EU sugar reform; the implications for the development of LDCs

This study argues that the granting of unlimited duty-free access under the EBA (Everything But Arms) Agreement will coincide with reform of the EU sugar regime, which is expected to lead to significant price reductions in the EU market. It questions whether whether maintaining a managed market system with a high EU sugar price via the use of fixed quotas would be in the long term development interests of the LDCs (Least Developed Countries). The study considers the extent to which EBA offers an opportunity for LDCs to develop sugar industries that are sustainable in the long run in the context of the various reform.It notes that the extent to which each LDC will benefit from unlimited access to the EU after 2008/09 will depend on two principal factors:the costs of supplying sugar to the EU marketthe other market opportunities available to each sugar industry.The report looks at future investment in LDC sugar industries, examining the future incentives for each sugar industry to expand their production levels over the next decade. The findings are that:although the reform option chosen by the EU does have an impact on future investment levels in the LDCs, it is not a great as one might expectasssuming investments are made on the basis of a financial rate of return, a 20% price cut in the EU would lead to around US$260 million of additional investmentthere is very little difference in the level of investment that would take place under the 33% Price Cut and Market Equilibrium scenarios.While high production levels are projected, there may be difficuties in sustaining these.The implications for policy reform are:LDCs would be better off with a transitional arrangement where prices are maintained at a higher level for a limited periodto ensure such a policy leads to increased investment in the LDCs, it is essential that it be accompanied with a clear price reduction schedulethe level of investment could depend on the availability of financial assistance from governments or international development institutionsif the EC does implement far-reaching price cuts, there may be a case for granting greater access for LDCs from 2005, which would be limited to each country's net exportable surplus