Forthcoming Changes in the EU Banana/Sugar Markets: A Menu of Options for an Effective EU Transitional Package

Research reports and studies
May 2005
Ian Gillson, Adrian Hewitt & Sheila Page

Preferential access under the EU’s Sugar and Banana Protocols has afforded large income transfers to a number of ACP countries. These transfers will be reduced under proposed reforms to the EU’s sugar and banana markets which have had to respond to a number of internal and external pressures (e.g. CAP reform, challenges in the WTO). Although reducing preferences for banana and sugar exports from these Protocol countries will have beneficial effects on development and poverty reduction in other major producing countries which are not party to these agreements, losses for some Caribbean ACP countries will be significant relative to external income.

Assistance can be justified under the EU’s international obligations because it is partially withdrawing from a binding undertaking which was of unlimited duration. In the absence of assistance, countries suffering from changes to the regime may attempt to delay reform to the detriment of those countries which stand to gain. The European Commission is proposing specific measures to assist the Protocol countries in adjusting to changes in the EU’s Sugar Regime due to begin in 2006. Such an offer for transitional assistance is well planned, but the EU’s commitments under the Cotonou Agreement to ensure the continued viability of the Protocol industries will be difficult, if not impossible, to maintain in higher-cost countries following reform.

Lessons can be learned from the numerous instruments the EU has used in the past to support commodity-dependent developing countries, not only various forms of trade preferences but STABEX and, in particular, those to facilitate adjustment in Caribbean countries adversely affected by preference erosion arising from successive reforms to the EU’s Banana Regime e.g. the Special Framework for Assistance. These schemes have been criticised for supporting production of declining commodities in countries that have only limited potential to become competitive. Where funds have been allocated for diversification into more productive sectors these have often been only for small-scale pilot projects and have failed to address the key constraints in the wider economy. In addition, strict and often inconsistent conditionality on the use of funds has led to delays
in payments and frequent changes to the schemes have hampered investment decisions.

Although any scheme, no matter how well designed, can be used efficiently or inefficiently, a new fund could be developed to overcome these problems. A dedicated preference erosion scheme could be used to finance investments supporting industry restructuring and export diversification without fixing countries into already outmoded trade and production patterns. The scheme would need to be predictable in order to encourage investment and to avoid strict conditionality to quicken disbursements.

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