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Identifying an Aid for Trade Agenda

Dialogue meeting on Challenges of Changing Agricultural Markets in the context of ACP-EU Trade

14-04-2008

Braun-Munzinger, Corinna, Solène Sureau, Vincent Fautrel, Francesco Rampa and Kathleen van Hove. 2008. Highlight report of CTA/ECDPM workshop. Dialogue meeting on Challenges of Changing Agricultural Markets in the context of ACP-EU Trade: Identifying an Aid for Trade Agenda, Brussels, 14-15 April 2008. Wageningen/Maastricht: CTA/ECDPM.

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This report has been written by Corinna Braun-Munziger (ECDPM) and Solène Sureau (CTA) with the editorial support of Vincent Fautrel (CTA), Francesco Rampa (ECDPM) and Kathleen Van Hove (ECDPM). This report provides a record of the main points emerging from the roundtable discussion. It does not pretend to be an exhaustive account of the meeting’s discussions. It does not necessarily reflect the views of its authors or CTA and ECDPM.

Summary

While ‘aid for trade’ (AfT) has been extensively discussed in recent years in multilateral fora, there have been very limited opportunities to specifically look at how the AfT initiative can support ACP countries in facing agricultural market challenges, in particular those arising from the changing context of ACP-EU agricultural trade relations. Recognising the need for further reflection on these issues, CTA and ECDPM organised in April 2008 in Brussels a dialogue with ACP and EU stakeholders with a view to identify an AfT agenda for the agricultural sector.

The meeting reviewed the implications for ACP-EU trade of the process of CAP reform, the evolution of EU markets for food and agricultural products and the EU’s bilateral and multilateral trade policies. In terms of ACP agricultural exports to the EU the core analysis highlighted the challenge facing the ACP with regard to either moving up the value chain to reduce dependence on basic agricultural commodity prices or shifting patterns of production away from serving ‘necessity purchase’ markets (where in the medium term EU prices are stagnant or declining) towards serving ‘luxury purchase’ markets where prices are more buoyant. Participants further noted the growing price competitiveness of EU food and agricultural exports and the need for this reality to be built into any final EPAs. A key question raised was how AfT support could best be used by ACP countries in responding to the challenges arising from changing market conditions.

Possible ways forward in this regard were explored in a series of associated papers which looked at:

  • the experience of agricultural-adjustment programmes in the ACP banana and sugar sectors and under the EU’s internal rural-development programme;

  • the lessons from production and trade adjustments under the NIPs in Kenya, Uganda and Tanzania;

  • the comparative experience of rural-development programmes in the French Caribbean overseas territories and the neighbouring Caribbean countries benefiting from sugar-sector adjustment support.

    A number of lessons emerged from this review and from the plenary discussions, namely:

  • the difficulties faced in working through ACP governments in extending support to what need to be private-sector-based productions and trade-adjustment processes;

  • the importance of ensuring that production and trade adjustments are ‘market led’;

  • the importance of getting to grips with the role to be played by the private sector, more specifically the question of under what circumstances and in what form public aid can be deployed in support of private-sector-led restructuring initiatives designed to achieve public-policy objectives with regard to economic diversification, structural economic transformation and employment creation;

  • the particular problems faced in extending production and trade-adjustment support to smallholder farmers;

  • the need for rapid and flexible support to production and trade adjustments in ACP food and agricultural sectors;

  • the need for dedicated financial instruments to support production and trade adjustments in ACP countries.

The comparative review of the experience of the French overseas territories in the Caribbean and the beneficiaries of the ACP sugar-protocol accompanying measures highlights how EU internal support to production and trade adjustment directs investment to those activities which follow market trends and evolving consumption patterns and which seek to shift patterns of EU production to serving ‘luxury purchase’ markets (which are less vulnerable to competition from advanced developing-country exporters in the era of trade liberalisation). The experiences analysed further show the need for the adoption of a coherent and integrated approach to supporting production and trade adjustment, embracing assistance in addressing human resource constraints, physical infrastructure constraints in the public sector, investment constraints on the physical potential of the private sector and marketing constraints. The case studies presented illustrate the importance attached by the EU to using public funds to ‘pump prime’ production and trade adjustments in the food and agricultural sector, particularly in small and remote territories such as those French overseas territories of the Caribbean. Similarly, in the ACP context a key challenge is to effectively deploy public funds to ‘pump prime’ market-led, private sector based adjustment processes, designed to attain clearly articulated public policy objectives and to establish aid deployment procedures which allow this to be achieved quickly and efficiently.

Most participants raised the need for flexible and fast funding procedures to respond to private sector needs under changing market conditions. They also stressed that integrating AfT measures into broader national development plans and sectoral policies requires a careful assessment of demands, which can be a lengthy process in some cases. Several participants underlined that current delivery mechanisms are not sufficient to appropriately support private sector initiatives. Accordingly, new ways of financing should be explored, moving beyond the traditional state-to-state cooperation. The need to involve all stakeholders including private actors into the decision-making process on AfT measures was stressed repeatedly throughout the conference. This implies for instance fostering public-private dialogue structures and supporting private sector organisations, including associations of small farmers.

As a follow up to the two-day exchange, participants suggested to hold similar meetings at regional level in order to develop ideas further. 

Introduction

The international community recognizes that trade liberalization per se does not automatically lead to economic growth and development. It is also broadly accepted that many ACP countries and especially least developed countries among them have not been able to fully benefit from enhanced market access opportunities because of non- competitive production capacities, a lack of infrastructure, inability to meet prevailing standards in high value export markets and being crowded-out of some markets by the domestic support and export subsidies of the developed countries. In this context Aid for Trade (AfT) initiatives have emerged within both WTO and EPA negotiations as a mechanism for assisting ACP countries and regions to address supply side constraints and to adjust their economies to trade liberalization.

In the agricultural sector, these include:

  • upgrading ACP productive capacities and developing trade-related infrastructure in ways which enable ACP producers and processors to take advantage of the economic opportunities created under EPAs;

  • assisting ACP producers and processors in adjusting to the new market conditions which are emerging under the impact of restructuring and liberalization processes;

  • supporting ACP governments in the establishment of appropriate legislative and regulatory frameworks for the implementation of new rules governing trade in food and agricultural products with the EU.

    A key question that emerges in this context is how to operationalise AfT support in the agricultural sector so that ACP countries can successfully undertake this process of structural economic change. Drawing lessons from the existing experiences in the ACP and the EU in supporting restructuring in the agricultural and food product sector in the context of the market changes which are underway in the EU constitutes an important starting point for this process.

    Against this background CTA and ECDPM have taken the initiative to organise a two day dialogue meeting in order to reflect on how to assist ACP agricultural stakeholders in this process of structural change. The workshop brought together around 70 ACP and EU stakeholders currently involved in these issues: ACP representatives from regional organisations, Ambassadors, farmers organizations, private sector representatives, civil society organisations, representatives from the European Commission (EC) and from the EU member states, as well as other experts from international organisations.

    This report first summarises some key issues and lessons raised during the meeting. Then it focuses on the main proposals for follow-up activities as identified by the different groups of stakeholders during the final session of the conference.

 

 Key issues raised

Most participants agreed that the central importance of agriculture for ACP economies does not appear to be appropriately reflected in the national and regional development priorities. In addition, agricultural policies are often poorly articulated with trade policies.

In terms of agricultural trade, ACP exporters are currently facing a number of key challenges that can potentially be addressed by AfT measures.

With regard to the ACP-EU trade relations, these challenges include the effects of the reform of the Common Agricultural Policy (CAP), which aims at increasing the price competitiveness of EU producers and decreasing the gap between EU internal prices and world prices. First, this leads to an expansion of EU food and agricultural exports to the ACP which implies a potential threat to some ACP industries, reinforced through market opening under an EPA1. In addition, declining relative EU internal prices simultaneously reduce the export prices obtained by the ACP on the EU market2, and the need of the EU to protect its market. As liberalisation at the bilateral and multilateral level reduces the ACP preferential margin earned on the EU market, ACP exporters face increasing competition from other suppliers.

The impact of preference erosion and decreasing EU prices is particularly strong because many ACP countries focus on very few export goods and often have higher costs of production compared to MFN competitors. An additional challenge for small countries is that producers cannot rely on domestic markets due to their small size.

Further, there is an increasing emphasis on food safety standards in the EU market, which can act as barriers to trade due to high cost of compliance and verification of compliance.

Existing support schemes to address the effects of preference erosion and EU internal CAP reforms on the ACP are suffering from inflexible and lengthy procedures, which hamper the effective and timely delivery of funds.

This section presents some ideas collected throughout the workshop on how to address the challenges described above in the context of the AfT agenda.

2.1 Increasing productivity and competitiveness

The challenge of increased EU price competitiveness needs to be addressed via national and regional tariff policies and through safeguards as well as support to domestic production and trade adjustments (i.e. developing alternative products and/or alternative markets).

ACP civil society organisations suggested strengthening competitiveness through investment in infrastructure, through supporting regional integration in order to increase the size of the market (focusing on regional markets before targeting international markets) and through modernising family farming through state intervention.

ACP private sector organisations also reported that devoting significant own resources to restructuring and adaptation with the aim of reducing costs has resulted in a high payoff.

Other suggested AfT measures include:

  • access to finance (address working capital problems, facilitate access to inputs);

  • support to packaging, marketing and quality control;

  • support to the strategic direction of production and productivity increases in terms of research and development as well as transfer of technology;

  • support to appropriate technologies to increase competitiveness;

    1 Note that the degree of competition posed to ACP industries by EU exports varies across countries and sectors.
    2 The current food price increase in EU is mainly concentrated on products that are not exported by ACP to the EU maket (e.g. cereals, milk). For the products that are exported by the ACP, the long term trend is towards a decline.

2.2

support to infrastructure, e.g. irrigation in the banana sector;

support to market information systems, such as regional observatories of value chains (e.g. applied in West Africa).

Diversifying products and markets

Given that prices of ACP traditional exports to the EU market are declining, diversification of products and markets can provide a solution, which allows access to higher price markets while reducing the dependence on export prices of individual products. Besides diversification into other products within or outside the agricultural sector, this includes vertical diversification into higher price markets (so-called “luxury purchase” segment) in the EU as well as diversification into markets outside the EU.

2.2.1 Targeting high price markets

Whereas prices on undifferentiated agricultural commodities are declining, the demand for “luxury purchases”, i.e. goods for which purchase decisions are not primarily based on price but rather on quality attributes of the good, is increasing in the EU. The AfT allocation should follow this trend, as well as other growing markets, in order to make AfT a ‘market led’ process. Suggested AfT measures include:

  • Support to marketing of “luxury purchase” products produced in the ACP in the EU: Such “luxury purchase” goods can be processed products or differentiated raw commodities.

  • Facilitation of the movement up the value chain towards producing more value added products in the ACP

    For instance, the main demand in the EU market concerns fresh bananas instead of processed banana products, but additional varieties of bananas (different colours, small bananas) and organic bananas offer potential to yield higher prices. For the sugar sector, a way to access this luxury purchase market would be to product value added, branded, organic sugars and to move to the production of non food products such as ethanol.

2.2.2 Supporting fair trade production

An example of a luxury purchase market is the fair trade market in the EU, which is expanding. However, fair trade should not exclusively be seen as a way to access new high price markets, but is intended to improve standards and fairness of production.

As participants reported from their experience, shifting to fair trade production is time consuming and costly due to the changes in production required and the fees for inspections by certification agencies. Challenges also include finding an appropriate labelling organization and commercial partners.

In the Windward Islands, problems to be addressed were the commercialization of fair trade bananas and delays in the transition to fair trade. On all these issues, AfT measure may play a role in facilitating the move to fair trade production.

Civil society organisations stressed that there are various commitments to fair trade at the EU level, which constitute a potential to be exploited. However, limited demand on AfT in this area has been expressed by the ACP so far. For instance, in the context of the sugar protocol accompanying measures no projects on fair trade have been funded because no such proposals have been submitted by producers. Hence, if there is an interest in fair trade among ACP producers, this should be clearly articulated.

2.2.3 Diversification into non-agricultural sectors

Besides diversifying production towards additional agricultural products, shifting economic activity to sectors outside of agriculture provides a solution to the challenges posed by competitive pressure and declining export prices. For instance, in the Caribbean diversification has taken place mainly into services rather than into other agricultural products.

2.2.4 Targeting non-EU markets

In light of the process of preference erosion in the EU market, AfT as a mean to diversify away from EU markets to other international markets was seen as crucial by several stakeholders. The viability of this option varies across products and countries, however, as it depends on the competitiveness of ACP producers compared to other suppliers in these markets.

2.3 Developing regional markets in the ACP

In addition to targeting international markets or the EU market, several (mostly West African) participants expressed the opinion that the development of regional markets in the ACP should be given priority, moving to international markets only after regional markets have been built.

In the context of rising food prices, regional market development may help alleviate food security issues and provide easier access for small producers. In addition, private sector representatives reported that regional markets can in certain cases provide higher returns on investment than exports to Europe. The case of onions from Niger which are successfully exported at the regional level illustrates the opportunity to develop regional trade as opposed to international trade.

However, transport costs, small size of markets and informal internal trade barriers were often mentioned as reasons for ACP producers not to target regional markets. Participants stressed the challenges posed by EPAs, which have fragmented the existing regional integration of some ACP regions, and which have to be addressed in the coming months.

Private sector representatives stressed the importance of product development for national and regional markets.

Participants underlined the importance of regional agricultural policy frameworks. In the African context, these should be coherent with agricultural policy initiatives under NEPAD/CAADP.

2.4 Complying with SPS and private standards

The increasing emphasis on food safety standards in the EU makes access to the EU market more difficult for ACP exporters. These standards comprise official SPS standards as well as private standards set by retailers, which are gaining increasing importance. As compliance and proof of compliance are costly, AfT measures may enable trade by addressing these issues.

While private standards offer an opportunity for branding products in order to access high price markets, they may act as barriers to trade.

In particular for small producers, the difficulty to access high value export chains often lies less in compliance with standards than in proving compliance.

A specificity of private standards is that requirements differ across retailers. This applies in particular to the primary level of production, while at secondary level (= processing) retailers tend to mutually recognise each others’ standards.

Private sector representatives explained that private codes of practices and traceability systems at the farm level, such as GLOBALGAP, can under certain conditions satisfy importing country requirements and hence provide a solution in case of the absence of competent authorities to verify compliance with standards.

Participants highlighted the need for harmonisation of standards and the importance of considering the discussions on standards at the multilateral level. Support measures should take into account activities carried out under the multilateral Standards and Trade Development Facility.

ACP private sector representatives pointed out that a key question on AfT in the area of standards is whether to assist producers in meeting existing standards or whether to focus on advocating a reform of the standards applied. A solution could be to fund compliance to private standards for small scale producers while simultaneously influencing reform toward a ‘system approach’, i.e. a certification that is not based on individual farmers. In conclusion, two AfT measures are suggested: First of all, producers should be supported with regard to the costs to meet SPS and private standards. Second, funds should be allocated to governments in order to improve their compliance verification capacities.

2.5 Supporting private sector led initiatives through public funds

A key policy issue on aid delivery pertains to the question of how to use public funding to support adjustment processes led by the private sector. This creates a need to move away from the traditional state-to-state focus of EU development cooperation and to increase the role of local private sector organisations in designing support measures, within a public policy framework that specifies eligibility criteria. Organisation and involvement of private stakeholders (see below) is key in defining AfT measures that benefit the private sector.

Private sector representatives stressed repeatedly the need for fast and flexible procedures on delivery of funds in order to support market oriented initiatives under changing market conditions. In the Caribbean heavy procedures and delay of disbursement of EDF funds allocated to bananas and sugar sectors remains an important issue to be solved. Funding should anticipate market developments rather than addressing problems in retrospect.

Funds provided under budget support are difficult to access for the private sector; accordingly alternative delivery mechanisms should be used for AfT funds. Existing private sector development programmes in the ACP should be used to channel funds.

Producer organisations have shown some scepticism on aid deployment through the private sector, fearing that the funds would tend to go to large scale companies rather than to small scale farmers. Furthermore, private sector representatives expressed the opinion that the amounts spent on consultants should be limited while more funds should be allocated directly to farmers.

In countries that have a fund that allows short term borrowing to bridge the time to access EU finance, funding from the EU could be made available to repay the fund directly.

Where companies are able to pre-finance expenditures themselves without requiring a separate fund, disbursement procedures can be simplified by paying out AfT funds against receipt for investments made by companies. This was reported to have functioned well under the SFA in the banana sector in Cameroon.

2.6 Organisation of stakeholders / public private dialogue frameworks

In order to ensure that AfT interventions correspond to the needs in ACP countries, organized stakeholder bodies (e.g. producer associations) may be made central to determining support measures, within a public policy framework that determines who and what is eligible to receive AfT funding.

The need for public-private partnerships and frameworks for dialogue was highlighted by several participants.

The trust fund approach applied in Kenya was mentioned as an example for private sector participation in determining the allocation of funds. In Kenya the EC supports economic adjustment processes in various areas through trust funds, such as the “Tourism Trust Fund”. Experiences with this show the importance of private sector leadership and accountability in the management of such trust funds.

In the context of private stakeholder organisations, external consultants should only be moderators in a process played by private actors.

2.7 Specific needs of small farmers

ACP farmers’ organisations stressed that in the context of restructuring agriculture in ACP countries, there is a need to focus on poverty alleviation before focusing on trade. This includes tackling the issue of food security as well as addressing the needs of small scale producers.

Strengthening and building the capacities of farmers’ organisations was seen as a top priority. Accordingly, targeted AfT measures in this area may foster their integration into the above mentioned dialogue frameworks. Further, support to farmers’ associations may enable smallholders to participate in trade, e.g. through bulking and facilitating access to standardised EU markets, through negotiating prices and through purchasing inputs in larger quantities. In Kenya, for example, the exporters remain large scale farmers whereas the great majority of famers are small scale; a main barrier for them being the compliance with standards.

AfT may also facilitate market access for small farmers by supporting partnerships with larger farmers.

Support to small scale producers should take place both at the level of producers’ associations, e.g. through training programmes, and at the level of individual companies by assisting these to adapt to the requirements of local and regional markets.

2.8 Lessons from EU rural development policy

The EU Rural Development Policy (RDP) constitutes an example of an integrated approach to rural development with the overall aim of increasing the efficiency and the added value of agricultural production.

Some elements of the RDP may be useful examples to look at when designing AfT measures in the ACP, in particular the orientation along market developments and the focus on decentralised decision-making involving local stakeholders in line with a bottom- up approach. On the latter, the Leader approach shows possibilities of designing local governance structures with participation of public and private actors. In Guadeloupe, the Local Action Group set up through the Leader programme and composed of respectively 40% and 60% of public and private stakeholders allowed this programme to be participatory and to define the regional priorities accordingly.

Specific lessons highlighted in the context of the EU RDP include the following:

  • While it is important to ensure that production adjustments are market led, this is difficult to implement working exclusively through government structures. Hence, the role of the private sector needs to be defined. In this context, particular attention needs to be given to small farmers and to strengthening their organisation.

  • In terms of delivery, fast disbursal of funds is crucial to address time sensitive adjustment processes and dedicated financial instruments may be needed.

    When drawing lessons from the EU RDP for AfT in the ACP, the differences in the share of the population working in the agricultural sector need to be taken into account. This leads to the question of whether elements of the EU rural development approach can be scaled up to correspond to a larger share of the population active in agriculture in the ACP, given financial constraints.

Priorities for the way forward

In order to determine concrete priorities for the AfT agenda and follow-up activities, during the last session of the workshop different groups of stakeholders presented their suggestions elaborated during the two day meeting. The detailed points suggested by each group can be found in the annex (see table 1).

Key points of action that were identified for the AfT agenda include:

  • Prioritise agriculture and develop national and regional policy frameworks to this end. AfT should then be integrated into national and regional policies and development plans and donor policies need to be harmonised to effectively support such ACP development strategies.

  • Strengthen productive capacities through modernisation to enhance competitiveness.

  • Upgrade infrastructure.

  • Support compliance and verification capacities to meet SPS and private standards.

  • Support public-private partnerships.

  • Give specifically targeted support to small farmers to enable them to access value chains and participate in trade. This includes strengthening of farmers organisations.

  • Improve aid delivery mechanisms to enhance effectiveness and timeliness. In this context, particular attention needs to be given to making AfT funds easily accessible for the private sector.

Conclusion

In general, most participants agreed that AfT in the agricultural sector should support market led processes and should be based on an integrated approach to rural development, taking into account economic, social, institutional, infrastructural and environmental issues.

Concerning the concrete implementation of AfT measures, on the one hand there is a need for flexible and fast funding procedures to respond to private sector needs under changing market conditions. On the other hand, integrating AfT measures into broader national development plans and sectoral policies requires a careful assessment of demands, which takes time.

Several participants underlined that current delivery mechanisms are not sufficient to appropriately support private sector initiatives. Accordingly, new ways of financing should be explored, moving beyond the traditional state-to-state cooperation.

The need to involve all stakeholders including private actors into the decision-making process on AfT measures was stressed repeatedly throughout the conference. This implies for instance fostering public-private dialogue structures and supporting private sector organisations, including associations of small farmers.

As a follow up to the two-day exchange, participants suggested to hold similar meetings at regional level in order to develop ideas further. 

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Economic Transformation and TradeAid for TradeEU Development Policy and PracticeCommon Agricultural Policy (CAP)European Union (EU)CaribbeanKenyaTanzaniaUganda

External authors

Corinna Braun-Munzinger

Vincent Fautrel

Solène Sureau