Pedro M. Picornell
Pedro M. Picornell is Executive Vice-President for Planning with the Paper Industries Corporation of the Philippines (PICOP). This article also appears in FAO Forestry Paper No. 45 entitled Establishing pulp and paper mills (see page 54 of this issue of Unasylva for a description of this book).
Are developing countries justified in adopting protectionist measures to assist their newly built pulp and paper plants? The issue is a complex one, says Pedro M. Picornell, but the basic answer is yes. For another view, see the article by Salah El Serafy that follows.
LOGS READY FOR LOADING: who gains - and who loses - from free trade?
· For many years, the markets for paper and paperboard products in developing countries were of limited interest to the pulp and paper industry in the developed world. Demand was small and usually handled by established Western traders. These traders, some of whom became very interesting figures, usually represented a number of mills in the developed world and covered considerable ground. When there was an oversupply of paper and board, these products were readily available but quite expensive. When supply was tight, paper and board products were simply unavailable unless one paid the price, which was very, very expensive.
As the economies of the developing countries began to expand in the late 1950s and through the 1970s, the markets for paper and paperboard began to increase, and these countries began to look into establishing their own pulp and paper industries. There were four main reasons that encouraged them to build their own mills.
· To make use of raw materials available locally and thus save on diminishing foreign-exchange resources. However, since many of these raw materials were not the traditional ones used in developed countries, new technology often had to be developed for their use.· To protect local consumers from the high prices and wild swings of the international pulp and paper market.
· To develop local industry and provide employment.
· To fulfill what was believed, rightly or wrongly, to be a part of industrial development by having a pulp and paper mill.
The effects of some of these factors, such as cheaper raw materials, can be readily measured. Others, such as the promotion of employment and savings in foreign exchange, are more difficult to evaluate.
A pulp and paper mill in a developing country has usually been justified by the availability of cheap raw materials and labour. It has also had a freight advantage in terms of the amount of money that would have to be paid in bringing products from the point of manufacture to the point of use. However, a mill in a developing country has also had the following disadvantages:
· A relatively small market. Most of the mills in developing countries have been built to supply the domestic market, as they have little hope of competing in the export markets with the large mills from developed countries. As a result of this, these mills are usually small.· A company building a mill in a developing country has usually had only one mill, manufacturing a limited number of products. This has put it at a disadvantage when competing with the giants in the developed world, who own many mills of different sizes and in different stages of depreciation; they can spread depreciation and overhead charges over a number of mills or products - or concentrate these charges on specific mills and products if necessary.
· The mill has cost more than a similar one in a developed country, since almost everything in it had to be imported. In addition, since most of these mills are also smaller, they have lost out in the economies of scale.
· Usually there have been no trained personnel available to start up and operate such mills. Start-up has therefore depended on the use of very expensive foreign technicians, whose services have had to be retained until the local staff gain expertise.
· The cost of energy and imported chemicals and other materials and supplies has usually been higher in developing countries.
· The cost of domestic money has also been higher in developing countries.
Thus, most of us in the developing countries knew from the beginning that new mills would not have many advantages - if any - over those in developed countries; but that, at prevailing and projected prices, we had a good chance of holding our own in the domestic market, mainly because of freight advantages once the mills began operating regularly at capacity.
The imposition of duties on imported pulp and paper did not come with the building of mills in developing countries; it was usually there before the mills were built.
While it is true that some mills in developing countries never had a good reason to exist, and that there were abuses and irregularities in their establishment, most of them were carefully planned and built with the assistance of internationally known consulting firms, often under the auspices of international financing institutions.
Another characteristic of mills built in developing countries is the involvement of government. With an almost chronic shortage of capital in the private sector, it has many times become necessary to get government involved in such projects by guaranteeing loans, lending money to the mills and, in some cases, sharing ownership of equity. And government approval has to be obtained before any pulp and paper mill can be built - something that is now also the case in most of the developed countries.
When the more important pulp and paper mills in developing countries were planned, it became obvious that these would have to be protected during their infancy in much the same way as children have to be protected, even from themselves, during their early years. We knew that these mills would be inefficient during their start-up periods, that operating bugs had to be worked out, crews trained, product quality improved and markets developed. The question was how much protection should be given. The answer usually boiled down to how much a country was willing to pay to get a new industry started, to create employment. Unemployment has been a chronic problem in developing countries for many, many years, whereas it has only gained importance in developed countries during the last two to three years of recession.
The imposition of import duties on imported merchandise is an accepted way of raising revenues. It is used, much like sales taxes and the other taxes, by all governments I know of. The imposition of duties on imported pulp and paper did not come with the building of mills in developing countries; it was usually there before the mills were built.
Governments themselves did not particularly cherish overprotection, since it meant higher prices for local products.
In most developing countries, extraordinary protection given to new industries was always assumed to be temporary. It was supposed to be removed gradually as the industry matured and operations "normalized". This seemed fair and feasible in the relatively stable economic conditions of the 1960s and early 1970s, when demand and price projections could be made with relative ease. It must also be remembered that governments themselves did not particularly cherish overprotection, since it meant higher prices for local products, and high prices are not especially liked by consumers who, after all, represent many votes. What happened was that before these industries could be left on their own, unprotected by government, the energy crisis suddenly appeared, completely disrupting the economic environment in most of the developing countries.
As the cost of energy rose rapidly, particularly in developing countries with no oil of their own, the few competitive advantages of these pulp and paper mills rapidly disappeared. Mills that tried to change over to cheaper fuels such as coal or wood were hit by rapidly increasing machinery charges from suppliers in the developed world as well as by soaring interest rates. The costs of raw materials also rose steeply because the cost of transporting them to the mills grew rapidly with the increasing cost of oil. Moreover, the demand for some of these raw materials, such as sugar-cane bagasse for fuel, repeatedly increased their cost. To make matters worse, the price of oil went up at a faster rate in developing countries than in most developed countries, particularly in North America. I am in no position to offer reasons for this, but the net effect was a substantial subsidy for North American mills, a factor that further eroded the competitive position of most of the mills in the developing countries.
In an attempt to survive, mills in developing countries responded with a drive for fuel efficiency and greater productivity. This, however, had the counter-effect of eroding a major competitive advantage of these mills, namely cheap labour. But cheap labour, we knew, did not necessarily represent low labour costs in the production of paper and board: this has to be tied to increases in labour productivity.
I believe it can be said that developing countries no longer have the same substantial advantage in labour costs they were once said to enjoy.
By the last quarter of 1982, the entire pulp and paper industry in the Philippines faced immediate collapse.
Also, increasing social costs during the last few years have started to increase the cost of labour in the mills, and we now find ourselves in a situation where, in order to increase productivity, labour has had to be upgraded. In order to upgrade it, higher and higher wages have had to be paid, I believe it can be said that developing countries no longer have that substantial advantage in labour costs they were once said to enjoy.
While it is true that mills in developed countries have had to spend huge amounts of money in areas such as pollution control, it is also true that these mills were able to spend large sums of money for substantial expansions in the late 1970s - particularly in the commodity grades - in anticipation of increasing demand, especially in North America. Then came the recession of the 1980s, and, as capacity began to outstrip demand, these mills turned to the export market in order to maintain their operating rates.
The effects of the current recession (or depression) on the pulp and paper industry in the developed world are well known, so I will discuss here only what has happened in the Philippines, where I can talk from personal experience.
Within the short period of 18 months, prices of commodity-type papers from the developed countries such as liner board dropped from US$ 500 per tonne c.i.f. to as low as $285. As freight from North America to Southeast Asia runs at about $90 per tonne, this represents a price of $195 f.o.b. North American port. I do not claim to know the detailed costs of liner board produced in North American mills, but I know enough to be able to say that the total cost of producing liner board in North America is higher than that, and that average prices there were also higher than these. During the last quarter of 1982, a total of 13000 tonnes of liner board was imported into the Philippines for its domestic market at these prices. This may be a very small volume for a developed country, but in a country where the total demand for liner board runs at about 45000 tonnes a year, it can be left to the reader's imagination what this did to the Philippine market. We experienced the same thing, although to a lesser degree, in newsprint and printing and writing papers. In fact, by the last quarter of 1982, the entire pulp and paper industry in the Philippines faced immediate collapse.
It is the first time I have heard of 29-inch and 36-inch newsprint rolls being labelled as "side runs".
To forestall the filing of dumping charges, exporters of this very low-priced paper were invoicing it as side runs, stock lots, start-up tonnage etc. This included paper from the very well known manufacturers as well as from less well known ones. It is the first time I have heard of 29-inch and 36-inch newsprint rolls being labelled as "side runs". It is true that such practices are one of the more serious problems in our part of the world, but if there were no people on the other side of the ocean ready to cooperate in order to move a few tonnes of paper, the solution of our problem would be that much easier. Under the General Agreement on Tariffs and Trade, a local industry could file dumping charges, but under the principle of Western law that one is innocent until proven guilty, this takes time, and our industry had run out of time.
It is claimed that the drop in prices in developed countries benefited the consumers in developing countries. In my experience, there was no drop in the price of a can of milk or a bar of soap or a composition book during this period. The benefits all accrued to every small number of merchants. The mills, at least, gave employment, which the merchants did not.
Intervention. Faced with the collapse of the pulp and paper industry, our Government had to step in. Such a collapse would have been disastrous for the country's economy. Not only would it have aggravated a very serious unemployment situation, but it would have created a further burden on the Government's foreign-exchange reserves and on the resources of the government financial institutions, which held a substantial exposure in the industry. What else could one have expected our Government to do? Did it have any choice? Will a government in a developing country allow an entire industry to collapse just because the mills in developed countries decide to dump a very small portion of their capacity to keep up machine utilization?
How inefficient should a so-called inefficient industry in a developing country be before it receives no protection and is allowed to collapse?
The Philippine Government moved in to save the country's pulp and paper industry from total collapse (1) by transferring the burden of proof that the grades declared in the import papers are those accepted internationally, and (2) by disputing that the prices charged are in line with the home-consumption value of the paper in the country of origin. In an effort to conserve foreign exchange, the Government now also requires importers to get certification from the Board of Investments that the paper they want to import is not available locally at a reasonable price. This, of course, has added to the red tape importers have to go through.
There are, of course, many questions that remain to be answered.
· What really is a reasonable price for the local product?· What is the true domestic consumption value in the country of origin?
· How much is a consumer in a developing country supposed to pay for having a domestic pulp and paper industry?
· How inefficient should a so-called inefficient in a developing country be before it receives no protection and is allowed to collapse?
· How long should such protection last?
These questions - and many others - have, in my opinion, no absolute answers; they depend upon the relative conditions of the country involved.
Finally, we in developing countries feel that while much lip-service is paid to free trade, particularly in the developed world which is criticizing us for our protectionist policies, the developed world is far from practising what it preaches. There are indirect restrictions on many imported items in Japan; France makes it difficult for Japanese electronic devices to enter by restricting their clearance to only one port of entry - and an inland one at that; the United States has quotas on sugar and is talking of restricting textiles and garments, and it has already increased duties on motor cycles by a very big multiple; the EEC is restricting the entry of agricultural products from non-EEC countries; the Scandinavian countries improved their competitive positions by devaluing their currencies; and so on. I am reminded of the biblical injunction: "Let him who is free of sin throw the first stone."
COLLECTING LOGS FOR PULPING: will exporters grab hold of domestic markets?
I wish I had a magic formula to solve this world-wide dilemma but, unfortunately, I do not. I have to limit myself to listing problems without being able to suggest immediate solutions. Only by talking to each other again and again in diverse ways can we come to understand each other's problems and work for mutually beneficial solutions.
