SOURCES OF SCALE ECONOMIES: SUGAR PRODUCTION IN LESS DEVELOPED COUNTRIES

A case study is presented of scale economies in cane-sugar manufacturing in less developed countries (LDC). The study concentrates on 3 issues: 1. assessing the strength of scale economies, 2. identifying the principal sources of scale economies, and 3. comparing the shape of the long-run average cost (LRAC) curve for 5 different countries in association with an examination of the significance of the "minimum economic size" criterion. It is concluded that, for most LDCs, the range of scales that would rationally be selected is in the order of 3,000-5,000 tons-per-day cane-crushing capacity. Scale economies are significant up to approximately 5,000 tons of cane per day (TCD), with a similarly L-shaped LRAC curve for each of the 5 countries. Data for the countries (Kenya, Ghana, Bangladesh, India, and Pakistan) show that most plants constructed and/or extended before 1978 were below 4,000 TCD crushing capacity, and few new factories were being built at this time in excess of 4,000 TCD. This indicates that the industry broadly concurs with the above conclusion.