The Banana Dilemma: The Challenges Facing CARICOM

• Author: Edwin Laurent, Brussels
• Pages: 1-34

1

The Banana Dilemma

The production of a single agricultural product and its export to protected

overseas markets have long since been the foundation of the economies of

several Caribbean countries. The tenuousness of such an arrangement has

been highlighted by the current crisis facing bananas. This crisis, which

challenges the old certainties and obliges confronting hard policy options,

did not suddenly appear without warning. Indeed geopolitical developments

which were beginning to take hold during the late 1980s and the slow moving

but radical GATT Uruguay Round1 were laying the foundation for a veritable

revolution in the regulation of global trading relations. The notable outcomes

of this round of multilateral trade negotiations were the birth of the World

Trade Organization (WTO) and the ushering in of an unprecedented

acceleration of the already ongoing process of trade liberalization. What

differentiated the outcome of this Round from all of its predecessors and

made it so “radical,” was that it vested the trade regulatory system, for the

first time, with the possibility of taking precedence over national policy,

thanks to its new and powerful dispute settlement mechanism. The other

dramatic development of the time, which was the principal trigger of the

crisis, was the unification of the national markets of the Member States of

the European Communities (EC). This new Single Market of 1993 was the

second largest and wealthiest in the world, constituting a new commercial

and economic super power, initially of 12 Members – since expanded to the

current 25. The interaction of these developments would not only define the

context in which the crisis is being played out, but actually caused it.

Since the birth of the WTO, with its enforceable rules, there has been a

dramatic increase in the number of trade disputes and a quicker and more

THE BANANA DILEMMA:

The Challenges Facing CARICOM

Edwin Laurent, Brussels

11

11

1

2CARICOM: Appropriate Adaptation to a Changing Global Environment

widespread resort by Members to litigation. The dispute however that stands

out as the most persistent, intractable and politically divisive of the decade

was over the European Community’s banana import regime and preferential

access for the African Caribbean and Pacific Group of countries (ACP), parties

to the ACP-EU preferential trade and aid Agreements. Whilst it is true that

the long running transatlantic battle was widely perceived as a straightforward

fracas between Europe on the one hand and the US and Latin American

exporters on the other, in reality, it involved a diverse mix of participants,

including some of the world’s smallest States, which had a decisive bearing

on the evolution of the regime and the nature of the eventual resolution of the

dispute. Among the most determined and active were Caribbean exporters,

particularly the Windward Islands.2 That experience has provided an

instructive case of the active participation of very small countries in major

international trade negotiations and diplomacy.

The high-profile international dispute was just one dimension of the issue;

the other was the consequent upheaval and crisis in the Caribbean States that

were dependent on the hitherto secure and lucrative export of bananas to

Europe. These States – Dominica, Saint Lucia and Saint Vincent and the

Grenadines (the most heavily dependent), and Belize, Grenada, Jamaica and

Surinam – were confronted with successive changes to the regulatory basis

for their export trade. These changes impinged both on the level of returns

which they were able to secure from their banana exports and the security of

their access. As a result there was severe contraction of the industry among

all producers, except for Belize (see Table 5). Given the high level of

dependence of most of them on the banana trade, the resultant loss of foreign

earnings and employment had severe consequences for the wider economy.

The most dramatic consequence was in Dominica where the resulting

imbalance obliged recourse to a structural adjustment programme of the

International Monetary Fund.

The crux of the difficulty facing CARICOM banana producers is that for

reasons elaborated upon later, their costs of production (see Table 2) and

freight are substantially higher than those of more competitive producers.

Consequently as the current impetus towards liberalization and the reduction

of trade preferences continues, it becomes increasingly difficult for their more

expensive bananas to be sold.

What then are CARICOM’s options?

1 – Bridge the competitiveness gap by reducing costs.

2 – Seek continuation of preferential margins. This requires convincing

the European Union (EU) to go against the liberalization trends by

3

The Banana Dilemma

keeping high import tariffs on bananas whilst continuing duty-free

entry of CARICOM bananas under the ACP-EU Agreement.

3 – Replace lost income and employment through new productive

activities.

Whilst there is doubtlessly scope for cost reduction, the competitiveness

gap is due largely to inherent structural disadvantages in production, including

the small size of holdings and low overall volumes which preclude the

benefiting from economies of scale which are crucial for successful marketing

of a homogeneous bulk commodity in a cost sensitive market. It is beyond

question that the third option, diversification, is the only feasible long-term

solution.

Evidently contraction in such a dominant sector which is not fully

compensated by growth elsewhere will result in net loss of overall national

income and/or employment. However the challenge facing CARICOM

exporters, notably the Windward Islands, is that the decline of their banana

industries resulting from EU reforms has been outpacing their progress in

diversification. The answer therefore is to change the relative speed of the

two forces: slow down the pace of liberalization and loss of protection on the

EU market whilst accelerating the domestic processes of diversification and

adaptation. The challenge at the international level is to “buy time” so as to

ensure that adjustment will be smooth rather than accompanied by a

disruptive period of increased unemployment and declining national earnings.

At the same time acceleration of the pace of domestic adjustment is required

so that the creation of new income and employment opportunities will at

least offset the losses in the banana sector. Simultaneous pursuit of these

distinct objectives can be exceedingly demanding on a small State and the

apparent policy contradictions are not always readily reconcilable.

This study explores the possible means by which more time can be secured

for the domestic adjustment process. It examines the banana dispute and

assesses the background and nature of the current challenges as a prelude to

consideration of the possible options for safeguarding an export trade that is

of vital economic importance to several Member States. Whilst detailed

analysis of domestic adaptation is required, at this stage only preliminary

proposals are made regarding facilitating accelerated diversification.

Whilst economic adaptation including diversification is inevitable, among

the most dependent of the banana exporters, the question is whether mass

unemployment can be avoided during the transition and how effective and

speedy can be the establishment of viable alternative productive activities.