand hectare (in 2007-08) variance at 36.82% has indeed been quite wide. Yield fell in range from 47.33 tonnes/hectare (in 2003-04) to 53.12 tonnes/hectare (in 2006-07), having 12.23% variance which makes it noticeable. Sugarcane production was in range form 44,099 thousand tonnes (in 2000-01) to 63,920 thousand tonnes (in 2007-08) giving variance of 44.94%, indeed significant. A record at 63.920 million tonnes sugarcane crop, having no use other than of its processing by the national sugar industry, its supplies to sugar mills soared to 52.757 (40.484) million tonnes, forming 82.53 (73.72)% of total output level. Sugar recovery improved to 8.98 (8.70) % contributed further in making the highest ever at 4.741 (3.516) million tonnes of sugar production. Sugar crushing fared in range from 28.983 million tonnes (of 1999-2000) to 52.75 million tonnes (of 2007-08), denoting a big variation of 82.2%. Sugar recovery rate was in range form 8.21% (of 1998-99) to 9.15% (in 2003-04), making significant at 0.94%. Sugar production in range from 2.415 million tonnes (of 1999-2000) to 4.741 million tonnes (in 2007-08), made a sizeable variance of 96.14%. Likewise, sugarcane supplies to industry for processing created range band form 62.07% (of 1999-2000) to 82.53% (of 2007-08). It made a marked variance of 32.96%. These figures underline significant, fluctuations in the relevant production parameters. This reflects inconsistency, derailing a steady, sustainable growth flow inevitable for managing economic gains. This precisely points out absence of a precise policy format fairly conceived and designed, to be in place. Unless it is made available, sugar segment will stay locked in deceptive dilemma, which tends to deny due benefits. During 2007-08 season 79(77) sugar mills were operational. Sugarcane crushing on an average by mills was 66,773 (52,555). Production of sugar on average per mills at 59,963 (45,662) tonnes was higher by 31.31%. Higher production level was not as much rewarding, which by normal feature of economies of scale should have been more rewarding. National sugar industry, by crushing at 52.751 million tonnes during 2007-08 season achieved 2.661 (1.911) million tonnes of molasses by-product, at 5.04(4.71)% recovery rate. A profound policy framework, taking care of sugar and derivatives of its key by-products is needed. Now is the time, to make move in this direction.

COST- PRICE DISEQUIBRIUM A record sugar production of 2007-08 did not cast a desired wholesome influence on bottom line of the sugar industry, contrary to a general impression of more the production more the profit. This tendency does not make a match with sugar segment due to markedly different traits governing sugar manufacturing and marketing. Sugar production takes place in about 110 days. Sugar sales stretch out to 365 plus days in event of larger production rollout, a record of it taken place during 2007-08, making sales further extended. This peculiar situation is attributable to inelastic demand characteristic of sugar. Sugar consumption remains steady, with normal increase by population and income growth. Sugar purchase by public tends to be in small quantity of packet sizes, not in bulk. Inflationary trend in the economy dented disposable income part, which in turn suppressed to an extend demand element of population increase as well. Besides, carry forward to review year sugar stock at 445,399 tonnes made aggregate sugar supply volume hefty at 5.182 million tonnes. Another element in price imbalance, rather distortion, carrying adverse influence on sugar industrys bottom line has been huge at about 72% being cost component of sugarcane in sugar production. Besides provincial governments fix sugarcane minimum price, usually endorsed by the Federal Government authorities. Provincial authorities carry tilt in favour of farmers, while federal functionaries keep concern for consumers about sugar price. This leaves sugar industry alone, grinded by such contrasting policy pursuit as a permanent feature being followed. There has been no rationale in price tag of sugarcane and sugar, exposing the sugar industry to heavy hazards. As a result fixed cost component of sugar manufacturing stays above 90%, leaving fraction to chase for economies of scale by increased production volume. PSMA has been agitating the problem of price imbalance on lacking linkage between sugarcane and sugar cost/price equation, and reiterating to take up this case with care jointly by the provincial and federal authorities. This time, it received a hearing, followed by a hesitant effort to reconcile the issue. Cost of sugar production was critically assessed for striking some equilibrium. A Committee of Federal Government Secretaries from three Ministries of Finance, Industry and Commerce was formed for the purpose. It worked out ex-mills sugar price at Rs.29,000/tonnes to safeguard sugar industrial segment. However, over supply of sugar, compounded by a short time prescribed for payment to sugarcane farmers, 15 days from the supplies, compelled as always happened, to sugar industry desperate sales during the crushing campaign, to care for cash flows for farmers payments. This has been a distinct feature of sugar industry, so it was always being brought to authorities attention but has been of no avail. Sugar prices fared through out the season markedly subdued, trailing far below the safe price level earmarked. Month-wise wholesales sugar price, containing 16% sales tax, besides transport cost, trade margin etc. has been as given hereunder. This information provides a clear picture of the crisis consistently over-riding the national sugar industry. This proved distress-laden situation which prevailed. The Government of Pakistan, however, agreed to procure 400,000 tonnes sugar. Its purchase was made through Trading Corporation of Pakistan. However, the rescue design was inadequate and so incompatible. Procurement by TCP was through tender system for competitive price. This did not serve the purpose it was designed. Had it been at assessed price of Rs.29,000/tonnes, the sugar industry could have safe sales to the extent of sugar procured. The quantity picked fell short of 10% of the output. PSMA had some solace that its proposal of carrying strategic/buffer stock by the Government was acknowledged and acted upon. We are hopeful that the system brought on track will be

maintained, improved and strengthen to deliver. Developing countries, like Pakistan, are often exposed to uncertainty of the crop size. It needs to hold strategic stocks of food stuff to serve society as a safety valve. INTENSIVE CROPPING INEVITABLE Sugarcane production figures of the past decade, in it output level above 50 million tonnes of sugarcane for five years, seems attractive. This achievement has largely been by more hectares brought under the crop. Yield has been above 50 tonnes/hectare but for three years. Pakistan, with on an average one million hectares under sugarcane crop holds potentials to double sugarcane and sugar production by improvement in quality of sugarcane and its marketing, particularly of supply schedule ensuring instant crushing of sugarcane on its harvesting. Potentials exist of producing more than twice the record sugar production at 4.737 million tonnes reached in 2007-08 season. It demands intensive crop pattern, to be inducted by improvement in the existing system. Greater dynamics can be infused in this regard by setting up of a sugarcane research institute. It is as imperative as important, more so as challenges on economic front in global circuit are increasing day by day. Each country cultivating sugarcane has to create a research and development institute of its own, to evolve new varieties, suitable to their soil and climate, in brief echology. Seeds can not be brought from abroad. Institutional structure is imperative for evolving seed/fuzz, its multiplication and distribution. Besides the institute shall become a centre of excellence for training of manpower in farms and factories engaged in sugarcane cultivation and processing respectively. Creation of such a superb and inevitable institutional set up shall not cause strain on government revenues. Huge funds running into billions of rupees contributed by mandatory requirement in form of sugarcane cess for decades by the sugar industry and sugarcane farmers, remain unutilized with Governments of the Punjab, Sindh and NWFP Provinces. Symbolic structures do exit in the public sector in all the three provinces but have been good for being entities. Their rise and sustainable future squarely lies with the stakeholders, being beneficiaries and having raised funds. Sugarcane cess fund carries two specific usage, creating pucca road network connecting sugarcane farms with sugar mills and undertake useful research and development work about sugarcane varieties and allied areas. PSMA has identified ideal location for sugarcane research and development institute, being Gharo in Sindh, by its being close to Arabian Sea. PSMA prepared a study about cost and benefits of the institution. PSMA has approached all the concerned authorities, at Federal and Provincial levels, for release of funds so that the institutional structure is earnestly brought into existence and pressed into functioning. Once the institutional structure comes into being, Pakistan shall have a steady, sustainable growth dynamics in sugarcane and sugar production, on lively intensive pattern of crop cultivation. On the present average one million hectare, sugarcane crop size can be more than doubled the latest record level achieved of 63.920 million tonnes. No extra land will be required. Similarly sugar production of a record at 4.737 million tonnes achieved at 8.89% recovery for 2007-08 season will be more than doubled in a short time. Sugar industry presently holds sugarcane crushing capacity considerably more than its record crushing of 52.757 million tonnes during 2007-08 season. No dose of fresh capital outlay is required. Sugar industry is now

running on average of 110 days which makes it short for economic uplift. Standard period of its working has been spelt out at 150 days. It can be extended to 210 days by varietals development of sugarcane of early, mid term and late maturities to keep sugar industry operational for longer, so as to provide it economic viability, serving the national interests more effectively. ZONAL VIEW, REVIEW Information and analysis of sugar industry on national level, on modest macro-scale, in aggregate is reflection of performance of three zonal segments. By and large, no material difference is discernable on end-result between national and zonal levels. This, nevertheless, implies to have at a glance on important features of zonal performances, with relevant observations of priority points. PUNJAB ZONE: Sugarcane was cultivated on 827 (712) thousand hectare, higher by 16.15%, setting a record. Season 2000-01 with 581 thousand hectares fared the lowest of the latest decade. Variance in range at 246 thousand hectare i.e. 42.34% has obviously been significant. Sugarcane production at 18.793 (12.592) million tonnes, up 49.24% was also a record, so highest of the past decade. The lowest sugarcane production was at 26.700 million tonnes of 2000-01, coinciding with area under the crop being at the lowest. Yield at 49 (52.74) tonnes/hectare dropped by 7.10% has emerged a case of concern, the lowest at 40.64 hectare/tonnes was struck in 1999-2000. Sugarcane crushing at 33.045 (26.584) million tonnes, up 24.30% was note worthy. It was the best of the past decade. The lowest at 18.068 million tonnes harvest was in 1999-2000 season. Sugarcane crushing fared fine at 81.98 (70.81)% of the crop, not on top in the decade. It was 83.53 in 2002-03 and the lowest run was 60.88% in 1999-2000. Sugarcane production at 2.949 (2.268) million tonnes, up admirable 31.12% was the best ever achieved. Sugar production fared in range of 1.316 million tonnes being the lowest in 1999-2000 season. Variance of 124% was indeed huge. It gives good reading by rise registered. The momentum needs to be maintained for multiple benefits of it. Sugar recovery rate at 8.92 (8.53)%, modestly up was the second best set during the past decade, the highest being 9.09% of 2003-04 and the lowest marked at 7.80% of 1998-99. During 2007 season 42 (41) mills were functional. On average a mills sugarcane crushing increased to 786,757 (684,381) tonnes, up 21.34%. Sugar production was up 26.91% to 70,202 (55,315) tonnes. On average capacity utilization per mills fared better but not at an optimum level, leaving much scope for further improvement. Molasses output was higher by 31.50% at 1.607 (1.222) million tonnes on 4.86 (4.60)% recovery. Higher molasses recovery means proportionately lower sugar output. This reflects upon quality of sugarcane, besides supply system and a large crop impact. SINDH ZONE: Sugarcane cultivation spread over 308(214) thousand hectare, up 43.92%, was a record. Lowest hit at 183 thousand hectare was in 2005-06. Sugarcane harvest at 18.793 (12.592) million tonnes, up 49.24%, was also a record, while the lowest fared at 9.357 million tonnes in 2004-05. This had happened due to yield then touched the lowest at 43.52 tonnes/hectare. The highest of the decade at 62.96 tonnes/hectare was fetched in 1998-99. This feature reflects marked fluctuation

in sugarcane quality, besides disruptions in supply system. Sugarcane crushing at 16.737 (11.627) million tonnes was at its best by giving an inspiring increase of 43.94%. The lowest of the past decade was at 7.915 million tonnes hit in 2004-05. Sugar rollout at 1.561 (1.062) million tonnes, higher by 46.98% and highest of the decade, was exciting, more so, it was attained by the modest sugar recovery rate of 9.33%, falling behind 9.83% of 2005-06 and 9.53% of 2004-05. Sugar recovery at 8.96% was the lowest in 1998-99. Barring this, recovery rate has been above nine percent. Scope of improving upon it to over double digit existed, calling for attention to its exploits, certainly to be in interest of the stakeholders and the national economy. Sugarcane crushing formed 89.05 (92.80)% of the crop size, ranking the third best of the decade. Highest of it was in the preceding season and the second best at 89.98% in 2002-03. The number of sugar mills functional remain unchanged at 29 units. On average sugarcane crushing per mills notched up by 34.94% to 577, 138 (400,930) tonnes. Sugar production per unit moved impressively up by 46.96% to 53,841(36,635) tonnes. However, capacity utilized was not at the desirable optimum level. Working was contained to net 125 days with a record sugarcane crushing so far, obviously providing a good scope to improve on the time scale, similarly on supply schedule. Molasses production of 889,566 (578,833) tonnes, up 53.68%, was achieved by recovery rate higher at 5.31 (4.98)%. It proportionately reduced sugar production. Reason for it tend to be higher volume of sugarcane besides hitches associated in supply schedules. NORTH WEST FRONTIER ZONE: NWFP zonal working bore a little variance during the 2007-08 season over the previous. Sugarcane cultivation was on 105,000 (106,400) hectare, rolling out production of 4.800 (4.792) million tonnes, with yield being constant at 45.11 tonnes/hectare. Sugarcane area and crop size fared in narrow range during the past decade. Highest crop harvest at 5.049 million tonnes was in 2002-03 and the lowest at 4.100 million tonnes in 2005-06. A notable feature was sugarcane supplies to the organized sugar industry segment improving to 62.11 (47.03)% of the crop size, increasing sugarcane processing to 2.976(2.579) million tonnes, up 15.38%. Sugar production went up by 17.62% to 226,750 (192,777) tonnes. Sugar recovery rate dropped to 7.62 (8.54)%. It fared the second lowest of the decade. Highest at 8.59% was in 2004-05 and the lowest at 7.22% in 2000-01 During the review season 8(7) sugar mills were functional. On average per mills, sugarcane crushing increased insignificant by 0.96% to 372,045 (368,485) tonnes. Sugar production was 28,344 (27,540) tonnes, up meager 2.91%. This zone holds promising potentials for growth. This is checked and prevented by predominance of unorganized gur making segment. PSMA and its NWFP zone have been pointing out the problem of tax free status of gur. This problem impacting adversely investments made in the industry and so also the federal and provincial revenues. Hopefully this problem shall be addressed soon. One sugar mill sliced 64,095 (83,580) tonnes of sugar beet, produced 5,532 (7,143) tonnes of sugar, at recovery unchanged 9.04%. Molasses production was 2,576 (2,973) tonnes. MOLASSES: Molasses has conventionally been considered a key by-product of Pakistan sugar industry.

Substantial part of its production was normally geared for export. Domestic consumption, in context of production, used to be just peanuts. However, molasses has been progressively replaced by ethanol from 2002 and a steady increase. A record sugarcane harvest and crushing during 2007-08 season gave molasses production at 2.661 million tonnes, being the highest. This created a space for molasses exports jump to 911,065 (339,595) tonnes becoming the best of the past three years. Replacement of molasses exports by ethanol has been a right pursuit, of having value-added forex revenues. Domestic market for molasses had been small all along. Similar situation unfortunately has been found for ethanol. Hopefully, it shall be short lived. Rising exports of ethanol provide clear credentials of the products, being useful in domestic market as well, by its acceptability abroad. This fact shall do away apprehensions, if any, about its utility as a gasoline supplement. Molasses market in the country has been very limited for want of its diversification into valueadded products. Its use in the past, and now for ethanol, was 1989 and actively from 1994 confined to animal feed and processing of it by four old distillery units. As ethanol holds positive prospects of domestic use and growth in global market, it needs concerted efforts to keep dynamics. Simultaneously it is desirable to keep molasses market abroad lively alive and online. This can be achieved by augmenting sugarcane production, as emphasized earlier, by intensive sugarcane cultivation method. Scope in both spheres is sizeable and need to be exploited in earnest. ETHANOL: Ethanol is a renewable source of fuel. Prices of gasoline registered a steep increase on a faster track, during the past five years, beginning form 2004. The phenomenon of consistently rising price made ethanol more popular as gasoline mix in several counties, leaving Pakistan still in lurch. The Government of Pakistan have in principle agreed and decided to promote ethanol as gasoline mix to begin with at five percent and increase it to 10% on faster track. Resistance to it is being consistently made on flimsy grounds. Initial 5% inter mix of ethanol with gasoline shall not be made an issue, but pave the way for its steady gear up intermix to 10%. PSMA has been persistently pursuing, urging and advocating this matter for prompt implementation. During 2007-08 season, 18 of the 22 functional distillery units were attached with sugar units. Three more are online to join the foray. Some more are to follow the suit. Prospects of ethanol tend to be tempting, being bright. Ethanol production and its almost entire export reflect a rising trend in store. Its growth potentials are promising. Ethanol production, spearheaded by its export, registered an impressive growth. It was 34,888 tonnes in 2002 and rose to more than 300,000 tonnes in 2008. It has been an impressive increase, translating into average growth of 125% a year. Eighteen distilleries with sugar industry segment hold capacity to produce 2.300 million litres of ethanol a day. Effective capacity, however, remains variable by quantity and quality of sugarcane available to sugar industry as these carry direct influence on by-products, including molasses. CO-GENERATION: Economy of Pakistan for the past several year has been suffering power shortage, assessed to the

tune of 5,000 MW. It has been due to consistent increase in energy requirement outpacing generation, sharply contrasted by no capacity creation taken place for power generation. In view hydel power generation less expensive though, no new project has been set up. Efficiency of the existing dams eroded by silting and reduced water supplies. This phenomenon pushed to increasing reliance on thermal power generation, being considerably expensive, due to steep increase in fuel prices. It compelled to look eagerly for renewable-cum-sustainable source of power generation. Sugar industry merits in category of renewal source of power. Pakistan Sugar Mills Association has been pursing this matter with the Federal Government since 1994 and actively since. Sugar industry being functional during November to March period has capability to generate power in excess of its own requirement to operate the mills. Its working to be during winter months, while hydle power supply tends to be at the lowest level, acute power shortage is being felt in this period. Sugar industry can generate now up to 2240 MW of electricity by using sugarcane by-product bagasse, besides distillery spent wash. Each sugar mills can generate extra electricity by using bagasse. Sugarcane has been acknowledged as renewable, besides sustainable source of energy in several countries, by use of ethanol and bio-fuel of bagasse. The bottleneck in its energizing to combat energy shortage, specially in typical acute scarcity time of winter season has been not yet won acceptance of authorities for a competitive tariff as Independent Powers Projects (IPPs) By economics parameters and logical dispense, energy being energy, of similar use, shall get an uniform tariff. PSMA has given presentation on it, dealing with scope and feasibility study, with economic benefits of acquiring electricity from sugar industry. In principle the project details provided have been acknowledged, leaving tariff factor under consideration. This restraint on sugar industry hopefully will soon settle down, enabling the national sugar industry with its 79 performing units, located in three provinces. All the mills in rural areas, strategically placed, play its role resuming to provide electricity making the oasis already created by it to become sparkling and contributing more to GDP. PROBLEMS, PROGNOSIS, SOLUTION Basic problem of sugar industry identified by consultations among the stakeholders has been lack of linkage between sugarcane and sugar prices. Sugarcane minimum price is being set by provincial governments. Sugar price stays afloat, left to market forces set it! Sugarcane processing spell is seasonal, production takes place on average in about 110 days. Sugar sales spread over a year, may be above it, by inelastic demand. Besides, sugar industry is directed to make payment to farmers in a week of supplies of sugarcane. How to manage finances of inventory piling up each month at least by 17% of production rollout and accumulating to 68% by the end of spell and simultaneously payout within one week of supplies of sugarcane, which forms above 72% of sugar production cost. This situation compels for desperate sugar sales by the industry, often in advance and more so during sugarcane crushing period to have cash flow! This issue has always been brought to the authorities attention, but solution has not yet come off. During the review 2007-08, season certain move ahead took place. The Federal Government prevailed to hold minimum price of 2006-07 season unchanged for 2007-08 season. MINIMUM SUGARCANE PRICE PER 40KG Season 2007-08 2006-07

Punjab Rs. 60/= 60/= Sindh Rs. 67/= 67/63*/= NWFP Rs. 65/= 65/= (*Revised) Besides, the Federal Government worked out sugar price to be Rs.29000/tonne ex-factory, based on given minimum sugarcane price and related other costs of production. However, mechanism was not structured that be in place to ensure sugar price as determined. This left sugar industry in usual distress. PSMA persevered to have some system in place that sugar price, as worked out, was assured. At best, the Federal Government procured 527,949 tonnes of sugar through the Trading Corporation of Pakistan, but this was neither made during the sugarcane crushing spell as envisaged nor at the break-even price of Rs.29000/tonnes worked out. TCP purchases were by tender pushing sugar industry in same shape as in open market. Hence, no desired support could be had of it to save national sugar industry form pinching impact of the policy defects! In desperate sale for liquidity, mills exported about 277,339 tonnes. PSMA hopes that a positive view of it will lead to progress, so as to put in place proper modalities to protect sugar industry from perils but place it in sound shape so that it contributes to the national economy to the full extent of its huge potentials. USES OF ETHANOL AS GASOLINE MIX: PSMA has been pursuing this case for years. In principle, five percent use of ethanol as gasoline mix has been accepted. However, modalities are being worked out for its implementation. Once the preset impasse created by other interests is overcome, ethanol use is bound to gather a steady rise. POWER CO-GENERATION: PSMA proactively took up this matter to address the problem of acute huge at about 5000MW power shortfall being faced by the country, much adversely affecting the national economy. Sugar industry holds potentials to provide 2400MW of power. Each sugar mills is capable to generate surplus power by using bagasse. Power to be available during critical winter months, the time of sugar industrys working, while hydle power goes to the lowest ebb, shall prove exceptionally convenient. PSMA is perusing with the authorities to give a standard tariff to the sugar mills so that cogeneration could be started immediately. FINANCING FACILITATION: Due to seasonal short term functioning, sugar industrys financial position stays vulnerable, as sugar industry has to procure the raw material in 140 days and hold the finished product for 360 days. Thus creating huge mismatch of financial resources. SUSTAINABLE FUTURE: Sugar is an energy food item. Its sustainable availability is essential. Besides, there must be a firm foothold in exports, rather succumb, time and again, to imports. Four by-products rollout of sugar production and their 40 derivatives offer huge potentials to exploit. For this, increase in

sugar production is prerequisite and essentially to be by intensive crop pattern, pursuit and practices. This can be achieved on having a seed evolving and breeding research institute. Proposal of PSMA for setting up such an institute at Gharo in Sindh and release of cess funds need Government attention and prompt approval, so that this vital project is taken in hand at the earliest. PERSPECTIVE 2008-09 NATIONAL: As expected, since sugarcane production trend is of cyclic tendency and it has not been broken as yet, it is essential that steady sustainable growth in sugarcane and sugar production is attained. Sugarcane crop is poised to be lower during the ensuring 2008-09 season. The first estimate of the crop size drawn officially portrays the position to bring distinctly lower sugarcane and similarly sugar output. Sugarcane production is estimated at 53.498 million tonnes, down by 16.31% from 63.920 million tonnes of 2008-09. Yield is likely to remain in narrow range of 51.5 (50) tonnes/hectare. At an average of 75% sugarcane, flow to sugar mills for crushing, to be 40.124 million tonnes and average recovery of 8.6%, sugar production may be 3.451 million tonnes, provided the first estimate stays put, chances of which seem not firm. However, with stocks of about one million tonnes of sugar in hand at the start of 2008-09 season, sugar availability in aggregate at 4.450 million tonnes shall not complicate situation to a serious shortfall. However to keep sugar prices fair in a reasonable range, import of raw sugar is a desirable option. PSMA has presented a proposal in this regard for consideration of the authorities. The provincial governments have increased minimum sugarcane price for 2008-09 season. In view of this increase and short crop size, economies of scale will operate but unfavorably. This odd situation added by inflationary tendencies in the national economy will have a significant impact on cost of sugar production, bound to increase. PERSPECTIVE 2008-09 International sugar market, inherent part of the wider commodity markets, during the year 200708 witnessed volatile price trend. It was in backdrop of financial tsunami gripping the United States of America and its spillover the global circuit. Currency values fluctuation carried a direct impact on commodity markets. Fear of recession rocked the boats of once considered durable strong economies, dictating terms on global business spectrum. The last quarter of October December 2008 is likely to give some insight to the future trend in sugar prices. End stock estimate despite lower production and higher consumption during the last quarter of 2007-08 is indicated to be larger than the corresponding period of the preceding two years. Current price trend indicates sugar production to slip lower, first time in the past four years of high tide in a row. Aggregate production projection for October 2008-September 2009 is 161.248 million tonnes, to be 6.602 million tonnes lower than at 167.850 million tonnes of 2007-08. European sugar production during 2008-09 season is 22.69 million tonnes from 26 million tonnes of 2007-08. Drop in Asia will be more from 64.7 million tonnes to 60.5 million tonnes. Production is poised to dip both in Pakistan and India. However, South America and Africa may go up in sugar output. * Excluding unrecorded disappearance

Sugar consumption in Pakistan is likely to go up slightly in 2008-09 to 4.7 (4.6) million tonnes, due to population growth of 2%, against GDP growth lower to 4.2(6.08)%. Rising prices by falling output is the reason for it. Sugar consumption in Asia may rise by 3.2% in 2008-09 to 74.200 million tonnes. Off take by the largest sugar consumer India may go up by 4.4 (7.1)% at lower pace, to 25.5 (24.5) million tonnes. Two preceding sugar years were of record breaking in crop size creating sugar surplus. It will be on back foot in 2008-09. However, it can not create supply slide and rise in prices as stocks hang higher by bumper crops of 2006-07-08 years. However, hedge fund operations may create artificial instability. Fundamentals of supply-demand-stock seem to keep cool. At the conclusion of this report, I would like to register my appreciation for the co-operations extended by the Central Executive Committee, Zonal Chairmen and Secretariat staff, with my good wishes to the new elected management of PSMA. During 2008-2009, the year under review, as forecasted, the sugarcane and sugar production ended far below the projected estimate for annual consumption. According to MINFALs data, plantation area under sugarcane was reduced to 1,029,400 Ha in 2008-2009, against 1,241,000 Ha for 2007-2008 which was a record bumper crop year that established a bench mark production of sugar at 4.741 million tonne. The sugar prices remained depressed for the past three years due to high production and low global prices. Lack of policies of the government, converted the huge harvest of 2007-2008 to economic disaster and did not bring any jubilation to the growers of sugarcane and the millers, that resulted in 17% reduction in the plantation area depicting preference to the other cash crops. The capacity utilization of the sugar mills and season working days was very low comparing the past two seasons. The below mentioned data is self explanatory: Punjab 2007-2008 2008-2009 Shakargan Da 174 104 j ys Hamza 168 105 " Indus 168 95 " Haq Bahu 167 117 " JDW 165 107 " SINDH Sanghar 180 132 " Habib 171 120 " Khairpur 171 119 " Larr 170 68 " The low capacity utilization of the mills affected the production cost of sugar, the overall capacity utilization of the mills was 39.40% as compared to last years 64%. The production during 2008-2009 ended at 3.19 million tonne i.e. 1.55 million tonne short compared to previous years production i.e., 32.7 %. While the crop itself was lower by about 14 million tonnes, the crop utilization by the mills was further reduced because of commercial manufacturing of Gur which has become a lucrative business in the Peshawar-Mardan Valley of Pakistan and being exported tax-free to Afghanistan and onward to Central Asian Republics. Despite the sugar shortage in the country, exports of gur was allowed in violation to the commitment made by GOP in the Supreme Court that there would be a complete ban on its exports.

The low production, deficit of consumption was foreseen by PSMA and the Government of Pakistan was in-time informed to import raw sugar to supplement the production to a comfortable level to avert any crises at the end of the year while the international prices had started picking up, unfortunately, our advise was ignored. The carry over quantity of 1.19 million tonne to supplement the production of 3.19 million tonne enhanced the availability to 4.4 million tonne provided a consolatory position but not consolidated enough to curb the rising trend of the domestic sugar price working together with the International prices all over the globe (shown here- under): Domestic Suger International Sugar Prices Prices 2008-2009 2008-2009 Months Rs / Kg US$ per tonne Oct08 Nov08 Dec08 Jan09 Feb09 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Average 37.61 37.72 35.59 39.38 42.63 43.83 44.96 45.45 45.71 46.79 51.86 49.10 43.39 337.08 330.67 319.58 347.70 388.35 392.24 405.16 444.87 445.45 468.42 556.93 576.71 417.76

The expected rise of sugar price after two years long depressed prices at the occasion of Ramzan disturbed the distribution chain and the consumers faced high prices and non availability of sugar for months. PROSPECTS 2009-2010: Due to the delay in presenting last years report, the industry has landed in 2009-10 with the crushing season already taken off. The plantation area has reduced to 951,500 Ha, a reductions of further 7.5 % over the area we had under cultivation last year. The present crop estimated at 48 million tonne may provide at least 70% of the crop for utilization by the sugar mills, subject to strict control is brought over the production of Gur,

otherwise, the mills may crush 34 million tonne of cane that could yield at least 3.06 million tonne sugar during 2009-2010 that will leave a gap of 1.30 million tonne to be filled by the import of white sugar. Once again, the demand of raw sugar to supplement the production was rejected for not being supported by MINFAL, who have preferred the shortfall in the sugar production to ensure hefty returns to big landlords of sugarcane at the cost of consumers across the country. Indeed, they have succeeded, as the sugarcane prices have soured to 80-100% above the support price and has resulted in manifold increase in the sugar price. No miller has so far been able to estimate production cost as the uncertain situation prevails which will reflect in the price of sugar in the coming months. The overall expectation of 2009-2010 as estimated in Dec09 is shown hereunder. Final production would be subject to supply of sugarcane and final recovery %. Sugarcane Plantation Area Estimated Yield Sugarcane + Cane Utilization 70% + Sugar Production @ 9 % + Carry Over Stock Availability Estimated Consumption @ 350,000 Per Month to 30 Sept10 Estimated Short fall Stock Required for Consumption (Oct 10 to Dec 10) 3 Months @ 350,000 Overall Deficit Say 951,000 51.10 48.62 34.00 3.06 0.86 3.92 4.20 0.28 1.05 1.33 1.30 Ha /Ha M. Tonnes Million Tonne

SUGAR PRICE DILEMMA Beside the impact of global sugar deficit on the import price of sugar, the domestic sugar and Gur price is always dependent to the sugarcane price that constitutes 80% of the cost price. Past experience indicates that the sugar price in the domestic production has been fluctuating in inverse proportion to the quantum of the sugarcane crop in each year. Hence the price of sugar is totally dependent on the quantum of sugarcane i.e. the size of the crop. The yearly fluctuation in the sugarcane plantation area is due to the absence of prudent Sugar Policy, changing climate, switching over to the other cash crops and defective policy of fixing agriculture produce support price. The recent years support price of wheat had its pressure over the other cash crops, despite high support price wheat crop failed because of the very low rainfall during past few months and hence it is not the high support price that brings a desirable harvest. Therefore, unless a long term scientific approach is adopted to increase the yield and recovery in all crops, specially sugarcane, the present fluctuations will continue, short term measures do not resolve, instead they aggravate the situation. The data hereunder and the graph shows the historical trend indicating the quantum of sugarcane as the main factor leading to the sugar price fluctuation. Sugarcane Production & Av. Sugar Retail Price

Season 1994-95 to 2009-10 Sugarcane Production 47,168,400 45,229,700 41,998,400 53,104,200 55,191,100 42,000,000 43,620,000 48,041,000 52,049,000 53,800,000 43,533,000 44,292,000 54,871,000 63,920,000 50,045,400 48,621,700 Av Sugar . Retail Price / Kg 14.36 17.86 21.44 18.75 19.63 22.85 26.73 21.97 20.12 19.26 25.34 33.07 30.63 28.62 43.39 55.00 Prov

Years 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Low Percentage of Sugarcane Utilization by the Mills PSMA has recorded the historical fact that during the low sugarcane production years the percentage of sugarcane supply to the mills drop drastically by as much as 20% and vice versa, during the high crop years supplies to the mills is in high proportion. This phenomenon always misleads the sugar production estimates, and so is the case with MINFALs estimate that are devoid of facts i.e., requirement of seed and fodder depends on a basic required quantity and not on a certain fixed percentage i.e. usually taken as 15% of the total crop. Such assumption does not work, as the 15% of the crop size 63 million tonne and of the crop size 42 million tonne brings a large difference. Hence assuming 80% utilization of sugarcane by mills is optimistic and is designed to blame mills showing low production. Furthermore, during low sugarcane harvest, farmers supply sugarcane filled with trash, as

a result, around 0.10% of the sugarcane recovery is consumed by the trash and burned in the boilers, this year, around 35,000 tonne of sugar lost in trash has been burnt by the mills. The following tabulated data shows the historical trend of the low utilization of cane by the mills during the low crop size years connected to un-favourable weather cycle. 199596 963,1 00 45.23 199697 964,5 00 42.00 199900 1,009,8 00 42.00 200001 960,0 00 43.59 200405 966,6 00 43.53 200506 906,9 80 44.29 200809 1,029,4 00 50.05 200910 Est. 951,5 00 48.62

Years Plantati on Area Ha Sugarca ne Prod. Mils Cane Utilizati on % age of Utilizati on

28.15

27.35

28.98

29.41

32.10

30.10

33.73

34.03

62.24

65.13

69.00

67.47

73.74

67.94

67.41

70.00

Low Sugar Production Years On the contrary during the sugarcane high production years much higher percentage of the sugarcane is supplied to the sugar mills For instance:Years Plantati on Area Ha Sugarca ne Prod. Mils Cane tilizatio n % age of 199798 1,056.2 00 53.10 199899 1,155,0 00 55.19 200102 999,7 00 48.04 200203 1,099,7 00 52.05 200304 1,074,7 00 53.80 200607 1,029,0 00 54.87 200708 1,2 41,300 63.92

41.06 77.32

42.99 77.90

36.71 76.33

41.79 80.28

43.66 81.15

40.48 73.78

52.78 82.54

Utilizati on High Sugar Production Years Similarly diversion toward Gur is more lucrative during the short size crop, a strong leverage used by the growers to push the sugarcane price up to maximize the benefits of the low production. You will also note that the short crop years have cycle of two years, as the weather cycle due to Al-Nino is prolonged period affecting the snow and rainfall in southern Asian countries directly distressing all crops simultaneously. At present, most of the countries world over are facing rising risk from low winter rainfall and snow, this does not leave any promising affects for the crop 2010-2011, particularly the sugarcane crop which is always vulnerable to the weather cycle. In general the crop of the year 2010-2011 is showing the sign of drought year at present.
Months October November December Jan23,10 February March April May June July August September Average 200405 20.78 21.62 21.63 24.35 27.00 26.33 26.27 26.15 26.60 28.54 27.85 26.97 25.34 200506 26.71 29.50 28.47 29.49 35.54 35.61 36.77 36.32 34.91 35.06 34.98 33.43 33.07 200607 32.87 33.15 30.86 31.55 30.83 30.63 30.25 29.85 28.38 29.2 30.17 29.85 30.63 200708 29.36 28.75 26.89 26.06 25.73 25.44 25.18 28.45 29.75 31.68 32.7 33.44 28.62 200809 37.61 37.72 35.59 39.38 42.63 43.83 44.96 45.45 45.71 46.79 51.86 49.10 43.39 55.26 200910 45.75 49.25 60.05 66.00

Months October November December

2004-05 247.18 248.43 247.46

2005-06 311.84 288.26 329.98

200607 376.08 371.24 348.04

200708 279.93 285.35 304.27

2008-09 337.08 330.67 319.58

2009-10 592.38 596.70 646.46

Jan27,10 February March April May June July August Septembe r Average

256.42 266.65 265.23 258.71 259.02 277.90 324.10 326.25 323.25 275.05

383.10 440.51 450.92 471.02 481.07 461.46 460.63 400.16 379.34 404.86

329.82 328.00 335.91 314.79 322.85 312.32 313.05 285.99 277.61 326.31

338.00 365.12 353.48 352.52 333.05 356.92 379.85 397.20 387.62 344.44

347.70 388.35 392.24 405.16 444.87 445.45 468.42 556.93 576.71 417.76

729.90 708.46

645.58

GLOBAL SCENARIO 2009-10 The estimates of global sugar production and consumption compiled by F.O.Licht & ISO this year shows a running deficit by about 7.0 million tonne with production estimates at 160 million tonne and the consumption estimated at 167 million tonne. South American sugar production has risen to 45 million tonne in 2009-10 up from 42.5 million tonne last year mainly due to Brazils increased sugar production. The Brazilian sugar output itself in 2009-2010 could be 37.0 million tonne, up from 34.8 million tonne last year. Thailand sugar production in 2009-2010 has marginally increased to 0.5 million tonne at 8.0 million tonne. In India, the acute shortage of sugarcane production during 2009-2010 has cut down the sugar production estimates by 15 million tones compared to 2008-2009, down by 42%. The country was forced to import large quantities of white and raw sugar from the world market last year. India is expected to marginally improve sugarcane crop this year, yet it has already supplemented 2009-10 production with 1.0 million tonne of white sugar at the beginning of the year starting October. The current situation has made India a largest consumer and leading importer as well. The spike in sugar prices to its highest level in the last 30 years is likely to boost direction of more sugarcane towards production of sugar than ethanol. While there will be plenty of capital available for investment, poor weather conditions would restrict potential rise in sugarcane produce of South Asia for a while. Following three years of surplus and heavy stocks, the global market has moved to deficit in 2008-09 because of sharp fall in the Asian production. However, the market absorbed the shock due to large stocks built up that has now depleted by the start of the New Year. Therefore the market is to remain tight depending on the domestic production and imports. The situation could

remain extremely bullish. PSMAS ARTICLE OF ASSOCIATION New Trade Organization Ordinance was promulgated by the Government of Pakistan known as Ordinance No. XLIII of 2006, followed by the new Trade Organization Ordinance No. XXXI of 2007 and Trade Organization Rules 2007. The Ordinance and the Rules repealed the existing Ordinance and rules including the Associations License, Memorandum and Article of Association of all Organizations were required to be amended to apply for a new license by submitting a draft Memorandum and Article of Association under the frame work of the new Trade Organization Ordinance and Rules 2007. All desired submissions were made, pending the approval and grant of the new license, we proceeded with the 42nd AGM under the old regulations in a normal way as allowed by the authorities. The Draft Article of Association submitted along with the application for registration was received back in Oct 2008 in an amended form. PSMA after CEC approval has lodged a petition against elimination of NWFP Zone to the Director General Trade Organization to review the amendment considering the close linkage of Sugar Factories with the Provincial Governments. Therefore till such time the Draft (New) Memorandum and Article of Association is being followed. At present PSMAs petition requesting the correction of amendment regarding the basic structure of our three zones and tenure of the Chairmen is pending for Trade Organization Advisory Boards first meeting along with the applications of other Associations. PSMA has attained Associations fresh license from the Director General Trade Organization Ministry of Commerce, as required under the Ordinance No. XXXI of 2007. The Ordinance defines the purpose, role, responsibilities and operational framework including code of corporate governance for the trade organization, and the matters connected therewith or incidental to such acts. The new license issued to us on 17th May 2008, is renewable after three years, on presentation of the desired record and compliance of the regulations. During the efforts made for attaining the compliance report from SECP, The shifting of Associations office from Al-Falah Building Lahore, to Islamabad in 1991 was registered on record. On fresh application and submission of concerned resolutions etc the Association was notified for being in default for the delay of 17 years. After imposing a penalty for the delay in informing the change of Head Office, your Association is now properly registered at SECP. Annual returns of the Association to SECP for the year 2000-2008, are in order now, but recently a show cause notice for its late filing has been received, which is being followed up. To conclude the report, I would reiterate that the sugar industry is faced with the persistent attitude that lacks objective approach on sensitive matters. Factual figures and the in-time counsel are ignored during the policy making where a consistent laid down sugar policy workable during the years of short fall and abundance is needed. Despite the recent crisis, we are optimistic that better and proper attention will be given to the sugar industry based on its merits. TEN LARGEST SUGAR PRODUCER AND CONSUMERS 10 LARGEST 10 Largest Sugar Producers 10 Largest Consumers

(in mln metric tonnes,raw value) 1 2 3 4 5 6 7 8 9 1 0 Brazil EU-27 India China Thailand U.S.A Mexico Australia Russian Federation Pakistan 33.45 16.63 15.65 13.63 7.94 6.85 5.81 4.52 3.60 3.50 1 2 3 4 5 6 7 8 9 1 0

(in mln metric tonnes,raw value) India EU-27 China Brazil U.S.A Russian Federation Mexico Indonesia Pakistan Egypt, Arab Republic 24.13 17.86 15.00 12.20 9.70 5.65 5.15 5.13 4.63 2.75

10 Largest Cane Suger Producers (in mln metric tonnes,raw value) 1 2 3 4 5 6 7 8 9 1 0 Brazil India China Thailand Mexico Australia Pakistan U.S.A Indonesia Colombia 33.45 15.65 12.85 7.94 5.18 4.52 3.49 2.92 2.85 2.60 1 2 3 4 5 6 7 8 9 1 0

10 Largest Beet Suger Producers (in mln metric tonnes,raw value) EU-27 U.S.A. Russian Federation Turkey Ukraine China Egypt Belarus Serbia Iran 16.23 3.94 3.60 2.61 1.38 0.78 0.74 0.57 0.40 0.37

Source: -

ISO Sugar Year Book 2010 data 2009 World Sugar Balances (Oct / Sep) in mln tonnes, raw value 2010- 2009- 2008- 2007- 200611 10 09 08 07 170.3 158.8 150.0 165.5 165.6 75 30 20 29 14 167.1 163.7 160.3 159.5 156.2 54 79 09 19 84 3,221 6.010 9.330 4.949 10.28 9 48,62 52.72 48.14 48.28 48.89

Production Consumption Surplus/deficit Import demand

200506 150.1 64 152.2 90 2.120 48.69

200405 140.8 01 146.9 68 6.197 47.99

200304 142.2 76 143.6 90 -1.414 45.23

Export availability End stocks Stocks/consumpti on ratio in % Sourc e:

5 50.55 7 56.19 2 33.62

2 52.68 8 54.90 3 33.52

4 47.87 7 59.81 8 37.31

5 48.51 7 69.84 0 43.78

7 48.81 0 64.06 2 40.99

2 49.20 8 54.97 0 36.10

3 48.46 5 57.60 6 39.20

1 45.13 6 64.27 5 44.73

ISO world Sugar balance September 2010

International Trade Market Monthly Refined Sugar Prices US$ / Tonnes


2000- 2001- 200201 02 03 259.2 224.6 214.7 October 5 3 6 242.9 248.4 224.0 November 4 5 0 241.3 253.9 225.9 December 9 6 5 248.4 261.8 228.0 January 5 9 0 234.7 238.0 242.0 February 8 9 0 226.1 238.3 231.4 March 8 1 2 233.8 222.4 223.5 April 9 3 6 258.1 227.2 219.3 May 5 8 7 279.5 220.7 212.8 June 3 7 2 277.7 225.8 217.0 July 7 1 3 266.3 227.3 215.0 August 0 1 6 234.9 213.5 197.5 September 9 2 0 Av. Retail 250.3 233.5 220.9 Price 0 4 6 Source: " LIFFE London / ISO" Months 200304 184.9 5 191.4 3 203.0 0 201.8 7 210.2 8 233.5 4 246.6 4 236.7 6 236.5 0 260.5 0 260.1 6 245.2 1 225.9 0 200405 247.1 8 248.4 3 247.4 6 256.4 2 266.6 5 265.2 3 258.7 1 259.0 2 277.9 0 324.1 0 326.2 5 323.2 5 275.0 5 200506 311.8 4 288.2 6 329.9 8 383.1 0 440.5 1 450.9 2 471.0 2 481.0 7 461.4 6 460.6 3 400.1 6 379.3 4 404.8 6 200607 376.0 8 371.2 4 348.0 4 329.8 2 328.0 0 335.9 1 314.7 9 322.8 5 312.3 2 313.0 5 285.9 9 277.6 1 326.3 1 200708 279.9 3 285.3 5 304.2 7 338.0 0 365.1 2 353.4 8 352.5 2 333.0 5 356.9 2 379.8 5 397.2 0 387.6 2 344.4 4 200809 337.0 8 330.6 7 319.5 8 347.7 0 388.3 5 392.2 4 405.1 6 444.8 7 445.4 5 468.4 2 556.9 3 576.7 1 417.7 6 200910 592.3 8 596.7 0 646.4 6 729.9 0 705.8 4 529.6 2 479.2 1 453.9 4 482.5 9 542.1 7 534.1 3 601.3 1 574.5 2

World Major Sugarcane Producing Countries 5-Years Production & Ranking 1000 Tonnes Raw Value

S.N o. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Name Argentina Australia Brazil China Colombia Cuba Egypt Guatemala India Indonesia Mexico Pakistan Philippines South Africa Thailand U.S.A

09-10 2,256 4,709 35,750 10,978 2,435 1,100 1,150 2,320 20,500 2,848 5,000 3,326 2,039 2,255 7,169 3,040

08-09 2,448 4,829 34,75 5 12,53 3 2,599 1,389 1,100 2,217 15,79 9 2,900 5,169 3,466 2,090 2,250 7,521 3,011

0708 2,20 4 4,93 9 32,9 84 14,8 69 2,03 6 1,42 2 1,12 6 2,15 6 28,6 49 2,66 1 5,75 4 5,15 3 2,54 1 2,62 0 8,05 9 3,11 0

0607 2,45 9 5,21 2 32,4 95 11,6 80 2,27 7 1,24 2 1,15 4 2,28 0 30,7 66 2,50 8 5,55 1 3,82 6 2,31 1 2,35 5 7,00 7 3,11 9

0506 2,21 7 5,39 7 27,8 15 8,70 4 2,41 5 1,19 7 1,09 4 1,91 1 20,9 42 2,43 5 5,50 2 2,81 3 2,21 3 2,49 7 5,07 6 2,68 2

0405 1,85 7 5,52 8 28,2 66 9,21 6 2,68 3 1,33 9 1,13 9 2,10 3 13,7 95 2,23 6 6,00 2 3,17 6 2,22 6 2,31 8 5,42 5 2,96 2

Ranki ng 12 6 1 3 10 16 15 11 2 9 5 7 14 13 4 8

World Sugar Production 2009-10 121,302,0 Tonne Cane Sugar Prod 00 s Beet Sugar 33,746,00 Tonne Production 0 s 155,048,0 Tonn Total Production 00 es Note: Prod. Ranking based on (09-10) Source F. O. Licht's '2010 Production in Raw Value

* *

Countries producing over 2.0 million tonnes included

Note: Production Ranking based on (09-10) * Source f.O. Licht's 2010 * Production in Raw Value * Countries producing over 2.0 Million tonners included

Major Cane Sugar Producing Countries Summary Sugarcane Harvested Area, Cane and Sugar Yield T/ Ha S. Cane Harvested Cane Yield T/ Sugar Yield T/ Name No. Area Ha Ha 1 Argentina 242 62 6.8 2 Australia 416 81 11.8 3 Brazil 2,439 58 8.3 4 China 1,299 61 6.4 5 Colombia 171 117 14.5 6 Cuba 1,030 33 3.1 7 Egypt 107 93 9.9 8 Guatemala 184 92 9.8 9 India 2,581 71 7.9 10 Indonesia 367 68 5.2 11 Mexico 606 72 8.7 12 Pakistan 848 47 3.9 Philippine 13 372 59 5.4 s South 14 323 70 8.1 Africa 15 Thailand 992 61 6.6 16 U.S.A 394 78 9.0

CONTENTS 1.Definition 2.Approaches 3.Income Distribution

4.Paretian Welfare 5.General Analysis 6.Welfare Under Monopoly 7.Welfare Under Monopsony 8.Welfare Under Middlemen 9.Criticism
Definition and Explanation of Theory of Factor Pricing
The theory of distribution or the theory of factor pricing deals with the determination of the share prices of four factors of production, viz., land, labor, capital and organization.

Four Factors of Production, in Economics:


(i) The share of land, is named as Rent. (ii) The share of labor as Wages. (iii) The share of capital as Interest. (iv) The share of organization as Profit. The four factors of production in cooperation with one another produce annually a net aggregate of commodities, material and non-material. This we name as national income. The national income is to be shared among the four factors of production which have contributed to this production. In the theory of distribution, we are chiefly concerned wrath the principles according to which the price of each factor of production is determined and distributed. In the words of Chapman: "The Economics of distribution or the pricing of factors accounts for the sharing of the wealth produced by a community among the agents or the owners of the agents which have been active in its production". Distribution is Functional and not Personal. I would like to make it clear that the pricing of factor of production discussed here is functional and not personal. By this we mean that when the reward of each factor is distributed, it is not paid to an individual but to the agents or factors of production. The individual

may represent in his person as landlord (if he used his own land), the labor (if he works himself), the capitalist (if he has contributed his capital) and. the entrepreneur (if be organizes the business). The price of land, labor, capital and organization which is termed as rent, wages, interest and profit is in fact their functional income. They are the costs from the point of view of the firm but income from the point of view of factors of production.

Why a Separate Theory of Factor Pricing?


It is often pointed out that the price of a factor of production is determined, like the price of a commodity, by the equilibrium of forces of demand and supply, If the demand of the particular factor rises, other things remaining the same, its price goes up and vice versa. The other economists who differ with this view are of the opinion that the theory of value is not applicable in its entirety to the pricing of factor of production. They believe that on the side of demand there is similarity between the two, because the value of a particular commodity and the price of a factor of production are governed by marginal utility and marginal productivity respectively. But on the side of supply, much difference exists between them. On the side of supply, the price of a particular commodity is determined by its marginal cost of production. But in ease of labor or an acre of land or a unit capital, it is not possible to ascertain exactly its costs of production. The other dissimilarity between the two is that the supply of a factor of production cannot be readily adjusted as we can do in the case of a commodity. For example, if the demand of a particular type of labor increases or the rent of land rises-up, it will not be possible to increase their supply immediately.

In the words of Marshall: "Free human beings are not brought up to their work on the same principle of a machine, a house of a slave. If they were, there would he very little difference between the distribution and the exchange side of value". Thus, we come to the conclusion that though the value of the commodities and the prices of the factors of production are determined by demand and supply yet, due to some differences of the factors of production on the side of supply, there is a need for a separate theory of distribution.

Marginal Productivity Theory (Neo-Classical Version):


The marginal productively theory is an attempt to explain the determination of the rewards of various factors of production in a competitive market. The marginal productivity theory of resource demand was the work of many writers, it was widely discussed by many economists like J.B. Clark, Walras, Barone, Ricardo, Marshall. It was improved, amended and modified later on. The final version of the theory as stated by Neo Classical economists is given below.

Definition and Meaning:


By marginal productively theory of a factor is meant the value of the marginal physical product of the factor. It is worked out by multiplying the price of the output per unit by units of output.

Formula:
VMP = MP x P Value of Marginal Product (VMP) = Marginal Physical Product x Price The marginal productivity theory contends that in a competitive market, the price or reward of each factor of production tends to be equal to its marginal productivity.

Explanation:
The demand for various factors of production is a derived demand. The resources do not usually directly satisfy consumer wants. They are demanded because these help in producing goods and service's. An entrepreneur while hiring a factor of production calculates the contribution which it makes to total production and the amount which has to be paid to it in a competitive market. An individual firm cannot influence the price of the factor of production. It has to take the ruling price in the market as given. The firm can employ as many number of factors units as it wishes at the ruling price of the factor. It has been observed that as a firm hires increasing amounts of a variable factor to a combination of fixed amounts of other factors, the marginal productivity increases up to a certain stage of production and then it begins to decline. The buyers of a factor of production while deciding whether one more unit of factor should be employed or not, compares the net addition which it makes to total revenue and the cost which has to be incurred on engaging it. If the marginal revenue product of a factor is greater than its marginal cost, the entrepreneur will employ that unit because it earns more than what he has to spend on employing the additional unit. As he employs more and more units of factor of production, the marginal revenue productivity increases up to a certain limit and then it begins to decrease. On the other hand, marginal cost decreases as production is expanded. After a certain point, when business becomes difficult to manage, marginal cost begins to increase. When both marginal revenue productivity of a factor and its marginal cost are equal, (MRP = MC) the entrepreneur stops giving further employment to a factor of production. The last variable unit which an employer just thinks it worthwhile employing is called the marginal unit and the addition made to the total production by the employment of the marginal unit is called marginal productivity or marginal revenue productivity. The entrepreneur will pay the remuneration to each factor of production according to its marginal revenue productivity.

Schedule and Example:


The marginal productivity theory is explained with the help of a schedule: Demand for a Factory or Resource (Daily): Units of Resource (Labor) (1) 1 2 3 Total Product Meters (2) 8 15 20 Marginal Productivity MP (3) 8 7 5 (4) 10 10 10 Product Price ($) P Total Revenue (5) 80 150 200 Marginal Revenue (Product) (6) 80 78 50

4 5 6 7

23 25 26 26.5

3 2 1 5

10 10 10 10

230 250 260 265

30 20 10 5

Rule For Employing a Factor of Production:


An entrepreneur is to maximize profits. While hiring any resource, he compares the marginal revenue product of a factor with the additional cost he has to pay. So long as the marginal revenue product is greater than the marginal cost of the factor, he will continue hiring it. When the MRP of the factor is equal to its MC, he will stop engaging more labor. The firm at this point will be in equilibrium and maximizing profit. In the table above, the entrepreneur adds more to its total revenue than to total cost up to the fifth unit. When he hires the sixth labor, the MRP = MC. The firm here is in equilibrium and maximizing profits, In case, the 7th worker is hired, the MRP is then < MC. The firm suffers loss and is not reaping the optimum profit.

Least-Cost Combination of Resources:


There are a number of resources which are required for the production of a commodity. The entrepreneur can maximize his profit only if the least cost combination can be arrived at by equalizing the ratios between the marginal products and the prices of the different factors of production. If the ratios differ, then it is in the interest of the employer to make necessary adjustment by employing more of one factor and less of other till be ratio between the marginal productivity and price of each factor becomes equal. The least cost combination will be achieved, when: MRP of Factor A = MRP of Factor B = MRP of Factor C = MRP of Factor N Price of Factor A Price of Factor B Price of Factor C Price of Factor N In the long run, under conditions of perfect competition, the price of each factor of production is already determined in the market. An individual entrepreneur cannot affect the market price of various factors of production by his own individual action as his demand for a factor or factors forms only a small part of the total demand. He is a price taker. So, what he does is that he goes on employing each factor of production up to a point which makes marginal revenue productivity of the factor equals to its price.

Diagram:

In the figure 18.1, the supply of labor is perfectly elastic. The wage (W) is equal to average wage (AW) and marginal wage, (MW) = W = AW = MW. At point E, the MRP of labor is equal to marginal wage (MW). The producer is-in equilibrium at point E. He will employ ON units of labor because when ON units of labor are employed, the marginal revenue productivity of labor MRPL = Wage. To the left of E the MRP of labor is higher than wage (MRP > W), the producer will increase the units of labor. To the right of the MRPL < wage, so the firm will curtail the units of labor. It is only at point E, the firm is in equilibrium where MRPL = Wage.

Assumptions:
The theory of marginal productivity is based on the following assumptions: (i) Factor identical: It assumes that all the units of a factor are exactly alike and so can be substituted to any extent.

(ii) Factors can be substituted: It is assumed that the various factors of production, which help in the production of particular commodity can also be substituted for one another. We can use more of labor or less of land or more of labor and less of capital. (iii) Perfect mobility of factors: It is assumed that the various factors of production can be moved from one use to another. (iv) Application of law of diminishing return: The theory rests en the assumption that the law of diminishing returns applies also to the organization of a business. (v) Perfect competition: It is based on the assumption that the reward of each factor of production is determined under conditions, of perfect competition and full employment.

Criticism:
The marginal productivity theory has been subjected to scathing criticism on the following grounds. (i) Theory based on unrealistic assumptions: The theory is based on a very wrong assumption, that all the units of a factor of production are homogeneous. The fact is that neither all land, nor all labor, nor all capital, nor all organizations are alike. We know it very well that labor varies in efficiency; capital in form, land in fertility and entrepreneur in ability. (ii) Factors are not perfect substitutes: It is also wrong to assume that the factors of production are close substitutes for one another. Labor is not a perfect substitute for capital, and vice versa. So is also the case with land in relation to other factors of production. (iii) Law of proportionate return: The theory rests on a very wrong assumption that the law of diminishing returns applies to a business. Is this not a fact that when there is proportionate increase in the factors of production, "the law of diminishing return is held in, abeyance in all businesses. (iv) Wage cuts does not determine demand: According to this theory, if employment is to be increased, the wages should be lowered. J.M. Keynes vehemently disagrees with this view and says that this may be true in case of an individual firm or industry but it is wrong when it is applied to aggregate or effective demand. (v) Difficulty In the measurement of MP: The other criticism levied on the marginal productivity theory by Tausslng, Davenport and Ardiance is that production is the outcome of joint efforts of different factors and so it is not possible to separate the contribution of each factor individually. (vi) Effect of withdrawal of a factor: Hobson criticizes this theory on the ground that if a factor of production which works in co-operation with other factors is withdrawn, it will disorganize the whole business and it may result in the decrease of production which may be greater than the addition made by the factor withdrawn. (vii) Factor units cannot be raised: Another criticism levied by Hobson on the marginal productivity theory is that there are many cases in which the variations in the use of factors is not possible. The proportion in which factors of production are to be employed is already determined by the technical conditions prevailing in a business. For instance, there are many machines for the working of which only one labor is required. If we engages two laborers, it will not be of much use. A variation in proportions in such cases are not possible, therefore, the marginal productivity of such a factor cannot be ascertained. (viii) One sided: The marginal productivity theory is also criticized on the ground that it assumes the supply of a factor or factors as fixed while in reality the remuneration paid to a factor does influence its supply. As the theory approaches the problem only from the side of demand and neglects the effect of

supply, therefore, it cannot be accepted as true. (ix) Static theory: Marginal productivity theory neglects the problem of technical change altogether. It is therefore, static theory. Conclusion: From all that we have said above, It can be concluded that the Theory is true only under the assumption of perfect competition and state of full employment Fraser has commented on the theory of distribution as such: "No economist would claim that theory is as yet complete, even as a purely academic structure of framework. It has the defects of its quantities being simple and self-consistent; it is abstract and impersonal it is quantity of sins both of omission and commission; its postulates are unduly rigid and narrow". In the words of Samuelson: Marginal productivity theory is not a theory that at explains wages, rent or interest; on the contrary it simply explains how factors of production are hired by the firms, once their prices are known".

Firm's Equilibrium in the Factor Market Under Perfect Competition:


Definition and Explanation:
In a perfectly competitive market, an individual firm cannot influence the market price of a factor by increasing or decreasing its demand. So it has to hire units of a factor at its prevailing price in the market. Same is the case with the supplier of a factor. As the supplier of a factor sells an insignificant quantity of the total supply, it is therefore not in a position to alter the market price of a factor by its own individual action. The individual buyers and sellers of a factor take the market price of a factor as given and adjust the quantity of a factor in the light of market factor price. The buyers and sellers of a factor are therefore called price takers. Since a firm in a perfect competitive factor market is a price taker, so the marginal product of the factor (MP) and the average product (AP) are the same and their curves coincide. They are a horizontal straight time and parallel to the X-axis.

Equilibrium of the Firm:


When a factor of product is to be hired by a firm, it compares the marginal revenue productivity of the factor (MRP) with that of its marginal cost (MC). So long as the MRP of the factor is greater than its MC. (MRP > MC), a firm will continue hiring the units of a factor (because the factor adds more to its total revenue than to its total cost). When the marginal revenue productivity of a factor is equal to the marginal cost of the factor, the firm will be in equilibrium and its profits maximized MRP = MC. If the output is increased by hiring additional units of the factor, then the MRP < MC, and firm incurs loss.

Formula For Firm's Equilibrium:


Marginal Revenue Productivity of Labor = Marginal Cost of Labor The equilibrium of the firm in the factor market is explained with the help of a diagram. In figure (18.2), we assume that labor is the only variable factor in the factor market. KL straight line represents the marginal wags rate. All the firms in the factor market can hire any number of workers at the ruling wage of OK. The marginal revenue product curve of labor cuts the wage line KL at two points P and R. The firm is not in equilibrium at point P because by the employment of increasing number of workers, the marginal revenue product rises higher than the marginal cost or the marginal wage OK. At point R, the marginal revenue productivity of the labor is equal to its marginal cost When the firm employs OE number of workers, it is in equilibrium because at point R marginal revenue product of the variable factor is equal to marginal cost of that factor. In case a firm decides to engage more than OE workers, the marginal cost of the workers {marginal wage) will exceed its marginal revenue productivity. The firm with there^^e, not be, in equilibrium. Summing up we can say that a firm in the labor market is in equilibrium when: (i) Marginal revenue productivity of labor = Marginal cost of labor. (ii) Marginal revenue productivity curve of labor cuts the marginal cost curve {marginal wage) from above.

Modern Theory of Factor Pricing Under Perfect Competition:


Definition and Explanation:
The modern economist discard the marginal productivity theory on the ground that it completely ignores the supply side of a factor of production. Moreover, it simply states as to how many units of a factor of production will be employed at different prices but it does not explain the real issue, i.e., the determination of the price of the factor of production. They, therefore, use the tools of demand and supply in solving the problem of determination of factor prices. Just as the price of a commodity in the market, they say, is determined by matching of demand and supply, similarly the price of an agent of production is determined by their forces of demand and supply in the factor market. The demand for and supply of a factor in a resource market under conditions of perfect competition is new explained in brief.

Demand For a Factor of Production:


The demand for factors is a derived demand. They are not demanded for their own sake but their services are required for the production of other goods and services which the consumers need. For instance, labor is hired because it helps in the production of the commodities. Similarly, land is not desired for itself.

It is demanded for the things which It grows or for the construction of a factory or shop, etc., on it. The demand for a factor of production, like the price of commodity, is a function of price. How much a factor of production will be demanded in the market depends upon two parameters: (1) the magnitude of demand and (2) the elasticity of demand for that factor.

(1) The Magnitude of Demand:


(i) If a factor of production is very important in the process of production of a particular commodity or commodities, it will have a higher demand in the factor market. (ii) If the demand for final product is expected to be high, then the demand for all the factors which produce the product will go up. (iii) If a factor of production has close substitutes, then its demand will not rise even if the demand for final product in which it is used increase. The reason is that the employers of factors of production would prefer to engage a substitute which is available in the market at an attractive price.

(2) Elasticity of Demand for Factors:


By elasticity of demand for factors is meant the degree of responsiveness of demand for the various factors to changes in their prices. The main propositions on which the elasticity of demand for the factors of production depends are as fellows: (i) If the price of a factor of production forms a very small proportion in the total costs of a product, then its demand will be inelastic. If cost forms a greater proportion of the total cost, then its demand will be elastic. (ii) The demand for a factor of production also depends upon the elasticity of demand for a commodity in which it is used. If the demand for a commodity is fairly elastic, then the demand for factors which go to make the product will also be elastic and vice versa. (iii) If a factor of production is easily substitutable in the market, then its demand will be fairly elastic. In case, it is indispensable, the demand will be inelastic.

Market Demand Curve for a Factor of Production:


We have stated earlier that the demand curve for a factor is the marginal revenue productivity curve of a firm. If we add up laterally individual demand curves of all the firms, we get market demand curve for a factor. This is illustrated with the help of the curve.

In Fig. 18.3 (a) when the wage is OW1 the firm s in equilibrium at point K and the demand for the factor is OR. When wage is OW2, the firm is in equilibrium at point M. The firm engages OS units of a factor. If we sum up laterally the individual demand curves of all the firms, we get DD / market demand curve for a factor. It is clear from this Fig. 18.3 (b) that with the fall in wages, the demand for a factor increases and vice versa. For instance, at OW1, market is OK units (in thousand) of factor are demanded. When wage falls to OW, the demand for factor increases from OK to OR. With further fail in wage to OW 2, the market demand

for factor increase from OR to OS. The market demand curve for a factory is a negatively sloped curve indicating inverse relationship between price of a factor and its quantity demanded.

Supply of a Factor of Production:


The supply of a factor of production can be defined as: "A schedule of the various quantities of a factor of production that would be offered for sale at all possible prices at any one instant of time". We have stated earlier that the demand far various factors of production is a derived demand. Just as the supply and stock of a commodity can be different, similarly the supply and stock of a factor of production can also vary. If the supply price of a factor is high, other things remaining the same, larger will be the units of factor offered for sale. If the supply price is low, less quantity of factors of production will be supplied in the factor market. The supply of a factor to an industry depends upon the transfer earnings of the various units of factor. Another characteristic of factors of production is that they do not bear direct relation between the prices of services offered by the factors of production and their cost of production. The supply of factors of production is very complicated because each kind of factor presents a peculiar problem of its own. Land, for instance, is fixed in quantity and its total supply cannot be increased even if its price rises. However, for a particular use, its supply can be varied. Similar is the case with labor. The total supply of labor in the country depends upon various factors, such as size of population, labor efficiency, expenses of training and education, geographical distribution, attitude towards work, etc. The total supply of labor in the country is fixed but for a particular occupation it can be increased by drawing workers from other occupations and by increasing the working hours of the labor already employed. The supply of capital is also complicated as it depends upon the power and willingness of the people to save. The marginal efficiency of capital and the rate of interest also play a very important role in the supply of capital in the country. In nutshell, we can say that the supply of a factor is also a function of price. The higher the price of a factor of production, other things remaining the same, the greater will be its supply and vice versa. The supply curve of a factor of production is positively inclined, i.e., its slopes upward from left to right as is shown below: In the diagram (18.4) we measure units of a factor, say labor, along OX axis and wage on OY axis. If the wage is OP, OL workers are supplied. At wage OR, the supply of workers increases from OL to ON. The normal supply curve of a factor is positively sloped. If rises from left to-right upward indicating that at higher factor prices, greater quantity of factor is offered in the factor market and vice versa. In a perfect competitive market, there are large number of firms to demand the services of a factor of production and also large number of households, to supply the services of a factor. In such a factor market, the price of a factor is determined by the interaction of the forces and demand and supply as is shown in the figure below: In this diagram 18.5, DD/ is the demand curve and SS/ is the supply curve of a factor, The demand and supply curves intersect at point E. The equilibrium factor price is OP. The price of a factor cannot be stable at the level higher than or lower than OP. For example, the price cannot be established at OP1. Since at price OP1, the quantity offered to supply is greater than the quantity demand (QM), therefore, the competition between the owners of the factor will force down the price to OP level. Similarly, the price of factor cannot be determined at the level of OP2 because at this price, the supply of a factor is less than demand by M1Q1. The competition among the producers demanding the factor of production will push the price to OP level. We thus find that the reward of a factor of production is determined by the interaction of the forces of demand and supply.

WTO

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. the World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. The multilateral trading systempast, present and future History The World Trade Organization came into being in 1995. One of the youngest of the international organizations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War. So while the WTO is still young, the multilateral trading system that was originally set up under GATT is well over 50 years old. The past 50 years have seen an exceptional growth in world trade. Merchandise exports grew on average by 6% annually. Total trade in 2000 was 22-times the level of 1950. GATT and the WTO have helped to create a strong and prosperous trading system contributing to unprecedented growth. The system was developed through a series of trade negotiations, or rounds, held under GATT. The first rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-dumping and non-tariff measures. The last round the 1986-94 Uruguay Round led to the WTOs creation. The negotiations did not end there. Some continued after the end of the Uruguay Round. In February 1997 agreement was reached on telecommunications services, with 69 governments agreeing to wide-ranging liberalization measures that went beyond those agreed in the Uruguay Round. In the same year 40 governments successfully concluded negotiations for tariff-free trade in information technology products, and 70 members concluded a financial services deal covering more than 95% of trade in banking, insurance, securities and financial information. In 2000, new talks started on agriculture and services. These have now been incorporated into a broader agenda launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November 2001. The work programme, the Doha Development Agenda (DDA), adds negotiations and

other work on non-agricultural tariffs, trade and environment, WTO rules such as anti-dumping and subsidies, investment, competition policy, trade facilitation, transparency in government procurement, intellectual property, and a range of issues raised by developing countries as difficulties they face in implementing the present WTO agreements. Policies MILLENNIUM DEVELOPMENT GOALS United Nations Millennium Development Goals The United Nations Millennium Development Goals (MDGs) are eight international development goals that all 192 members and a number of international organizations have agreed to achieve by the year 2015 to end poverty. They include reducing extreme poverty, reducing child mortality rates, fighting disease epidemics, such as HIV/AIDS, and creating a global partnership for development. The main goal that concerns the WTO is MDG 8, building a global partnership for development. However, WTO activities are also relevant to other goals, such as MDG 1, whose aim is to eradicate extreme poverty and hunger. In fact, the MDGs cannot be seen in isolation: they are all interconnected. Goal 1: Eradicate extreme poverty and hunger Target 1a: Reduce by half the proportion of people living on less than a dollar a day Target 1b: Achieve full and productive employment and decent work for all, including women and young people Target 1c: Reduce by half the proportion of people who suffer from hunger Goal 2: Achieve universal primary education Target 2a: Ensure that all boys and girls complete a full course of primary schooling Goal 3: Promote gender equality and empower women Target 3a: Eliminate gender disparity in primary and secondary education preferably by 2005, and at all levels by 2015 Goal 4: Reduce child mortality Target 4a: Reduce by two thirds the mortality rate among children under five Goal 5: Improve maternal health Target 5a: Reduce by three quarters the maternal mortality ratio

Target 5b: Achieve, by 2015, universal access to reproductive health Goal 6: Combat HIV/AIDS, malaria and other diseases Target 6a: Halt and begin to reverse the spread of HIV/AIDS Target 6b: Achieve, by 2010, universal access to treatment for HIV/AIDS for all those who need it Target 6c: Halt and begin to reverse the incidence of malaria and other major diseases Goal 7: Ensure environmental sustainability Target 7a: Integrate the principles of sustainable development into country policies and programmes; reverse loss of environmental resources Target 7b: Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss Target 7c: Reduce by half the proportion of people without sustainable access to safe drinking water and basic sanitation Target 7d: Achieve significant improvement in lives of at least 100 million slum dwellers, by 2020 Goal 8: Develop a Global Partnership for Development Target 8a: Develop further an open, rule-based, predictable, non-discriminatory trading and financial system Target 8b: Address the special needs of the least developed countries Target 8c: Address the special needs of landlocked developing countries and small island developing States Target 8d: Deal comprehensively with the debt problems of developing countries Target 8e: In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries Target 8f: In cooperation with the private sector, make available the benefits of new technologies, especially information and communications WTO Regime and Its Impact on Pakistan As far as the industrial sector is concerned, at the moment Pakistan the main export of Pakistan is Textile and related products. These are discussed separately in this report. The non-textile export of Pakistan is negligible. This trend needs to be

changed as no country should rely solely on the export of one or few products. On the Import side, Pakistan recently has rationalized its tariff structure to a large extent. The average tariff in Pakistan is around 17 percent with only four tariff slabs. There should not be any adverse affects on the domestic producer with the globalization as the local industry has already adjusted to the increased competition from global market. This however does not hold true for automobile industry, which still enjoys high protection and needs to become efficient if it wants to survive. This study attempts to analyze the impact of WTO on the important sectors in Pakistan i.e. Industry, Textile, Agriculture and Services. PAKISTAN LEADERSHIP Almost the entire international trade of Pakistan is conducted on multilateral basis rather than under any Free Trade Agreement (FTA) or other preferential basis such as those available to the Least Developed Countries (LDCs). Therefore, the current Round of trade negotiations known as the Doha Development Agenda is crucial for us. Not only it would it would substantially reduce or eliminate discriminatory practices but would also create new market access opportunities. At present our exporters have to pay an average of over 10% duty on exports to the United States and Europe whereas most of our competitors enjoy preferential rates either because they have FTAs with those economies or because they have LDC status. Also our farmers suffer because of huge amount of subsidies paid to farmers in rich countries. Moreover, our skilled and semi-skilled people find it hard to move to other countries where they may be in demand because of labour shortages in those countries because of various kinds of restrictions. It is for these reasons that Pakistan is keen that the Doha Round be completed in 2006. We have taken a leadership role to move the process forward. For the first time at a Ministerial Conference during the 55 years of GATT/WTO negotiations, Pakistan was designated as a 'facilitator' for negotiations on industrial goods. Scores of trade ministers from around the world met our Commerce Minister to explain their view point. Pakistan's written proposal on NAMA was one of the key proposals for discussions on NAMA. The WTO Ministerial Conference held at Hong Kong from 13-18 December 2005 represented an important milestone towards completing the DDA negotiations. Commerce and Trade Minister from 150 WTO Member countries used this occasion to narrow their differences in key areas of negotiations. Mostly they concentrated on issues such as agriculture, industrial goods and development issues (duty and quota free access for LDCs). It was because of the crucial importance of this Conference that over 6000 delegates from 150 WTO members participated in this Conference. Pakistan's delegation represented technical negotiators, legislators, businessmen, press reporters and representatives of Civil Society.

Agriculture Although agriculture accounts for 3 % for global output and 10% of global trade, this was one of the most contentious issue. The reason being that developed countries have been following very distortionary practices and agriculture was excluded from any negotiations during the GATT era. In the Uruguay Round also there were no serious attempts to correct this imbalance. In case of Pakistan, agriculture provides for 25% of GDP and more than 50% of employment, consequently any decision in this area would have significant impact on our overall growth rate and incomes of our farmers. Therefore, we took keen interest in negotiations on this issue. It was for this purpose that Pakistan has held a G-20 Ministerial Conference at Bhurban in September 2005. It was felt that one of the deliverables for the agriculture negotiations could be determining an end date for elimination of export subsidies. Although G20 and Cairns Group where Pakistan is a Member insisted for 2010 to be an end date but after intensive discussions and when it became apparent that the EU would not accept such an outcome, it was agreed that all export subsidies will be eliminated by 2013. However, it would be ensured that a substantial amount of those subsidies would be eliminated during the first half of the implementation period of the Doha Round i.e., during the next 3 to 4 years. It was also agreed that other related distortions in developed countries such as subsidized export credits, insurance programmes, State Trading Enterprises, etc. would also be brought under strict disciplines. In case of cotton it was agreed that all forms of export subsidies would be eliminated in 2006. In other areas of agriculture negotiations, progress was not significant but nevertheless there was some forward movement. In case of domestic support, a basic structure of reduction formula was agreed. Under this formula, there will be three bands for reduction. The EU with the highest level of domestic support will cut the most while the US and Japan will fall in the second band and would be required to cut less than EU but more than any other country. Developing countries such as Pakistan that have no or little trade distorting programmes would be exempt from reduction commitments. In case of agriculture market access, progress has been very disappointing. According to a study by the World Bank more than 90% of gains would come from this pillar of reforms. The EU refused to improve on its earlier offer of making average cuts of 46% and also sought other flexibilities and therefore no meaningful discussions were held on this pillar. There was some progress regarding the basic structure of a formula for tariff cuts. It was agreed that there would be four bands and higher tariffs would be cut by a higher percentage. Also as a special and differential treatment for developing countries, it was agreed that they could designate special products and also resort to special safeguard mechanism. This means that for certain products they could make less cuts and also in case there is any surge in import levels in their countries, they can apply certain restrictions.

Industrial Goods The most important issue in the DDA from Pakistan's point of view is that relating to non agriculture market access (NAMA). Pakistan's objective for NAMA negotiations was that there would be an ambitious formula which should reduce tariff peaks and tariff escalations on products of our export interest. At the same time we were seeking a formula that should provide adequate special and differential treatment for developing countries so that we are able to maintain adequate tariff level for protecting our industries and for revenue purposes. The Ministerial Conference agreed to adopt a so called Swiss formula. In this kind of formula, tariff cuts depend on the coefficients applied. If the coefficient is small there is a large tariff cut but if the coefficient is large then there is low reduction. Although there has been no agreement as to what the coefficient should be, it was agreed that coefficients should be at levels which ensure reduction of tariff peaks, high tariffs and tariff escalations on products of export interest to developing countries. At the same time the coefficient should take into account the special needs and interest of developing countries. Pakistan's proposal to have two coefficients, one for developed countries which should be 6 and another for developing countries which should be 30, received strong support from all developing countries. If such coefficients are eventually agreed it would mean that tariffs on textile and clothing in the EU and US markets would be cut by more than 50%. In fact, they would be cut to less than 6% as against 12 -30% prevailing at present. This would considerably reduce discriminatory tariffs which our exporters face vis--vis our competitors many of which enjoy duty free access because of their LDC status or because they have FTA with major trading economies. It was also agreed that flexibilities should be an essential part of negotiations for any final outcome. Development Issues One of the principles agreed at the 2001 WTO Doha Ministerial Declaration was to provide duty free quota free market access for products originating from least developed countries (LDCs). At Hong Kong, LDCs insisted that there should be an early harvest and that all developed countries and advanced developing countries should immediately allow duty free and quota free access for all products originated from all LDCs. Since the EU and a number of other developed countries (except US which provide such access to some LDCs only) already provide duty free access under schemes such as 'Everything But Arms' (EBA), they also put pressure on the US to provide immediate duty free access. Through this tactics, the EU was trying to deflect pressure on them to provide greater market access on agricultural goods. If the tactics had succeeded, this would have meant duty free exports of textile and clothing to the US market from all LDCs including those which are efficient producers. This would have resulted in serious erosion of our market share in the US. We

therefore insisted that such concessions should take into account the impact on other developing counties at similar level of development. The US also showed reluctance to grant duty free access on textile and clothing to LDCs which have an efficient T&C industry. Eventually it was agreed that all developed countries would provide duty free access for 97% of products originating from LDCs. Accordingly 3% tariff lines which are likely to cover sensitive sectors such as textile and clothing would not be exempt from duty at present. Thus countries such as Pakistan would continue to enjoy level playing field vis--vis our competitors. In this connection, Pakistan proposal was supported by Kenya and Sri Lanka which expected similar problems of market loss if duty free treatment was extended to LDCs. All these countries argued that they were not opposed to giving duty free access provided it did not impact their market share. Other Issues There was some progress in other areas of DDA although the progress was very limited. In areas such as Services, Rules, TRIPS, Trade, Debt and Finance, Trade and Transfer of Technology etc., the Ministers only took note of the reports transmitted by the General Council and endorsed the work programme. In case of Trade Facilitation, there was noticeable progress as Ministers approved the elements which could be a part of any subsequent agreement. In case of Aid for Trade, Ministerial Conference welcomed various initiatives for expanding Aid for Trade. In this connection, the World Bank and IMF jointly organized a discussion forum on 13 December 2005 where trade Ministers from major economies such as US and EU and also senior representatives from Donor Agencies such as the World Bank and IMF were represented. Pakistan's Minister for Commerce Mr. Humayun Akhtar Khan was also one of the panelists. Mr. Humayun Akhtar argued that Aid for Trade should be given to those countries which would be most affected after implementation of the DDA. These includes countries enjoying trade preferences, net food importing countries, low income countries which are higher depended on customs duties as a source of revenue and other low income countries which need to diversify their exports. Mr. Humayun Akhtar suggested that a separate fund be set up for this purpose. A copy of his speaking points is attached as Annex-A. At the plenary session of the Ministerial Conference, Mr. Humayun Akhtar asked his fellow trade Ministers to do a so called SWOT analysis of negotiations which would imply reflecting on strength and weaknesses and opportunities as well as threats to progress made so far. He felt that major threat was that if due care is not exercised; DDA may end up agreeing to a least common denominator result. He said that such a result would not remove existing discriminations against developing countries and would not result in any development for a vast majority of developing countries. A copy of his speech is placed as Annex B. Over all, although the Conference did not achieve its full objectives, it was a

successful event from our angle. Not only we had a leadership role in important areas of negotiations such as NAMA, we had considerable influence on the whole process. Pakistan's Minister chaired the OIC Members conference and was invited to all other parallel events. We were also represented in all Green Room meetings (called Chair's Consultative Group meetings). It is expected that with the progress made, WTO members may be able to move the work at a much faster pace and achieve full modalities by April 2006 so that the Round could be completed by the end of 2006. INTRODUCTION Pakistan is one of the founder Members of the WTO since 1995, and its predecessor organization the GATT set up in 1948. We are following an export led growth strategy and as such market access is of vital importance for our businesses. The increase in preferential arrangements and free trade areas between some members is also eroding our market access. Therefore in order to maintain current markets and gain new ones for our exportable goods and services we are dependent on the WTO to get tariff and non tariff barriers lowered on an MFN basis. Such MFN liberalization effectively levels the playing field for competitive suppliers. The implications of WTO membership on employment relations in Pakistan over a wide range of issues: the implementation of international labour standards; the role of trade unions; working conditions; wageprice factors in relation to cost of production and export competition in global markets; social protection and social inequality; efficiency versus fairness and justice; power of multinational corporations (MNCs); global division of labour versus Pakistani labour diversity; and industrial democracy versus power control and corruption. There has been no explicit blueprint of future developments in employment relations. Pakistans accession to the WTO added an international dimension to the complicated domestic employment relations system. There was increasing pressure from international governing bodies, such as the ILO and WTO and other organizations like the International Confederation of Free Trade Unions (ICFTU), with regard to the issues of labour rights, the role of unions and labour standards involving the Therefore, it is crucial for both the international community and the Pakistanis people to seek a more informed perspective on the current situation and the future engagement of the Pakistanis economy into the global economic system, as well as Pakistans future economic and political reforms. THEORETICAL PERSPECTIVES Pakistans accession to the WTO opened a new page in Pakistans reform and further engagement in the process of globalization. So far, a clear division has emerged in the theoretical debates about globalization between three major schools of thought: the first, positive neo-liberal approach, claims that the current process of globalisationwill encourage free trade and investment across countries and

eventually create more economic prosperity for everyone; the second, negative neo-Marxist approach, claimsthat the outcome of globalisation would be more inequality and disparity between the north and the south and that international governing bodies such as the WTO, World Bank and International Monetary Fund (IMF) are serving the interests of the powerful north and its alliance of MNCs; and the third, relatively neutral approach, claims that globalization is a double-edged sword which might bring both benefits and disadvantages to countries or communities, and the critical question is how well people manage it . An important aspect of the impact of globalization on the division of labour and human resources in the East Asian region. Several important issues need to be considered here. The first issue is about the international division of labour. Since labour is one of the major resources of developing countries in Asia, the labour market will be one of the first to register the effect of economic changes. In addition, the competition between developing countries to attract foreign investment by providing cheap labour might eventually result in a race to the bottom. Critics argue that the current agreement within the WTO has further consolidated the developed countries already vested monopolies in technology, knowledge and capital, and that it is now impossible for developing countries to break through the existing international division of labour. In fact, one may argue, it is more likely that developing countries will be confined to an arena of competition in which they will be fighting among themselves for shares in the labour-intensive sector of export-processing industries. The second issue is about changes in employment/unemployment via the process of globalization. Advocates of the WTO argue that liberalized international trade will increase both employment and incomes among trading-partner nations. However, the opposition believes that entry into the WTO is unwise, as the odds are stacked against the new entrants whose domestic industries may be adversely affected once tariff and non-tariff barriers come down. The consequence would be greater labour surpluses, lower wages, more unemployment and economic stagnation. Other social problems would also emerge, such as insufficient social protection, greater inequality and social unrest. CHANGING EXTERNAL AND INTERNAL ENVIRONMENTS WTO accession is the latest factor eroding Pakistanis economic and political isolation and its employment relations system needs to respond to external pressures and internal demands. THE IMPACT ON ECONOMIC SECTORS The impact of WTO entry is by no means uniform across economic sectors. It is expected that the agriculture sector will experience strong overall consequences as a result of the lowering of the average tariff. Resource reallocation, primarily of rural labour, will flow toward other sectors such as urban labour-intensive industries. The manufacturing sector may experience an unclear overall outcome from WTO entry.

Industries that have recently developed and have become capable of competing with foreign firms are more likely to meet the challenge of increased Changing patterns of HRM in Pakistan trade and undergo restructuring to consolidate their businesses and become more competitive. THE IMPECT ON EMPLOYMENT RELATIONS WTO accession also means that international bodies, such as the WTO will closely monitor Pakistans adherence to trade regulations and labour standards, according to relevant international conventions and regulations. WTO accession, additionally, will build up international pressure on Pakistan to implement and follow international conventions. On the one hand, labour issues will no longer be in the domestic domain but will be linked to international trade and diplomatic relations. Western trade unions, consumer groups, NGOs, and other countries governments and international bodies closely monitor trade and labour standards within the WTO. Particular, to coincide with the crucial time of WTO accession. Based on the previous research on Pakistan, we tested the following six hypotheses: 1. Ownershipenterprises with different ownership have different HRM practices and the greater the degree of foreign ownership, the more likely that formal HR practices will be adopted with fewer in some organizations. 2. Sizethe larger the number of workers employed in the enterprise, the more likely that formal HR practices will be implemented. 3. Marketexternally market-oriented enterprises are more likely to adopt formal HR practices. 4. Sectornew economy-oriented or high-value-added enterprises are more likely to carry out formal HR practices. 5. Regioncoastally located enterprises are more likely to implement formal HR practices. 6. Historyrecently established enterprises that have a weaker relationship with the traditional State planning system are more likely to use formal HR practices. BENEFITS From the money in our pockets and the goods and services that we use, to a more peaceful world, the WTO and the trading system offer a range of benefits, some well-known, others not so obvious. The ten benefits 1. The system helps promote peace 2. Disputes are handled constructively

3. Rules make life easier for all 4. Freer trade cuts the costs of living 5. It provides more choice of products and qualities 6. Trade raises incomes 7. Trade stimulates economic growth 8. The basic principles make life more efficient 9. Governments are shielded from lobbying 10. The system encourages good government Implications of WTO in Pakistan Pakistan was one of the 23 founders of GATT in 1947. It actively participated in all the subsequent GATT negotiations and was involved in the Uruguay Round that resulted in the creation of the WTO. Pakistan was thus also one of the founding members of WTO that was established in 1995. There is a considerable impact of WTO on all sectors of Pakistan's economy, particularly, its industry, textile, agriculture and services. The nature of impact is predictable for some sectors, whereas, it is difficult for others in view of global developments in trade and degree of complexity involved. As far as the industrial sector is concerned, Pakistans main exports are textile and related products. The non-textile exports of Pakistan are negligible but have a potential to grow tremendously under the WTO regime. On the import side, Pakistan has been rationalizing its tariff structure to a large extent under the trade liberalization principle as envisaged by WTO. The average tariff in Pakistan is around 17 percent however, there is a need to ensure that there are no adverse affects of trade liberalization on the domestic producers. This calls for a need to make adjustments in the policies for the domestic industry, so that they may be able to face the increased competition from global market. The complete integration of all textile and clothing products into the free trade environment under the Agreement on Textile and Clothing (ATC) on 1st January 2005 was one of the most significant changes for Pakistan under the world trade regime. Pakistans economy finds itself heavily dependent on the textile and clothing (T&C) sector. It is because of the nature of textile industry being labor intensive and requiring less capital and technical skills. However, a quota-free trade era calls for structural and operational adjustments in the textile sector, to enable Pakistan's exporters to be globally competitive. China is the biggest challenge to Pakistan T&C exports in this post ATC regime. As regards agriculture, Pakistan being an agrarian economy is still a net importer of

food items. The Agreement on Agriculture (AOA) of WTO has been significant in molding agricultural policies of Pakistan. The Agreement on Agriculture provides rules regarding export subsidies, domestic support and market access. Furthermore, the WTO Agreement on the application of Sanitary and Phytosanitary Measures (SPS) with regard to food safety and protection of human and animal life, and health from agricultural imports has considerable impact on Pakistan. Apart from the major crops, Pakistan needs to exploit its comparative advantage in the production and exports of meat, dairy products, fruits, vegetables, horticulture, etc. The developing countries and the developed world are at loggerheads over agriculture. With regard to agricultural negotiations in the WTO, Pakistan along with the other developing countries, insists on a world trading system that is fair. Moreover, Pakistan has a comparative advantage in many primary commodities. But in order to fully utilize its comparative advantage, it needs to focus on and solve the problems in supply side (domestic requirements). Pertaining to the Agreement on trade related aspects of intellectual property rights (TRIPS), Pakistan needs to ensure that the industry is encouraged to provide intellectual property protection for its products and also make certain that there is effective protection of the intellectual property rights attached to imported products. Services are the largest and most dynamic component of both developed and developing country. It is impossible for any country to prosper today under the burden of an inefficient and expensive services infrastructure. In Pakistan, the services sector contributes more than half of the GDP. Workers remittances account for the largest component of services and the country has a large number of expatriates throughout the world. Being a developing country, Pakistan has adopted a cautious approach while making commitments in trade in services. However, the actual policy of the government is far liberal as compared to the binding commitments scheduled in the General Agreement on Trade in Services (GATS). Pakistan has made some horizontal commitments that apply across the board, while in six sectors specific commitments have been made. These include Business services, Construction and related engineering services, Tourism and travel related services, Health and related social services, Telecommunication services, and Financial services. Pakistans domestic industry also faces problems of increased imports and unfair practices under the global trade regime. WTO Agreements have an in-built mechanism providing for trade remedial measures to counteract the effect of dumping, subsidies and surge of imports. Accordingly, Pakistan through national legislation has come up with anti-dumping laws against dumping, countervailing duties laws against subsidies and safeguard action laws against surge of imports in order to protect its domestic industry. In a nutshell, at present Pakistan maintains a fairly liberal trade regime, where all

quantitative restrictions on imports have either been removed or converted into tariffs. It is noteworthy that the applied tariffs in Pakistan are well below the bound tariffs under WTO, translating into market access. However, quality control is integral to competitiveness of Pakistan's exports. Low quality products fetch low price in the international market. The obvious problems of quality for Pakistan are those of technical precision, grading and specialization. The WTO Agreement on Technical Barriers to Trade is relevant in this regard. Proper support and prudent policies for the industry, along with intelligent balancing of imports and exports is vital for the sustainability and growth of Pakistan's economy and is likely to lead towards a bright future and trade enhancement under the WTO regime. Trade Policy Review: Thailand The sixth review of the trade policies and practices of Thailand takes place on 28 and 30 November 2011. The basis for the review is a report by the WTO Secretariat and a report by the Government of Thailand. Conclusion Pakistan follow must follow the role of WTO. Before WTO agreement there was a serious disconnect between the needs of the industry and the availability of special skills suited to the needs of the industry. There was no data available so that the industry could match the needs and the skills available in the domestic manpower market. It was also pointed out that the existing number of technical and vocational centers had been languishing for the past several years. These were usually run and managed by the Provincial the Governments while the provincial the Governments do not. At present with WTO, have any role in promoting exports from the country. Now Government of Pakistan allocating of funds for the Annual Plan, special emphasis be placed on the projects and programs of the Federal and the Provincial the Governments aiming at boosting trade and through this to increase jobs and incomes of the people due to this Pakistan become a developed country

General Analysis Overview


Welfare analysis is a systematic method of evaluating economic implications of alternative allocations. It answers the following questions: 1. Is a given resource allocation efficient? 2. Who gains and who loses under various resource allocations? By how much? Welfare economics: A methodological approach to assess resource allocations and establish criteria for government intervention. Partial analysis: Evaluates outcomes in a subset of markets assuming efficiency in others.

Welfare economics investigate the condition that maximizes economics as whole. Welfare economics is a branch of science which attempts the economic policy which we use well being of the society as a whole. Pareto Welfare Economics

MRSAx, y = MRSBx, y MRTSAL, C = MRTSBL, C D = demand curve Area under demand curve ABC0 = gross benefits from consumption. ABP = consumer surplus=area between demand and price. Efficient outcome
When there are no externalities, an

S = supply curve Area under supply curve 0ELM =cost of production. PLM =producer surplus=area between price and supply

efficient outcome occurs where the sum of consumers and producers surplus is maximized.
Area under demand = gross benefits

Area under supply = gross cost Social surplus = gross benefit cost.

Welfare under Monopoly


A monopoly is the only seller in a market. The basic condition for a monopoly is Maximize P(Q) Q-C(Q) Optimality occurs where:

MR(Q)-MC(Q)=0, where MR=marginal revenue and MC=marginal cost

Linear Example of Monopoly-1


Inverse demand=

P(Q) =a - bQ Revenue = (a - bQ)Q = aQ-bQ2 Supply = c + dQ Competitive outcome is where Demand=supply a - bQ = c + dQ

Welfare under Monopsony


A monopsony is the only buyer in a market.
Qc, Pc=under

Competition Qmn,Pmn=under Pmn Qmn QC Maximization equation: Area: Q Calculation of monopsony Monopsony

Price paid by monopsony:

Summary of monopoly and monopsony Monopolist: Underbuys and oversells. Monopsonist:Underbuys and underpays.

Welfare under Middlemen


A middleman is the only buyer and seller of product
MO

Qmm=middlemen output

Pmms=price paid by

middlemen to supplier Pmmb=price paid to middlemen by buyer


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WELFARE ECONOMICS
Before define the welfare economics first we remind the general definition of economics Economics is a science which deals with scarce resources, unlimited wants, human resources etc, its also called decision making. Economics is the study of production of wealth, consumption of wealth, exchange and distribution of wealth. A branch of economics that focuses on the optimal allocation of resources and goods and how this affects social welfare. Welfare economics analyzes the total good or welfare that is achieved at a current state as well as how it is distributed. This relates to the study of income distribution and how it affects the common good. Welfare economics is a subjective study that may assign units of welfare or utility in order to create models that measure the improvements to individuals based on their personal scales Welfare economics uses the perspective and techniques of microeconomics, but they can be aggregated to make macroeconomic conclusions. Because different "optimal" states may exist in an economy in terms of the allocation of resources, welfare economics seeks the state that will create the highest overall level of social welfare. Some people object to the idea of wealth redistribution because it flies in the face of pure capitalist ideals, but economists suggest that greater states of overall social good might be achieved by redistributing incomes in the economy. Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution. Associated with it. It analyzes social welfare, however measured, in terms of economic activities of the individuals that comprise the theoretical society considered. Accordingly, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units. Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in Pareto efficiency terms from social state A to social state B if at least one person prefers B and no one else opposes it. There is no requirement of a unique quantitative measure of the welfare improvement implied by this. Another aspect of welfare treats income/goods distribution, including equality, as a further dimension of welfare. Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be specified as the summation of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of "utils" or dollars, or measured ordinally in terms of Pareto efficiency. The cardinal method in "utils" is seldom used in pure theory today because of aggregation problems that make the meaning of the method doubtful, except on widely challenged underlying assumptions. In applied welfare economics, such as in cost-benefit analysis, money-value estimates are often used, particularly where income-distribution effects are factored into the analysis or seem unlikely to undercut the analysis. Since the early 1980s economists have been interested in a number of new approaches and issues in welfare economics. The capabilities approach to welfare argues that what people are free to do or be should also be included in welfare assessments and the approach has been particularly influential in development policy circles where the emphasis on multi-dimensionality and freedom has shaped the evolution of the Human Development Index. Economists have also been interested in using life satisfaction to measure what Daniel Kahneman and colleagues call experienced utility. What follows, for the most part, therefore refers to a particular approach to welfare economics, possibly best referred to as 'neo-classical' or 'traditional' welfare economics.

Other classifying terms or problems in welfare economics include externalities, equity, justice, inequality, and altruism.

Two approaches
There are two mainstream approaches to welfare economics: the early Neoclassical approach and the New welfare economics approach. The early Neoclassical approach was developed by Edgeworth, Sidgwick, Marshall, and Pigou. It assumes that: Utility is cardinal, that is, scale-measurable by observation or judgment. Preferences are exogenously given and stable. Additional consumption provides smaller and smaller increases in utility (diminishing marginal utility). All individuals have interpersonally comparable utility functions (an assumption that Edgeworth avoided in his Mathematical 'Psychics). With these assumptions, it is possible to construct a social welfare function simply by summing all the individual utility functions. The New Welfare Economics approach is based on the work of Pareto, Hicks, and Kaldor. It explicitly recognizes the differences between the efficiency aspect of the discipline and the distribution aspect and treats them differently. Questions of efficiency are assessed with criteria such as Pareto efficiency and the Kaldor-Hicks compensation tests, while questions of income distribution are covered in social welfare function specification. Further, efficiency dispenses with cardinal measures of utility, replacing it with ordinal utility, which merely ranks commodity bundles (with an indifference-curve map, for example).

Efficiency
Situations are considered to have distributive efficiency when goods are distributed to the people who can gain the most utility from them. Many economists use Pareto efficiency as their efficiency goal. According to this measure of social welfare, a situation is optimal only if no individuals can be made better off without making someone else worse off. This ideal state of affairs can only come about if four criteria are met: The marginal rates of substitution in consumption are identical for all consumers. This occurs when no consumer can be made better off without making others worse off. The marginal rate of transformation in production is identical for all products. This occurs when it is impossible to increase the production of any good without reducing the production of other goods. The marginal resource cost is equal to the marginal revenue product for all production processes. This takes place when marginal physical product of a factor must be the same for all firms producing a good. The marginal rates of substitution in consumption are equal to the marginal rates of transformation in production, such as where production processes must match consumer wants. There are a number of conditions that, most economists agree, may lead to inefficiency. They include: Imperfect market structures, such as a monopoly, monopsony, oligopoly, oligopsony, and monopolistic competition. Factor allocation inefficiencies in production theory basics. Market failures and externalities; there is also social cost. Price discrimination and price skimming. Asymmetric information, principal-agent problems. Long run declining average costs in a natural monopoly. Certain types of taxes and tariffs. To determine whether an activity is moving the economy towards Pareto efficiency, two compensation tests have been developed. Any change usually makes some people better off while making others worse off, so these tests ask what would happen if the winners were to compensate the losers. Using the Kaldor

criterion, an activity will contribute to Pareto optimality if the maximum amount the gainers are prepared to pay is greater than the minimum amount that the losers are prepared to accept. Under the Hicks criterion, an activity will contribute to Pareto optimality if the maximum amount the losers are prepared to offer to the gainers in order to prevent the change is less than the minimum amount the gainers are prepared to accept as a bribe to forgo the change. The Hicks compensation test is from the losers' point of view, while the Kaldor compensation test is from the gainers' point of view. If both conditions are satisfied, both gainers and losers will agree that the proposed activity will move the economy toward Pareto optimality. This is referred to as Kaldor-Hicks efficiency or the Scitovsky criterion.

Income distribution
There are many combinations of consumer utility, production mixes, and factor input combinations consistent with efficiency. In fact, there are an infinity of consumption and production equilibria that yield Pareto optimal results. There are as many optima as there are points on the aggregate production possibilities frontier. Hence, Pareto efficiency is a necessary, but not a sufficient condition for social welfare. Each Pareto optimum corresponds to a different income distribution in the economy. Some may involve great inequalities of income. So how do we decide which Pareto optimum is most desirable? This decision is made, either tacitly or overtly, when we specify the social welfare function. This function embodies value judgements about interpersonal utility. The social welfare function shows the relative importance of the individuals that comprise society. A utilitarian welfare function (also called a Benthamite welfare function) sums the utility of each individual in order to obtain society's overall welfare. All people are treated the same, regardless of their initial level of utility. One extra unit of utility for a starving person is not seen to be of any greater value than an extra unit of utility for a millionaire. At the other extreme is the Max-Min, or Rawlsian utility function (Stiglitz, 2000, p102). According to the Max-Min criterion, welfare is maximized when the utility of those society members that have the least is the greatest. No economic activity will increase social welfare unless it improves the position of the society member that is the worst off. Most economists specify social welfare functions that are intermediate between these two extremes. The social welfare function is typically translated into social indifference curves so that they can be used in the same graphic space as the other functions that they interact with. A utilitarian social indifference curve is linear and downward sloping to the right. The Max-Min social indifference curve takes the shape of two straight lines joined so as they form a 90 degree angle. A social indifference curve drawn from an intermediate social welfare function is a curve that slopes downward to the right. The intermediate form of social indifference curve can be interpreted as showing that as inequality increases, a larger improvement in the utility of relatively rich individuals is needed to compensate for the loss in utility of relatively poor individuals. A crude social welfare function can be constructed by measuring the subjective dollar value of goods and services distributed to participants in the economy.

A simplified seven-equation model


The basic welfare economics problem is to find the theoretical maximum of a social welfare function, subject to various constraints such as the state of technology in production, available natural resources, national infrastructure, and behavioural constraints such as consumer utility maximization and producer profit maximization. In the simplest possible economy this can be done by simultaneously solving seven equations. This simple economy would have only two consumers (consumer 1 and consumer 2), only two products (product X and product Y), and only two factors of production going into these products (labour (L) and capital (K)). The model can be stated as: maximize social welfare: W=f(U1 U2) subject to the following set of constraints: K = Kx + Ky (The amount of capital used in the production of goods X and Y) L = Lx + Ly (The amount of labour used in the production of goods X and Y) X = X(Kx Lx) (The production function for product X) Y = Y(Ky Ly) (The production function for product Y) U1 = U1(X1 Y1) (The preferences of consumer 1)

U2 = U2(X2 Y2) (The preferences of consumer 2) The solution to this problem yields a Pareto optimum. In a more realistic example of millions of consumers, millions of products, and several factors of production, the math gets more complicated. Also, finding a solution to an abstract function does not directly yield a policy recommendation! In other words, solving an equation does not solve social problems. However, a model like the one above can be viewed as an argument that solving a social problem (like achieving a Pareto-optimal distribution of wealth) is at least theoretically possible.

Efficiency between production and consumption


The relation between production and consumption in a simple seven equation model (2x2x2 model) can be shown graphically. In the diagram below, the aggregate production possibility frontier, labeled PQ shows all the points of efficiency in the production of goods X and Y. If the economy produces the mix of good X and Y shown at point A, then the marginal rate of transformation (MRT), X for Y, is equal to 2. Point A defines the boundaries of an Edgeworth box diagram of consumption. That is, the same mix of products that are produced at point A, can be consumed by the two consumers in this simple economy. The consumers' relative preferences are shown by the indifference curves inside the Edgeworth box. At point B the marginal rate of substitution (MRS) is equal to 2, while at point C the marginal rate of substitution is equal to 3. Only at point B is consumption in balance with production (MRS=MRT). The curve 0BCA (often called the contract curve) inside the Edgeworth box defines the locus of points of efficiency in consumption (MRS1=MRS ). As we move along the curve, we are changing the mix of goods X and Y that individuals 1 and 2 choose to consume. The utility data associated with each point on this curve can be used to create utility functions.

Social welfare maximization


Utility functions can be derived from the points on a contract curve. Numerous utility functions can be derived, one for each point on the production possibility frontier (PQ in the diagram above). A social utility frontier (also called a grand utility frontier) can be obtained from the outer envelope of all these utility functions. Each point on a social utility frontier represents an efficient allocation of an economy's resources; that is, it is a Pareto optimum in factor allocation, in production, in consumption, and in the interaction of production and consumption (supply and demand). In the diagram below, the curve MN is a social utility frontier. Point D corresponds with point B from the earlier diagram. Point D is on the social utility frontier because the marginal rate of substitution at point B is equal to the marginal rate of transformation at point A. Point E corresponds with point C in the previous diagram, and lies inside the social utility frontier (indicating inefficiency) because the MRS at point C is not equal to the MRT at point A. Although all the points on the grand social utility frontier are Pareto efficient, only one point identifies where social welfare is maximized. Such point is called "the point of bliss". This point is Z where the social utility frontier MN is tangent to the highest possible social indifference curve labelled SI.

Welfare economics in relation to other subjects


Welfare economics uses many of the same techniques as microeconomics and can be seen as intermediate or advanced microeconomic theory. Its results are applicable to macroeconomic issues so welfare economics is somewhat of a bridge between the two branches of economics. Cost-benefit analysis is a specific application of welfare economics techniques, but excludes the income distribution aspects. Political science also looks into the issue of social welfare (political science), but in a less quantitative manner. Human development theory explores these issues also, and considers them fundamental to the development process itself.

Paretian welfare economics


Paretian welfare economics rests on the assumed value judgment that, if a particular change in the

economy leaves at least one individual better off and no individual worse off, social welfare may be said to have increased.

Criticisms
Some, such as economists in the tradition of the Austrian School, doubt whether a cardinal utility function, or cardinal social welfare function, is of any value. The reason given is that it is difficult to aggregate the utilities of various people that have differing marginal utility of money, such as the wealthy and the poor. Also, the economists of the Austrian School question the relevance of pareto optimal allocation considering situations where the framework of means and ends is not perfectly known, since neoclassical theory always assumes that the ends-means framework is perfectly defined. Some even question the value of ordinal utility functions. They have proposed other means of measuring well-being as an alternative to price indices, "willingness to pay" functions, and other price oriented measures.[citation needed] These price based measures are seen as promoting consumerism and productivism by many.[citation needed] It should be noted that it is possible to do welfare economics without the use of prices, however this is not always done.[citation needed] Value assumptions explicit in the social welfare function used and implicit in the efficiency criterion chosen tend to make welfare economics a normative and perhaps subjective field. This can make it controversial. However, perhaps most significant of all are concerns about the limits of a utilitarian approach to welfare economics. According to this line of argument utilities are not the only claim or welfare output that matters to people and so a comprehensive approach to welfare economics should include such factors. The capabilities approach to welfare is an attempt to construct a more comprehensive approach to welfare economics, one in which functionings, happiness and capabilities are the three key aspects of welfare outcomes that people should seek to promote and foster.

FUNDAMENTAL THEOREM OF WELFARE ECONOMICS

There are two fundamental theorems of welfare economics. The first states that any competitive equilibrium or Walrasian equilibrium leads to a Pareto efficient allocation of resources. The second states the converse, that any efficient allocation can be sustainable by a competitive equilibrium. Despite the apparent symmetry of the two theorems, in fact the first theorem is much more general than the second, requiring far weaker assumptions. The first theorem is often taken to be an analytical confirmation of Adam Smith's "invisible hand" hypothesis, namely that competitive markets tend toward an efficient allocation of resources. The theorem supports a case for non-intervention in ideal conditions: let the markets do the work and the outcome will be Pareto efficient. However, Pareto efficiency is not necessarily the same thing as desirability; it merely indicates that no one can be made better off without someone being made worse off. There can be many possible Pareto efficient allocations of resources and not all of them may be equally desirable by society. The ideal conditions of the theorems however are an abstraction. The GreenwaldStiglitz theorem, for example, states that in the presence of either imperfect information, or incomplete markets, markets are not Pareto efficient. Thus, in most real world economies, the degree of these variations from ideal conditions must factor into policy choices. The second theorem states that out of all possible Pareto efficient outcomes one can achieve any particular one by enacting a lump-sum wealth redistribution and then letting the market take over. This appears to make the case that intervention

has a legitimate place in policy redistributions can allow us to select from all efficient outcomes for one that has other desired features, such as distributional equity. The shortcoming is that for the theorem to hold, the transfers have to be lump-sum and the government needs to have perfect information on individual consumers' tastes as well as the production possibilities of firms. Additionally, an additional mathematical condition is that preferences and production technologies have to be convex. Pareto Efficiency/ Pareto optimality Pareto efficiency, or Pareto optimality, is a concept in economics with applications in engineering and social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution. Given an initial allocation of goods among a set of individuals, a change to a different allocation that makes at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made. Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society.