George Plunkett shows off JP Bananas packaged for ripening. Twenty-five years ago the export of Jamaican bananas to the United was Jamaica Producers' largest business, but today that has fallen to about 10 per cent and the conglomerate's other businesses are spread well beyond the Caribbean. - File

The following is the text of the ninth William G. Demas Memorial Lecture given by Dr Marshall Hall in Halifax, Canada, May 27, 2008, at the 38th annual meeting of the Board of Governors, Caribbean Development Bank. Part two appears next week.

A reading of the previous papers on the economic needs of the Caribbean in this forum reveals that the authors had remarkable foresight when they identified the problems that would face the region in the future.

In 2000, at the inaugural paper of this series, Sir Alister McIntyre highlighted many of the issues and problems that the Caricom region would face for the next several years.

These included, among others, our inherent uncompetitiveness in production, the end of trade preferences and the requirement to offer reciprocity in future trade arrangements.

The recent initialling of an Economic Partnership Agreement (EPA) with the European Union (EU) proved Sir Alister and others right.

For example, the EPA gives immediate quota free and duty free access to bananas and a range of other commodities and products, with sugar, rice and rum to follow shortly.

This could be regarded as a tremendous achievement.

Even before the agreement was formally signed, however, the EU opened discussions with Central America and the Andean pact countries on freer trade arrangements.

The information received to date, and confirmed by the directors general for trade in the European Commission and the World Trade Organisation (WTO), is that they, too, are seeking improved pre-ferences for their bananas, and that it is anticipated that they will receive some accommodation from the EU.

The accommodation that our Central American and Andean neighbours seek is similar to the offer received by the Cariforum countries.

To Cariforum, however, the supposed benefit confirmed by the signing of the EPA would be reduced, if not nullified, if similar benefits are offered to other banana exporters to the EU.

EPAs will ensure that no one gets a preference. As Sir Alister warned in 2000, the end of preference is nigh.

For many of those who now claim that no EPA was better than a bad one, the most troubling clause in the agreement is the requirement that grants no worse status to the EU on any agreement reached by Cariforum as a unit, or by any individual member country of Cariforum with a third party.

This, some member countries of Cariforum believe, will make it virtually impossible for them to negotiate sensible and strategically advantageous trade regimes with any other country or regional unit.

DIFFERENTIAL TREATMENT

This clause highlights the failure to get the EU to buy the argument that Small Island Developing States (SIDS) like those in Caricom require special and differential treatment

Special and differential treatment for a country or region is not part of the medium to long-term mantra of trade liberalisation and, at best, SIDS will be granted a few years of grace before full reciprocity is required.

Given the EU's intention to enter into specific EPAs with the regional blocs that make up the ACP and with specific trade blocs in Central and Latin America, and the inevitable push by each signatory for no worse treatment than that obtained in any other EPA, it does appear that the end of preference is not nigh, but here.

FREE TRADE: LOSER'S PERSPECTIVE

Although much of the focus in this paper is on the erosion of trade preference and the banana experience, we must not forget that the goal of trade liberalisation is general tariff reduction and therefore industries that benefit in the home market from protection could over time see that protection removed and face the competitive pressure that banana faces.

They say that in matters of trade policy, 'where you stand depends on where you sit.'

That is, even those of us who accept the basic premise of freer trade must admit that in the short term there are winners and losers. The short term for many of us can be very, very long.

The pat solution to the problem of winners and losers in trade regime change is that with a little organisation, the winners can be made to compensate the losers and all can be made happy.

This is unlikely to happen without the free movement of labour.

This business of compensating losers takes on special significance in the Caribbean trade environment for at least four basic reasons: First, many of our Caribbean economies are quite dependent on the losing sector.

Second, the losing sector - at least in the case of sugar and bananas - tends to be a major employer and, therefore, the losers can often be greater in number and in many constituencies more politically powerful than the winners.

Third, the losers tend to be low-skilled and economically disadvantaged with few alternatives for productive engagement in the formal sector.

And fourth, and perhaps most fundamentally, the Caribbean states themselves often don't have the wherewithal to successfully manage major social dislocation.

POSITION OF THE EU

EU officialdom, other donor countries and multilateral agencies would, I believe, posit that they understand the short-run dilemma.

The EU, in the case of bananas, has put in place a broad range of support programmes in every banana-growing country in the ACP.

The underlying philosophy of the grant programme is poverty alleviation.

Poverty alleviation in the short run is about getting funds into the hands of the poor; it is not about investment sustainability.

Thus, although the programme centred in part on improving competitiveness, its focus was always poverty alleviation and, consequently, it never really engaged the export growers, the losers, in their vision for the industry or their vision for change.

Interventions were agreed between the EU and the relevant government and the interventions were funded.

The initial EU intervention focused, as it were, on improving competitiveness in the context of poverty alleviation, and acted to slow down the transformation of the industry to meet the challenges of changes to the trade regime.

The EU responded to the many challenges to their banana regime brought by the USA, the Central and Latin Americans at the WTO but the panels set up by the WTO rebuffed each response.

The ACP became unsure about their individual survival in bananas and failed to offer a coordinated response to the conclusions of the WTO.

The EU appeared to grow weary and were as much a part of the problem even as they sought to find what they thought were sustainable solutions.

CORE THESIS

My core thesis is that it is not too late to engage the losers in freer trade in a proactive plan for transitioning our economies.

Failure to engage the losers means that the land, labour and capital are unlikely to be put to best use, and the labour and capital will flee, if possible.

Moreover, with the push for fuller trade liberalisation, losers will emerge in other industries as the protection windows falls even on goods produced for the domestic market.

To determine how best to proceed we need to identify the rigidities that make transition difficult, and the change possibilities for the losers.

We centre the discussion on the banana industry but remind that it is true about all trade preference reduction in agricultural products, and is relevant to the necessary reorganisation that will follow displacement from trade liberalisation.

The discussion on how preference in bananas will change began from as far back as the mid-1990s.

Before I go any further, allow me to spend a minute and declare interest.

I come to the Caribbean development challenge from a slightly different vantage point than many of my fellow lecturers who have addressed this forum.

There was a point in time, many years ago, when, as an economist and Dean of the Faculty of Social Sciences at the University of the West Indies, I would have wanted you to think of me as an academic.

I have not been an academic or development professional for over 25 years.

I am now a Caribbean businessman.

My primary business activity in the Caribbean for the last 25 years has been the production and export of Jamaican bananas to the United Kingdom within the context of the - now eroding preference regime.

Despite the hurricanes and trade issues, the Jamaica Producers Group (JP), the business that I have been affiliated with most closely during my years in the private sector, still employs almost 1,000 people in bananas in Jamaica.

Twenty-five years ago, the export of Jamaican bananas to the UK was unquestionably our largest business.

Today, as a diversified group, the majority of our revenues, approxi-mately 90 per cent, are earned in various business activities other than bananas and substantially outside of the Caribbean.

It is in this context that I can assure you that it is theoretically possible for all of us, the Caribbean academic, the Caribbean development practitioner and the Caribbean businessman, to be concerned about exactly the same set of questions.

What Happened? Why The Slow response?

The Caribbean, having once been dominant world producers in sugar and bananas, failed to realise that they had become small and relatively insignificant exporters of bananas. They no longer dominated supply and were lulled into believing they had market power by the preference regime.

Any pressure on margins in the marketplace was deemed a failure of the preference regime, and the response was a cry for improving the preference regime.

It is agreed by all that the banana growing SIDS of the region operating at maximum efficiency are, at best, 25 to 30 per cent less productive than growers in Central and Latin America.

In reality, many operate at efficiency levels below their maximum efficiency.

Soil, weather, terrain and climatic interference make us inherently less competitive.

Banana exports from Caricom require a preference regime for survival.

LABOUR

Bananas and sugar are labour-intensive industries and, therefore, their maintenance for as long as possible is deemed absolutely essential to most governments.

Understandably, the trade union movement and governments since independence championed the cause of the workers in these industries, and workers in general.

Labour laws quite properly focused on the rights of workers. One piece of labour legislation critical to reorganisation is the redundancy payments to workers.

In Jamaica, the accepted practice is to pay both severance and notice pay.

The legislation in Jamaica results in an employee with five years' service being entitled to receive 12 weeks pay, and with 20 years, 62 weeks.

These payout rules are in stark contrast to the rules applicable in the United States.

There, the use of unemployment insurance places the burden of the labour cost not on the company that is least able to bear it, but instead recognises that reorgani-sation should allow the company in transition to use its capital to diversify, to hold the company together and maintain as many jobs as possible.

MASSIVE REDUNDANCIES

The company under stress is not required to further deplete its capital by the payment of massive redundancies, as all contribute to a common pool.

Where the government is the employer these costs flow through to the taxpayer.

Recall the case of St Kitts where when the government in 2005 took the decision to close the sugar industry. The government had to borrow US$40 million to meet the closure costs that amounted to approximately 102 weeks per worker.

Redundancy was designed to address situations when particular positions were abolished and the holder of the abolished position was made redundant.

I suspect that it was not intended to deal with the total closure of an industry.

The cost of severance payments has meant that big employers are encouraged to stick with old approaches.

Existing redundancy law places the burden of the necessary worker severance on companies at a time when they can least afford it.

Moreover, given, the low skill and educational levels of most workers in sugar and bananas, governments only consider closure and change when it is inevitable and all options have been exhausted.

The combination of government desperately wanting to maintain the jobs and the very high closure costs have jointly acted to discourage rational responses.