Race to the Next Income Frontier
Chapter

Chapter 17. Policies, Prices, and Poverty: The Sugar, Vegetable Oil, and Flour Industries in Senegal

Author(s):
Ali Mansoor, Salifou Issoufou, and Daouda Sembene
Published Date:
April 2018
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Author(s)
Ahmadou Aly Mbaye Stephen S. Golub and Philip English

Introduction

With little in the way of export-oriented manufacturing, much of the domestic industry in Senegal, as in most of sub-Saharan Africa, consists of import-competing production of basic necessities, particularly food products. For basic food products, such as sugar, vegetable oil, and flour, policymakers in Senegal face a difficult trade-off between maintaining employment and lowering the cost of living, both of which figure prominently in current government policy.

The products of the three industries examined here account for roughly 14 percent of the consumption basket of the poor, so lowering their prices can have a significant effect on poverty reduction. At the same time, however, the sugar monopoly is the largest private employer in Senegal, and incumbent firms in the other two sectors are also significant employers. Conflicting pressures to protect producers while lowering prices to consumers have led to a rather incoherent policy mix of high levels of protection with price ceilings.

This chapter analyzes performance and pricing in the sugar, vegetable oil, and wheat-flour-bread industries; assesses current policies; and makes recommendations for policy reforms that aim to serve the general interest of Senegalese society as outlined in the government’s Plan Sénégal Émergent. The opening sections provide an overview of the three industries’ market structure and the government policies impinging on them, followed by a breakdown of markets and policies for each industry. The chapter next presents our findings on the effects of Senegal’s policies on the differential between domestic prices and world prices. We then offer an analysis of the implications for welfare and poverty reduction, as well as an examination of the political economy of reform in the three sectors.

Overview of Senegalese Industrial Development and Trade Policies

Upon attaining independence in 1960, Senegal’s political authorities took up the challenge of adopting an industrial strategy based on import substitution and the development of a national bourgeoisie capable of implementing it. This resulted in an overprotected economy with an impressive array of tariff and nontariff barriers, privileged access to finance, and the direct involvement of the state through public and parastatal enterprises.

The initial results were disappointing. Most of the enterprises that benefited from protection did not grow significantly. With domestic prices diverging substantially from world prices, the state and consumers continued to subsidize the local bourgeoisie. Imports grew quickly while exports fell drastically. This system soon showed its limits, with a double deficit in both the current account and the national budget, leading to a rising and unsustainable debt.

In the early 1980s, following shocks both international (oil crisis, financial crisis, etc.) and internal (drought, various macroeconomic imbalances), the state was obliged to adopt structural adjustment programs. This general move toward liberalization and deregulation nonetheless spared certain sectors in which powerful lobbies held vested interests. The sugar, edible oil, and flour sectors are three notable examples.

Senegal is a member of the West African Economic and Monetary Union (WAEMU), involving a single currency, the CFA franc, with a Common External Tariff. That tariff dramatically reduced the complexity and lack of transparency of Senegal’s tariff structure by consolidating its previous tariffs into four categories, with the top import duty rate, applicable to consumer goods, being set at 20 percent (from 2000 until 2015).1 The other major WAEMU tax on imports is the value-added tax (VAT), currently set at 18 percent on most goods in Senegal. To the extent that it applies equally to imports and domestic goods, the VAT does not provide protection to producers, but raises prices to consumers. Other smaller import taxes and fees add up to about 3 percent.

WAEMU provides for two types of special tariffs for industries under duress, consistent with the World Trade Organization’s “safeguards” or “escape clause” provisions: the Special Import Tax (Taxe Conjoncturelle à l’Importation, or TCI) and the Digressive Protection Tax (Taxe Dégressive de Protection), with the TCI being more widely used. Normally the TCI is set at 10 percent, as it is for flour when the price falls below the reference price. A special reference price mechanism is applied to sugar, as described in the next section.

If no TCI or Digressive Protection Tax applies, the maximum rate of import taxation, taking into consideration customs duties, the VAT, and other taxes, is about 45 percent. Excluding the VAT, the maximum nominal rate of protection to producers is a relatively moderate 23 percent. The effective rate of protection to processing can be considerably higher, however, to the extent that inputs enter with lower customs duties or are exempt from VAT.

Sugar

Senegal in the World Market

Sugar is an important part of the local consumption basket of households as well as being a rural-based industry. Developing countries have become the largest producers and exporters of sugar, led by Brazil in both categories. India and Thailand are ranked second and fifth, respectively, in sugar production, while Thailand is second in sugar exports (OECD and FAO 2011; USDA 2013a). Advanced economies, particularly the United States and European Union members, have long maintained high levels of protection for their domestic sugar producers owing to strong producer interest groups.

Both US and EU prices have remained 50 to 100 percent above world levels in recent years, in spite of sugar market reforms in the European Union in 2006 that approximately halved the level of protection (FranceAgriMer 2010). Much traded sugar has traditionally been managed through bi- or multilateral agreements, with administered prices well above world levels, resulting in a very thin free market for the remaining sugar, which has traded at prices often below costs of production. In recent years, however, about a third of world production is being traded, with developing countries accounting for more than half of global sugar imports as well as the bulk of exports. Senegal produces about half of its domestic consumption for household and industrial use and imports the other half.

Market Structure

Since 1972, sugar production in Senegal has been controlled by the Compagnie Sucrière Sénégalaise (CSS), from sugar cane grown on 9,600 hectares located near Richard Toll in the Senegal River valley. Annual production reached about one million tons of sugar cane in 2013, or 100,000 tons refined.

CSS employs about 6,000 workers, with an approximate payroll of CFAF 16 billion in 2013, making it the second-largest employer in Senegal after the government. Many of these are part-time workers hired for harvesting. The CSS is a vertically integrated firm growing, cutting, refining, packaging, and transporting sugar cane for consumption throughout the country. Cutting is done manually rather than mechanized, substantially boosting employment, reportedly as part of an agreement with the government.

Importantly, CSS is also a major importer of sugar. CSS describes itself as responsible for ensuring the domestic availability of sugar, and accordingly imports to fill the gap between its production and domestic demand. Until 2009, CSS had monopsony power in importing sugar legally for consumer use, with industrial users allowed to import for their own use and exempt from the TCI variable levy. In 2009, private traders were permitted to import limited quantities of sugar, and the volume of imports has risen sharply since then. Just a few large traders, represented by the Union Nationale des Industriels et Commerçants du Sénégal (UNACOIS),2 seem to be involved. Since then, an open conflict between CSS and UNACOIS has broken out.

Policies

As a finished product, sugar imports are subject to the highest applicable Common External Tariff rate of 20 percent. In addition, sugar benefits from a special TCI variable levy (péréquation), with a reference price used to establish duties assessed rather than the import price. If the import price is below the reference price, all duties levied, including VAT, are assessed on the reference price. Moreover, additional duties are levied equal to the difference between the import price and the reference price, so that the TCI acts as a variable levy (valeur mercuriale). The reference price was established in September 1999 at CFAF 325,056 per ton, with some variations depending on the type of sugar, and has remained at that level since then.3 That is, the tax rate depends on the ratio of the reference price to the world price, along with the normal tax rate. If the world price of sugar is well below the reference price, extremely high rates of import protection can apply.

On the consumption side, in late 2012 the new government of Macky Sall imposed a price ceiling of CFAF 590 per kilogram, considerably bringing down the price of sugar to consumers. In May 2013, CSS revealed that it had accumulated 46,000 tons of unsold sugar—equivalent to about a third of annual consumption—and threatened to shut down its production and lay off workers. The government responded with a ban on further UNACOIS imports until CSS’s inventories were sold off, including blocking a 15,000-ton shipment of sugar at the port.4

Complaints from UNACOIS led the government to back off, releasing that shipment, with the CSS renewing its threats to shut down production. In the midst of this standoff, the government opted to lower the VAT on sugar, officially by adjusting the base on which the tax is levied rather than the reference price or the tax rate itself, so as to remain consistent de jure with WAEMU stipulations on the VAT rate. The new effective VAT rate on sugar is about 6 percent.

Vegetable Oil

Senegal in the World Market

A variety of vegetable oils are available in the world market, each with different characteristics. Groundnuts have been Senegal’s predominant cash crop since the colonial era, and Senegal is a major producer of peanut oil. Peanut oil is relatively expensive, however, so most of the peanut oil produced in Senegal is exported, while domestic consumption is dominated by cheaper imported palm and, until recently, soybean oils. Argentina, Brazil, and the European Union are the world’s largest exporters of soybean oil. Indonesia and Malaysia are the largest exporters of palm oil (USDA 2013b). Although Malaysia and Indonesia are the most competitive producers of palm oil, Senegal imports this product mainly from Côte d’Ivoire, given that Ivoirien imports are exempt from customs duties, because of their origination within WAEMU.5

Market Structure

Although the market was partially liberalized in the 1990s, until 2005 the government retained a near monopoly on the production of vegetable oils through the parastatal Société Nationale de Commercialisation des Oléagineux du Sénégal (SONACOS), which produced peanut oil and oil cake, primarily for export, and imported and refined soybean oil for the domestic market. In 2005, SONACOS was privatized and renamed Suneor. A few other firms compete with Suneor in some product lines, but the latter retained a dominant market share until 2015.6

Policies

In this chapter, we focus on policies in regard to imported vegetable oils.7 Until recently, Suneor maintained a de facto monopsony on legal imports of unrefined vegetable oil given its dominant market share and protection accorded by the government. Suneor faced competition from imported palm oil from Côte d’Ivoire, a member of WAEMU, and Southeast Asia, which is generally less expensive than soybean oil on world markets. Refined vegetable oils are subject to the maximum customs duty rate of 20 percent, while Ivoirien palm oil should enter duty free, although still subject to VAT. Unrefined soybean oil enters at a lower customs duty rate of 10 percent.

The Senegalese government implemented a succession of special import taxes between 2002 and 2008 to protect SONACOS/Suneor against competing imports of refined vegetable oils, particularly palm oil:

  • 2002–05: TCI of 10 percent.

  • 2002–08: specific tax of 12 percent.

  • 2006–07: safeguard tax of 25 percent.

In 2010, the government instituted an import ban on oil containing more than 30 percent saturated fats, aiming at palm oil from Côte d’Ivoire and Asia, under the guise that these oils posed health risks because of high levels of saturated fats. Ivoirien exporters were also accused of transshipping Asian palm oil. UNACOIS traders mounted a countercampaign, sponsoring a public forum with two nutritional experts who debunked the claims that palm oil adversely affects consumers’ health.8 A WAEMU commission ruled that this measure contravened the regional customs union, forcing the Senegalese government to retract the measure in late 2010.

Wheat Flour and Bread

Senegal in the World Market

Wheat is the world’s most actively traded grain and is not particularly restricted. About one-sixth of global production is traded. Most varieties of wheat are best produced in countries with temperate climates. The United States, the European Union, Canada, Australia, and Argentina have been the most important wheat exporters, but Central Asia and Eastern Europe, particularly Kazakhstan, Russia, and Ukraine, are rising in importance (USDA 2013b). Although Senegal produces no wheat, one of the legacies of French influence is a preference for the French-style baguette, with about 3 million consumed per day. Senegal imports most of its wheat from France. Wheat is used primarily for milling flour, which in turn is used mostly for producing bread. Wheat accounts for about 80 percent of the cost of flour. Wheat is much more actively traded than flour, with the latter accounting for less than 10 percent of trade, as a result both of the ease of shipping wheat and of the greater import protection for flour (FAO 2009).

Market Structure

Flour imports have fallen to very low levels since the early 2000s. There are four flour producers in the country, the largest being the Grands Moulins de Dakar, a firm controlled by the same family that owns the sugar monopoly CSS, with about a 65 percent market share of the flour market. Thus, as with sugar and vegetable oil, flour production was previously characterized by a dominant competition, but now it is subject to more competition.9 Millers manage their own imports of wheat, from which they produce flour as well as animal feed, with higher profit margins on the latter. Flour is sold to bakeries on credit.

Bread is supplied by a competitive market, with about 1,000 bakeries around the country that distribute bread through informal and unreliable transport services. Reportedly, the number of bakeries is shrinking as a result of losses. Profit margins on bread are very low or even negative, as one would expect in a highly competitive industry confronted with a price ceiling and rising costs.

Policies

There are numerous government interventions in the wheat-flour-bread value chain in Senegal. Wheat is subject to a low statutory import duty of 5 percent as well as the usual small additional import taxes, but it has been exempt from VAT since 2002, for an overall statutory import tax rate of about 8 percent. Flour, however, is subject to the maximum import duty rate of 20 percent as well as the usual 18 percent VAT. In addition, as with sugar, the usual taxes on flour are supplemented by a TCI duty when the price of imported flour is below a threshold (CFAF 201,400 per ton), though it is a fixed rate of 10 percent rather than a variable levy, as for sugar. Thus, the import taxes on flour cumulate to about 55 percent when the price is below the reference price and 45 percent when the price is above the reference price. Given that wheat is the main ingredient in flour, accounting for about 80 percent of the costs of production, the effective rate of protection on flour is very high.

Until recently, the retail price of flour has not been officially regulated, although it was set in consultation with the government. On the other hand, the government sets the price ceiling for the baguette with a government-set weight of 210 grams.10 Controlling the price of bread is highly problematic in a situation in which flour prices are free to move. For this reason, in late 2012 the new Senegalese government moved to fix the price of flour. The government has wavered on setting flour price ceilings, first lowering the ceiling to CFAF 18,890 from CFAF 20,600 for a 50 kilogram bag, and then raising it back to CFAF 20,000 after pushback from the flour producers. In 2015, flour producers demanded a reduction in VAT similar to that accorded to sugar, claiming that they were suffering losses at the controlled price of CFAF 20,000. The underlying problem is that price ceilings on flour and bread are not viable when wheat prices fluctuate on the world market.

Protection and Domestic Prices

Statutory Nominal and Effective Protection

Table 17.1 shows statutory nominal and effective rates of import taxation on these industries, based on the customs duties, VAT rates, and other levies discussed in previous sections, as of 2011. The effective rates of protection are rough estimates of the protection provided to value added, taking into consideration rates of protection of the main inputs and their approximate shares of total costs. In the case of sugar, as noted previously, the tax rate is endogenous, as it depends on the gap between the reference price and the world price. Nominal rates of taxation on final products are relevant for consumers, as they indicate the wedge that protection places between domestic and international prices. For producers, effective rates of protection depend on tariffs on final products relative to input tariffs. If input tariffs are lower than final-goods tariffs, as in the case of vegetable oil, oil processors receive much higher implicit protection than nominal rates indicate. The high input tariffs on flour, on the other hand, mean that in effect flour producers are being subsidized and bakeries taxed. The rates of import taxation relevant to consumers include VAT rates, while the rates of protection for producers exclude VAT, since it applies in principle to both imports and domestic production.

TABLE 17.1Nominal and Effective Rates of Production, Based on Statutory Tax Rates, Sugar, Wheat, Flour, 2011
Nominal Consumer Tariff (percent)Nominal Producer Tariff (percent)Main InputInput Tariff (percent)Input Share (percent)Effective Producer Tariff (percent)
Sugar10080Diesel fuel80.298
Refined4524Crude vegetable00.8120
Edible Oiloil
Flour5534Wheat80.8138
Bread00Flour540.6−81
Source: Authors’ calculations, based on official Senegal documents and interviews with Senegalese officials.
Source: Authors’ calculations, based on official Senegal documents and interviews with Senegalese officials.

A rough estimate of the statutory nominal protection for sugar in recent years is a taxation of 100 percent on consumers and a subsidy of 80 percent for producers. The effective rate of protection for sugar producers is not much higher than the nominal rate, owing to the vertically integrated nature of CSS. On the other hand, both the flour and refined vegetable oil sectors feature a large share of imported inputs in the final product price. Moreover, the inputs used by these two industries enter with low import duties. This translates into very high effective rates of protection for producers. Nominal rates of protection affecting consumers of flour and vegetable oil are substantial but not as high as those affecting consumers of sugar. Bread producers suffer from large negative protection, given that they face a price ceiling combined with high tariffs on their main input, flour.

Actual Protection and Domestic Prices

How much protection is actually accorded to the three industries in question in view of the combination of tariffs, nontariff measures, and price ceilings? Three alternative measures of protection are (1) the statutory level of duties, (2) the actual level of duties collected, and (3) the actual differential between domestic and world prices. If import taxes are the only form of protection, the three measures should yield similar results. In practice, however, all three measures provide differing estimates of protection.

Figure 17.1 illustrates the ratio of domestic to world prices for all three industries, allowing comparison among three calculations of the ratio: using actual prices, using the prices implied by the statutory import taxes, and using the prices implied by the import taxes as actually applied.11 Actual taxes levied often differ from statutory rates because of discretion within customs in setting values and exceptions granted under special provisions.12 In the case of sugar, the actual tax rates applied, as measured by customs revenues received, have often been far below the rates called for under the reference pricing mechanism. On the other hand, for sugar and vegetable oil, domestic prices exceed world prices by as much as or more than the statutory protection implies, suggesting the presence of non-tariff barriers.

Figure 17.1.Ratio of Senegalese Domestic to World Prices: Actual and Implied by Import Taxes (Including Value-Added Tax), 2000–13

Sources: Index Mundi (http://www.indexmundi.com); and Senegal customs.

Note: World prices have been adjusted upward to account for trading costs and domestic markups.

For sugar, panel 1 of Figure 17.1 indicates that actual tariff protection (as reported in Table 17.1) typically implies domestic prices’ being about double world prices (statutory protection is endogenous because of the reference price mechanism and closely tracks world prices by design). However, until recently, Senegalese retail sugar prices were often three to four times higher than world prices. Thus, a substantial component of the price differential between domestic and world sugar prices cannot be explained by actual tariff protection, suggesting that protection is in part applied through nontariff barriers rather than customs duties, which in turn creates market power.13

In the last few years, the ratio of the domestic Senegalese retail price of sugar to world prices has declined substantially and has become closer to the level predicted by import taxation. For vegetable oil (Figure 17.1, panel 3), the differential between domestic and world prices has been much more volatile and consistently above the levels of statutory and applied import tax duties, likely reflecting the implementation of nontariff barriers on palm oil imports and the monopsony power of Suneor during much of this period. In the case of flour (Figure 17.1, panel 2), differences between the statutory and actual tariff protection and the observed differential between domestic and world prices have been considerably less than those for sugar and vegetable oil.14 The sharp drop in retail flour prices in the last few years to levels well below those implied by protection likely reflects the implementation of binding price controls.

Welfare Effects

The foregoing analysis has shown that the sugar, vegetable oil, and wheat flour sectors have been characterized by a combination of limited competition in both production and trade, high rates of import protection to value addition, and price ceilings. In the cases of sugar and vegetable oil, the dominant incumbent firms have, at least until recently, apparently benefited from substantial monopsony power. What are the pros and cons of these policies?

The most important justification for government intervention is to protect employment in these industries. Senegal’s manufacturing sector has been struggling since the 1980s. At the time of our previous study (Golub and Mbaye 2002), the Senegalese textile and tuna-canning factories were in severe difficulties, and now they have all but disappeared.15 CSS and the vegetable oil and flour-milling firms are among the few major formal manufacturers left in Senegal. If protection is removed, these firms too could disappear.

On the other hand, import protection can involve a very large disguised subsidy from consumers to the protected sectors. This cost to the consumer can be approximated as the difference between the domestic price and the world price, adjusted for transport costs and wholesale-retail costs and margins, multiplied by total consumption.16Table 17.2 shows the results of this calculation for annual averages over 2000–10 and 2011–13. Import restrictions are estimated to have raised the domestic price of sugar by about 60 percent in 2011–13, at a cost to consumers of CFAF 247 per kilogram, for a total cost of CFAF 43 billion, triple the CFAF 15 billion average annual labor compensation bill of CSS over this period.17 Inclusion of the approximately CFAF 7 billion in import duties collected as an additional social benefit of protection still leaves costs to society that are double the benefits.18 In 2000–10, the protection of the sugar industry was even more costly relative to labor compensation, since it more than doubled the domestic price.

TABLE 17.2Implicit Costs to Consumers and Subsidy to Producers Associated with Protection, Sugar, Flour, and Vegetable Oil, 2000–10 and 2011–13
Domestic Retail Price (CFAF per kilogram)Adjusted World Price (CFAF per kilogram)Ratio of Domestic to World PriceUnit Cost to Consumers (CFAF per kilogram)Total Cost to Consumers (CFAF billions)Total Labor Compensation (CFAF billions)Customs Duty Revenues (CFAF billions)
1.2000–10
Sugar5242372.2128743.111.54.9
Vegetable Oil9485361.7741249.55.73.9
Flour3492781.267114.23.60.1
2.2011–13
Sugar6664191.5924744.414.76.7
Vegetable Oil1,3608481.6051261.55.43.9
Flour4424261.04164.84.00.1
Sources: ANSD, Deuxième enquête de suivi de la pauvreté au Sénégal (ESPS II) (for production and retail prices); Index Mundi (http://www.indexmundi.com) (for world consumption prices); and authors’calculations.
Sources: ANSD, Deuxième enquête de suivi de la pauvreté au Sénégal (ESPS II) (for production and retail prices); Index Mundi (http://www.indexmundi.com) (for world consumption prices); and authors’calculations.

Over the period 2000–10, the estimated unit cost to consumers for this protection of processors was considerably lower, as a share of world prices, for vegetable oil than for sugar, but the total cost was higher at CFAF 49 billion, given the larger share of vegetable oils in consumer expenditure compared to that of sugar. The annual cost to consumers of vegetable oil protection in 2000–10 was about CFAF 50 billion, nine times higher than the industry’s wage bill of CFAF 5.7 billion or five times higher if customs duties (of nearly CFAF 4 billion) are included as a benefit of protection. In 2011–13, the domestic price of vegetable oil was also about 60 percent higher than the world price, and the annual cost to consumers of vegetable oil protection rose to over CFAF 60 billion and more than 10 times labor compensation. In the case of flour, the subsidy was considerably smaller than for the other two sectors in 2000–10, but it was still substantial in absolute terms at CFAF 14 billion, amounting to about four times the wage bill of CFAF 3.6 billion. In 2011–13, however, the gap between domestic and world prices nearly vanished for flour.

In the case of sugar and vegetable oils, it appears that incumbent firms have in the past received large quota rents accruing to their monopsony status. It is very hard to see any social rationale for such a situation, except perhaps that domestic production is so uncompetitive it has to be cross-subsidized by granting quota rents to producers.

Sugar, vegetable oil, and bread are important elements in the consumption of the poor. The 2011 poverty survey, Deuxième Enquête de Suivi de la Pauvreté au Sénégal (ESPS II), found that they accounted for 14 percent of total consumption among the poorest quintile of the population and only a little less for the next quintile. In an earlier analysis of 2006 data, it was estimated that sugar prices in Senegal were roughly 90 percent higher than those in The Gambia, 58 percent higher for vegetable oil, and 33 percent higher for wheat flour (Golub and Mbaye 2009). Reducing sugar prices to Gambian levels would have raised 150,000 people above the poverty line. Lowering vegetable oil and flour prices to Gambian levels would have allowed another 220,000 people to escape poverty.

A similar calculation was made for the period 2011–13, taking into account the evolution of prices. While domestic flour prices approximated world prices during this period, sugar and vegetable oil prices in Senegal remained about 60 percent above world prices. Eliminating this difference would have raised consumption levels of the poor by 3 percent and enabled about 227,000 people to move above the poverty line.19 The national rate of poverty would have declined by 1.9 percentage points, which is more than what was actually achieved between 2006 and 2011.20

The Political Economy of Reform

The reform of the industrial sector has always been complicated in Senegal. Since independence, the country has experienced a number of reform periods, with varying results. The interplay of actors has always determined the success or failure of these reforms, which have evolved differently depending on the sector. The three sectors covered here involve three of the products that experienced the most delicate and adaptable reform processes.

The state has always faced a strong tension between the need to promote economic efficiency in these sectors and the desire to preserve social stability. The presence of very strong interest groups with important political and social interests as well as substantial economic rents has further complicated the reforms. With the liberalization of the economy, the national bourgeoisie has steadily exited from industry in favor of commerce and particularly the import-export business. The confrontation between traders/importers and industrialists has generally favored the former. The three sectors that interest us here are notable exceptions.

The sugar sector has received the most attention, given its great capacity to resist reforms. The sugar lobby, in place since 1972, has managed to hold onto rare tariff and nontariff barriers. CSS no longer has a monopoly on sugar imports, but the level of protection remains very high. In the face of this lobby, the Senegalese traders, usually affiliated with UNACOIS, constitute another important actor in this sector. UNACOIS is undoubtedly the most important employers’ group in the country in terms of the number of members (more than 70,000, according to its estimates). For many years, it has confronted the sugar lobby to obtain the liberalization of imports and the end of the CSS monopoly, using consumers as its allies, since they pay prices well above world prices.

Between the interests of these two groups, the state has fluctuated between price controls and import controls. Each time CSS threatens to close shop and put 6,000 workers in the street, the state tends to react by allowing discretionary fiscal exemptions or reducing imports. Then, whenever popular discontent increases as a result of rising prices, the state tends to control prices and encourage imports. A definitive liberalization of imports would appear to be consistent with the economic and social policies of the government. However, in order to help CSS remain competitive, it may be necessary to permit the mechanization of sugar cane harvesting and to offer an adjustment package to the cane cutters, financed by the state.

In the flour sector, we observe more or less the same actors: the traders of UNACOIS and the Grands Moulins de Dakar (GMD). However, the GMD has finally accepted the entry of other millers, and as of 2015 it controlled only 67 percent of the market. The same grounds for conflict were present, but liberalization was pursued, and the GMD found the means to live with some competition.

In the case of edible oil, the same actors—members of UNACOIS—have been in opposition to SONACOS, which became Suneor. Here too the industrialist is losing market power, but now it is the interests of the workers that makes liberalization difficult, since some factories may have to close down or at least downsize. An adjustment package will certainly be needed for those who lose their jobs. In addition, since the employers of Suneor are also shareholders, the state could offer them additional shares in the recapitalized Suneor or, if it is sold, in the new company. Efforts could also be made to integrate them into horticulture and rice operations, which are growing well in the same region.

Conclusion

The sugar, edible oil, and flour sectors in Senegal are fraught with controversy, with the government facing difficult choices and pressures from competing interest groups. The government faces intractable trade-offs between conflicting objectives: (1) maintaining employment in these industries, (2) keeping prices of these basic consumer items low to help the poor and head off social unrest, (3) limiting incentives to smuggle cheaper products from neighboring countries, and (4) obtaining fiscal revenues to finance public goods. The only way to lower prices to consumers by administrative fiat, while supporting producer prices through high levels of protection, is to provide government subsidies or tax breaks that bleed the budget. High levels of protection might support employment in these sectors, but they would hurt consumers and encourage smuggling.

To date, consumers have been subsidizing the few jobs created, especially the owners of these industries. For historical reasons, these trade-offs between consumers, traders, producers, and fiscal revenues are particularly acute in regard to sugar and vegetable oil, but also manifest themselves in the wheat-flour-bread value chain. These conflicting pressures have resulted in incoherent policies, with high and nontransparent protection to producers combined with price controls to benefit consumers. These offsetting policies result in highly variable rates of protection as the balance between protecting producers and shielding consumers shifts erratically while ratcheting up government intervention in price setting that politicizes economic policy.

Overall, the level of protection accorded to the incumbent firms in these sectors, in the form of customs duties and de facto monopsony, is too high, especially for sugar and vegetable oil. Lowering these levels of protection is the best way to bring consumer prices down, and it would substantially obviate the need for price controls, which are difficult to administer and set at appropriate levels. Furthermore, discretionary and nontransparent customs practices, which manipulate the level of protection through variations in import valuations rather than announced changes in statutory protection, should be eliminated to maintain a level playing field and avoid corruption.

If world prices spike, the government can consider temporary reductions in import duties and VAT rates. To boost competitiveness rather than protect rents, governments should replace protection with targeted assistance to overcome the most binding constraints and improve the business climate. In the case of sugar, this may mean expansion or the mechanization of harvesting, without, however, providing subsidies or privileged access to land and water to CSS relative to other users, notably horticultural producers.21 In the case of peanuts, processors need to focus on promoting the groundnuts sector by working more closely with farmers and providing assistance to improve yields and quality, in return for guaranteed access to their harvest through contracts. In the case of bread, the production and use of local grains should be promoted, building on recent research to promote the production of composite flour and the marketing of breads using local grains.22

More generally, these battles over rents are a sideshow to the deeper issues of reducing poverty and raising incomes. To raise incomes, labor-intensive economic growth is required. Growth in turn depends on developing a competitive economy that can export goods and services that other countries’ consumers want to buy. In this regard, Senegal’s past performance has been disappointing. Today, traditional exports are in trouble and export diversification remains limited, with little dynamism in labor-intensive sectors that could promote equitable growth.

Rather than protecting import-competing industries, Senegalese policy should focus on export competitiveness. Industries with export potential include edible groundnuts, fishing, tourism, horticulture, mining, telecommunications, and possibly light manufacturing. Senegal needs to make more progress in resolving the long-standing obstacles to competitiveness identified more than a decade ago: corruption and red tape; poor public services, notably electricity; and adversarial relations between workers and employers (Golub and Mbaye 2002).23 The government has recently embarked on an ambitious program to improve the business climate, which will need to be sustained in the coming years. Its new Plan Sénégal Émergent, with its focus on exporting industries, holds promise for the future but will require a shift in focus from the vested interests of the past to a new generation of entrepreneurs.

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We thank Salifou Issoufou, Elke Kreuzwieser, and Aifa Ndoye Niane for very helpful comments and Edem Akpo and John Pontillo for capable research assistance. All views are the authors’ own.

A fifth band of 35 percent was added when the Common External Tariff was extended to all Economic Community of West African States (ECOWAS) members.

UNACOIS is an association of the most important informal sector actors, operating primarily in commerce and other services such as transportation.

The reference price is set according to a WAEMU document, Règlement No. 06/99/CM/UEMOA, “Portant Adoption du Mécanisme de la Taxe Conjoncturelle à L’Importation au Sein de l’UEMOA” [Concerning the Adoption of the Cyclical Import Tax Mechanism in WAEMU]. Discussions were underway in 2015 for the revision of this price.

PressAfrik, “Etat du Sénégal et UNACOIS/Jappo: la guerre est ouverte autour du sucre” [Senegal and UNACOIS/Jappo: The War Is On over Sugar], June 13, 2013. http://www.pressafrik.com/Etat-du-Senegal-et-UNACOIS-Jappo-la-guerre-est-ouverte-autour-du-sucre_a105505.html.

Providing they meet the requirement of a minimum value added of 35 percent.

Suneor was virtually bankrupt in 2015 and was taken over by the state at the end of the year.

For analysis of peanut oil, see Mbaye, Golub, and English 2015 and World Bank 2015.

“La guerre des huiles bat son plein [The Vegetable Oil War Heats Up],” Jeune Afrique, January 5, 2010.

There are reports that two new companies are preparing to enter the Senegalese market. If so, competition could increase significantly.

The price was set at CFAF 175 in 2013 but reduced to CFAF 150 in 2014.

World prices are adjusted to be consistent with domestic prices through adjustments for transport costs, wholesale and retail markups, and so on. See Mbaye, Golub, and English 2015 for details.

Actual tax rates are based on data on customs revenues provide by Senegalese customs. See Mbaye, Golub, and English 2015 for details.

A recent study by Cadot and Gourdon (2014) finds that nontariff barriers significantly raise domestic prices for staple food products in many African countries, including Senegal.

For vegetable oil, the prices used are for soy oil, but actual protection is measured for palm oil, given that soy oil is mostly imported in unrefined form subject to lower import duties than refined oil. Palm oil is imported refined.

One tuna cannery was recently reopened by Korean investors.

This calculation understates the loss of consumer welfare, since it does not capture the effect of protection on reduced consumption.

The total payments to workers provide an upper bound on the gains from protection accruing to workers. The figures for labor compensation cited in this section include fringe benefits (obtained from the Centre Unique de Collecte de l’Information [CUCI] database).

VAT revenues are ignored, since these depend on consumption rather than imports, and VAT revenue will decline as consumption falls under import protection, as noted previously.

Sugar and vegetable oil (other than peanut oil) account for 7.4 percent of the consumption basket of the third quintile, which includes those households around the poverty line of 46.7 percent. Peanut oil is excluded, since it is assumed that it is produced at the household or community level and therefore not affected by the market price. These households would have spent only 4.6 percent of their income if they had paid world prices, a saving of 2.8 percent.

The national poverty rate declined from 48.3 percent in 2006 to 46.7 percent in 2011, declining by 1.6 percentage points.

It would seem prudent to maintain some balance between domestic production by CSS and imports in order to keep pressure on CSS to improve efficiency and provide a cap on prices.

Supported by the West Africa Agricultural Productivity Project financed by the World Bank.

Similar constraints were documented in the 2009 Investment Climate Assessment by the World Bank.

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