I. The Restructuring of the Banana Industry in St. Lucia and The Windward Islands
1. The Windward Islands banana producers comprise the states of St. Lucia, St. Vincent and the Grenadines, Dominica, and (in a smaller scale) Grenada. Historically, banana production has accounted for a substantial share of export earnings and rural employment of the islands. Until recently, it was estimated that some 30,000 farmers were directly involved in banana production, and some 70,000 people were employed directly or indirectly by the industry; this amounts to about a third of the labor force or 16 percent of the population of the Windward Islands being dependent on the banana sector.
2. The banana industry of the Windward Islands (WI) is at a critical juncture. Recent developments in the international banana market have brought into question the viability of the industry. Increased competition in the world market and uncertainties concerning preferential access to the European Union (EU) have contributed to weak prices and lower farmers’ confidence. As a result, there has been a steady migration of banana farmers to other activities. Between 1992 and 1997, the number of farmers in Dominica, St. Lucia, and St. Vincent and the Grenadines decreased by an estimated 44 percent, 49 percent, and 17 percent, respectively, and further reduction is likely in the next several years. In spite of some progress being achieved in mitigating the economic effect, particularly with the expansion of the services sector, the employment and social fallout of a declining industry has been, and may continue to be, substantial. This chapter examines the challenges facing the WI banana industry with a focus on the socioeconomic impact and production recovery strategies. A section is dedicated to St. Lucia, the region’s largest producer and most populous island.
B. Competitiveness of the Windward Islands Banana Industry
3. The WI producers are at a competitive disadvantage in terms of topography, plantation size, and wage rates when compared with Latin American producers.1 The ownership structure of the WI banana industry is characterized by small plantations, producing on lands that are smaller than five acres and mostly on hilly slopes. Production yields average six to eight tons per acre per year. Wage rates for farm laborers are comparably high, averaging US$11 per day for nonprocessing labor.2 The working day for farm laborers lasts no more than five hours. In addition, most growers provide transportation, a meal, and allow workers to leave the estate with some produce. As a result, the total compensation of workers can be in excess of US$19 per day.3
4. In comparison, “dollar” banana plantations range from 2,500-12,000 acres with yields of approximately 15 tons per acre per year. Wage rates are much lower than in the Windward Islands. In Ecuador, for instance, which is the largest banana producer, wage rates average US$4 per day. Workdays are longer, averaging eight to ten hours. Moreover, “dollar” producers enjoy additional advantages for their production in terms of infrastructure, capital, and economies of scale.
C. The European Union Banana Import Regime
5. The WI banana industry has historically relied on guaranteed market arrangement regimes provided by European states (principally the United Kingdom) which pay above free market prices for the fruit. With the establishment of the single European market, a common marketing structure came into effect on July 1, 1993. The so-called EU Banana Regime maintained the traditional obligation to the African, Caribbean, and Pacific (ACP) producers by restricting imports from non-ACP suppliers through a tariff/quota system.
6. The preferential banana regime has been challenged both internally in Europe, through the EC Court of Justice, and externally by the GATT bodies, and subsequently, by the WTO. The WTO has contested the legality of the EU regime five times since 1993. The most controversial element of the regime was its allocation of licenses among suppliers based on their actual exports to the EU during a reference period (for 1999 and 2000, the reference period used were the years 1994 to 1996). The United States and other Latin American producers challenged the historical reference used for allocation of quota licenses. They brought the case to the WTO, and recently (April 1999) the panel reiterated its rule against the current import regime. In December 2000, the EU Agriculture Committee approved a new proposal, to be put in place in April 2001, in the latest attempt to settle the dispute.
The existing EU banana regime (to be modified in April 2001)
7. With the formation of the European Common Market, the EU replaced individual member countries’ trade regimes governing banana imports with a common policy. ACP countries continued to receive protection through a tariff/quota arrangement. The mechanism of the tariff/quota system consisted of a reserved duty-free quota of 857,700 tons for traditional ACP producers, and a quota of 2.55 million tons subject to a duty of €75/ton for third party suppliers.4 Imports from the latter in excess of 2.55 million tons are assessed the full tariff rate of €750 per ton. Nontraditional ACP bananas (defined as any-ACP supplier without a historical export record to the EU, or traditional ACP suppliers with volumes in excess of the 857,700 tons) have duty-free access within the first quota band; for any amounts above this quota allocation, a reduced tariff rate of €550 per ton is applied.
“First-come, first-served” arrangement (to be effective in April 2001)
8. In order to comply with WTO rules, on December 19, 2000 the EU Agriculture Commission approved plans for a new trade arrangement. The proposal, coined “first-come, first-served” (FCFS), eliminates the historical reference period used in the allocation of licenses. Instead, licenses would be issued upon simultaneous examination of banana import applications during a weekly or fortnightly period, to ensure a regular import flow to the EU market. The FCFS regime would continue with the two quota bands (the first, for ACP countries, slightly reduced to 850,000 tons, and the second, for other countries, remaining at 2.55 million tons). However, the quota bands would now be open to all suppliers, but imports from ACP countries would benefit from duty-free access under both quota groupings. Non-ACP bananas would be subject to a €75/ton duty within the 2.55 million quota, and to a €300/ton duty within the 850,000 quota.
9. Suppliers will be required to commit bananas to the vessel before submitting the declaration of intent to import into the EU and to lodge a sufficiently high security deposit. This measure is aimed at deterring speculation and fraud. In addition, there would be a pre-allocation procedure based on operators declaring their intention to import a specified quantity. The pre-allocation would be decided when vessels are a sailing distance from Europe to avoid discrimination against countries that are further away. If the initial pre-allocation were oversupplied, every application would be proportionally scaled down.
10. The FCFS regime would be in place until 2006, when a flat rate tariff-only system is to be established. The EU feels that the FCFS arrangement is compatible with the WTO ruling of 1997, which argued that the quota was discriminatory. However, the United States, most Latin American producers, and the ACP countries are opposed to the new plan. The effects of the FCFS measure is likely to have an adverse effect on an already troubled WI banana industry. The pre-allocation procedure of FCFS favors producers with high and stable volumes and well-developed markets. Any reduction in their allocation can be shipped to Eastern Europe. However, it poses a severe disadvantage for the Windward fruit since their exports are seasonal, destined mostly to the United Kingdom, and relatively low in volume, with the result that any scale back in allocation could have a high financial cost to the growers.
D. Economic and Social Impact of a Declining Banana Industry
11. Banana production and exports from the WI have declined sharply since the early 1990s. Between 1990 and 2000, the volume of banana exports fell by 50 percent, to 140,500 tons. This retrenchment is attributed mainly to the uncertainties surrounding the EU import regime, declining world market prices, and rising cost of inputs. Although some of the economic impact of the decline has been mitigated by expansion-taking place in other sectors, particularly tourism, the employment problems and social fallout remain significant.
12. Over the past decade, the WI made progress in diversifying their economies and the banana sector’s contribution to GDP declined from approximately 20 percent in 1990 to less than 5 percent in 1999. (Grenada, although a small scale producer, has been very successful in shifting its agricultural production away from bananas and toward cocoa and nutmeg). Nonetheless, banana exports remain significant, accounting for approximately 40 percent of domestic exports.
13. The critical issue facing the Windward Islands is the displacement of labor and income effects of a declining banana industry. According to a recent ILO study, no other economic activity in the Eastern Caribbean has similar multiplier-effects on employment levels and on the development of other economic sectors.5 Current employment in the banana industry constitutes 23 percent of total employment. The expectation is that a large number of small- and medium-sized farms will go out of business in the years to come. Farmers on marginal lands and those that cannot afford to finance the inputs or maintain the quality standards of the Certified Grower Program6 will be most affected. A 1998 study identified the noncertified growers as “the resource poor, with lower standard housing, fewer assets, smaller farms with less secure tenure, and less confidence in their future.”7
14. The rise in unemployment could have a ripple effect in the rural economies and urban communities. Declines in consumption will affect businesses that rely on farmer income, further increasing unemployment. Migration to urban areas will likely occur leading to increase demands for social services, particularly sanitation and pubic health.
E. Agriculture Recovery Strategy: The Process of Adjustment
15. In an effort to restructure the industry and respond to higher quality demands, the governments of St Lucia and St. Vincent and the Grenadines, industry leaders, and donor groups met in May 1998 to outline a recovery strategy. The resulting Production Recovery Plan (PRP), adopted in September 1998, was designed to increase the profitability and competitiveness of the WI banana industry. The PRP identified poor irrigation and drainage infrastructure as a major cause of low yields and as a barrier to the use of a high yield variety of bananas commercially grown in Latin America. It pressed for the release of available funds from donor groups and governments to finance irrigation and drainage projects, with a long-term objective of installing 4,700 acres of irrigation and 2,270 acres of drainage systems over the course of the plan. Additional production increases were to be achieved through a program of targeted grower recapitalization, improved technical capacity, more stable prices to growers and cost cutting measures.
16. The targeted grower recapitalization component of the PRP provided funding for rehabilitation of plantations, drainage and irrigation, shed construction, and increased input purchases. Two separate loan packages were made available to growers, a certification loan and recapitalization loan, each with its own conditionalities. Lending was to be targeted to commercial growers that are part of the Certified Grower Program or have the potential to achieve yields of at least 12.5 tons per acre. Funding for the recapitalization loans was provided by STABEX grants from the EU. The grants operate as a revolving trust fund established on each island. Funds are disbursed to successful applicants based on the recommendation of a Steering Committee.
17. A successful program embraced by the PRP is the Certified Grower Program, initiated in 1996. The program originated as a response to increased pressure from the U.K. supermarkets for the WI to supply superior quality fruit and meet specific requirements. It works by pooling farmers producing superior quality fruit of a required consistency under conditions acceptable to the supermarket trade. Farmers agree to volume contracts with buying companies with specified quality scores. Fruit scoring below the minimum levels is not purchased. Although the program requires greater levels of inputs and record keeping, it has been highly successful in obtaining premium prices for quality fruit.
18. In addition to the Certified Grower Program, quality improvements for Windward fruit have been achieved with the implementation of a five-tier pricing system. Under this system, a base price (which varies in line with market conditions) is established for bananas with quality of less than 75 percent of a specified consistency score. For consistency scores above 75 percent, there are four quality ranges with increasing premiums paid to growers as quality improves.
19. Overall, the PRP has shown mixed results. The implementation of the Certified Grower Program and other quality based pricing mechanisms have contributed to increases in the quality level of Windward bananas. In conjunction, palletization of the shipping, loading, and discharging of bananas has reduced downgrading at destination ports. These developments are important to ensure higher prices for farmers and promote a differentiated product for marketing. However, the output increases expected by the PRP have not been achieved, with drops in volumes actually being recorded. Loan disbursements have been sizable but inadequately targeted. Moreover, investments in irrigation and drainage envisaged under the plan have not fully materialized.
F. Case Study: The St. Lucia Banana Industry
20. The St. Lucia banana industry has its origins in 1925 when a subsidiary of the United Fruit Company acquired lands for cultivation. Production began to expand in the 1950s with the decline in the sugar industry and reached a peak in 1990 at more than 135,000 tons or 48 percent of WI total output. Currently banana production in St. Lucia is around 70,000 tons, with its share of regional output remaining at 50 percent. The sector’s contribution to GDP declined from 10 percent in 1990 to 4 percent in 2000 (part of this decline is attributed to economic diversification toward services). The number of banana farmers fell from an estimated 10,000 to approximately 4,800 in 2000. In the medium term, further displacement is expected, with the total number of farmers declining to between 2,000 and 3,000.
21. As St. Lucia restructures its banana industry, the main challenges will be rural poverty and employment and linkages to other economic sectors. According to the Agriculture Ministry, an estimated 30,000 persons are directly or indirectly employed by the banana industry. The industry traditionally provided a weekly paycheck and a respectable living for even marginal farmers. As a result of the decline in the banana sector, poverty levels have increased in St. Lucia. Recent studies indicate that 19 percent of the households and 25 percent of individuals are living below the poverty line, with most of this poverty being concentrated in rural areas. In addition, options for displaced farmers are limited by low education levels.
22. The loss of regular income from the industry has multiplier effects on those that supply goods and services to the farmer. Strong formal and informal linkages have been established between the banana sector and other economic sectors. Wholesale and retail trade, construction, as well as transport and communications rely on business generated by the banana production.
23. In order to address the problems of the banana sector, the government of St. Lucia has outlined a country strategy that focuses on commercialization of the banana industry, agricultural diversification, and a social recovery plan. Funding for the strategy will be provided by STABEX, which has earmarked US$12.4 million toward commercialization. US$13.6 million for agricultural diversification, and US$15.4 million toward social recovery.
24. Commercialization of the banana industry aims at providing assistance to viable farmers in order to achieve a fully competitive banana industry. The programs outlined are consistent with the regional Production Recovery Plan, which includes raising productivity through grower recapitalization, shed building, technical assistance, and input financing. A long-term objective put forward in the PRP is for the construction of irrigation on 2,000 acres and drainage systems on 1,500 acres.
25. The agricultural diversification component identifies the need to restructure the agricultural sector and promote a shift toward nontraditional crops for the nonviable banana farmers. A secondary objective is to enhance food security by reducing the country’s food import bill, which reached EC$90 million in 1999. The strategy will pursue these objectives by investing in marketing, infrastructure, and capital access. A marketing agency is to be established to facilitate the trade of agricultural produce; its authority will be to oversee the implementation of a system of grades and standards for agricultural commodities and provide market opportunities for local agricultural products.
26. Infrastructure improvements will be made to support the agricultural sector, such as rehabilitation of farm access roads, installation of irrigation and drainage systems, enhancement of port facilities, and development of inland reception and distribution centers. Greater capital access for agricultural enterprises will be implemented by widening the cross-section of beneficiaries and expanding the range of agricultural projects.
27. Trade facility measures include encouraging community based input supply outlets, strengthening the St. Lucia Bureau of Standards to enforce compliance with established standards, and promoting the development of an agro-processing subsector.
28. The social recovery program addresses the emerging social fallout and provides new avenues for employment. The removal of some 3,000 farmers from the banana industry potentially displaces some 14,000 persons from their sphere of economic activity, creating social problems. To address such problems, assistance will be provided to those farmers in the following areas: adult education; housing and sanitation improvement; health; child protection; skills training; and a farmers’ pension scheme.
29. An important underpinning of the production recovery plan is the recognition that the industry will downsize to two main categories of growers, irrigated with yields of at least 18 tons per acre and rain fed with yields of 12 tons per acre.8 Currently, St. Lucia averages yields of 4 to 6 tons per acre compared to an average of 15 to 20 tons per acre for some “dollar” producers. In this context, targeted construction of irrigation and drainage systems is paramount. Experience in St. Vincent and the Grenadines has demonstrated that yields of 25 tons/acre can be achieved within the second year of the construction of irrigation and drainage systems.
30. There is a need to increase the commercial and management skills of growers. Production volumes and practices poorly respond to market signals. Among growers, there is a limited understanding of break-even yields and prices. In addition, production volumes are not, as yet, managed in order to meet market demands. Training of farmers in agro-business, farm management, and developmental support is needed.
31. In the long term, production volumes may stabilize at about the current levels with the full implementation of the restructuring plan. However, prospects for further price declines from the adoption of a ‘tariff-only’ EU trade regime could put significant pressure for additional contraction in the industry. In any event, the number of farmers is likely to fall by as much as 1,000-2,000 producers. Therefore, the social recovery program will be of major importance to smooth the transition and address the displacement of farmers.
32. Significant progress has been made in the Windward Islands in response to the declining banana industry. Buying companies have been privatized in St. Lucia and a similar intention has been expressed in other islands. This has led to changes within the industry structure leading to increased competition and commercialization at all levels. There has been a recognition that the status quo of the banana industry is not viable and resistance to change among the producers is diminishing. As a result, institutions are more willing to meet the requirements of liberalization. Finally, both industry and government are developing more coherent strategies for the future of the industry, which may eventually lead to a successful transition to a fully liberalized market. Taken together, these developments represent a fundamental shift in the direction of the banana industry and provide a foundation for the stakeholders to bridge the gap between the current status of the industry and the required status for full competitiveness.
|Export volume (tons)||281,941||227,061||279,800||242,450||169,385||193,644||191,408||137,428||144,671||130,438||140,499|
|St. Vincent and the Grenadines||81,155||63,411||78,777||58,689||30,925||50,084||44,038||31,021||39,887||37,376||42,339|
|Export revenue (EC$ million)||386.8||326.7||376.4||269.9||217.4||217.9||224.3||164.5||185.0||176.9||170.4|
|St. Vincent and the Grenadines||110.0||89.5||101.4||62.0||39.8||39.8||52.4||37.1||55.5||51.2||51.7|
|Average green wholesale price (£/ton)|
|For Windward Islands bananas||525||579||538||541||618||548||544||548||564||532||490|
|For dollar bananas 1/||371||387||331||359||349||340||368||364||350||321||344|
|Unit value of Windward||286||302||284||275||311||264||278||271||286||310||299|
|banana exports (£/ton)|
|Average exchange rate (EC$/£)||4.8||4.8||4.7||4.0||4.1||4.3||4.2||4.4||4.5||4.4||4.1|
|Total number of active growers||24,954||29,656||30,578||24,111||23,046||20,186||17,965||16,269||15,360||12,906||11,520|
|St. Vincent and the Grenadines||5,709||9,180||9,237||7,800||7,375||3,139||5,667||6,653||6,048||4,500||3,822|
U.S. import price for Ecuador and Central America first class quality tropical pack. 2000 prices based on WEO estimates.
U.S. import price for Ecuador and Central America first class quality tropical pack. 2000 prices based on WEO estimates.
|(Metric ton yield per acre per year)|
|St. Vincent and the Grenadines||5.0||3.9||5.0||3.6||4.3||4.3||4.4||4.5||4.1||4.1||4.1|
|Banana as share of|
|GDP (at factor cost)||21.5||19.9||18.9||14.3||11.2||8.3||7.7||6.9||5.7||5.9|
|Banana as share of|
|GDP (at factor cost)||2.2||1.9||1.4||0.9||1.1||1.1||0.3||…||0.0||0.0|
|Banana as share of|
|GDP (at factor cost)||19.8||14.9||16.3||12.0||9.3||9.8||9.7||6.5||6.6||5.7|
|St. Vincent and the Grenadines|
|Banana as share of|
|GDP (at factor cost)||24.3||18.5||18.9||11.3||7.2||6.6||8.3||5.6||7.7||6.9|
|(In thousands of tons)|
|St. Vincent and the Grenadines|
|Selected dollar producers|
|(In thousands of tons)|
|Korea, Republic of||…||183.3||87.7||35.9||16.3||11.5||14.5||13.6||0.1|
First Lomѐ Convention signed, replacing the Yaounde Convention.
Lomѐ IV negotiations concluded in December, with banana protocol continued from Lomѐ III.
European Parliament enquiry; in November, draft ACP proposal calls for quota on dollar bananas allocated by license. ECOSOC (Economic and Social Committee) report calls for compliance with Lomѐ.
Costa Rica, Colombia, Guatemala, Nicaragua and Venezuela are consulted by the EU in GATT, regarding existing national banana regimes.
European Parliament gives opinion (Legislative Resolution A3-0410/92).
EU banana regime proposal agreed in Council by qualified majority voting—2 million tons import quota for dollar bananas.
GATT Panel begins to consider complaint against the previous national banana policies by Latin American states.
GATT Panel requested for new EU banana regime by Latin American states. Germany challenges EU banana regime in the European Court of Justice.
GATT Panel finds national banana policies of European countries are not GATT consistent.
EU begins Article XXVIII negotiations with Colombia and Ecuador.
Publication of Implementing Regulations for EU Regime.
EU banana regime commences operation.
Uruguay Round of GATT signed in Marrakesh.
Framework agreement between EU and Colombia, Costa Rica, Venezuela, and Nicaragua on percentage of EU banana quota allocated to some Latin American countries—increases EU dollar quota to 2.2 million tons.
Chiquita and the Hawaii Banana Industry Association formally petition the United States Trade representative (USTR) to initiate Section 301 investigations against the banana policies of the EU, Costa Rica, Columbia, Nicaragua and Venezuela.
European Court of Justice upholds EU banana regime.
Enlargement of EU to include Sweden, Austria and Finland leads to effective increase in dollar import quota to 2.553 million tons.
After concluding that a negotiated settlement of the pending 301 case against the EU was impossible, the USTR announce that the US, Mexico, Guatemala and Honduras would challenge the EU banana regime in the WTO.
Following its accession to the WTO, Ecuador joined the US, Guatemala, Honduras and Mexico in requesting formal WTO dispute settlement consultations with the EU regarding its banana import regime.
The USTR asks the WTO to investigate the EU Banana Regime.
The WTO Disputes Settlement Body approved the establishment of the Panel. A three-man Panel chaired by the WTO Permanent Representative of Hong Kong with one Swiss and one Australian member was set up.
Complaint against EU banana regime heard by WTO Disputes Panel in Geneva.
WTO Disputes Panel finds that several aspects of the EU banana regime breached WTO rules.
An appeal against the WTO Dispute Panel findings, initiated by the EU, was held in Geneva.
WTO Appellate Body essentially confirms the Panel’s findings.
The EU Commission submits proposals to the Council of Ministers to bring the EU banana regime into conformity with the WTO’s ruling.
House of Commons International Development Committee Report, The Renegotiation of the Lome Convention, supports efforts to secure a new Banana Protocol to run from the year 2000.
The EU adopts a revised banana import regime.
The Windward Islands launch a Banana Recovery Program, designed to raise productivity and consistency of quality.
The amended EU banana regime comes into force on January 1,1999.
Ecuador asks the WTO to rule on whether the amended regime is compatible with WTO rules and a Panel is set up.
The US, without waiting for the Panel’s verdict, announces its intent to impose trade sanctions of more than $500 million on EU exports.
The WTO Panel report on the amended regime concludes that it is still inconsistent with WTO rules in a number of respects.
A further WTO Panel Report rules that the US is entitled to impose retaliatory sanctions on EU exports.
The EU, having consulted with all the principal parties concerned, puts forward proposals for a new banana regime.
The European Commission issues proposals for the amendment of the EU Banana Regime.
The European Parliament debates the Parliament’s Agriculture and Development Committee’s proposals for the amended banana regime.
The WTO Arbitrators Panel rules that Ecuador may levy sanctions against the EU.
EU Agriculture Committee approves the “First Come First Serve” proposal giving continuation of the three quota bands until 2006, when the flat rate tariff only system will be established. The new proposal takes effect in April 2001.
Cargill Technical ServicesNovember1998Action Plan For Restructuring of The Windward Islands Banana Industry.
International Labor Organization1999Restructuring and the Loss of Preference.
SandifordWayne2000On the Brink of Decline,(Grenada, West Indies:Fedon Books).
LuciaSt.Ministry of Agriculture Forestry and FisheriesOctober2000Agricultural Diversification Strategy,
LuciaSt.December2000Country Strategy Paper for the Banana Industry,Agricultural Diversification and the Social Recovery of Rural Communities.
WilliamsOralDariusReginald1998“Bananas: The WTO and Adjustment Initiatives in The Eastern Caribbean Central Bank Area”,Eastern Caribbean Central Bank Research Papers.
These include Ecuador, Costa Rica, Colombia, Guatemala, Panama, Honduras, Nicaragua, and Venezuela. They are sometimes referred to as “dollar” banana exporters because their industry is usually associated originally with U.S.-based multinational (or U.S. dollar revenue-based) companies.
Labor not engaged in the immediate preparation of the fruit for receiving or loading.
The quota was originally set at 2.2 million tons and later expanded by 353,000 tons to accommodate an increase in consumption due to the expansion of EU membership to include Austria, Finland, and Sweden.
Restructuring and the Loss of Preference, ILO, 1999.
The Certified Grower Program works by pooling farmers producing superior quality bananas under commercial contracts with buying companies (see Section E).
Cargill Technical Services, Action Plan For Restructuring of The Windward Islands Banana Industry, November 1998.
Based on the findings of the EU funded Restructuring of the Windward Islands Banana Industry Project.