Abolition of the cotton quota system and modification of the cotton subsidization system
This scenario addresses the current state policy of fixing the price and the area the farmers have to cultivate for cotton. Because cotton is the main export product of Uzbekistan (45 % in 2004) and contributes to 25 % of the foreign exchange revenues and additional tax revenues, this policy is understandable (GILLSON ET AL., 2004). Furthermore, the subsidies and guarantied prices for cotton lead to a reduced risk for farmers.
However, due to the governmental procurement system, the cotton producers obtain prices that are lower than market prices (RUDENKO, 2008). The state’s involvement in the agricultural sector hampers the development of true private farms due to the limited access to open markets, credits and inputs (FAO,2003d). Furthermore, the intensive cultivation and, to some extent, monoculture of cotton in this arid area is leading to previously described problems such salinization and chemical contamination, waterlogging, high water consumption, the reduction of soil fertility and soil crustification. These problems result in a continuous reduction of cotton yields the last years (GUADAGNI ET AL., 2005). The quota system also has negative impacts on water use and management because farmers have to fulfill their quotas regardless of the suitability of the area and the availability of water
(ABDULLAYEV ET AL., 2009). RUDENKO (2008) shows that the export of intermediate cotton products such as fiber prevents the further development of the local processing industry and the integration of the cotton sector into the remainder of the economy. Simultaneously, the government transfers many of the subsidies for the maintenance and operation of the irrigation system, including free irrigation water, a financing and credit system, write-offs and agricultural inputs such as fertilizer, machinery and energy, to lower the prices.
It should also be noted that subsidies, support, direct payments and quotas for the farmers in cotton-producing countries is standard. The subsidies in Europe (Spain, Portugal and Greece) and in the United States account for more than 100 % and 50 % respectively of the averaged world cotton prices in 2005/06 (USDA,2005 and ICAC,2007). These subsidies are the highest in the world and may be damaging, especially for the cotton production in developing countries, due to the distortion of competition. China and other countries such as Turkey, Colombia, Mexico and Brazil provide direct income and price support. The impact of those incentives is that cotton prices are kept artificially low. According to the studies mentioned above, the world market prices of cotton would be approximately 10 %21 higher if the subsidies were eliminated worldwide.
The situation just described reveals the controversy regarding subsidies and governmental intervention. It provides a certain guarantee and safety for the farmers but provides no incentives to reduce water consumption. Furthermore, the government intervention leads to huge governmental expenditures and negative externalities on the international cotton market, especially for developing countries.
WTO (2007) and the International Cotton Advisory Committee (ICAC, 2005) arranged agreements for a rapid and elaborate reduction of governmental measures and subsidies in the cotton sector. As a result the Uzbek “Cabinet of Ministers” and the President passed several regulations and decrees on the reduction of subsidies and demonopolization of Uzbeks ginning industry and cotton sector privatization (ASKAROV, 2005). In addition to the progression of farm restructuring in Uzbekistan, another step in the direction of policy transformation, market liberalization and privatization has thus been initiated.
The impact of the liberalization of the cotton market will be analyzed in the model for the Khorezm region. For this scenario, an elimination of the governmental procurement system is defined. There are several linkages between the explicit and implicit subsidies,
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taxes, credits, pricing and transfers back to agriculture that make it difficult to define the essential factors and changes for this scenario. Both input and output factors have to be changed. The state procurement price and the abolition of input subsidies for fertilizer, diesel, fuel and operation and maintenance costs for the irrigation canals have to be adjusted.
It is assumed that the price for raw cotton in a liberalized market situation is increased. RUDENKO (2008) showed that the Uzbek and Khorezmian cotton-producing farmers received approximately 66 % of the export border price for cotton fiber in 2005. Because Uzbekistan is not exporting raw cotton directly but rather cotton fiber, the processing of raw cotton into cotton fiber with a current ginning efficiency of 32 % for Uzbekistan has to be taken into account. RUDENKO,2008showed in a study on the Cotton Value Chain that 3.125 tons of raw cotton yields approximately 1 ton of cotton fiber22. In addition, GUADAGNI ET AL.,2005 stated that the border price for raw cotton in 2003 could be approximately 28 % higher than the governmental price for raw cotton. This corresponds well with the 34 % cotton value chain analysis by RUDENKO. Thus, a 30 % increase of the cotton price for the liberalization scenario appears to be realistic.
The second factor is the simultaneous change of production costs for cotton in the scenario of the abolition of the governmental subsidies. The costs for inputs such as fertilizer, energy and diesel fuels, seeds and water, as well as the operation and maintenance of the irrigation and drainage network, will increase for the farmers. Due to the absence of reliable, empirical data these estimates must be based on data from neighboring countries and other studies. BOBOJONOV (2008) indicates an increase of 36 % for fertilizer and 24 % for fuel and DJANIBEKOV (2008) reported an increase of 28 % for cotton seeds and 20 % for pesticides in Kazakhstan in 2003. The change in production costs under a liberalized cotton scenario in this model is based on RUDENKO´s (2008) calculations of an increase of 32 % for the total production costs, with fertilizer application being one of the major input factors in terms of expenses.
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With a changed ginning structure, which also is subsidized by the state, the efficiency would certainly change, too.