Forthcoming changes in the EU banana and sugar markets: a menu ofoptions for an effective EU transitional package

Preferential access under the EU’s Sugar and Banana Protocols has supported 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 are due to take place at the end of 2005. Total losses for ACP Protocol countries have been estimated to be in the region of US$500 million for sugar and US$100 million for bananas.This study identifies a number of options for an effective EU transitional assistance package to support sugar- and banana- dependent ACP countries. It proposes the creation of a dedicated preference erosion scheme to finance investments supporting industry restructuring and export diversification. The scheme would need to be predictable in order to encourage investment and to avoid strict conditionality to quicken disbursements.. Previous schemes to compensate for loss of export earnings and to provide finance for restructuring, such as the SFA and STABEX have only had limited success both in terms of the way funds have been used and administered:where direct compensation has been provided to affected sectors this has often served to aggravate dependence and delay reform rather than facilitate adjustment.funding for diversification purposes has generally failed to stimulate the development of more productive sectors due to the frequent use of unrelated small-scale pilot projects that ignore the wider constraints in the economy. Future support, possibly through the creation of a new and dedicated preference erosion fund, needs therefore to be de-linked from production. previous schemes have often been subject to changes and conflicting conditionality: any scheme must be predictable to encourage its use and strict conditionality should be avoided in order to quicken disbursements.financing has often been provided following the shock although the effectiveness of support for transitional assistance would be enhanced by financing ex ante the required investments.There are a number of options for transitional assistance that could be provided by the EU in supporting the ACP Protocol countries adjust to it reforms. Although there is no one-size- fits-all approach (even within individual countries multi-track strategies may be required) some measures may be more suitable for some than for others. For higher production cost countries the greater emphasis would be on diversification while for other countries, where there remains scope for improving competitiveness, support could be provided for restructuring, branding and marketing and diversification into niche and related products e.g. ethanol production.For sugar, and at the country-level, Belize and Guyana are the most competitive sugar producers internationally among the Caribbean ACP producers and their strategies to improve the competitiveness of their sugar industries could merit financial support from abroad. The viability of Jamaica’s sugar sector is much more fragile, and its investment plans more difficult to realise, while Barbados and St. Kitts have largely diversified out of sugar, although the former has reasons connected with its tourist industry for not discontinuing production for export altogether. For bananas, diversification into services in each of the four Windward Islands has already more than compensated for declines in banana production arising from existing reforms made to the EU’s Banana Regime. Financial support could be provided to continue this trend. The report argues that transitional assistance (allocated in proportion to each country’s loss of income transfers arising from preference erosion) should be channelled through national governments or, where there are potential economies of scale or the willingness of a set of countries to decide on intra-group allocations of funding, via regional organisations. Providing support directly to the private sector would risk crowding out investment and could offset incentives for diversification. As a longer-term objective, however, the creation of a multilateral scheme dedicated to preference erosion, encompassing all countries and all sectors, would help to mitigate future problems in other sectors (e.g. for textiles) and facilitate agreement in the WTO. Funding for financial assistance would need to be additional to existing aid allocations in order to send an important political message to ACP Protocol countries that the EU is committed to facilitating adjustment in their economies. Therefore, allocations should not come from the EDF but from the creation of a dedicated line in the EU’s budget developed for this purpose. The level of funding allocated would dictate the duration of support and its degree of front-loading. [adapted from author]