Thursday 28th February, 2008

 

Facing reality

 
 
 
 
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In a commentary piece published in the Jamaica Gleaner on February 8, Professor Norman Girvan, who I last week anointed as the Dean of Caribbean thinkers, wrote about the potential impact of “preference erosion” which he described as “the diminishing relative advantage enjoyed by Caricom exporters vis-à-vis other exporters,” which exposes the Caricom exporters to “competition from lower-cost sources of supply.”

The professor—who along with two of his academic colleagues responds to my EPA Madness: How preferences underdevelop sugar” on this page—went on to argue that “preference erosion reduces the relative advantage of DFQF (duty-free, quota-free) market access for all Caribbean exports, including manufactured good. He wrote that “the expansion and even the maintenance of existing exports will be dependent on the ability to reduce production costs. It is quite possible to envisage a situation where exports to Europe fall rather than rise.”

That, to me, is the crux of the argument of those who oppose the EPA: At the base of their position is a fear that the agreement will lead to job losses.

In this they are right.

The trade aspect of the EPA will undermine the inefficient producers of goods and services in the Caribbean who can only survive behind protective barriers, fixed quotas and high tariff barriers in the EU.

Those who have the most to fear from the EPA, as with all trade agreements, are those companies or countries which do not have the will or the means to transform their operations or their workforces by being relentless in slashing inefficiency.

Faced with the reality of the EPA, inefficient manufacturers and service providers in the region will be forced to make the investments (for example in equipment, training and hiring quality staff) needed to increase productivity. If they don’t make the adjustments in a timely fashion, there will be a steady erosion in their profitability which, in effect, lessens their ability to make the needed investments in efficiency. They will be forced out of business eventually.

Competition from European goods and services will require regional manufacturers and service providers to either raise their game—by constantly and deliberately focussing on driving productivity growth and customer service—or retire hurt.

As it is companies, so is it with countries.

Countries which do not have the vision, capacity or ability to make the necessary investments in raising the efficiency of their populations will, undoubtedly and deservedly, suffer as a result of the implementation of the EPA.

Politicians who divert resources away from education, skills training and infrastructural upgrades and into providing populist make-work jobs and goodies for their constituents would be expected to hate the EPA because it will expose the inadequacies of their policies.

The mantra now must be efficiency or certain demise. There is cogent evidence from the region that our manufacturers, given the right incentives and facilitation can compete with the best in the world. In the early 1990s, faced with a period in which oil and petrochemical prices had declined, the first Manning administration put in place the framework for the dominance by T&T manufacturers of the regional markets.

This framework included the lowering of tariffs on imports, the flotation of the TT dollar, the privatisation of some state enterprises, increased depreciation on capital equipment and the reduction in taxes.

As I argued in my debate with another professor, UWI St Augustine’s Dennis Pantin, this mix of macro-economic policies—which came straight out of the handbook of the International Monetary Fund—was mainly responsible for the fact that T&T was able to pull itself out of the recession caused by the decline in oil prices in the late eighties. That issue, in my view, is now settled. The point is that given the right conditions it is possible for Caribbean producers to increase their competitiveness and efficiency.

But, as was noted in the Wilson/Pantin debate, it is also possible for countries to get competition wrong as Jamaica has done in the last 30 years.

The other point of departure on the EPA between me and the three professors is that they never recognise that lowering import tariffs may have some real and tangible benefits.

Reducing tariffs on the importation of European products—which should lower the cost of EU imports into the region—may hurt some regional producers but it is likely to benefit regional consumers and some manufacturers.

The classic, and deliberately provocative, example of the positive and negative impact of a sudden decrease in the cost of an imported product is Jamaica which was required to open up its dairy market in the early 1990s as part of the World Bank’s structural adjustment policies.

As a result of Jamaica’s dairy liberalisation, the over-production of powdered milk in Europe and substantial subsidies for European dairy farmers, Jamaica was flooded by subsidised powdered milk from the EU. A 2004 IPS wire service story indicated that in the 10-year period between 1994 and 2003, Jamaican farmers saw their market share for local milk slip from 24 per cent to 4.2 per cent.

The article quoted Aubrey Taylor, one of the country’s champion dairy farmers, as saying that the country's poorest farmers were hardest hit by the unfair trading practices of the EU dumping of powdered milk.

In the last 20 years, the article quoted farming officials as saying, the number of dairy farmers dropped from more than 4,000 to just over 100.

While this may have led to severe hardships for some 4,000 farmers, can it be disputed that cheaper milk provided a significant benefit for all 2.6 million Jamaicans—especially the poorest Jamaicans?

So, while acknowledging all of the issues surrounding food security, the issue becomes: Does one put the interest of 4,000 farmers ahead of the interest of 2.6 million consumers?

It is not a question I am prepared to answer but certainly it is a question that needs to be asked whenever this issue of the EPA is discussed.

But it is indisputable that the lowering of tariffs and the global competition which has resulted from it, has meant significant benefits for the cost of living in the Caribbean.

All things being equal, the cost of cellphones, computers, cars, clothing and electronic gadgets such as DVD players and televisions—which are all subject to global competition—have become relatively more affordable compared with the price of imported food, for example.

While the availability of cheap Made in China clothes on the local market may have put some garment factories out of business, can anyone dispute that T&T has benefited from the availability of cheap garments from China?

We will resume battle next week, I am sure.

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