POLICY (IN) COHERENCE IN EUROPEAN UNION

SUPPORT TO DEVELOPING COUNTRIES :A three country case study

“ Ensuring coherence between the objectives of the EC’s development policy and its policies and objectives in other areas is an

operational priority as well as a legal obligation for the Commission.“(European Commission annual report on EC development

policy and the implementation of external assistance, 2001)

“ Ensuring coherence between the objectives of the EC’s development policy and its policies and objectives in other areas is an

operational priority as well as a legal obligation for the Commission.“(European Commission annual report on EC development

policy and the implementation of external assistance, 2001)PH

OTO

GR

APH

:Lib

a Ta

ylor

/ A

ctio

nAid

Glossary ofcommon

abbreviations

ACPAfrican, Caribbean and Pacific group of countries

DACDevelopment Assistance Committee (of the OECD)

EBAEverything But Arms

EDFEuropean Development Fund

ECEuropean Community

EPAEconomic Partnership Agreement

EUEuropean Union

FDIForeign Direct Investment

GSPGeneralised System of Preferences

iQSGInterservice Quality Support Group

MDGsMillennium Development Goals

NGONon Governmental Organisation

OECDOrganisation for Economic Co-operation and Development

PPMsProcess and Production Methods

RoORules of Origin

SPSSanitary and Phytosanitary measures

WTOWorld Trade Organisation

01

From small beginnings the EU has grown to become a major international actor in trade and development.However, its organic growth, whereby successive treaties and political decisions have added new interna-tional responsibilities to the EU’s remit, has become an obstacle to effective policy design and implementa-tion. Competing priorities co-exist at an EU level and between the EU’s policies and those of the MemberStates.

This report is an attempt to assess the impact of a range of EU policies on poor people in three developingcountries – Bangladesh, Brazil and Kenya. The report does not provide a comprehensive overview of allpotentially relevant EU activity but rather selects key policy areas in each country and assesses the extent towhich these policies represent a coherent approach to supporting development.

The report opens with a general discussion on what is meant by policy coherence in an EU development pol-icy context and finds that the concept itself is ambiguously defined providing a weak starting point for ensur-ing that development aims are fully supported by other EU policies.

Each country is then considered in turn with the major areas of study being around the interplay betweendevelopment policy and EU trade and agricultural policies. Other policy areas such as fisheries policy andsupport to Foreign Direct Investment are also examined where relevant.

On the basis of the country specific conclusions the report makes a series of recommendations that wouldlead to more effective support for development in each of the countries. For example, the need to simplifythe EU’s Rules of Origin are cited in the Bangladesh chapter whilst both the Kenya and Bangladesh chapterslook in detail at the EU’s food safety and other standards and show how they cause substantial difficulties toindustries employing significant numbers of poor people.

In Brazil the research focuses on the dairy sector since it is a major employer of small scale farmers. The chap-ter shows how the bilateral cooperation agreements between Latin American countries and the EU whichinclude sustainable development as one of their aims, do not sit comfortably alongside the CommonAgricultural Policy the impact of which is felt by thousands of small rural producers and which has con-tributed to the rise in poverty in rural regions.

In addition to the country specific recommendations the report makes a number of general recommenda-tions which would contribute to ensuring that EU policy formulation and implementation achieve greaterunity of purpose from the beginning. These include:

1. The InterGovernmental Conference must clarify the role of development in the EU’s externalstrategy and ensure beyond any doubt that the fight against poverty is not compromised by other EUpolicies such as trade and security.

2. The European Commission, responsible for implementing EU policy, should elaborate a uniformprocess for developing country strategy papers across all geographical regions ensuring that allCommission services whose activities impact on development are involved in the initial planning stages.This should include representatives from Directorates General Agriculture, Fisheries, Public Health andConsumer Protection. A record of these discussions should be attached to the draft country strategy forsubsequent discussions in the Commission and among Member States.

3. The European Commission should apply the same coherence criteria to all developing countriesregardless of whether the geographical desks are located in Directorate General Development or ExternalRelations.

OCTOBER 2003

ExecutiveSummary

02

U

U

U

Introduction As the world's largest trading bloc and the biggest donor, the EU has tremendous potential to influence, inten-tionally or not, the lives of millions people around the world by the choices it makes with regard to its exter-nal and internal policies. The extent to which these policies affect people in developing country is not wellunderstood.

The purpose of this research is to attempt to gauge the total impact of EU policies on the people andeconomies of Bangladesh, Brazil and Kenya and to assess the extent to which its different policies form anoverall, coherent whole. The research focuses mainly on how selected EU policies fit with development poli-cy although other areas for concern and future study would include the extent to which EU development pol-icy is coherent with that of the Member States, the extent to which the EC's development activities themselvesform a coherent approach and a more in depth country study examining all EU policies and their impact onpoor people in developing countries.

In each country researchers examined different sectors including trade, aid, and agricultural policies as wellas support to Foreign Direct Investment (FDI). Although the research primarily assesses the impact of EU poli-cies on developing country economies using statistical data, interviews with government officials, academicsand NGOs, each country report also attempts to gauge the impact of the totality of EU policies on the poorestpeople.

Each of the countries finds itself in a different situation vis-à-vis the EU. Kenya is part of the ACP group of coun-tries that have historically enjoyed privileged access to EU markets. However, the value of these preferenceshas been eroded by multilateral agreements through the WTO and in any case, the extent to which the poorhave been able to take advantage of market access opportunities is not clear.

Bangladesh as a least developed country enjoys certain privileges afforded by the Everything But Arms provi-sions but again, in its most important export market - ready made garments, its preferences will be eroded after2005 and the impact of this looks to be negative without changes to the existing terms of trade.

Brazil, which operates under the Generalised System of Preferences (GSP), enjoys a significant trade surpluswith the EU but the transformations that have been wrought on its dairy industry following entry into marketsby European multinationals (financed in part by export subsidies) has had a negative impact on small dairyproducers.

Part I of this report examines the debate around policy coherence in the development sector and aims to showwhy it is important and what steps donors have taken to address the issue before focusing on the EU and thespecific obligations arising out of EU membership in relation to coherence. This section concludes with ananalysis of how the European Commission has addressed coherence to date.

Part II then assesses the EU’s impact in each of the countries studied in turn. It looks first at each country’s tradeand aid relations with the EU followed by an analysis of how EU policies affect the sectors under study.

Part III draws together country conclusions. The report concludes with a final section drawing together specif-ic recommendations addressed to the EU.

Full versions of the country studies are available at www.actionaidalliance.org

03

PART I COHERENCE AND DEVELOPMENT POLICY

The annual OECD ministerial meeting in 2002 called onthe OECD to, "enhance understanding of the development dimen-sions of member country policies and their impacts ondeveloping countries. Analysis should consider trade-offs and potential synergies across such areas as trade,investment, agriculture, health, education, the environ-ment and development co-operation, to encouragegreater policy coherence in support of the internation-ally agreed development goals."

The Millennium Development Goals, have given fur-ther impetus to the coherence imperative by clearlyunderlining in goal 8 (global partnership for develop-ment) that developed countries must commit them-selves both to increased and more effective aid and toincreased policy coherence if the MDGs are to beachieved. The international focus on the MDGs createsits own dynamic for changes to donor practice and pro-cedures but donors need to move beyond their aidagenda and departments of development into main-stream policy making to effect the required changes.

Coherence and the EU

At an EU level, the Commission is legally responsiblefor ensuring that coherence is achieved.

The origin of the acknowledgement of coherence insuccessive EU treaties has been dealt with exhaustive-ly elsewhere and will not be developed in this paper 1.Article 177 of the Treaty on European Union (TEU)defines the objectives of Community DevelopmentPolicy as being, “..to foster:

> the sustainable economic and social develop-ment of the developing countries, and more par-ticularly the most disadvantaged among them,

> the smooth and gradual integration of the devel-oping countries into the world economy,

> the campaign against poverty in the developingcountries.2 ”

Article 178 makes an implicit reference to coherence bystating that, “The Community shall take account of the objectivesreferred to in Article 177 in the policies that it imple-ments which are likely to affect developing countries .3 ”

This implies that the policies that are likely to affectdeveloping countries should not run contrary to whatthe EU is trying to achieve with its development policy,otherwise, the existence of the article has little mean-ing.

In addition to the specific development related articles,Article 3 of the Treaty on European Union as amendedby the Nice Treaty states,“The Union shall in particular ensure the consistency ofits external activities as a whole in the context of itsexternal relations, security, economic and developmentpolicies,” carefully leaving aside the question of whichpolicy takes precedence over the others.

Despite the stated commitment to coherence, the EUfailed for a number of years to address it in any formalsense. However the joint Council and CommissionDevelopment Policy Statement adopted in November2000, had this to say in relation to coherence: "There must be greater coherence between the variousCommunity policies focused on sustainable develop-ment. Efforts must be made to ensure that Communitydevelopment policy objectives are taken into accountin the formulation and implementation of other poli-cies affecting the developing countries. The way toachieve this is to make a systematic and thoroughanalysis of any indirect effects of measures in especial-ly sensitive areas and to take development problemsinto account in the Commission decision-makingprocess.4 ”

PART I Coherenceanddevelopmentpolicy

04In 1991 the Development Assistance Committee (DAC) of the Organisation for Economic Co-operationand Development (OECD) called for greater coherence in the policies of developed countries that havean impact on developing countries. A DAC statement issued in 1995 emphasised that “it is critical thatother policies not undercut development objectives”. More specifically, a 1999 DAC publication “DACScoping Study of Donor Poverty Reduction Policies and Practices” referred to pro-poor policy coher-ence. The DAC has continued to promote greater donor policy coherence, including by referring explic-itly to coherence issues in DAC peer reviews. In October 2002 the DAC released a checklist for policycoherence: ‘Improving Policy Coherence and Integration for Sustainable Development’. Policy coher-ence has thus been framed at the international level in terms of development co-operation and theachievement of development goals.

Source: BOND policy briefing, www.bond.org.ukReferences: ‘Development Partnerships in the new Global Context’, DAC 1995

http://www.oecd.org/pdf/M00035000/M00035366.pdf

1 The reader is referred to Box, L., and A.Koulaïmah-Gabriel. 1997.TowardsCoherence? Development CooperationPolicy and the Development of PolicyCooperation. (ECDPM Working Paper No.21). Maastricht: ECDPM and to Coherenceand Consistency in Europe’s foreign poli-cy, Paul Hoebink, Centre forInternational Development Issues,University of Nijmegen (CIDIN), inEurope in the World ed. Howard Mollett,BOND, 2003.

2 EUROPEAN UNION CONSOLIDATEDVERSIONS OF THE TREATY ON EURO-PEAN UNION AND OF THE TREATYESTABLISHING THE EUROPEAN COMMU-NITY (2002) (2002/C 325/01)This publication contains the consolidatedversions of the Treaty on European Unionand of the Treaty establishingthe European Community, incorporatingthe amendments made by the Treaty ofNice, signed on 26/02/ 2001.http://europa.eu.int/eur-lex/pri/en/oj/dat/2002/c_325/c_32520021224en00010184.pdf

3 ibid.

4 Joint Council and Commission Statementon Development Policy November 2000,para 39, http://europa.eu.int/comm/devel-opment/development_old/lex/en/coun-cil20001110_en.htm

PART I Coherence

anddevelopment

policy

The political commitment therefore to policy coher-ence is in place. This was reiterated in the 2001 AnnualDevelopment Report which stated, "Ensuring coherence between the objectives of the EC’sdevelopment policy and its policies and objectives inother areas is an operational priority as well as a legalobligation for the Commission."

Implementation of Commitments

The Commission views its Country/Regional StrategyPapers as a genuine attempt to establish a frameworkfor its relations with these countries that covers devel-opment assistance and other relevant Community poli-cies.

"The challenge for the EU is to provide the right mix ofpolicies for each region and country. The broad rangeof policies that the EU has at its disposal gives it aunique opportunity to apply an effective and efficientmix of co-operation instruments, including develop-ment assistance, fishery agreements, trade instruments,political dialogue, foreign policy instruments. The useof these various instruments is to be made more coher-ent through the Country Strategy Paper Process. All ECservices are consulted in drafting a Country StrategyPaper, in addition to consultations with the partnercountry itself. CSPs are required to include a sectionidentifying the different EU policies affecting the part-ner country and analysing the appropriate policy mix.5 "

The extent to which this is achieved is verified by theinter-service Quality Support Group (iQSG). Thisgroup's task is to examine all CSPs and assess thembroadly in terms of the EU's aims, stated objectives, thework of the Member States in the same country, inclu-sion of cross cutting themes and coherence. It has beenoperational since January 2001 and its members aredrawn from all the services that are involved in themanagement of the EC's relations with developingcountries (DGs Development, External Relations, Trade,Economic and Financial Affairs, Enlargement, ECHO,EuropeAid and the relevant Evaluation Unit). It has itsown secretariat in DG Development.

Whilst its appears that the existence of the iQSG hascertainly raised the profile of policy coherence withinthe Commission its impact on country strategies andprogramming has yet to be felt. By the Commission'sown admission it has proved hard to translate thecoherence commitment into practice. The iQSG's reporton the 2001 CSP process states that in 34% of theCSP/RSPs the section on policy coherence was under-developed.6 A staff working paper published inNovember 2002 states that although the "policy mix"was mentioned in the vast majority of programmingdocuments, the analysis was rarely taken very far, inparticular with regard to trade and fisheries." 7

Furthermore, there are a number of other areas thatneed to be addressed to ensure that the Commission is

able to make the commitment to policy coherencemeaningful. These include

a] a uniform process for developing country strat-egy papers across all geographical regions.Particular attention should be paid to ensuring thatall Commission services likely to be affected areinvolved in this first broad stage of planning. Forexample, the iQSG includes representatives fromall services involved in the management of exter-nal relations but no representatives from DGsAgriculture, Fisheries and Public Health andConsumer Protection - all DGs that our researchshows have a direct impact in the countries westudied and their ability to take advantage ofdevelopment opportunities.

b] A record of these country discussions should beattached to the draft country strategy when it goesforward to the iQSG and to Inter ServiceConsultation within the Commission.

c] Country desks/delegations leading the processshould clearly indicate how coherence relatedcomments have been taken into considerationregardless of whether amendments arising fromthe comments have been included in the finalstrategy paper.

d] The Commission should apply the same "coher-ence criteria" across the board. At present itappears that the development policy statement ismore of an ACP policy statement, than a strategy fordevelopment in all developing countries. Even theprocesses being pursued for the Mid Term Reviewsappear to differ which makes it harder to monitorhow the Commission is addressing coherence bothinternally and in relation to the Member States.

For those countries that depend on DG ExternalRelations rather than DG Development, it seems thatthe Commission takes a rather narrow view of coher-ence since the region specific references to coherenceare all focused on trade and development rather thanthe totality of EU policies and their potential impact ondevelopment. The section relating to Latin Americagoes one step further stating," regional co-operation activities designed to strength-en regional integration and establish common marketsare consistent with Community trade policy."That may be so, but the point is rather to ensure thatCommunity trade policy is consistent with develop-ment activities in the region.

The extent to which the EU's trade and agricultural poli-cies are coherent with the EU's development policy is avital concern for developing countries. It is worth exam-ining EU trade and agricultural policies in greater detailtherefore before considering the specific country casestudies.

05

5 Annual Report 2001 on the ECDevelopment Policy and the implementa-

tion of External Assistance, EuropeanCommission, p.16

6 DEV/iQSG/CT D(2002) Brussels 18March 2002, p. 4

7 Commission Staff Working PaperProgress Report on the Implementation ofthe common framework for country strat-

egy papers SEC (2002) 1279 26.11.02,P.17

Aims of EU trade policy

The overall aim of the EU’s trade policy is “to promotethe economic and political interests of the EuropeanCommunity" 8 . DG trade as an institution is aware of theneed to balance trade policy with the EU's develop-ment policy yet in practice, our research shows that thisbalance is not being achieved. The EU's promotion ofFree Trade Areas for example, whilst presented asbeing in the best interests of the countries concernedalso serves the EU's own interest. For example in 1995the Commission said of FTAs that they are, "economi-cally beneficial, especially where they help the EU tobolster its presence in the faster growing economies ofthe world, which is our overriding interest." 9

On 26 February 2001 the EU eliminated all dutiesand quotas for all products originating from leastdeveloped countries (LDCs), with the exceptionof bananas (from 2006), sugar and rice (both from2009). This initiative is known as Everything ButArms (EBA).

The EU GSP offers preferential tariff reductions todeveloping countries on a range of products. Yet itspotential is undermined by strict ‘rules of origin’ thatprevent developing country manufacturers fromimporting component parts, other than from the EU. Asa result, only one third of products from developingcountries legally eligible for preferential treatmentactually enter the EU market under reduced tariffs .10

EU Agricultural policy

In economies where the majority of the population isdependent on subsistence agriculture for survival,changes to the EU's support system for its own farmerscan have a significant impact. Not only does the EUhave a determining influence on certain world marketprices because of the scale of its exports but EU exportswhich undercut local market prices in developingcountries can have a devastating impact.

PART I Coherenceanddevelopmentpolicy

06

GSP

The Generalised system of preferences is a system by which preferential tariffs are granted unilaterallyto certain countries on a non-reciprocal basis. It was approved by GATT in 1971, allowing industrialisedmembers to adopt one-way tariff preferences in favour of developing countries. The waiver was mademore general and permanent in 1979 with adoption of so-called "Enabling Clause" allowing industri-alised countries to implement measures extending "differential and more favourable treatment" todeveloping countries. The preferences under the GSP are granted to exports of specific products fromparticular countries. Source: DG Trade website, European Commission

The EU GSP scheme grants preferences for a given product as a percentage reduction of the MostFavoured Nation (MFN) duty rates. This percentage depends on a given product’s “sensitivity”, which isdetermined by the situation of the sector manufacturing the same product in the Community. Since1995, the EU has eliminated all quantitative limitations. Yet, its GSP scheme maintains the “graduationmechanism” under which the benefit of the scheme is phased out for specific sectors or countries thathave reached a degree of competitiveness where they increased their exports even without enjoyingGSP treatment. Moreover, the EU GSP scheme contains safeguard measures that may suspend the pref-erential market access. When such measures are applied, MFN rates are reinstated on imports from oneor more beneficiary country.Source: Titumir 2003

The impact of dumping: dairy products and the DominicanRepublic

The livelihoods of thousands of small-scale pro-ducers in the Dominican Republic have beenundermined because of the dumping of EU dairyproducts. There are about 30,000, mainly small-scale producers in the country.

During the 1990s, demand for dairy productsincreased but, after the country liberalised itsagricultural trade and joined the WTO in 1995,this demand was met primarily by imports.Largely as a result of export subsidies, the priceof EU milk powder is 25% lower than the equiva-lent price for local fresh milk. By 2000, theDominican Republic was the fifth largest recipi-ent of EU milk powder and thousands of farmershad been forced out of business. 11

The giant Scandinavian Company Arla Foods hasbeen implicated in the dumping of dairy pro-duce. According to AgraEurope, “Arla Foods' milkpowder exports to the Dominican Republic areworth €65.85m, and are currently subsidised bythe EU to the tune of €17.55m.”12

8 http://europa.eu.int/comm/trade/whatwedo/work/index_en.htm

9 Free Trade Areas:An Appraisal, CEC SEC(95) 322 final p.6

10 Brenton, P, and M Manchin (2002),“Making EU trade agreements work, CEPS2002, quoted in Titumir.

11 Oxfam, 2002b. Milking the CAP: HowEurope’s Dairy Regime is DevastatingLivelihoods in the Developing World.http://www.oxfam.org.uk/policy/papers/34milking/34milking.html

12 Agra Europe, 2003. Milk powderexports spark Swedish row. 28th February.

PART I Coherence

anddevelopment

policy

Reforms of the EU's Common Agricultural Policy(CAP) have been characterised by their slow pace.

The 2003 CAP reform only tackled one aspect of agri-culture in the European Union – that of domesticsubsidies. The reform proposal and final agreementwas not an attempt to tackle issues of fundamentalconcern to developing countries, namely the erosionof the value of preferential market access and theimpact of direct aid payments on the price competi-tiveness of EU exports.

The central plank of the EU package is that the major-ity (but not all) of the current direct payments tofarmers will be ‘decoupled’ from production. Thiswill enable the EU to reclassify these decoupled pay-ments into WTO compliant subsidies, moving themout of the blue box into the green box.

One estimate is that, as a result of the agreement, theEU will be able to reduce its blue box subsidies byabout 75%, more than meeting the call in theHarbinson text to reduce them by 50%. 15 These piece-

meal reforms offer little, if any benefit to the world’spoor. Particularly since they continue to allow theprovision of public aid to agriculture in ways whichare designed not to reduce overall levels of EU pro-duction.

In the case of the dairy regime (which is the focus of theBrazil section) the newly adopted measures lay thebasis for incorporation into the new single farm pay-ment scheme. This involves reducing the interventionprice for butter by 25% over four years and skimmedmilk powder by 15% over three years. These reformswill make EU dairy exports more price competitive and,depending on developments in the EU-US exchangerate, will considerably reduce the need for export

refunds in the dairy sector. It will not however reducethe unfair trade practices implicit in EU agricultural sup-port since the reductions in the intervention price areaccompanied by increased direct aid payments. Largeamounts of public aid (a mixture of export refunds andincreased direct aid payments) will still be made avail-able to EU dairy farmers enabling prices to be chargedfor milk which do not reflect the underlying costs of pro-duction of EU dairy producers. Whilst currently, thedairy sector spends about €1 billion on export subsi-dies, under the final agreement, according to theEuropean Commission, export subsidies for dairy prod-ucts in 2013 will be only €620 million.17 Direct aid pay-ments in the dairy sector will however have corre-spondingly increased. The Mid Term Review (MTR) of Agenda 2000 (CAP)reveals a distinct lack of coherence on trade policyand development issues. The impact of the CAP ondeveloping countries was simply not addressed aspart of the MTR, eliciting just one mention. TheCommission is fundamentally wrong to assert thatthe 'MTR of the CAP, if adopted, would present a con-crete example of steps taken to improve coherence'.18

The Commission's own projections show that currentproduction levels will be retained under a reformedCAP. Indeed the Commission's proposals were modi-fied to ensure EU production levels were notadversely affected. Some independent studies com-missioned by the European Commission even sug-gest EU production will expand in all major sectorsexcept beef and rye under a reformed CAP. Since thisexpanded production will be at much lower prices, itis difficult to see how a reformed CAP is less tradedistorting. The most that can be claimed is that thereform measures agreed will lock into place existingtrade distortions.

07

WTO Domestic Subsidy Boxes.

The WTO classifies subsidies into three categories:

> AMBER BOAMBER BOX: X: all domestic subsidies – such as market price support - that are considered to dis-tort production and trade. Subsidies in this category are expressed in terms of a “Total AggregateMeasurement of Support” (Total AMS) which includes all supports in one single figure. Amber Boxsubsidies are subject to WTO reduction commitments.

> BLBLUE BOUE BOX:X: subsidy payments that are directly linked to acreage or animal numbers, but underschemes which also limit production by imposing production quotas or requiring farmers to set-aside part of their land. These are deemed by WTO rules to be ‘partially decoupled’ from produc-tion, and are not subject to WTO reduction commitments. In the EU, they are commonly known asarea and headage or compensation payments.

> GREEN BOGREEN BOX:X: subsidies that are deemed not to distort trade, or at most cause minimal distortionand are not subject to WTO reduction commitments. 13 For the EU and US, the most important allow-able subsidy in this category is decoupled support paid directly to producers. Such support mustnot relate to: the type or volume of production, the prices, domestic or international, applying to anyproduction undertaken, or the factors of production employed. It can also be given on conditionthat no production shall be required in order to receive such payments. 14

13 For full details see Annex 2 of theAgreement on Agriculture

14 Other subsidies allowed include envi-ronmental programmes, government serv-

ice programmes (eg. research, pest con-trol, extension; infrastructure provisions);public stockholding for food security pur-poses; domestic food aid; relief from natu-

ral disasters; government income insur-ance and income safety-net programmes;

producer and resource retirement pro-grammes; adjustment support during agri-cultural land privatisation; and assistance

programmes limited to producers in disad-vantaged regions.

15 AgraEurope, 2003.A CAP reform agree-ment that – just about - delivers. 27th June.

16 AgraEurope, 2003. EU Staggeringtowards hybrid CAP reform. 20th June.

17 European Commission, 2003b. CAPReform – A long-Term Perspective for

sustainable Agriculture.http://europa.eu.int/comm/agriculture/

mtr/index_en.htm.The legislative propos-als can be found at:

http://europa.eu.int/comm/agriculture/mtr/memo_en.pdf

18 ibid. p. 21

PART II BangladeshSectionauthor:Rashed AlMahmudTitumir

08The trading positions of Bangladesh,Brazil and Kenya with the EU

The situation in which each country finds itself vis-à-vis the EU is quite different – Bangladesh is a LeastDeveloped Country (LDC) that benefits from dutyfree access under the Everything But Arms initiative.Kenya is a signatory to the Cotonou Agreement andhas for many years benefited from the preferencesaccorded to it under successive ACP-EU agreements.However it is starting to see the value of these pref-erences being eroded and the research tends to sug-gest that entering into an Economic PartnershipAgreement with the EU from 2008 will do nothing toaddress this trend. Brazil trades under the GSP sys-tem and is currently negotiating a Free TradeAgreement (FTA) with the EU as part of the Mercosurgroup.

This report now summarises the findings from eachof the three country case studies, highlighting themain challenges. A final section then draws generalconclusions and recommendations.

PART IIBANGLADESH19 SECTION AUTHOR:RASHED AL MAHMUD TITUMIR

Bangladesh has found it difficult to force a faster rateof poverty reduction beyond an average of one percent per year throughout the 1990s. Despite the con-sistent reduction in the share of people living inpoverty, absolute numbers of poor people continueto rise, as does the denial of their rights. Incomeinequality in Bangladesh rose considerably duringthe last decade, particularly in urban areas. One ofthe reasons for which aid has failed to stem the risingnumbers of poor people is due to the mistaken diag-nosis of the causes of poverty by donors. Donors’strategies, including that of the EC, have failed toappreciate that poverty originates in injustice ratherthan in the poverty of resources. This in turn hasmeant that donors have not used aid money to focuson the root causes of poverty.

EC co-operation with Bangladesh is guided by theEC’s development policy (2000), the ALA Regulation(1992), the EC Strategy towards Asia (2001), the EC-Bangladesh Co-operation Agreement (2001), theEuropean Commission's Country Support StrategyPaper (CSP) (2002-2006) and a raft of wider policieson trade plus secondary bilateral agreements andregional agreements.

Bangladesh is the second largest aid recipient for theEU in Asia (after India) and is at the top of the list ofEC food aid recipients globally. The growing impor-

tance of the EU - Bangladesh relationship is also visi-ble in terms of its connections with NGOs.Bangladesh is the fifth largest recipient of EU aidthrough NGOs.

However, donor aid strategies as in the CSP of EChave tried to address poverty only through wideningcapabilities and choices. Yet both capabilities andchoices are themselves constrained by institutionalstructures designed to perpetuate injustices. InBangladesh, sources of injustice include the market,the social structures, the institutions of state andglobalisation processes within an asymmetrical glob-al order.

The principal donors like the European Commissionand most of its Member States are committed to astrategy rooted in neo-liberalism – such as free mar-ket economics, deregulations, privatisation, etc. Untildonors to Bangladesh are willing to use their aidleverage to secure a redistribution of assets towardsthe poor or within socially-owned institutions theirclaim to bias their aid strategies to target groups ofthe poor appears to be self contradictory.

Research indicates that in Bangladesh 25% of foreignaid goes to suppliers of foreign equipment and for-eign consultants, another 50% goes to various mid-dlemen including civil servants and politicians andonly 25% actually reaches poor people.20 This isborne out in part by research carried out byActionAid Alliance on tied aid. It finds that by untyingaid donors can unlock up to 20% more resources fordevelopment and it cites specific examples of howtied aid uses scarce resources inefficiently.21

TRADE RELATIONS

The first agreement signed between Bangladesh andEU was in 1976 outlining commercial cooperation.The New Cooperation Agreement, signed onFebruary 17, 1999 entered into force on May 22, 2000and has as objectives, amongst others, to stimulatetwo-way trade and to promote investment and eco-nomic links.

The EU is the main destination for Bangladeshexports (see Table 1). The structure of Bangladeshexports demonstrates the vulnerability of the econo-my and its interconnectedness to, and dependencyon, the EU trade regime. Any change in the EU tradepolicy regime has a powerful effect on the economyof Bangladesh. Almost 95 % of exports fromBangladesh are manufactured products, of which 88% are textiles and clothing while 5 % comprise pri-mary products. Obviously any policy change relatedto textile and clothing has serious consequences onBangladesh’s economy.

19 This section summarises a report com-missioned by ActionAid Alliance inBangladesh EU-Bangladesh aid and tradepolicy regime: a citizens perspective byRashed Al Mamud Titumir,The Innovators,May 2003.

20 Titumir p.10

21 Towards effective partnerships, UntieAid,Terlinden C. and Hilditch L.,April2003,ActionAid Alliance

A narrow concentration on textiles and a generallylow value addition in the Ready ManufacturedGarment (RMG) industry has kept Bangladeshdependent on preferential treatment by its maintrading partners, the EU and the USA. This has led toan increasing concern about her future market posi-tion and market share once all quantitative restric-tions on trade in textiles and clothing have beenremoved in 2005 22, with India and China being themain risks in terms of supplanting Bangladesh mar-ket share. This is because the structure of globalapparel manufacturing is such that manufacturerstend to turn to Bangladeshi firms only once they haveused up the quota allocation in other countries.23

Imports

EU is the second largest trading partner ofBangladesh in terms of imports. In 1998/99, the EUaccounted for 9.5% of total imports by Bangladesh,second only to India (15.4%) and far ahead of bothUSA (3.7 %) and Japan (6.1%).

Everything But Arms

Although Bangladesh enjoys access to EU marketsunder the terms of the Everything But Arms (EBA)Initiative, which provides duty and quota free accessof LDC products to its market, this has not so farbrought significant gains because the initiative hasnot brought with it complementary reforms in the ECrules of origin (RoO). Prior to the entry into force ofthe EBA initiative, in 2000, Bangladesh was only ableto use 39% of the eligible level of preferential accessdue to the stringent two and three-stage conversionrequirements under the EC rules of origin (RoO). EBAhas failed to address this issue in relation to EU-Bangladesh trade.

These findings are confirmed by a recent study intothe impact of EBA on LDCs 24. This study argues thatthe preferences granted under EBA are only of mar-

ginal benefit since most of the currently exportedproducts - 99.5% in fact - were already eligible for tar-iff and quota free access and in the remaining impor-tant products - rice, sugar and bananas, the removalof trade barriers has been delayed (to 2006 forbananas and 2009 for rice and sugar). For thosecountries that could benefit without diversifyingfrom their existing portfolio the take up rate of thepreferential rates is only 50%. The paper identifiesthe Rules of Origin as the prime suspect behind thelow take up rates and recommends that they be sim-plified.

The paper identifies Bangladesh as a country forwhich the potential to take advantage of the EBA con-cessions are significant even though advantage iscurrently being taken at 50%. It calculates that theEBA concessions were worth €1.9 billion toBangladesh in 2001 (assuming that all the transfergoes to the exporter and none to the importer). If the

PART II Bangladesh

Sectionauthor:

Rashed AlMahmud

Titumir

09

1989-90

34%29%37%

1994-95

41%34%25%

1999-00

46%37%17%

EUUSARest of the World

Destination

Table 1 – : Share of EU in Bangladesh’s Global Export • Source: Rahman and Rahman (2000)Note: Figures are rounded.

Rules of Origin

Simply put, Rules of Origin refer to the laws,regulations and administrative procedureswhich determine a product's country of origin,i.e. in what country a good will be consideredas actually made for tariff and other trade pur-poses. These rules vary from country to coun-try.

The RoO in place for preferential apparelsexports under the EC-GSP in 1996 was a three-stage conversion requirement for knit-RMG(spinning, weaving and apparel-making) andtwo-stage conversion requirement for wovenRMG (weaving, apparel making). The ExportPromotion Bureau (EPB) issues certificates oforigin which confirm that exports comply withthe EU’s RoO criteria. In 1996, the EC initiatedan inspection of about 25,000 certificates oforigin and the following year, the EPB cancelledthe certificates requiring the payment to the ECof US$67 million in previously waived importduties.Source: Rahman 2001 in Titumir, 32

22 In 2005 the Multifibre Arrangement(MFA) will be phased out under the new

Agreement on Textiles and Clothing(ATC).The MFA operated on a system ofquotas, allowing industrialised countriesto limit imports.The phase out has been

seen as a gain generally by developingcountries but the case of Bangladesh is

atypical.

23 Trade liberalisation in the garmentindustry: who is really benefiting? AngelaHale in Development in Practice,Vol. 12

No. 1, Feb. 2002 p. 36

24 Integrating the Least Developed Countriesinto the World Trading System: The Current

Impact of t EU Preferences under EverythingBut Arms, Brenton P., February 2003

take up had been 100%, Bangladesh could havegained an additional €1.9 billion.

Even without having taken full advantage of the poten-tial benefits afforded by the existing trade regime,quota free entry for Bangladesh has been of significantbenefit to Bangladesh. Maintaining the existing prefer-ences together with simpler Rules of Origin could havean even bigger positive impact on Bangladesh’s textileindustry. This is particularly important as the textileindustry in Bangladesh employs a sizeable number ofwomen workers with few alternative sources ofincome generation.

If as seems likely Bangladesh, loses out to new devel-oping country competitors, such as India, Indonesia,Pakistan and China, which will be in a position toincrease their exports to the EU when quotas areremoved in 2005 the losses that Bangladesh is likely tosuffer will include a decline in export earnings and aloss of employment for many thousands of workers,primarily female (Titumir, 2003). Such losses wouldundermine several of the EU’s development co-opera-tion objectives in Bangladesh, including povertyreduction, gender equality, economic growth, andimprovement of social indicators (health, education,nutrition and population).

Non tariff barriers to trade

Many countries, including Bangladesh, Brazil andKenya, are worried about the increasing use of stan-dards such as sanitary and phytosanitary measures(SPS) and use of production process methods (PPMs)to limit their access to EU markets, as evidenced forexample by the EU ban on shrimp exports fromBangladesh and other LDCs. Developing countryexporters are worried that their products may incurhigh investment costs to comply with such standards.Developing countries are also concerned by the insti-tutional requirements necessary to verify compliance,which are often beyond the capacity of the developingcountry to attain. There are growing concerns thatthese standards could become major new non-tariffbarriers which effectively protect developed countrymarkets.

Although Article 10.1 of the SPS Agreement directs thatin the preparation and application of SPS a membershall take account of the special needs of developingcountry members, and in particular of the LDC mem-bers, this does not bind the importing country mem-ber to comply with the provision. Thus in effect theimporting developed countries can protect the inter-ests of their local producers, without any reference tothe impact of such measures in developing or leastdeveloped countries.

Such protections may not necessarily be aimed atsafeguarding the interests of domestic industries indeveloped countries alone, but also the interests offavoured trading partners, and developed countryentrepreneurs investing abroad.

The unit cost of meeting SPS standards could fall par-ticularly heavily on small countries with limited pro-duction capacity, since they have to spread the fixedinvestment costs in meeting EU SPS standards across alimited volume of exports. These issues need to beaddressed under the EBA, since otherwise the eco-nomic costs of meeting EU SPS standards could wellserve to exclude countries such as Bangladesh fromthe benefits of the tariff free access granted as aninstrument of the EU's development policy.

Furthermore, in the context of the trade and environ-ment relationship, PPMs have become one of the mostdebated topics. Traditionally, attention has beenfocused on the product standards issues, but nowmembers like the EU are increasingly asking for PPMstandards. From the environmental viewpoint bothproduct standards as well as PPM standards areimportant because more often than not it is the pro-duction process and not the product that poses anenvironmental threat.

However, many developing countries are worriedabout the possibility of PPMs becoming entry barriers.Exporters in developing countries are nervous thatthey may be forced to incur high costs in order tomaintain access to overseas markets. Allowing PPM-based trade barriers would open the opportunity formany countries to protect their industries unfairlyagainst foreign competition.25

Conclusion

Dismantling existing protection is a necessary, thoughnot sufficient condition for improved LDC export per-formance. Measures aimed at improving technical andinstitutional infrastructure may be required to makebetter market access effective, yet the size of the gainsto LDCs, although significant, is not sufficiently large tolift them above their current levels of development. Inthis regard, market access openings, if they are tooccur, should be viewed as elements of a broaderstrategy for development not within the confines oftrade policy. The development strategy has to travelbeyond capabilities and choices which are con-strained by institutional structures designed to perpet-uate injustice to address the sources of injustice—themarket, the social structures, the institutions of stateand globalisation process within an asymmetricalworld order.

PART II BangladeshSectionauthor:Rashed AlMahmudTitumir

10

25 Sandeep and Mehta quoted in Titumir p. 36

PART II Kenya

Section:Authors:

Gerrishon K.Ikiara, Moses

M. Ikiara,Walter

Odhiambo

Kenya Section26 : Authors: Gerrishon K.Ikiara, Moses M. Ikiara, WalterOdhiambo

This section will focus on the impact of EU policies onthe Kenyan horticultural and fisheries sectors with par-ticular emphasis on the poor. It will also address coher-ence between various EU policies with respect toKenya's development objectives. The paper analysesthe role the Lomé Conventions, both their non-recipro-cal trade preferences and aid dimensions, have playedin export development, economic growth and povertyreduction in the country. It also discusses the likelyimplications to the country of the Cotonou Agreement,in particular (i) the loss of non-reciprocal trade prefer-ences and their replacement with an economic part-nership agreement (EPA) in 2008, and (ii) the changingaid facilities, modalities and conditionality. Coherencebetween various EC policies with respect to theCommunity’s development objectives for Kenya is alsoreviewed. On coherence, the paper focuses on how the CAP,Common Fisheries Policy, trade policies with respect tonon-ACP countries (including ‘Everything But Arms’)and commitments under the multilateral trade frame-work, are consistent with the development objectivesof export development, economic growth, and povertyalleviation that have been the driving force of succes-sive Lomé Conventions and the Cotonou Agreement.Kenya’s relations with the EU have been conducted

within the framework of successive Lomé Conventionsand since 2000, the Cotonou Agreement. The main aimof the Agreement is " to reduce and eventually eradi-cate poverty while contributing to sustainable devel-opment and to the gradual integration of ACP countriesinto the world economy" 27. Through these agreements,the EU granted Kenya and other African, Caribbeanand the Pacific (ACP) states duty free access for the vastmajority of their exports although for certain sensitiveagricultural products this duty free access is qualifiedby a range of quota and seasonal restrictions. In addi-tion, under successive Lomé agreements, substantialdevelopment assistance resources have been madeavailable to Kenya. This has taken the form of bothgrant aid and concessional loan financing.

Aid

Aid has focused mainly on rural development andfood self-sufficiency although energy, commerce andindustry, health and education have also featured to alesser extent. The country has been a major beneficiaryof the STABEX scheme for the stabilisation of agricul-tural export earnings (intended to offset the impact ofdeclining commodity prices on commodity dependentcountries) although the deployment of these funds hasbeen subjected to extensive delays profoundly under-mining the benefits which Kenyan coffee farmerswould otherwise have gained in the face of dramatical-

ly declining coffee prices. With respect to loan finance,many sectors including tourism and horticulture havebenefited.

If EU aid to Kenya has not had the desired impact interms of decreasing poverty, responsibility for thisdoes not lie entirely with the EU; inefficiency and gov-ernment corruption under the former governmentbear most of the responsibility for the increased pover-ty in the country. However, it is also the case that theshare of ACP aid as a percentage of allocable aid fellfrom 67% in 1986-1990 to 42% in 1990-1995 29. Thuseven though Kenya’s aid receipts have not declined inabsolute terms, the country must be receiving less thanif the level of commitment to ACP countries had beenmaintained. This trend towards skewing external aid infavour of countries bordering the EU is continuing andseems to indicate that the EU’s foreign policy interestsrather than development are dictating resource alloca-tion.

Trade

Access to EU markets has been granted through non-reciprocal trade preferences in the form of lower tariffsor tariff exemptions in manufactured and agriculturalproducts provided the latter were not in direct compe-tition with products coming under the CAP. As a conse-quence, Kenya has been able to export almost all itsproducts to the EU without facing any tariff barriers.The value of these trade preferences is enhanced bythe fact that they are: (i) non-reciprocal, meaning thatthe ACP countries are not obliged to offer similar pref-erences to EU exports, (ii) stable since they wereoffered in 5-year periods and for 10 years under LoméIV, (iii) predictable because they are contractuallybinding on the partners, and (iv) negotiated with theACP members before they are signed.Kenya has benefited substantially from the non-recip-rocal trade preferences especially in the horticulturaland fisheries sectors, largely because it has some pro-duction and supply capacity. Indeed, according to theFirst Report of the Working Group of ACP Experts (1999)Kenya and other countries such as Mauritius,Madagascar, and Zimbabwe that had production andsupply capacity achieved a better export performancecompared with non-ACP developing countries.

11

26 This section summarises research com-missioned by ActionAid Alliance in Kenya

entitled Impact of the European Union onPoor and Marginalised People: The case of

Kenya's Horticultural and Fisheries Sectors,Ikiara, K. Gerrishon, Ikiara, M. Moses and

Odhiambo Walter, June 2003

27 Cotonou Agreement,Article 1,http://www.acpsec.org/gb/cotonou/accor

d1.htm

28 Mwanzia (1997) in Ikiara, Ikiara andOdhiambo p. 7

29 Wolf and Spoden 2000 in ibid. p.33

General Trends in Kenya’s Exports to and Imports from EU

Agricultural products are by far the most important exports from the country. They accounted for 54-57% of thecountry’s total exports over the period 1992 and 2000 (Table 2). Over the same period, industrial exports account-ed for 18-26% of total exports, with their share dropping from about 26% in 1994 to 19% in 2000. Other consumergoods are also emerging as important exports with their share in total export value rising from 8% in 1992 to 16%in 2000 (Table 2). Indeed, this is the only export category that maintained steady growth in its contribution to totalexport value over the period 1992-2000.

The EU remained Kenya’s main export destination until the early 1990s when it was overtaken by the CommonMarket for Eastern and Southern Africa (COMESA) (Table 3). It is still the second most important destination,accounting for about 33% of Kenya’s total exports with its share of Kenya’s total imports having fallen from 40.7% in1992. The major markets for Kenya’s exports in the EU are the UK, Germany, the Netherlands, Belgium and Italy.

Kenya’s exports to the EU comprise of mainly agricultural commodities, which account for about 90% of the valueof the country’s total exports to the EU market. Horticultural products are by far the country’s most important pri-mary exports to the EU, accounting for about 44% of its total exports to the Union.

PART II KenyaSection:Authors:Gerrishon K.Ikiara, MosesM. Ikiara,WalterOdhiambo

12

Export category

Table 2: Domestic exports by broad economic categories, 1992-2000 Source: Calculated from Republic of Kenya, STATISTICAL ABSTRACT, 2001.

*Values are in Kshs billions. €1 = 87 Kshs** Value of the export category percentage of total exports for that year.

Food and beverages

Industrial suppliesFuel and lubricantsMachinery and othercapital equipment

Transport equipmentOther consumer goodsTotal

18,58

7,434,93

0,24

0,162,78

34,12

54,45

21,7814,45

0,70

0,478,15

100

1992Value* %**

1994Value* %**

1996Value* %**

1998Value* %**

2000Value* %**

42,95

21,995,45

0,75

0,9411,33

83,41

51,49

26,366,53

0,90

1,1313,58

100

60,23

29,697,56

1,02

0,5214,90

113,92

52,87

26,066,64

0,90

0,4613,08

100

65,67

20,9110,45

1,03

0,7315,66

114,45

57,38

18,279,13

0,90

0,6413,68

100

67,39

22,9210,24

0,60

0,5418,04

119,73

56,28

19,148,55

0,50

0,4515,67

100

Table 3: Kenya’s Domestic Exports by Regional Destination (% of total export value).Source: Calculated from Republic of Kenya, STATISTICAL ABSTRACT, 2001.

EU

Eastern EuropeCOMESASouth Africa

AmericaAsiaRest of the WorldTotal

40,7

0,0321,8

-

3,6116,2917,57

100,0

1992 1994 1996 1998 2000

34,8

0,1439,10,5

3,6113,488,37

100,0

29,2

0,2339,92,1

2,8514,2411,48100,0

31,7

0,3141,40,8

3,3017,99

4,5100,0

33,4

0,5035,70,5

2,9920,876,04

100,0

PART II Kenya

Section:Authors:

Gerrishon K.Ikiara, Moses

M. Ikiara,Walter

Odhiambo

Horticultural sector

Since horticultural production is highly intensive inthe use of low skilled labour, the rapid growth of thesector has supported the livelihoods of manyKenyans. World Bank estimates suggest that the exporthorticultural industry provides jobs to around 2 mil-lion people30 . A recent Institute of DevelopmentStudies paper found that households involved in thevegetable export industry have higher incomes thanthose not involved, especially in rural areas. Theirsimulation work suggests that enabling more house-holds to participate in the sector could reduce pover-ty substantially in both urban and rural areas31 .

The vegetable export industry affects poverty in sev-eral ways. First, in Nairobi the exporters employunskilled or semiskilled women in pack houses toweigh, grade, cut and pack the vegetables. Thoughthese are casual and low paid, they are usually higherthan the minimum wages and women rarely havealternative employment. Second, in the rural areas theexporters create substantial employment (i) on theirown farms and on contracted farms, and (ii) throughthe purchase of produce from smallholders.Employment in exporter owned and large commercialvegetable farms is mostly casual and earnings are sea-sonal, but it assists desperate segments of the popula-tion especially landless women with few alternativeincome sources.

An important trend in the country’s horticulturalexport sector, is that of exporters moving up the valuechain by selling value-added products such as ready-to-eat salads directly to major supermarket chains likeMarks and Spencer, Tesco and Sainsbury in the UK.One of the major changes in the fresh vegetable chainin recent years has been the transfer of processingactivities (including washing, trimming, bar coding,and labelling) from UK importers to African exporters.Direct marketing of vegetables and flowers has led tohigh returns, which has seen the value of horticulturalexports grow much faster than that of volume. In 2001,for instance, the value grew by 43% even though thevolume remained at about 99,000 tonnes32 .

This is an important development because ita] reduces the dependence of Kenyan exporterson basic agricultural product markets in the EU,prices for which are declining partly as a result ofthe changing patterns of EU agricultural supportb] increases the value of exports thereby makingit easier for the exporter to carry the costs of com-pliance with increasingly strict EU SPS measures.

Fisheries sector

Fish production in Kenya accounts for only about 2%of the non-monetary GDP and 4.4% of the monetary

GDP. However, it is a significant source of livelihoodand employment for many Kenyans. In 1995, forinstance, the Fisheries Department estimated that798,000 Kenyans were directly or indirectly supportedby the sector. The areas with significant fisheries(coast and Lake Victoria) happen to be the areas withthe highest poverty rates in the country, underlyingthe importance of fisheries in those areas. Fish exportsaccount for about 3% of the country’s total exports.In 1995, it was estimated that the EU and Israel jointlytook up 75% of the country’s fish exports. The EU is animportant market for fish, importing a total of 4.3 mil-lion tonnes of fishery products in 1999. Fish importsinto the EU are strongly influenced by fishing restric-tions in the EU due to over-fishing. The EU market has,however, been highly unstable for the Kenyan fishexports since the mid-1990s because of bans onKenyan fish exports on health grounds (27 November1996, 23 December 1997, and 26 March 1999). Thus,the share of Kenyan fish exports going to the EUchanged as follows over the period: 58% in 1996, 56%in 1997, 36% in 1998, 34% in 1999, 0% in 2000 and 21%in 2001. Kenya lacks scientific and technical capacityto challenge the health bans despite having institutedmeasures to address the problems identified.

EU Impact

The EU has played a major role in the rapid growth ofKenya’s horticultural and fisheries sectors and thus inthe support of the poor people who depend on them.In the two sectors, however, the country now facesserious challenges over market access to the EU large-ly because of the investment costs and institutionalinfrastructure constraints on compliance and verifica-tion of compliance with EU sanitary and phytosanitarystandards (SPS) and food safety standards.

Contradicting the EU's support to development inKenya there is a growing list of policy and regulatoryissues that Kenya needs to contend with in order totrade profitably with the EU. It is the SPS measures thatare having the biggest impact on Kenya’s horticulturaland fisheries sectors but other developments areproving equally challenging including:

> Erosion of the value of preferences as a result ofCAP reform

> The costs and difficulty of proving compliancewith SPS standards

> New and unpredictable market-led standardsetting

This report looks briefly at each of these challenges inturn before drawing some preliminary conclusionsand identifying priorities for action. Fuller argumenta-tion in relation to the different points is contained inthe full version of the Kenya country study.

13

30 Quoted in IDS working paper 174,Export horticulture and poverty in Kenya,

McCulloch and Ota, December 2002 p. 1

31 ibid

32 Mwangi (2002) in Ikiara, Ikiara andOdhiambo p. 16

Erosion of the value of tradepreferences

The most important sources of this erosion are (i) theprocess of CAP reform which is leading to a reduction inthe prices of basic CAP covered agricultural products;(ii) the EU’s conclusion of preferential agreements witha growing number of other countries, and (iii) EU’s gen-eral reduction of tariffs under the WTO.

Reduction of MFN rates reduces the differencebetween preferred and un-preferred suppliers andthus increases competition for preferred suppliers.Since the conclusion of the Uruguay Round the EU hasreduced its tariffs to an average of 30%, which is threetimes lower in real terms33 . For example, the EU hadduties on coffee at 5% MFN and 4.5% GSP while Kenyaenjoyed duty free status, which were removed in theUruguay Round. This eliminated the margin of prefer-ence the country had. In addition, MFN cuts for fruit,vegetables, and cut flowers reduced the value of pref-erence that the country enjoyed in the EU as a result ofincreasing competition from other exporters of similarproducts. The four commodity protocols have alsobeen eroded by factors external to the ACP-EU negotia-tions.

Non Tariff Barriers to Trade Sanitary and Phytosanitary legislation

Although Kenyan exporters are familiar with therequirements there are problems regarding incompletephytosanitary documentation or wrong-qualitylabelling of product, which lead to delays at the port ofdestination and even product destruction at theexporter’s expense.

EU legislation on food safety and hygiene covers allforms of contamination including bacteria, chemicals,pests, glass splinters, and metal pieces among others.The legislation holds the supplier responsible for anyfood safety problem unless “due diligence” can bedemonstrated: detailed procedures and checks toensure food safety, traceability of product sources, andmaintenance of appropriate documentation andrecords. Maximum limits on pesticide residues andfood additives must also be adhered to.

These statutory requirements are accompanied byincreasingly stringent requirements of EU supermar-kets which are having two major and contrasting effectsin Kenya’s horticultural industry. On the positive side,the requirements are providing incentives for thelarge-scale horticultural producers and exporters tomove up the value chain. On the negative side, howev-er, the requirements are posing a major challenge to thecountry’s small-scale horticultural producers andexporters as major retailers play safe and buy fromlarge producers rather than small scale farmers.

In general, the way EU standards are set and theprocess of challenging their legality poses enormousdifficulties to Kenya as it lacks adequate technical andnegotiating skills. The fact that once one exporter in acountry fails to meet the standards affects all exportersfrom that country is, in particular, very unfair.

Due to lack of access to appropriate scientific and tech-nical expertise, the country is also limited in its capaci-ty to demonstrate compliance34 . Kenya’s lack of capaci-ty to comply with or prove compliance of SPS measureswill lead to substantial loss of employment, as facinghigh costs of compliance producers will downsize orclose down entirely, especially small horticultural pro-ducers and artisanal fishermen. The EU has, over theyears, provided resources for compliance capacitybuilding and human resource and institutional capaci-ty development in general, but these have been inade-quate.

The recently introduced (April 1 2003) compulsoryinspection of all cut flower exports to the EU at thepoint of entry has introduced considerable costs to

PART II KenyaSection:Authors:Gerrishon K.Ikiara, MosesM. Ikiara,WalterOdhiambo

14

Health controls in the EU for fisheryproducts relate to two main areas:

Directive 91/493/EEC on “Health Conditionsfor the production and placing on the marketof fishery products for human consumption”.The main requirement under this Directive isthat a Competent Authority to ensure foodsafety must be approved by the EC, which isdifficult in countries with weak governments. Itis not sufficient to show that individual opera-tors meet the requirements; only if the govern-ment can demonstrate that all production andexport of fishery products is adequately con-trolled will a country retain access to the mar-ket. Food safety and its regulation is now ahighly political issue to the extent that getting acountry into the list of approved suppliersdoes not necessarily end the matter. Some ofthe stringent directives include safety of waterused in food processing, control of use of addi-tives, type of packaging material, and control ofuse of veterinary medicines (and resultantresidues) in farmed fish.

Directive 96/23/EC “On measures to monitorcertain substances and residues thereof in liveanimals and animal products”. This Directiverequires the countries to submit a ResidueMonitoring Programme (RMP) and countrieswith acceptable RMPs are listed. Kenya has notsubmitted a RMP and is therefore not permit-ted to supply any farmed meat or fishery prod-ucts to the EU.

33 European Commission (EC) PressRelease, MEMO/02/296: Facts and Figureson EU Trade in Agricultural Products:open to trade, open to developing coun-tries, 16/12/2002.

34 Noor 2003 in Ikiara, Ikiara andOdhiambo p. 37

PART II Kenya

Section:Authors:

Gerrishon K.Ikiara, Moses

M. Ikiara,Walter

Odhiambo

Kenyan exporters. The rate charged for inspection is notonly high but also doubles during weekends or when ithas to be completed within six hours, and is charged onthe whole consignment even though the sampleinspected is only 20%. The exercise has also introduceddelays and bureaucracy in the flower export business.It would be cheaper and far simpler to undertake theseinspections at the point of export as previouslyoccurred at the auction sites.

Possible Impact of Regional EconomicPartnership Agreements, REPAs

With the entry into force of the Cotonou Agreement,Kenya will lose the non-reciprocal trade preference byJanuary 2008. The country will have to negotiate areciprocal trade arrangement (economic partnershipagreement, EPA) with the EU by then.

Establishing EPAs on a regional basis in east Africa is acomplicated issue. A REPA between the EU and the EastAfrican Community (EAC) would be problematic sinceboth Uganda and Tanzania are LDCs, which will retainnon-reciprocal trade preferences in the EU market, andhave little need of an EPA to secure their access to theEU market beyond 2007. Even more importantly, sinceUganda and Tanzania compete with Kenya for the EUmarket for coffee, tea, crude vegetable material and fish(among others), they have no incentive to participate inan arrangement that would benefit a competitor.

Problems will also arise for Uganda and Tanzania as aresult of their membership of the East AfricanCommunity should Kenya seek to sign a bilateral freetrade area agreement with the EU. In this case, duty freeimports from the EU into Kenya could find their wayonto the Tanzanian and Ugandan markets via Kenyaand kill their largely infant industries.

For broadly similar reasons, a REPA between the EUand COMESA, to which Kenya also belongs, is unlikelyto be supported by all COMESA members.

An EPA between Kenya alone and the EU will be injuri-ous to the country unless it contains substantial non-reciprocity features. Several factors lead to this conclu-sion:

> Kenya is unlikely to acquire much greater marketaccess into the EU market, through the EPA, thanit has been getting from non-reciprocal tradepreferences under Lomé due to (i) the fact thatthere are currently no tariff restrictions on prod-ucts that Kenya has comparative or competitiveadvantage in, and (ii) the production and supplycapacity limitations that characterize manufac-turing and a number of other sectors of the econ-omy.

> An EPA alone will not lead to much attraction of

foreign direct investment to Kenya. The experi-ence of other free trade area agreements sug-gests FDI does not automatically flow followingthe conclusion of a free trade area agreementwith the EU. Such an agreement may be a neces-sary condition for those developing countriesnot already enjoying full duty free access to theEU market but it is not a sufficient condition forthe promotion of FDI.

> The EPA could lead to de-industrialization of thecountry. Kenya exports substantial amounts ofmanufactured products into the COMESA market(of which the EAC is a part). Some EU products,particularly the non-bulky high value productsthat do not face a major distance disadvantage,could compete with Kenyan products in thisregional market under conditions of free trade.This is a particular problem for value added foodproducts given the enhanced price competitive-ness of EU exports as a result of the process ofCAP reform.

> As liberalisation under the structural adjustmentprogramme (SAP) has demonstrated, Kenya'smanufacturing sector is not competitive againstmanufactures from developed countries andmost Asian countries. Kenya has been able toexport largely because the trade agreementsaccord its products preferential access relative tothose from outside the region. With an EPA, morecompetitive consumer products from the EUwould enter regional markets thereby shiftingconsumption demand from regionally producedalternatives. The loss of the important COMESAmarket could lead to the collapse of industries inthe country with enormously adverse implica-tions on employment and poverty reduction.The broad sectors that would suffer most includeindustrial supplies and other consumer goods,including some food items. The growing shift ofKenya’s imports from the EU towards consum-ables (including food items, new and worn cloth-ing and other worn articles, and embroideries) isreflective of what could happen on an extendedbasis once an EPA with EU is formed.

> Kenya would lose significant import duty rev-enue if it signs an EPA with the EU. Since the EUaccounts for slightly more than 30% of Kenya’simports, the country would forego substantialrevenue if these imports enter the country dutyfree. Data available shows that in 1997 and 1998,for example, the country collected US$ 248.6 mil-lion and US$ 299.7 million, respectively, as taxeson imports from the EU. This accounted for about10% of the total revenues collected in the countrythat year. Ignoring the dynamic effects of an EPA,this is the potential revenue loss that the countrycould suffer annually if it signs the EPA. The bal-ance of payments would also be negativelyaffected as a result of the effects discussed underthe preceding bullets.

15

Conclusions

The preceding evidence shows that EU policies havebenefited some poor people in Kenya; EU trade poli-cies have stimulated the growth of a vibrant and diver-sified horticultural export industry. However the bene-fits of the development of the horticultural exportindustry in Kenya have not been evenly distributed.Our report also shows that small scale producers arebeing increasingly squeezed out and the negativeimpacts on the environment and food security are thesubject of intense debate. Furthermore, while theindustry has created employment opportunities,especially for women, the enforcement of workers'rights in Kenya appears not to have kept up with newmarket led demands for flexibility35 .

Overall, growth in Kenya's horticultural industry isunder great pressure from increasingly stringent SPSand other requirements. While EU concerns over foodsafety are understood, small-scale producers andexporters in Kenya lack the capacity to meet the strin-gent standards imposed. A new EU regulation in par-ticular fixes the minimum residue level (MRL) to “ana-lytical zero”, that is, no traceable pesticide residue infruits, vegetables and cut flowers. This regulation islikely to cost Kenya the market share it has built overthe years because the country’s tropical climatedemands frequent pesticide use. This issue needs tobe taken up with the EU so that exceptions can bemade for pesticides used in tropical agriculture whichpose no risk to human health. The cost of compliancewith this will therefore be very high for the country,especially for small producers who may be driven outof business. This will be compounded by the fact thatknowledge of SPS issues in the government and indus-try (especially small scale operators) is limited.Furthermore there is no guarantee or control overchanges to the risk assessment parameters.

While Kenya and Bangladesh find themselves with dif-ferent histories and sets of relationships with the EUthe main blockage to their development vis-à-vis whatthe EU can influence, centres on Non Tariff Barriers totrade. Both reports clearly indicate that SPS provisionsare already undermining industries in their countries.The effect of the imposition without consultation of EUhygiene regulations on Kenyan and Bangladeshi prod-ucts in the fisheries sector (and in the case of Kenyaalso horticulture) is hampering the development ofindustries in their sectors. In neither case is the needfor strict Regulations contested but the high costs ofcompliance and the relatively high risk that the ruleswill change arbitrarily and without notice, contributeto preventing investment in these sectors. Althoughthe reports acknowledge that the EU has investedresources in both countries to address these short-comings these efforts are far below the level required(and far below the level of support available to new EUmember states to bring their food processing indus-tries up to the standards applied within the EU).

Brazil Section:35 Author: Raquel Souza,DESER

The Brazil study focuses on how EU policies relatingto agriculture, export incentives, intellectual propertyand investment influence the Brazilian dairy sector.

The proposed formation of a free trade area betweenMercosur (Argentina, Brazil, Paraguay and Uruguay)and the EU has the potential to bring burdens andbenefits, especially in the agricultural sector on whichmany rural families are dependent. Based on the dataof the 1995/96 Farming Census, Brazilian farming isdistributed across more than 4.6 million Brazilianproperties, about 85% of which are family-based, i.e.relying on the family workforce as the main laboursource in terms of both production and managementtasks. Furthermore, family agriculture is the largestgenerator of jobs in the rural environment. Accordingto the study made by FAO/INCRA, of the 17.3 millionpeople employed in the Brazilian rural economy,about 75% work on family properties. Despite gener-ating the highest number of jobs in the rural sector,family agriculture possesses only 30% of the country’scultivated area, where 64.3% of the family-basedfarming establishments have 20 hectares at most.Family agriculture contributes around 38% of totalproduction.

Brazilian Agriculture and international trade

Beans, rice, wheat and milk and to a lesser extentmaize are produced for the internal market whilstmeat, coffee and soya are produced mainly for export.Production of chicken and pork meat has alsoincreased substantially in recent years, again mainlyfor export. Nevertheless conditions in the externalmarket still have enormous influence on what hap-pens in the internal market and thus on the incomeand living conditions of agricultural workers.

Although in 2002 Brazil’s trade balance presented asurplus of US$13 billion, between 1990 and 2002, theoverall balance of trade was negative due to the for-mation of Mercosur and to changes in the exchangerates. Overall during the 1990s the total volume ofBrazilian exports in relation to world exports was vir-tually unmoved at around 0.9%.

The main markets to which Brazil exported its agricul-tural produce in 2002 was the EU (US$9.1 billion) fol-lowed by Asia and the Middle East (US$5.7 billion)and NAFTA US$6.65 billion). The main source ofimports was Mercosur with the EU exporting less than$1 billion worth of goods in 2002.

BrazilSection:Author:RaquelSouza,DESER

16

35 For a more detailed examination of theseissues and debates see The Guardian, 17 May2003, Growers' market atwww.guardian.co.uk/food/focus/story/0,13296,956536,00.html

36 Noor 2003 in Ikiara, Ikiara andOdhiambo p. 29

37 European Agricultural and trade policiesand their impacts on the production andcommercialisation of agricultural productsin Brazil, Raquel Souza, DESER, May 2002

BrazilSection:Author:RaquelSouza,DESER

Factors regulating trade between Braziland the EU in the dairy sector

In the case of milk and milk products, although totalimport volumes have increased, in percentage termsthere has been a fall in the EU's market share from 28%in 1990 to 13% of imports in 2002 as a direct result of theformation of Mercosur which enabled a zero tariff levelon these products between Mercosur countries.However, the EU’s own dairy reforms are aimed at mak-ing the EU more competitive by lowering milk prices.

Brazil has restricted access to its internal market in milkand milk products by applying anti dumping measuresto EU imports of powdered milk at a 3.9% rate. In gen-eral however the Brazilian government has expendedmore effort on promoting exports than on blockingimports.

Trade preferences granted by the EU

Brazil trades with the EU under the Generalised Systemof Preferences (GSP). Although Brazil has a CooperationAgreement with the EU this has not led to an increase inBrazilian exports, mainly due to the system of agricul-tural subsidies that the EU has in place. In addition,graduated tariffs make it difficult to export higher valueadded products which hold the greatest interest forBrazil.

Whilst in theory therefore a free trade agreementwould benefit Brazil which is a much more competitiveproducer than the EU, this only holds if agriculturalsubsidies are removed at the same time and EU agri-cultural prices are allowed to find their true marketlevel. It is worth noting in any case that increases inBrazilian exports to date have not been to the benefit ofthe country’s farmers but to the benefit of mainly for-eign owned agribusinesses.

Impact of European Union policies onthe national dairy sector

The policies practised by the EU, both in relation toagriculture through the Common Agricultural Policyand in relation to transnational companies originatingin the EU, have been highly damaging to the nationaldairy sector. It should be noted however that the situa-tion in which the sector finds itself today, as we shallsee below, has not arisen entirely from the EuropeanUnion’s policies, but also from a series of local factorswhich, in combination with the former, enabled the dis-mantling of the national dairy sector, causing greatharm to small milk producers.

According to Melo38 , the Brazilian farming sector wasseverely affected in the 1990s by changes in both eco-nomic and agricultural policy, among which we can

highlight trade liberalisation, with excessive reductionsin import tariffs on agricultural products. On one hand,Brazil had already been adopting a unilateral reductionin import tariffs since the start of the 1990s. On theother hand, following the creation of Mercosur in 1995,this process led to zero tariffing within the block, aswell as a reduction in the Common External Tariffapplied to third countries when compared to the tariffimposed by Brazil before formation of the trade block.

Combined with other factors, this situation led to anincrease in imports. As a result, the prices received byfamily producers fell by 4.7% per year between 1989and 1999, while the prices received by large-scale pro-ducers fell by 2.6% per year39. This arose from the factthat the largest reduction in prices was experienced bythe products typically produced by family farmers.Among these products, milk underwent the largestreduction in price (about 6.4% p.a.). In this case thereduction was in large part caused by the creation ofMercosur and the process of lowering the CommonExternal Tariff, as well as by the fact that milk is one ofthe products receiving most subsidies from countrieswhich adopt this kind of practice. According to informa-tion from the European Union,40 in 2001 about 4.5% ofthe FEOGA-guarantee expenses (European Fund forAgricultural Guidance and Guarantees)41 was targetedtowards milk derived products (about €1.9 billion). In2003, the prediction is for expenditure to reach 6.0%, or€2.6 billion. Perversely, although the EU has met itsobligations towards reducing internal support meas-ures, the EU designed its commitment in such a waythat it avoided fundamental change to its supportregime. The impact of the EU's internal support policyon the international prices of milk and dairy producebecomes clearer when we note the importance of theblock’s share of world trade in these products.According to information from the FAO,42 about 24.2%of world exports in cheese, 7.6% of world exports in but-ter and 29.2% of world exports in powdered milk origi-nate in the European Union.

Taking into account the fact that the CAP has existed forabout 30 years and that until the mid 1990s the EU wasthe main exporter of dairy produce to Brazil, it is verypossible that subsidies to EU dairy products heavilyinfluenced the reduction in the prices paid to Brazilianmilk producers.

Although Mercosur become the main supplier of dairyproducts to Brazil between 1995 and 1996, the EU’s pol-icy has still generated problems for milk producers. Infirst place because many European multinationals haveestablished themselves in countries belonging toMercosur and have benefited from the competitive-ness of these sectors (in Argentina and Uruguay), alliedto the zero tariffing for the exportation of these prod-ucts to Brazil, and the fact that the latter countryaccounts for about 80% of the South American block’spopulation. In second place, there have been accusa-

17

38 MELO, Fernado Homem de. Liberalizaçãocommercial e agricultura familiar no

Brasil. In: Comércio Internacional, segu-rança alimentar e agricultura familiar.

Action Aid Brasil. Rio de Janeiro,September 2001.

39 Source: Idem 23

40 Available athttp://europa.eu.int/comm/agriccultura/

agrist/2002/table_en/indes.htm

41 Financing mechanism of the CommonAgricultural Policy.

42 Idem 25

BrazilSection:Author:RaquelSouza,DESER

18

43 Full text of audit is available athttp://www.eca.eu.int/en/reports_opin-ions.htm quoted in Trade implications ofCAP reform Update 16, June-July 2003,European Research Office

44 Revista Exame, 24/05/95.

45 This issue is explored in more depth inthe ActionAid report Unlimited Companiespublished June 2003. www.actionaid.org

tions that companies based in Brazil have been prac-tising a trade triangulation of dairy produce, meaningthese companies have imported dairy produce fromMercosur countries which enjoy tariff preferences intheir trade with Brazil (in actual fact these productsderive from other countries or blocks, among them theEuropean Union). In this case, these companies areexploiting the lower import tariffs of Brazil’s Mercosurpartners in order to import from third markets andthen export from there to Brazil.

The EU’s subsidising of its milk production hasallowed multinationals, the largest dairy produceimporting companies in Brazil, to import milk at avalue below the domestic price. A recent Court ofAuditor's report into the EU's Export Refund Schemefinds evidence of systematic over compensation oftraders. The report found that the Commission did notalways have the information necessary to calculateexport refunds correctly and the Commission's ownanalysis of skimmed milk power and whole milk pow-der price quotations shows that the subsidy exceededthe difference in EU and world market prices for sig-nificant periods covered by the audit43 . The over com-pensation allows the companies to export dairy pro-duce to third countries at below domestic prices. Thisstimulates the growth of imports, jeopardizing thecountry’s trade balance. Second, it puts downwardpressure on the prices paid to producers, and third itenables the multinationals to establish themselvesmore competitively on domestic markets in an unfairway, in so far as they possess greater facilities foraccessing import credits and extended payment dead-lines, as well as having extensive knowledge of theprocess and best channels for importation. In 2001, theEuropean Union (except Denmark) along withUruguay and New Zealand were accused and con-demned for dumping practices in their milk exports toBrazil between 1998 and 1999, with the application ofanti-dumping measures in order to correct the distor-tions. On the other hand, Mercosur has allowed multi-nationals from the dairy sector to establish themselvesin its member countries, principally Argentina andUruguay, and to exploit the absence of tariffs in orderto place their products on Mercosur's markets. Forexample, Parmalat, an Italian multinational, inaugurat-ed its most modern factory in Argentina in 1995, withthe aim of exporting milk produced in this factory toBrazil.44

In the case of transnational industries originating inthe European Union, these practically oligopolize –along with North American transnationals – not onlythe dairy production sector but also the distributionsector through the retail networks, as well as the sectorfor animal feed and production supplies. This hasplaced the entire dairy chain in the hands of thesecompanies. As a result, producers face losses in beingforced to negotiate prices and work conditions withmultinationals, and to negotiate the purchase of sup-

plies for preparing the soil and planting feed crops fortheir cattle, while small and medium-sized coopera-tive-based industries who produce milk suffer in hav-ing to negotiate with the large-scale retailers in orderto have access to their shops.

Foreign Direct Investment

The EU has argued for FDI to be covered by multilater-al rules established within the WTO which follow theprinciple of non-discrimination in relation to foreignexternal investment (with exceptions for LDCs). Aspart of this policy, the EU argues that the OECD guide-lines for multinational companies must be followednot only by OECD member countries but also by othercountries which belong to the WTO, and further, thatadequate mechanisms must be developed for evaluat-ing and accompanying the application of these guide-lines, as well as publicising the good practices ofEuropean companies.

Certainly this entire discourse – permeated with con-cern for developing countries and in line with OECDrecommendations on corporate social responsibility(CSR) – is good for the EU's image, in the same way thatsocial responsibility programs implemented by com-panies are important to a company’s public image.However, it is necessary for this debate to movebeyond theory into practice and to ensure that thispractice really works towards regulating these invest-ments in a form matching the reality faced by develop-ing countries, rather than seeking to benefit devel-oped countries behind a discourse of fair trade, as hashappened with the WTO’s Agreement on Agriculture.The promotion of CSR as an alternative to binding cor-porate accountability failed to deliver the commitmentneeded in companies' foreign investment perform-ance with many firms treating it as no more than a pub-lic relations exercise.

CSR should not be simply another dimension of mar-keting. This is the case of Parmalat, for example. InBrazil the company develops aid programs for itsworkers’ children, mainly targeted towards theirinvolvement in sports. This program reaches a fewhundred youngsters. This is without doubt sociallyresponsible. However, just as important as this atti-tude are decent working conditions for their produc-ers, which the company has not allowed in excludingthousands of small milk producers from the activity bypaying low prices or by making demands absurdly outof keeping with the reality of family-based agriculture.This is why companies cannot be left to regulate them-selves and why a binding international regulatoryframework for multinational companies, outside theWTO, is necessary45 .

There is no doubt that investments by transnationalcompanies are positive for the countries involved,since they generate job and wages – as long as they are

subject to regulation. Regulation prevents these com-panies from pursuing socially and environmentallypredatory activities. Currently regulations in Brazil arein their early stages and therefore as yet mostly inef-fective.

In the Cooperation Agreement signed between the EUand Brazil, both parties committed themselves to cre-ate stable and favourable conditions for an increase ininvestments of mutual benefit, involving the promo-tion of the exchange of information, support for thedevelopment of a legal context which favours invest-ment between the parties, as well the promotion ofjoint enterprises. It is worth stressing that in the case ofBrazil and the EU, the flow of investments is one-way –or in other words from the EU to Brazil. Thus it is possi-ble that the intensification of relations between thepartners in terms of investment will imply a larger FDIin Brazil than in the EU. The consequence of this forBrazilian farming may be extremely negative in so faras it may intensify the process of oligopolization in cer-tain sectors, such as the milk sector, or initiate thisprocess in other sectors where there is still a competi-tive market between national companies. For family-based agriculture, this would imply further exclusion.

The deep national recession of the 1980s, due tonational government policies, had a massive impact onthe structure and competitiveness of the Braziliandairy industry but it affected multinationals less. Theywere then able to exploit the crisis in the national sec-tor and acquire cooperatives and national companies.Of the nine cooperative groups set up in the 1970s onlyone remains in operation today.

The most active company in this activity was Parmalat.It acquired 27 companies between 1989 and 2000. Thecommercial opening in Brazil and the entry of multina-tionals has influenced the prices paid by both con-sumers and producers (see table below)

The entry into Brazil of large retail networks

and the need for differentiation transformed the locallandscape. Market led demands together with thesearch for new quality standards have squeezed smallmilk producers who cannot afford the investments tomeet the new standards.

This process has led to the exclusion of thousands ofsmall milk producers lacking the resources to meet thisnew standard. On the other hand, it has enabled anincrease in productivity among those who remain asthey become increasingly more specialized in theactivity. Between 1996 and 2002, four of the largestcompanies from the sector excluded about 70,000 pro-ducers, obtaining a 15% growth in production46 . In thisprocess, the company Parmalat alone excluded 23,200producers between 1996 and 2002, losing out only toNestlé, which excluded 32,000 producers. Even so,Parmalat obtained an increase in production of about19% in the period mentioned.

As well as reducing the number of producers, Parmalathas pressurized producers to adopt refrigerators, orexpansion tanks, with the idea of raising the price ofthe product by R$ 0.02 per litre47 . If we consider that arefrigerator tank costs about R$ 5,000.00 and that theproducers deliver on average 50 litres/day48, these pro-ducers will take about 13.6 years to pay for the equip-ment. This without taking into account the fact the priceof milk varies considerably, such that during variousperiods it would mean a lot for producers to assign R$0.02 per litre to pay for the refrigerator. There is alsoevidence that Parmalat is pressurizing producers tobuy certain brands of refrigerator in which it has salespartnerships.49

Intermediation in the purchase of refrigerators is oneof Parmalat’s strategies, which has meant the endebt-ing of associated producers. In this process, the compa-ny provides credit to the producer while the latter iscommitted to paying the instalments with theresources coming from milk sales.

BrazilSection:Author:RaquelSouza,DESER

19

Year

1989

199219941995

19961999200020012002

40,7

0,0321,8

-

3,6116,2917,57

100,0

Prices received by producers (R$) 2

Prices paid by consumers (R$) 2

Share of the price receivedby the producer in the price

of the final product (%)

Imports (millions of litres)

34,8

0,1439,10,5

3,6113,488,37

100,0

29,2

0,2339,92,1

2,8514,2411,48100,0

31,7

0,3141,40,8

3,3017,99

4,5100,0

Table 4 – Price Received by the Producer and Paid by the Consumer for C-Type Pasteurized Milk in theState of Minas Gerais – Brazil • Source: FAEMG/SMAA/PJF.

Notes:1.The State of Minas Gerais is the largest producer of milk in Brazil,therefore roughly demonstrating the trend in the country as a whole.

2. Prices corrected by the IGP-DI for November 2002 (R$/litre). Base:August/1994 = 100.

46 Leite Brasil.

47 This has happened in the State of RioGrande do Sul, an important area of dairy

farming forParmalat. In this State alone, the company

is responsible for 25% of the milk collected.

48 50 litres/day was used as an example as,according to the study “Avaliação de pro-

gramas de assistência técnica no setor leit-eiro: um estudo de caso do departamento

de assistência técnica ao produtorParmalat,” about half of the producers

who deliver milk to the company produceless than 50 litres/day.

49 According to information contained inthe Jornal Gazeta Mercantil of

05/05/2000 and in the statements of pro-ducers interviewed in the regions of

Ibirubá and Três Passos (Rio Grande doSul) in March 2003.

BrazilSection:Author:RaquelSouza,DESER

20As a result, the instalment is debited from the total pay-ment before the company actually pays the producer.An aggravating factor in this situation is that the month-ly prices are set by Parmalat itself, since no formal con-tract exists between producer and company regulatingat least a minimum value to be paid, or guaranteeingthe producer any type of rights. Consequently, the pro-ducer becomes dependent on the company and sub-ject to the price it imposes, without the freedom to optto market the product with other companies.

In the case of Brazil, about 80% of the milk producingestablishments are family agriculturists50, and 52% ofthe GPV (Gross Production Value) of dairy activity isobtained through the production of these establish-ments. Family agriculture51 in Brazil is characterized byits diversity. The properties produce various crops,part of these crops are used for self-consumption whilethe rest is destined for the market. Milk productioncomprises an activity complementing the otherswhereby crops already existing on the property areused to feed the dairy cattle. This keeps expenses lowand allows the milk exceeding family consumption tobe sold, generating income for the families. In otherwords, milk produced on family properties has a lowcost, since its production depends on factors alreadyexisting at the property. At the same time, as milk pro-duction is a continuous activity, it generates a monthlyincome, which is of great importance to the families. Ingeneral, producers use this income to pay for theexpenses required in maintaining the family.

For many small farmers for whom milk is but one com-ponent of their income it is simply uneconomic toinvest in the necessary improvements which in anycase are tied to contracts with Parmalat through itsinvestment in equipment companies.

Another example of Parmalat’s predatory practices isexemplified by its activity in the region of Carambeí, inthe State of Paraná. in this region, Parmalat acquired51% of the largest cooperative of producers in the State,the CCLPL (Batavo). According to statements,52 thechange in control of the cooperative led to the pricespaid to producers in the period falling from R$ 0.32 toR$ 0.27.

Conclusions

The main beneficiaries of increased agricultural tradebetween Brazil and the EU are the agroindustries (mostof which are foreign owned) and the profits made ininternational trade have only rarely been passed oneffectively to producers, as has happened with soya. Inmany sectors, oligopolization has meant that prices toproducers have been pushed downwards, while prof-its are kept by the industry. For Brazilian family agricul-ture, the biggest problem following increased exposureto European competition lies in the continuance of thepolicy of agricultural subsidies, along with the intensi-fication of investments by multinationals in Brazil. Thisprocess allows agroindustrial concentration at variouslevels of production, meaning a low bargaining power

for producers vis-à-vis the industries in terms of con-tracts and prices.

There are clear public policy choices to be made by theBrazilian government in terms of what action to takethat would support the incomes and development ofsmall scale farmers. It is clear that the big companieswould prefer that EU standards apply domesticallysince they can then more easily and cheaply comply. Atthe same time, this will limit the opportunities for smallscale dairies that want to market nationally.

The EU should consider the role of export subsidies indriving the expansion of companies like Parmalat andit should look at the current provisions governing CSRand reassess whether a binding set of rules would bemore appropriate to achieve the goal of poverty eradi-cation rather than voluntary codes of conduct as are inapplication currently.

In addition, the Brazilian government may need tointroduce a strong competition policy focusing on theabuse of a dominant market position to address theadverse effects of oligopolistic control on small scaleproducers.

PART IIIFINDINGS

Pushing producers into specialisa-tion brings them higher costs for little real gain.

Parmalat proposed that the Frederich family whofarm in the region of Ibirubá (Rio Grande del Sur)buy expansion tanks financed by the companyitself. According to Elaine, “the profit which wewere going to make was set to pay for the 36instalments, meaning no profit would be leftover, it would only pay for the refrigerator, butthis wouldn’t work out either as although we sellmilk, it isn’t our only business.” In the words ofBaldur, “when the price of milk has to be raisedthey say it’s a bonus, then when they have tolower it they reduce the bonus, but leave theprice as it is. They take from some and pass it toothers, from the smallest to the biggest, thenwhen the small producer realizes he’s receivingless, they raise it a little, but then they are just tak-ing it away from someone else.” The familystopped delivering milk to Parmalat and joinedthe cooperative system, immediately receivingabout R$ 0.07 more per litre. The producer BaldurFrederich declared that in a conversation withrepresentatives from Parmalat he heard that “(...)they’re not bothered about receiving milk fromthose who sell little, they want those who pro-duce a lot more so they can reduce the price.”

50 Farming Census 1995/1996, special tab-ulation FAO/INCRA.

51 Family agriculture: agriculture undertak-en on small properties, whose productiveworkforce is almost exclusively the familyitself.

52 Jornal Gazeta Mercantil, 07/04/1998.

PART IIIFindings

PART III FINDINGS

This section examines the findings of the research inmore detail in particular highlighting instances of inco-herent or poorly considered public policies and thesubsequent costs to poor people of the disjointedapplication of EU policies. It concludes with specificrecommendations that the EU should address toincrease its total positive impact on poor people indeveloping countries.

The Bangladesh chapter concludes generally thatdonors' weak analysis of the causes of poverty limitsthe impact that they can have in general. More specifi-cally, the chapter identifies actions that the EU shouldtake with respect to its Rules of Origin that wouldenhance significantly the benefits of the Everything ButArms concession and provide opportunities forBangladesh once the Multi Fibre Agreement expires in2005. Third, the chapter addresses the SPS measuresthat block opportunities for potential exporters andwhich are a common theme in both Bangladesh andKenya.

The Kenya chapter finds that development support toKenya is being undermined by food safety and otherstandards the that EU has put in place and interpretedin an inflexible way. It points out that the EU played amajor role in the growth of Kenya’s horticultural andfisheries industries both of which play a major role insupporting the livelihoods of poor people even if thereare a series of outstanding issues surrounding theirenvironmental and social impact. Yet at the same time,in the two sectors the country now faces serious chal-lenges over market access to the EU largely because ofsubstantial resource and infrastructure constraints tocompliance and verification of compliance with SPSand food safety standards.

The EU’s tightening of pesticide maximum residue lim-its (MRLs), the increasing importance of irrigation inhorticultural production for export, and the cost of col-lecting output from multiple small producers have allcontributed to smallholders being squeezed out of thedevelopment in these sectors.

The chapter claims that Kenya’s lack of capacity to com-ply or prove compliance with SPS measures will lead toa substantial loss of employment, as facing high costs ofcompliance producers will downsize or close downentirely, especially small horticultural producers andartisanal fishermen.

Uncertainty associated with frequent and unpre-dictable changes of standards and other market accessconditions in the EU (for example the introduction onApril 1 2003 of compulsory inspections of flowerexports at the point of entry) is also a major challengefacing the country’s exporters.

The control of the horticultural and fish value chains bylarge supermarkets and importers in Europe (cf. market

led restrictions emanating from the UK retailers) meansthat most of the profits are retained in the EU. Forinstance, while a kilo of Nile perch retails for as much as$14-17 in the EU, exporters in Kenya get less than $4 perkilo which then has to be divided between theexporters, the boat owners and the fishermen53 .

Finally, the EU's trade policy is eroding the value oftrade preferences that the country has been enjoying.The loss of non-reciprocal trade preferences and theirreplacement with the proposed economic partnershipagreements (EPAs) will affect Kenya considerably. Thecountry can only retain duty-free access for its exportsinto the EU at the cost of exposing its relatively weakermanufacturing sector (and thus the increasingly impor-tant COMESA market) to EU competition, which wouldcertainly kill it. EU’s increasingly generous trade prefer-ences to non-ACP countries and commitments withinthe multilateral trade framework (WTO) have also con-tributed substantially to the erosion of preferentialmargins for Kenyan products. This is being compound-ed by a process of CAP reform which is reducing thevalue of existing trade preferences on CAP coveredagricultural commodities.

The Brazil chapter shows how the bilateral cooperationagreements between Latin American countries and theEU which include sustainable development as one oftheir aims, do not sit comfortably alongside theCommon Agricultural Policy the impact of which is feltby thousands of small rural producers and which hascontributed to the rise in poverty in rural regions. Thisis without taking into account the additional fact thatEuropean multinationals also contribute to rural pover-ty through the prices and work conditions they imposeon small producers.

RECOMMENDATIONS

General

1. The InterGovernmental Conference must clarifythe role of development in the EU's external strategyand make it beyond doubt that the fight against pover-ty to which the EU is committed will not be eclipsed byother policies - trade, security or other - that the EU isalso interested in pursuing.

2. The EU should use its position and influence ininternational fora to encourage OECD member coun-tries to enshrine their commitment to policy coherencein their respective national laws and to take account ofthis commitment in defining national policies with aninternational dimension.

3. The European Commission, responsible forimplementing EU policy, should elaborate a uniformprocess for developing country strategy papers acrossall geographical regions ensuring that all Commissionservices whose activities impact on development areinvolved in the initial planning stages. This shouldinclude representatives from Directorates GeneralAgriculture, Fisheries, Public Health and Consumer

21

53 Personal communication with an officialof the Fish Processors and Exporters

Association of Kenya.

U

U

U

Protection. A record of these discussions should beattached to the draft country strategy for subsequentdiscussions in the Commission and among MemberStates.

4. Country desks/delegations leading the processshould clearly indicate how coherence related com-ments have been taken into consideration regardlessof whether they have resulted in amendments to thefinal strategy paper.

5. The Commission should apply the same "coher-ence criteria" to all developing countries regardless ofwhether the geographical desks are in DG develop-ment or external relations.

Bangladesh

1. The EU should introduce realistic, flexible andsimplified Rules of Origin to match the industrialcapacity of LDCs to enable them to raise their marketshare in world trade.

2. The EU should create a “ComplementarySupport Fund” as an add-on to the EBA to stimulateLDC efforts to access the potential opportunities stem-ming from the initiative.

3. The EU should take energetic steps to encour-age WTO members to develop a global initiative toprovide global zero-tariff, zero-quota access for theproducts of LDCs. Without such an initiative the bene-fits will accrue only to a few countries whereas non-reciprocal preferential trade liberalisation targeted atLDCs is likely to entail significant gains for beneficiarycountries coupled with negligible losses for the donorand third countries.

4. The EU should act to support Bangladesh toadapt following the termination of the MultiFibreAgreement in 2005.

Kenya

1. The EU should work within the WTO to ensureprovision for less than full reciprocity in EPAs. Thiswould include the flexibility for developing countriesto protect their domestic industries from external com-petition (which is consistent with the WTO’s DohaMinisterial Declaration). In this respect, the relevantprovisions of Article XXVIII bis of GATT 1994 affirm"the needs of less-developed countries for a more flex-ible use of tariff protection to assist their economicdevelopment and the special needs of these countriesto maintain tariffs for revenue purposes". To this end,ActionAid Alliance supports the call from ACP coun-tries to the WTO to enable them to decide their ownrate, pace and scope of liberalisation.

2. The EU should engage in an ongoing dialoguewith its ACP trading partners, within the CotonouAgreement Framework, regarding its hygiene/foodsafety and environmental rules and agree a frame-work and timeframe for dispute settlement.

3. The EU should support producers’ organisa-tions financially and technically in meeting interna-tional standards with a particular emphasis on theneeds of small scale producers. The EU already pro-vides considerable assistance in this regard but thisneeds to be increased and more effectively targeted atsmall scale producers. Areas in which capacity build-ing is required include compliance and ability todemonstrate it, negotiation skills and capacity, accessto market and other trade information, and export sup-ply capacity. Specific and targeted assistance shouldalso be given to developing countries that are heavilyreliant on one or two commodities and which rely onthe high EU internal price.

4. The EU should address the process of prefer-ence erosion through the introduction of "compensa-tory trade measures" designed to remove residualmarket access restrictions on those agricultural prod-ucts of potential export interest to Kenya.

5. The EU should help to establish inspectionfacilities at the point of export to reduce frustrations,delays and the heavy costs arising from inspection atthe point of entry of the products in the EU.

Brazil

1. The EU should support the establishment of abinding international regulatory framework on multi-national corporations, outside the WTO, that willstrengthen the ability of developing countries to man-age foreign investment to the benefit of the poor.

2. The EU should support the BrazilianGovernment in developing a competition policy whichfocuses on the abuse of a dominant market position toaddress the adverse consequences for small scale pro-ducers arising from the increasing tendency towardsoligopolistic control of agro-processing activities inBrazil.

3. The EU should adopt administrative arrange-ments for the regulation of exports of dairy productsdesigned to halt "triangular trade" by linking finalexport refund payments to the verified arrival and util-isation of milk products in the country of destinationof the scheduled exports.

PART IIIFindings

22U

U

U

U

U

U

U

U

U

U

U

U

U

U

ACTIONAID ALLIANCE

10 rue de la Science1000 Bruxelles, Belgique

Tel 32 2 503 24 22Fax 32 2 502 62 03info@actionaidalliance.orgwww.actionaidalliance.org

ACTIONAID

Hamlyn HouseMacDonald RoadLondon N19 5PG, United Kingdom

Tel 44 20 7561 7561Fax 44 20 7263 4613mail@actionaid.org.ukwww.actionaid.org

ACTIONAID HELLAS

1 Amynda Street 11635 PagratiAthens, Greece

Tel 30 210 724 87 89Fax 30 210 724 34 49mail@actionaid.gr www.actionaid.gr

ACTIONAID IRELAND

Unity Buildings 16/17 Lower O’ Connell Street Dublin 1 – Republic of Ireland

Tel 353 1 87 87 911 Fax 353 1 87 86 245 info@actionaidireland.org www.actionaidireland.org

AIDE ET ACTION

53 Boulevard de Charonne 75545 Paris Cedex 11

Tel 33 1 55 25 70 00Fax 33 1 55 25 70 29info@aide-et-action.orgwww.aide-et-action.org

AYUDA EN ACCION

C/ Infantas, 38 28004 Madrid, Spain

Tel 34 91 522 60 60 Fax 34 91 532 84 02 www.ayudaenaccion.org informacion@ayudaenaccion.org

AZIONE AIUTO

Via Broggi, 1920129 Milano

Tel 39 02 742001Fax 39 02 29537373info@azioneaiuto.itwww.azioneaiuto.it

ActionAid Alliance's mission is to work with poor and marginalized people to eradicate poverty by overcoming the injustice and inequity that cause it. We aim to do this byworking towards empowering and supporting poor and voiceless people so that they can make their own choices and satisfy their basic needs.

This paper was written by Louise Hilditch. Gerrishon K. Ikiara, Moses M. Ikiara, Walter Odhiambo, Rashed Al Mahmud Titumir and Raquel Souza wrote country specificsections and Paul Goodison of the European Research Office provided general orientation and on-line support.

Acknowledgments are also due to Claire Terlinden, ActionAid Alliance, Tim Rice and Matthew Lockwood at ActionAid UK, Mueni Kiio at ActionAid Kenya, ShahidurRahman at ActionAid Bangladesh and to Adriano Campolino at ActionAid Brazil.

For further information contact info@actionaidalliance.org or visit www.actionaidalliance.org

PHO

TOG

RA

PH:G

idon

Men

del