metadata: authors: 0: author: Baffes,John
count: World
docna: 0: docna: Cotton, biotechnology, and economic development
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Social Policy,Legal Products,Judicial System Reform,Crops and Crop Management Systems,Food Security,Legal Reform,Legislation,Regulatory Regimes,Energy Demand,Energy and Environment,Energy and Mining,Commodity Risk Management
teratopic: Agriculture,Private Sector Development,Macroeconomics and Economic Growth
abstracts: cdata!: During the past decade, cotton prices
            remained considerably below other agricultural prices
            (although they recovered toward the end of 2010). Yet,
            between 2000-04 and 2005-09 world cotton production
            increased 13 percent. This paper conjectures that
            biotechnology-induced productivity improvements increased
            supplies by China and India, which, in addition to keeping
            cotton prices low, aided these countries to cap-ture market
            share from (and cause losses to) non-users of biotechnology.
            By contrast, with a single exception, Africa has not adopted
            biotechnology and, not coincidentally, its cotton output
            declined by more than 20 percent between the first and
            second half of the past decade. The paper concludes that the
            development implications of biotechnology go beyond cotton
            and Africa. High energy prices have been an important driver
            of the recent commodity price boom. Therefore, investment
            and policy strategy responses to a cost-driven boom should
            be consistent with cost-saving alternatives. Biotechnology
            clearly meets this challenge.
repnme: repnme: Cotton, biotechnology, and economic development
display_title: Cotton, biotechnology, and economic development
listing_relative_url: /research/2011/12/15526785/cotton-biotechnology-economic-development
topicv3: Agriculture and Food Security m1326205 435,Legal and Regulatory Framework m1326307 845,Energy and Extractives m1326595 507,Crop Production m1326627 174,Commodity and Resource Prices m1503849 3034
publishtoextweb_dt: 2011-12-01T00:00:00Z
historic_topic: Agriculture,Private Sector Development,Macroeconomics and Economic Growth
no_of_pages: 26
author_keys: 0: author_key: 96507
model_extractions: WPS5896 Policy Research Working Paper 5896 Cotton, Biotechnology, and Economic Development _John Baffes_ The World Bank Development Economics Development Prospects Group December 2011
Policy Research Working Paper 5896

# **Abstract**

During the past decade, cotton prices remained considerably below other agricultural prices (although they recovered toward the end of 2010). Yet, between 2000–04 and 2005–09 world cotton production increased 13 percent. This paper conjectures that biotechnology-induced productivity improvements increased supplies by China and India, which, in addition to keeping cotton prices low, aided these countries to cap-ture market share from (and cause losses to) non-users of biotechnology. By contrast, with a single exception, Africa has not adopted biotechnology and, not coincidentally, its cotton output declined by more than 20 percent between the first and second half of the past decade. The paper concludes that the development implications of biotechnology go beyond cotton and Africa. High energy prices have been an important driver of the recent commodity price boom. Therefore, investment and policy strategy responses to a cost-driven boom should be consistent with cost-saving alternatives. Biotechnology clearly meets this challenge.

This paper is a product of the Development Economics, Development Prospects Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at jbaffes@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Cotton, Biotechnology, and Economic Development**

## **John Baffes**

**THE WORLD BANK** <u>jbaffes@worldbank.org</u>

**KEY WORDS** : Biotech cotton, cotton prices, agriculture prices

This was prepared under auspices of the UK-supported Global Trade and Financial Architecture project. The views expressed are personal and should not be attributed to the World Bank. I would like to thank Ataman Aksoy, Jock Anderson, Armelle Gruère, Tassos Haniotis, Bernard Hoekman, Melinda Smale, and Terry Townsend for comments and suggestions on earlier drafts. Comments by seminar participants at the International Monetary Fund (March 01, 2011) and a meeting with staff of the International Food Policy Research Institute (March 17, 2011) are greatly appreciated.
# **Cotton, Biotechnology, and Economic Development**

Although agricultural commodity prices may diverge from each other for short periods of time, they are expected to converge over the longer term since they respond to the same fundamentals and exogenous shocks. Moreover, when supply and demand conditions force prices to deviate, producers will shift land and other resources from lower- to higher-priced crops while consumers will shift from higher- to lower-priced products, thus balancing the market and inducing price convergence. Yet, during the past decade, the cotton market defied that logic. Between 2000-04 and 2005-09, the real agricultural commodity price index increased by 38 percent while real cotton prices declined 4 percent (figure 1). More surprisingly, world cotton production increased 13 percent. That is, despite declining cotton prices and sharply increasing prices of competing crops, growers supplied more cotton. Why?

The cotton market has been subjected to considerable domestic support which encouraged more production, thus exerting downward pressure on world prices. While the effect of subsidies has been a hotly debated subject, the literature review discussed in Appendix A reveals that such effect is in the order of 10 percent; that is, cotton prices are 10 percent lower than what they would have been in the absence of domestic support. This is a relatively small impact which by no means accounts for the large deviations between cotton and other agricultural prices—especially if one takes into account the fact that other commodity sectors have been subjected to policy distortions as well.

For the most part, the gap between cotton and other agricultural prices is explained by the use of biotechnology. Indeed, econometric evidence presented in Appendix B shows that the historical strong co-movement between cotton and other agricultural prices began weakening during the early part of the past decade and such weakening is explained by the use of biotechnology, especially by China and India. In other words, biotechnology-induced productivity improvements by China and India generated supply response which was large enough to keep cotton prices in check.

Between the first and second half of the past decade, China and India increased their combined cotton production by 47 percent (table 1). During the same period, cotton production in the rest of the world declined 7 percent while it declined 22 percent in Africa—not coincidentally, Africa did not adopt biotech cotton varieties. In short, early (and heavy) users of biotech cotton increased their market share at the expense of—and causing welfare losses to—non-users of biotechnology.

This paper examines the deeper reasons behind the uneven adoption of _— 2 —_
biotechnology in the cotton market. The next section places biotechnology in the context of the global cotton market and reaches the following conclusions. First, some countries have reached full conversion to biotech cotton while others have not introduced the necessary legal and regulatory framework. Second, when cotton biotechnology is introduced, conversion takes place quickly. Third, the benefits appear to be relatively large, especially in developing countries where between 15 and 20 percent yield increases and 50 percent reduction in insecticide use have been observed. Section 2 discusses the reasons surrounding the biotech controversy and notes that opposition to biotechnology not only has blocked its adoption in Africa and other low-income countries, but also may have slowed down the development of second generation technologies. Section 3 explains how Africa missed the opportunity to embrace the technology. The last section concludes and discusses policy implications and lessons that go beyond cotton and Africa.

# **1. Biotechnology and the cotton market**

As in most aspects of life, the rules of allocating non-free resources are dictated by market forces or battles. Crops, including cotton, are no exception. Humans grow cotton for clothing while insects use it for food. Cotton growers win the battle by spraying the cotton plant with toxins. When the insects attempt to eat the plant (and, hence, the toxin), they die before inflicting irreversible damage. Here is where biotechnology comes in handy. Instead of the grower spraying the cotton plant, the toxin is inserted in the plant by genetically modifying the seed—a process similar to human vaccination.

Early stages of biotechnology made use of a family of soil organisms called _Bacillus thuringiensis_ (Bt) that produced certain toxins. Research by several public and private institutions in the early 1980s focused on inserting the Bt gene into tobacco plants. While initial results had limited success, a major breakthrough was achieved in 1988 by Monsanto—a biotechnology company—and by 1990 the first Bt cotton varieties were commercialized (see Tripp 2009 for an extensive discussion of the development of biotech cotton varieties).

Biotech cotton was introduced commercially in 1996 in Australia, Mexico, and the United States. China followed suit a year later and so did Argentina and South Africa in 1998. As of 2009, 10 countries have used the technology, accounting for more than half of world cotton area and 55 percent of production, a figure that may be higher if one accounts for illegal use of biotech varieties—illegal biotech is widespread in Pakistan as it was the case in India a few years ago.

At least three countries have adopted fully biotech cotton (Australia, South Africa, and the United States). Argentina, China, Colombia, India, and _— 3 —_
Mexico are heavy users as well where biotechnology accounts for two-thirds of cotton area. Brazil, which introduced the technology in 2006, currently allocates 20 percent of cotton area to biotech varieties. In Burkina Faso, almost one-third of its cotton area was under biotech varieties in the first year of its commercial release (table 2). At a global level, James (2009) reported that as of 2009, 29 countries had used biotechnology. Soybeans accounted more than half of global biotech area (52 percent), followed by maize (31 percent), cotton (12 percent), and canola (5 percent). Several other commodities are also using biotech seeds but their share in total biotech area is very small.

Because of high R&D expenditures, biotech seeds are more expensive than conventional ones. At the outset, if the costs of buying these seeds are lower than the savings realized due to fewer chemical applications, biotechnology will displace conventional seed technology. Otherwise, the technology will be abandoned. So far, it appears that the former is the case.

While the costs of the biotechnology are straightforward in the sense that they only reflect the costs of purchasing seeds, the benefits are more complex to evaluate because they are affected by several factors that go beyond the reduction in the number of chemical applications. To see this consider the following, purely hypothetical, scenarios (table 3). Suppose that growing one hectare of cotton requires 10 chemical applications at a cost of $50 each or a total of $500. Assuming yield of one ton of lint per hectare priced at $1.50/kg, it would imply revenue of $1,500 and a profit of $1,000. If the use of biotech seeds (at the cost of, say, $150 per hectare) reduces the number of chemical applications to 5, it increases the grower’s profit to $1,100, associated with an incremental net gain of $100 (the difference between $1,100 and $1,000), which is the incentive to switch to biotechnology. Assume now another scenario whereby the use of insecticides is sub-optimal, with an effectiveness-equivalent of say, 5 applications per season, in turn achieving half the yield compared to the 10-application scenario, generating revenue of $750 per hectare, with a profit of $500.<sup>**1**</sup> If biotech seeds are used, in which case the 5 applications per season become optimal, the profit increases to $1,100 (same as in the earlier scenario), generating an incremental net gain of $600 (the difference between $1,100 and $500).

Thus, the adoption of biotechnology can be viewed as a move along the production possibilities frontier (scenario I) or a move to the production possibilities frontier (scenario II) depending on whether optimal or sub-optimal use of

> **1** The notion of sub-optimality used here is much broader than fewer chemical applications. It could include other aspects such as use of low quality chemicals, not spraying the right time, the proper amount, or the required type. These are common problems in developing countries due to poor research and extension services.

_— 4 —_
chemical applications took place prior to its introduction. In some respects, these two scenarios can be mapped to developed and developing countries where the input intensity may roughly correspond to the numbers used in this hypothetical experiment. Thus, the difference in incremental profit under the two scenarios ($100 _versus_ $600), which reflects productivity increases, can be seen as the driving force behind China’s and India’s adoption of biotechnology and subsequent increase in cotton production.

The pros and cons of biotech cotton (and biotechnology in general) have been discussed extensively in a broad context and in terms of specific costs and benefits, the latter mostly from survey-based research. Despite early signs regarding the benefits of biotechnology, institutions were at first reluctant to engage in the debate (or take an ‚official position‛), not only in terms of policy or financial assistance but also in terms of a general policy discussion. Such reluctance reflected, most likely, the controversial nature of the subject.

Perhaps, the first institutional study to discuss and explicitly acknowledge the broader benefits of biotechnology in developing countries was FAO’s 2004 _The State of Food and Agriculture_ report, which showed that on balance, biotech cotton growers were better off than growers of conventional seed varieties. Individual authors followed suit. Baffes (2005) argued that in addition to subsidy elimination and domestic policy reforms, adoption of biotech varieties should have been a priority among policymakers in low-income cotton producing countries. Falck-Zepeda, Horna, and Smale (2007) and Anderson, Valenzuela, and Jackson (2008) warned that the downward pressure on world cotton prices caused by the large-scale adoption of biotech cotton is likely to force other countries to adopt the technology in order to compete in the global market.

Numerous survey-based country-specific papers have evaluated the costs and benefits of biotech cotton. An earlier review by Smale, Zambrano, and Cartel (2006) surveyed 47 peer-reviewed articles published between 1996 and mid-2006. While they concluded that the evidence is promising in the sense that biotechnology is beneficial to producers, they also noted that it was too early to reach definite conclusions, in part due to methodological limitations and in part because the longer term economic impact is often shaped by institutional and political considerations the effects of which cannot be discerned within a limited timeframe.

Later reviews, however, reached more definite conclusions. Qaim (2009) summarized the evidence from 11 studies representing seven countries (table 4). The results show that, on average, introduction of biotech cotton varieties is consistent with a 50 percent reduction in insecticide use, 19 percent increase in effective yield and 160 percent increase in gross margin (measured in $US/hectare). Although insecticide reduction varies little among the cases reviewed, there was _— 5 —_
considerable variation in yield increase (from no change in Australia to 37 percent increase in India). Large variation was reported in the gross margin as well (from a low of $US 23 per hectare in Argentina to a high of $US 470 per hectare in India).

A more extensive review undertaken by Tripp (2009) covered six countries but was based on broader survey coverage (table 5). His results are remarkably similar to those of Qaim (2009). For example, the average reduction in insecticide costs is 41 percent, with relatively little variation among countries. The average change in yields is 15 percent, ranging from a 2 percent reduction in Australia to a 35 percent increase in South Africa.

Gruère and Sengupta (2011) reviewed 51 estimates based on 23 studies that focused exclusively on India and found even larger benefits. They concluded that, on average, use of biotech cotton reduces the number of chemical applications and pesticide costs by 36 percent each, increases yields by 34 percent, raises net returns by 84 percent, while it increases the costs of production by 15 percent.<sup>**2**</sup> Numerous other models have evaluated the welfare gains from biotech cotton varieties. Depending on assumptions regarding adoption rates and methodology, global welfare gains range from a low of $1.5 to a high of $3.6 billion annually (see Bouët and Gruère 2011). Welfare gains in Africa vary from a low of $20 million annually (Bouët and Gruère 2011) to a high of $214 million (Anderson, Valenzuela, and Jackson 2008). Again, such range depends on numerous factors including modeling framework, country composition, and more importantly, price assumptions.

# **2. The biotechnology controversy**

Despite its benefits, biotechnology remains a highly controversial subject which becomes evident when considering how unevenly countries responded. Some have fully embraced the technology while others have not even introduced the necessary legal and regulatory framework. From the perspective of high-income countries, the United States and Europe have taken different stances with the United States being the leader in both development and use of biotechnology and Europe taking a cautious approach. Other countries fall into one or the other camp with most African countries taking the precautionary approach.

Graff, Hochman, and Zilberman (2009) argued that adoption of biotechnology has been affected by the alignment of rent seeking behavior that influences the policy-making process. They also note that because companies in the

> **2** It should be noted that some studies appear in more than one review.

_— 6 —_
United States have a relative advantage in biotech innovation while Europe has dominance in agricultural pest-control markets, biotechnology advanced in the United States while conventional seed technology (which requires higher use of pesticides) dominated Europe. Paarlberg (2008, p. 119) argued that initially, ‚Europe’s precautionary principle had honorable origins‛ and reflected sensitivities related to environmental problems that took place during the 1970s and 1980s.<sup>**3**</sup> However, the public opinion in Europe shifted against biotechnology—more so than North America—in part because of pressure by the NGO community (see below). Paarlberg (2008) also noted that, instead of using existing laws and regulations, Europe created a new and very demanding regulatory regime, thus erecting obstacles rather than creating opportunities for development and use of biotechnology.

At the time that governments were engaging in the debate of whether to adopt and how to regulate biotechnology, a strong anti-biotech movement emerged in developed and developing countries alike. For example, following FAO’s publication of 2004 _State of Food and Agriculture_ , a coalition of 670 NGOs and 816 individuals sent a letter (‚FAO Declares War on Farmers not on Hunger‛) to FAO’s Director General expressing their disagreement with the findings of the report and their dissatisfaction because they were not consulted (GRAIN 2004). Interestingly, a year later the _American Agricultural Economics Association_ honored a key contributor of FAO’s publication with its 2005 Quality of Communication award.

A telling illustration is how opposition to biotech cotton has unfolded in India. Its logic is based on the following arguments. In order for growers to buy biotech seeds they often borrow funds from financial institutions. If the crop fails, they will not have the money to pay back the funds and thus the financial institutions will not lend them again. Then, they turn to private moneylenders. If the crop fails again, the growers will not repay the private lenders, who, in turn, will exert a lot of pressure on the growers. Some growers cannot take such pressure and commit suicide.<sup>**4**</sup> Various media outlets argued, often with graphic illustrations, that biotechnology has been the key cause of suicides in the cotton growing areas of India. The issue was picked up by western media outlets as well. The _New York_

> **3** The Forward of Paarlberg’s book, _Starved for Science: How Africa Biotechnology Is Being Kept out of Africa,_ was written by Norman E. Borlaug (agricultural scientist, often called the father of the green revolution) and Jimmy Carter (former President of the United States). They are both Nobel Peace Prize Laureates (1970 and 2002).

> **4** Although the logic of these arguments is correct, the probability of each event occurring (conditional on occurrence of the previous event) becomes progressively low, especially in view of the spectacular performance of the Indian cotton sector during the relevant period.

_— 7 —_
_Times_ published the article ‚On India’s Farms, a Plague of Suicide‛ on September 19, 2006 while the TV channel PBS aired the episode ‚The Dying Fields‛ on August 28, 2008. On the more sensational side, reports have gone as far as naming India’s cotton growing region the ‚suicide belt‛ (a term borrowed from the ‚cotton belt‛ in the United States). Gruère, Mehta-Bhatt, and Sengupta (2008) reviewed the Indian cotton biotechnology industry in detail and focused on the suicide issue. They concluded as follows (p. 38): ‚ _Therefore, it is not only inaccurate but simply wrong to blame the use of Bt cotton as the primary cause of farmer suicides in India. In fact, our overview of the evidence suggests that Bt cotton has been quite successful in most states and years in India, contributing to an impressive leap in average cotton yields, as well as a decrease in pesticide use_ .‛ Herring (2008) argued that biotechnology has been subjected to framing by its opponents for at least two reasons. The first reason has to do with the possibility that biotech seeds may, in the future, incorporate ‚terminator technology‛. In other words, plants from biotech seeds will not be able to reproduce thus raising fears that the entire food system would be dominated by multinational corporations which may manipulate the biotech seed market. Second, biotechnology has been stigmatized because the introduction of the insect-resistant trait into plants involved genetic engineering.

The logic behind the first argument is, at best, weak and, at worse, flawed simply because the ‚terminator technology‛ concern can be applied to all aspects of modern agriculture (or any other sector of the economy for that matter). Most of today’s agricultural production depends on commercial inputs such as irrigation equipment, fertilizers, chemicals, fuel, electricity, tractors, and trucks, which certainly do not have the ability to reproduce—in fact, most of these inputs have been instrumental for the success of the green revolution. If some (or, even one) of those inputs are not available, output from commercial agriculture will disappear. While there may be imperfections in the way in which some of these markets function, there are plenty of companies willing and able to supply these inputs and no concerns have been expressed that the markets of, say, fertilizers or tractors have been subjected to manipulation. It is unclear why the biotechnology industry will act any differently compared to all other input-supply industries. But, even if the industry acted in a worrisome manner, regulation to ensure that anticompetitive behavior does not take place or funding of public research institutions to supplement private research would prevent likely problems.

Yet, the framing has been successful, in large part because of the way in which biotechnology was marketed. Biotechnology was commercialized in the mid-1990s as a genetically-engineered technology with the stated objective of increasing yields and generating higher profits for farmers in developed countries. However, at that time consumers were becoming more sensitive to food health _— 8 —_
and environmental considerations, they were shifting to organic products, and they were becoming aware of the negative impact of OECD agricultural subsidies on producers of low-income countries—the latter became apparent during the failed attempt to launch what would have been the Seattle-round of trade negotiations in December 1999. In short, a ‚transgenic‛, ‚genetically modified‛, or ‚genetically engineered‛ product was promoted at a time when consumers were already tuned to ‚organic‛, ‚fair trade‛ and ‚environmentally sustainable‛ products.<sup>**5**</sup> Indeed, in 2004, the author met with two senior managers of a seed company, one of whom strongly believed that the negative reaction against biotechnology reflected, for the most part, its name. He argued: ‚ _Unfortunately, the name [transgenic crops] was left up to the engineers. In retrospect, it appears that cultural anthropologists or sociologists could have assisted the industry with a much better choice of name._ ‛ He further noted that ‚biotech cotton‛ or ‚enhanced seed technology‛ would have been much better alternatives.

# **3. The collateral damage**

Despite organized opposition, India’s use of biotech cotton increased every single year since its introduction in 2002 and by 2009 had reached 80 percent adoption rate. Biotech cotton was initially used in India on an illegal basis. And, according to Herring (2007), it was the illegal use of biotech seeds that pushed the Indian government to put the legal and regulatory framework in place and eventually approve cotton biotechnology. In China, biotech cotton’s share reached 70 percent in 2009. Between the first and second half of the past decade cotton production in China increased 31 percent with similar contributions from yield increases and area expansion (figure 2). India experienced a 51 percent output increase during this period, with yield increases contributing almost three-quarters to that expansion. These yield increases are in line with the ones reported in the literature reviews. Today, these two countries dominate the global cotton market, accounting for half of world’s cotton output, up from one-third during the 1990s.

Cotton production in Africa declined 22 percent (17 percent due to area contraction and 5 percent due to yield losses). It was only in 2008 that Burkina Faso introduced the technology and the second year almost 30 percent of its cotton area was under biotech varieties. James (2009) estimated that biotech cotton in Burkina Faso is likely to generate economic benefits of about US$100 million per annum, based on yield increases and reductions in chemical applications experienced elsewhere. Again, these gains are very much in line with the benefits

> **5** Not surprisingly, opponents of biotechnology took the name issue to extremes by calling biotechnology products ‚death seeds‛, ‚seeds of suicide‛, ‚frankencrops‛, and ‚frankenfoods‛.

_— 9 —_
reported in the literature discussed earlier. Anderson and Valenzuela (2007) showed that the benefits from full adoption of biotech cotton varieties by African cotton-producing countries could be even greater than the benefits of the removal of all cotton subsidies by the United States and the European Union.

In view of these gains, a simple (and relevant) question is what if Africa had matched India’s and China’s cotton expansion record during the past decade? Africa’s output would have been 2.1 million tons instead of 1.1 million tons. Even at the past decade’s low prices of $US 1.30/kg, that would have generated an additional $US 1.3 billion in export revenues per year. Moreover, if the realignment of cotton prices with other agricultural commodities that began during the second half of 2010 persists, the additional revenue could top $US 2.0 billion.<sup>**6**</sup> While such gains would have required other policies and investments to have taken place as well, they are so large that officials and policy makers in charge of agricultural policies and investment strategies should take notice.

Yet, concerns regarding biotechnology have been expressed at high levels of policy making in many African countries. For example, Uganda’s Cotton Development Organization—the regulatory body of the cotton industry—chose to proceed cautiously by examining the pros and cons of this technology despite Cotton Research Institute’s repeatedly emphasis on the need to venture into the area of biotechnology (Baffes 2009). Similarly, Zambia’s cotton development trust attempted to set up the institutional structure and eventually introduce biotech cotton but the President of the country halted its activities, in response to pressure by various groups, including the Council of Churches. It was only in 2010 that the subject of biotechnology re-emerged in the public policy making arena (Yagci and Aksoy 2011).

Many authors have noted that Africa’s precaution with biotechnology reflects more external influence rather than domestic concerns. For example, Paarlberg (2008) argued that the views regarding biotechnology of some African countries and their subsequent actions have been influenced directly or indirectly by many European governments or their citizens through mechanisms which include financial and technical assistance, activities through international organizations, NGO activity campaigns, and import marketing arrangements.

Regardless of the nature, origins, and degree of the opposition to biotechnology, commodity markets—and, perhaps, development—have been affected in at least two ways. First, because of the opposition, biotechnology adoption by developing countries was limited; ironically, that is where the technology turned

> **6** To put these gains into perspective, consider that during 2009 IDA (International Development Association) net inflows to Africa were $US 3.2 billion while ODA (Official Development Assistance) flows reached $US 28 billion.

_— 10 —_
out to be most effective and is most needed. Second, the opposition may have slowed down the development of second-generation biotechnology since private companies are unwilling to invest in relevant R&D technologies because of uncertainty while publicly-funded (national and international) institutions limit their engagement in biotechnology-related research due to inadequate funding.

# **4. Conclusions and Policy Implications**

During the second half of the past decade, commodity prices experienced the broadest and most sustained post-WWII boom. However, cotton prices remained stagnant—though they recovered towards the end of 2010. This paper conjectured that cotton prices were kept in check in large part due to biotechnologyinduced expansion of supplies by China and India. Yet, Africa has a poor record not only in terms of biotech adoption but also in terms of having the necessary legal and regulatory framework in place. Only one African country—Burkina Faso—had utilized biotechnology as of 2011. Not coincidentally, the region’s cotton industry has performed poorly. Between the first and second half of the past decade Africa’s cotton output declined 22 percent. World cotton output increased 13 percent—India and China increased their production by 51 and 31 percent, respectively.

Against this background, this paper highlighted a number of stylized facts. First, the use of the technology at a global level has increased on a continuous basis since it was first introduced 15 years ago—on average, each year an additional 4 percent of global cotton area is converted to biotech varieties, and, with a few exceptions, this has been the case at the country level as well. Such adoption rates imply that biotechnology is cost-saving to producers (since they adopt the technology), it is welfare improving to consumers (because they buy cotton at lower prices), it is profitable to the seed companies (since they expand their business), and it is beneficial to the environment (because of less chemical applications). On a global basis, the use of biotech cotton varieties implies a 40-50 percent reduction in chemical applications and 15-20 percent increase in yields with relatively larger benefits accruing to cotton growers of developing countries. Second, if historical trends continue, almost all cotton will come from biotech varieties within a decade. Third, in addition to the legal and regulatory framework, the largest obstacle to introduce the technology appears to be political will. When the technology is introduced it takes off quickly, including in lowincome countries such as Burkina Faso—the only African country to embrace the technology.

Despite such adoption rates and cost/benefit record, biotech cotton is still surrounded by controversy. The most ferocious debate takes place in India _— 11 —_
where numerous reports in the local (and international) press and other news outlets have argued repeatedly and continuously that biotech cotton is the key cause of suicides among cotton growers in the so-called ‚suicide belt‛, despite strong evidence to the contrary. While such opposition did not prevent India from utilizing the technology, it has caused irreversible damage elsewhere, especially in Africa.

Such outcomes not only expose a gap between developmental objectives and results on the ground but also give some valuable lessons. On the one hand, cotton growers in the United States and Europe received a considerable amount of domestic support and, in the former, access to biotechnology. On the other hand, emerging countries such as India and China gained access to biotechnology (despite strong opposition in the former) and on some occasions support. At the other end of the spectrum, African cotton growers not only did not use biotechnology or support but also were not given the opportunity to evaluate the technology (even worse, on some occasions they were taxed). All this has led to the following paradox: African countries such as Uganda and Zambia with per capita income of $US 1,000 not using biotechnology for a raw material destined for exports and high-income countries such as Australia, Canada, and the United States with per capita income of $US 40,000 using biotechnology for domestically consumed food commodities.

The development implications of biotechnology extend beyond cotton. As noted earlier, commodity prices are experiencing one of the broadest and most sustained booms of the post-WWII period. Such increases, which were seen initially as welcome developments, have alarmed government officials and policy makers alike. It is becoming increasingly apparent that although a host of factors fueled the boom, higher production costs due to increases in energy prices have played a key—and, perhaps, the most important—role (Baffes 2011b).

High energy prices will present challenges and, perhaps, transform the way in which agricultural commodities are produced, especially in view of environmental sensitivities. Therefore, investment and policy strategies to a costdriven boom should be consistent with cost-saving alternatives. Biotechnology clearly meets this challenge. Indeed, researchers (e.g., Thompson 2011) are increasingly recognizing the role these technologies could play not only in alleviating temporary price pressures but also in shaping longer term price trends.

_— 12 —_
**Table 1: Cotton production**

||**_1990-94_**|**_1995-99_**|**_2000-04_**|**_2005-09_**|**_1990-94_**|**_1995-99_**|**_2000-04_**|**_2005-09_**|
|---|---|---|---|---|---|---|---|---|
|**_WORLD_**|||||||||
|||**_Thousa_**|**_nd tons_**|||**_Share of _**|**_World(%)_**||
|China|4,483|4,311|5,314|7,269|24.4|22.3|24.9|29.9|
|India|2,149|2,767|2,864|4,742|11.7|14.3|13.4|19.5|
|US|3,649|3,708|4,123|3,844|19.9|19.2|19.4|15.8|
|Pakistan|1,591|1,646|1,869|1,986|8.7|8.5|8.8|8.2|
|Brazil|556|462|1,013|1,285|3.0|2.4|4.8|5.3|
|Africa|904|1,316|1,422|1,142|4.9|6.8|6.7|4.7|
|Uzbekistan|1,356|1,095|994|1,061|7.4|5.7|4.7|4.4|
|Others|3,692|3,993|3,703|2,952|20.1|20.7|17.4|12.2|
|**WORLD**|**18,380**|**19,300**|**21,303**|**24,282**|**100**|**100**|**100**|**100**|
|**_AFRICA_**|||||||||

|||**_Thousa_**<br>|**_nd tons_**<br>|||**_Share of _**<br>|**_Africa(%)_**<br>||
|---|---|---|---|---|---|---|---|---|
|Burkina Faso|65|102|178|210|7.2|7.8|12.5|18.4|
|Mali|116|194|198|130|12.9|14.8|14.0|11.4|
|Zimbabwe|55|109|93|105|6.0|8.3|6.5|9.2|
|Nigeria|54|75|89|91|6.0|5.7|6.3|8.0|
|Benin|82|144|148|90|9.1|11.0|10.4|7.9|
|Tanzania|62|59|62|89|6.8|4.5|4.4|7.7|
|Côte d'Ivoire|101|133|129|68|11.2|10.1|9.1|6.0|
|Cameroon|51|78|99|63|5.7|6.0|6.9|5.5|
|Others|317|421|426|298|35.1|31.9|29.9|26.1|
|**AFRICA**|**904**|**1,316**|**1,422**|**1,142**|**100**|**100**|**100**|**100**|

**Source** : United States Department of Agriculture (http://www.fas.usda.gov/psdonline) **Note** : All figures in this table (and the paper) refer to cotton lint.

_— 13 —_
**Table 2: Area under biotech cotton varieties (percent of area allocated to cotton)**

||**United**<br>**States**|**Australia**|**Mexico**|**China**|**South**<br>**Africa**|**Argentina**|**India**|**Colombia**|**Brazil**|**Burkina**<br>**Faso**|**WORLD**|
|---|---|---|---|---|---|---|---|---|---|---|---|
|1996/07|12.7|7.7|0.8|—|—|—|—|—|—|—|**2.0**|
|1997/08|25.5|14.0|7.8|0.7|—|—|—|—|—|—|**4.4**|
|1998/09|45.0|15.4|14.3|2.4|12.0|0.8|—|—|—|—|**6.6**|
|1999/00|58.7|22.7|12.5|14.2|28.0|3.9|—|—|—|—|**12.1**|
|2000/01|71.1|30.0|33.4|25.0|24.0|6.1|—|—|—|—|**15.7**|
|2001/02|76.7|30.0|27.4|32.0|74.0|4.6|—|—|—|—|**18.1**|
|2002/03|75.4|30.0|37.6|48.7|84.0|8.0|0.5|—|—|—|**20.2**|
|2003/04|75.1|60.0|41.4|51.6|86.0|10.0|1.1|0.5|—|—|**20.8**|
|2004/05|78.0|60.0|60.6|59.1|75.0|10.0|6.1|23.0|—|—|**24.3**|
|2005/06|81.0|90.0|57.4|62.2|84.0|20.0|14.1|40.0|—|—|**28.4**|
|2006/07|85.4|90.0|59.0|66.6|91.0|25.0|41.5|44.0|0.5|—|**36.5**|
|2007/08|90.2|95.0|60.0|61.0|95.0|25.0|66.3|57.0|13.0|—|**43.5**|
|2008/09|92.6|95.0|65.0|65.7|95.0|25.0|74.0|71.0|20.0|1.6|**47.1**|
|2009/10|95.0|95.0|62.0|68.0|95.0|85.0|79.3|61.0|20.0|30.5|**52.0**|

**Source:** International Cotton Advisory Committee **Notes:** ‘—‘ indicates that no biotech cotton was used.

_— 14 —_
**Table 3: A hypothetical experiment on the costs and benefits of biotech cotton**

||**_SCENA_**<br>**_Optimal use o_**|**_RIO I_**<br>**_f chemicals_**|**_SCENAR_**<br>**_Sub-optimal use_**|**_IO II_**<br>**_of chemicals_**|
|---|---|---|---|---|
||**_Conventional_**|**_Biotech_**|**_Conventional_**|**_Biotech_**|
|Number of sprays/hectare|10|5|5|5|
|Cost of chemicals, $50/spray|500|250|250|250|
|Cost of biotech seeds, $|0|150|0|150|
|Yield, kgs/hectare|1,000|1,000|500|1,000|
|Revenue, $1.50/kg|1,500|1,500|750|1,500|
|Profit, $|1,000|1,100|500|1,100|
|**Incrementalprofit, $**|**100(=1,100**|**- 1,000)**|**600(=1,10**|**0 – 500)**|

**Source:** Author’s calculations.

**Table 4: The economic effects of biotech cotton**

||**_Insecticide_**<br>**_reduction(%)_**|**_Effective yield_**<br>**_increase(%)_**|**_Gross margin_**<br>**_increase($US/ha)_**|**_Number of surveys_**|
|---|---|---|---|---|
|Argentina|47|33|23|2|
|Australia|48|0|66|1|
|China|65|24|470|1|
|India|41|37|135|2|
|Mexico|77|9|295|1|
|South Africa|33|22|91|2|
|United States|36|10|58|2|
|**AVERAGE/SUM**|**50[53]**|**19[31]**|**163[303]**|**11**|

**Source:** Qaim (2009), p. 672, Table 1.

**Note:** The average reported in the last row has been calculated by the author. Numbers in square brackets show the India/China average.

**Table 5: Changes in yield and insecticide costs from biotech cotton**

||**_Insecticide cost reduction(%)_**|**_Yield change (%)_**|**_Number of surveys _**|
|---|---|---|---|
|Australia|51|-2|2|
|China|65|25|3|
|India|27|15|10|
|Mexico|77|10|2|
|South Africa|38|35|9|
|United States|47|9|1|
|**AVERAGE/SUM**|**41[46]**|**15[20]**|**27**|

**Source:** Tripp (2009), p. 74, Table 4.1.

**Note** : The country averages reported in the last row have been calculated by the author. The original table reports results from individual surveys. Numbers in square brackets show the India/China average.

_— 15 —_
**Figure 1 Agriculture and cotton price indices (Real, MUV-deflated, 2000=100)**

<!-- Start of picture text --> 300<br>250<br>200<br>150<br>100<br>Cotton<br>50<br>1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010<br>Source: World Bank<br><!-- End of picture text -->

# **Figure 2**

**Production growth decomposition into yield and area, 2000-04 to 2005-09**

<!-- Start of picture text --> 60%<br>Yield Area<br>38%<br>30%<br>51%<br>15%<br>31%<br>14% 13% 16% 13%<br>0% -1%<br>-17%<br>-22%<br>-5%<br>-30%<br>WORLD China India Africa<br><!-- End of picture text -->

**Note:** Growth decomposition has been calculated as: log(Q2005-09/Q2000-04) = log(A2005-09/A2000-04) + log(Y2005-09/Y2000-04), where Q, A, and Y denote production, area, and yield.

**Source:** Author’s calculations based on USDA data

_— 16 —_