Sugar Prices, Labor Income, and Poverty in Brazil

Why the hell should I give up what I have if in fact it’s not going to be to the benefit of anyone but a middleman? . . . The poorest of the poor gets hardly anything, but this is being advertised as a benefit of reform.

—Jack Wilkinson, President of the International Federation of Agricultural Producers

Sugar is produced in 121 countries in the world.¹ It remains one of the most distorted sectors, and only in a handful of countries do producers face world prices. In many industrialized countries, sugar producers benefit from all sorts of border protection, as well as domestic and export subsidies. There has been significant pressure on member countries of the Organization for Economic Cooperation and Development (OECD) to liberalize the sugar sector. Some estimates suggest that world prices could increase by as much as 40 percent following the elimination of all trade-distorting policies in this sector.² This could benefit the many developing countries that have a natural comparative advantage in the production of sugar. Brazil is likely to be one of the largest beneficiaries.³ It is the largest producer and exporter of sugar in the world, accounting for 28 percent of world sugar cane production and 25 percent of world sugar exports.

But who is likely to be the largest winner within Brazil? Some have argued that given the structure of the sugar sector and the large mechanization it has experienced in recent years, very little of the economic gains would go to small farmers and agricultural workers in Brazil. Rather, reforms in the OECD are likely to benefit almost exclusively large multinational firms investing in Brazil and their skilled and often foreign workers. Indeed, since Brazil opened its sugar sector to foreign investment in the late 1980s, around thirty European firms have established their presence in Brazil and currently represent about 10 percent of the sector’s total output.⁴ Nevertheless, the impact of an increase in sugar prices on the poorest segments of the population could be quite large. The sugar sector accounts for a substantial share of employment among the poor in Brazil. A third of sugar workers in the north and northeast are illiterate, and almost 60 percent of sugar workers in Brazil have not completed primary school. Moreover, the sugar sector’s overall contribution to GDP and employment is around 1 percent and reaches 3 to 4 percent in Pernambuco. General equilibrium effects may lead to a relatively high impact on wages and employment in other sectors as well, depending on interindustry linkages and factor mobility across sectors and industries. Thus the presence of foreign capital in a relatively concentrated sector does not preclude significant impacts on labor markets.

This paper investigates how changes in the world price of sugar could affect individuals within different segments of the income distribution by focusing on the relationship between sugar prices, wages, and employment. We first estimate the extent of price transmission from world markets to eleven Brazilian states. Some states are more isolated than others, preventing a full price transmission from world markets to sugar producers.⁵ Empirical results suggest that long-run price transmission across states is somewhat heterogeneous, ranging from 0.75 in Pernambuco and Bahia to 1.00 in Goiás, Minas Gerais, and São Paolo. Consequently, increases in world prices are not going to be homogeneously transmitted to households in different states.

Second, we simultaneously estimate the impact of changes in local sugar prices on regional wages and employment for workers with different characteristics. These two are often examined separately, yet price changes simultaneously affect wages and labor opportunities.⁶ The relative strength of these two channels of transmission from domestic prices to labor income will depend on labor demand and supply conditions, as well as labor market regulations. Our results show that better-educated workers experience higher wage increases following a rise in sugar prices. This may be partly due to the fact that mechanization and the entry of foreign multinationals has made this sector more capital and skilled-labor intensive. Also...