EU sugar reforms
DFID-commissioned report grim reading for Caribbean -five out of six industries in jeopardy
Business October 15, 2004
Stabroek News
October 15, 2004
The European Commission's proposed reforms to its sugar regime could mean five of the six industries in the Caribbean would have to close or severely reduce output, causing significant social and economic dislocation.
This is one conclusion captured in a comprehensive report on the effect of changes to the European Union's sugar regime - that are still not certain - on the African, Caribbean and Pacific (ACP) producers. The report was commissioned by the UK Department for International Development (DFID) in 2003 and was undertaken by LMC International. It was published before the proposals for the cuts were announced in July. Local observers have their doubts about the figures and the economic models used by the LMC. But they say the consultancy has largely got Guyana's position right in terms of how the industry may fair under the proposed price cuts coupled with keeping existing quotas in place. Executive Director of the Sugar Association of the Caribbean, Dr. Ian McDonald does not flat out reject the report's conclusions but does condemn the report for its assumption that many of the least efficient industries in the Caribbean would have to go out of business.
Report is 'death sentence'
He wrote to DFID in March stating that the report "in essence delivers a death sentence" upon five of the six industries within Caricom, that make up the largest agricultural enterprise in the region and bring wide ranging contributions which go largely unquantified and unappreciated. He warns that the demise of the industries would have devastating economic and social consequences. While acknowledging that the report was not prepared by DFID, he questions a number of what he calls mistaken assumptions made in a covering letter the agency sent with the report, most of which refer to the long established Sugar Protocol. He agrees with extending benefits to developing countries but asks "why go in a direction which will end in benefiting countries like Brazil and Australia and others which do not depend one hundredth as much on their sugar industries as our small Caribbean countries do on our sugar industries?" McDonald quoted from a position paper presented to Caricom ministers that said, "countless feasibility studies have shown that sugar is irreplaceable by any other crop... The value of sugar cannot be measured purely in accounting or banking terms."
Reforms far from certain
The European Commission (EC) is now changing commissioners which has meant a delay in any decision on the cuts which are equally contentious to European beet farmers many of whom will go out of business albeit with compensation. Those countries where beet farmers are more efficient are more supportive of the cuts than those, particularly in the Mediterranean, where farmers are marginal producers. While the cuts were proposed as being put in place in 2005, talks with the ACP are not scheduled until early next year so it is unlikely that any initiative would be in place before 2006. McDonald notes that this is far from a done deal and advises against accepting the reforms as inevitable.
One observer notes there are considerable threats facing Guyana but also possible advantages because the reforms will come at a time when the marginal ACP producers are going out of business and Guyana, with its planned expanded production, could take up quota shortfalls. A large portion of the quota would in theory go to Mauritius as part of the Sugar Protocol's rule that any shortfall must be spread out among all the ACP countries. But that country's spare capacity is probably not sufficient.
Keeping the quota within Caricom
Guyana is pushing to get a larger share of the Caribbean quota left over from the possible end of sugar as opposed to cane production in Trinidad, Barbados, St Kitts and even Jamaica. McDonald says Caricom unity on this issue is essential. But this also raises the possibility of disagreement within the ACP and could undermine the unity the grouping needs in negotiations with the EU. It is also far from clear that these producers would want to give up their quotas so readily.
Meanwhile one of the motives for the reforms is to allow Least Developed Countries (LDCs) to ramp up production under the Everything But Arms (EBA) initiative and receive unlimited access. But it may not work out that way given that the lower EU prices may not be enough of an incentive for them to invest. Even if they do, it would take some years to build up output and this would leave a window for more established producers including Guyana.
According to officials who have seen the document, the report's two main objectives were to assess the possible economic and social impacts of preference erosion on ACP producers of the Sugar Protocol; and to consider various options for assistance strategies to address these impacts.
Bad, worse, worst
LMC places the various ACP countries into categories based on their expected ability to withstand the reforms.
Group 1 countries are the lowest-cost producers which are mainly situated in southern Africa. They are Congo, Malawi, Swaziland, Tanzania, Zambia and Zimbabwe and are not expected to see EU policy reform have a significant overall employment impact.
Group Three includes industries that may already be unprofitable and would become so following the reform of the EU sugar regime. These are Barbados, Belize CĂ´te d'Ivoire, Jamaica, Madagascar, St Kitts and Trinidad. Belize is placed in this category which observers have said is not an accurate assessment for the scenario the EU is now proposing. Jamaica is also in this group and has complained about this, but some analysts say this is probably correct. LMC estimates that in Jamaica and Trinidad, the effect of the reforms could increase unemployment by around 2.5% and 3.6%, respectively and in St Kitts by 8%. This may be less as many workers are migrants from the Caribbean who would look for work elsewhere.
LMC places Guyana along with Mauritius and Fiji in Group 2 as having industries that are on the margin in terms of the future profitability. Sources say the report states that: "Although the industries are likely to remain profitable, the returns from sugar production may be close to their full costs of production. The future viability of these industries will therefore depend on their ability to keep costs down in the future."
Stakes high for Guyana
LMC is said to note that for all three countries sugar plays a major part in the economy; for Guyana sugar makes up 18% of GDP and employs 7.5% of the workforce. As such the erosion of EU preferences has the potential to be most severe.
LMC is also said to note that "although the Guyanese industry will continue to be viable from an average cost perspective under most policy options, this may not mean that the entire industry survives. A condition of the World Bank support package that is currently being provided to the industry is that each milling estate must be viable on a marginal cost basis. This means that, while the industry as a whole may be able to cover their average costs under most scenarios, the higher cost estates, such as the four Demerara estates, may lose money on a marginal cost basis. If this is the case, these operations will be
forced to close, increasing significantly the impact of preference erosion on sugar-dependent livelihoods in the country."
This is an argument Guysuco and the government have consistently refuted and was the conclusion of an earlier LMC report commissioned by the World Bank in 2000 that was used to guide its financing of the Skeldon project. Dr Ian McDonald also refutes the concept saying that cross-subsidisation is used in many industries, including that of the cheapest producer, Brazil, where less profitable mills are supported by more efficient ones.
Sources also say LMC later reports: "The Demerara estates, which have significantly higher production costs, will remain open until 2006, at which time they will have to demonstrate their viability or face closure...the possible closure of the Demerara estates may result in the loss of 8,000 jobs and will severely depress the local economy." But LMC also adds that, "there may be scope to direct assistance at improving the productivity of the Demerara estates provided there is a reasonable prospect of regaining commercial viability...One element that is not identified in the economic modelling is the role of ethnic politics in Guyana. Because the East Indian community is dominant in both the sugar industry and the ruling party, industry restructuring will only be politically acceptable if it is accompanied by substantial social mitigation programmes."
Limited alternatives to sugar
Officials note that LMC started out in the report by stating that trade preferences have provided relatively few benefits to exporting countries on the whole, and can have "a distortive impact on economic incentives and create dependency on production patterns that are not in line with a country's comparative advantage." They add that in such cases resources could be better employed elsewhere in the economy. But in the case of Guyana the report acknowledges this may be limited. It notes that since much of the land for cane is owned by the state, displaced workers are more vulnerable than in other countries as they do not have lands to grow other crops. LMC reportedly observes that mill estates also provide health care and other social services that would disappear if they were to be closed. They state that sugar sector workers receive pay considerably higher than for workers in the rest of the economy indicating that opportunities outside the sector are limited including in the rice sector which also faces EU reforms.
Trade-based or aid-based assistance?
The report devotes a lot of space discussing forms of assistance to ACP countries affected by the reforms. It first tackles the issue ACP countries are expected to argue, that since the Sugar Protocol is a legally binding commitment, "they would tend to view compensation as an automatic entitlement in the event of any reduction in trade preferences. They are likely to demand compensation as a price for their agreement in trade negotiations relating to the Sugar Protocol, and broader trade reforms such as EPAs. These demands are likely to be particularly strong if compensation is paid to EU farmers in response to falling sugar prices."
LMC then looks at various options that are either trade-based or aid-based, pointing out that countries in Group Three may likely go for aid initiatives since their industries would be going out anyway.
One observer has noted that while the ACP may be putting forward a uniform position, those in Categories One and Two would likely be pushing for trade-based compensation, or a mix of trade and aid, while those in Category Three would be more willing to sign on to an exit strategy. The report also seems to suggest that the EU should look at different packages depending on the country status as opposed to a one-size fits all approach. Trade-based options would attempt to mitigate the effect of price cuts but these would have to pass the WTO rules and this depends on whether the ACP and the EU can get a waiver for sugar in the next round of trade talks.
This trade-based assistance could include extending transition periods for phasing out preferential access so as to give producers more time to become competitive. This would obviously be cheaper to the EU. Another option would be to improve market access for other products as a means of offsetting preference loss in sugar. Sources say the LMC report states that, "This would help create incentives for ACP sugar producers to diversify production into alternative areas and would be consistent with plans for Economic Partnership Agreements (EPAs) between the ACP and EU."
But LMC notes that under the EPA negotiations this access for other goods is already to be put in place so the ACP may not see this as anything more than what they were originally expecting. They also observe that this approach would not help the sugar sectors in the affected countries and point to the previous programmes including that for bananas as not having worked out. The report concludes that "the payment of compensation should generally be avoided, and
that assistance programmes should be linked to more developmental objectives. However, it may be necessary to retain the option of compensation as a means to secure progress in trade negotiations that may potentially deliver far greater benefits than the costs of compensation."