The banana saga vs diversification

by Edwin Laurent

Five weeks ago, this information series began with the perspectives of a sceptical young Vincentian professional and last week, reviewed the current threat to the future of our banana marketing arrangements.

Diversification, the subject of this article, I deliberately left for last. Since we are fighting in Europe to safeguard the marketing arrangements for bananas, we should remain focussed on the challenge before us and must not be distracted by a parallel strategy that is outside of our sphere of responsibility. {{more}}Nonetheless, since the long term decline of the banana sector is irreversible, the adaptation of our economies with the creation of new sources of income and employment is an absolute and urgent policy imperative.

In its heyday at the start of the 1990s, Windwards’ banana exports amounted to 270,000 tonnes per annum, and employing over a quarter of the labour force. They have since declined to 78, 931 tonnes. Even with the most optimistic assumptions about the future of the EU market Regulations we will never return to, far less surpass, the banana export and income levels of a decade ago. In the meanwhile our populations have been growing along with expectations of a better life. The only prospect of preserving and hopefully increasing income and employment is the creation of new productive activities including new uses for the banana fruit and plant and innovative production/marketing approaches, e.g. organic bananas.

Generally, diversification is seen as essential and is being pursued in the Windwards with support from the EU, which provided finance under the 1994 Special System of Assistance and then from 1999 through the Special Framework of Assistance (SFA). Funds averaging € 45 million per annum have been provided to ACP suppliers for a variety of projects including productivity improvements, institutional reform, diversification and the provision of social safety nets. In addition there was STABEX, which was recently replaced by FLEX, the mechanism for Financing Short-term Fluctuations in Export Earnings.

But how have we been faring? In 1999 the EU consultants Hubbard M., Herbert A. and Roumain de la Touche assessed the value of EU assistance to banana suppliers and recommended that higher priority be given to diversification. This had an effect because, the share of diversification projects as part of the total SFA funds rose to 64% by 2002 from 12% in 1999. Diversification projects were principally in the Windward Islands with Dominica accounting for €14.84 million, Saint Lucia €24.9 million, and Saint Vincent €6.10 million.

In 2003 the EU again evaluated its assistance and found that Windward Islands were still the least diversified of the ACP suppliers. The consultants, Landell Mills Ltd. noted various shortcomings including unclear objectives, unrealistic expectations and an ill-defined approach to diversification.

It is too soon to expect dramatic results in diversification, since for small single-commodity exporting countries, the process is long and difficult with the islands facing particular problems including;

* Inadequate flexibility in the labour force due to a lack of new and appropriate skills;

* Undeveloped capital markets which are not only ineffective in mobilising funds for investment but in general do not make risk capital available for new ventures on reasonable terms particularly to entrepreneurs who are not yet established;

* The small size of the domestic market which obliges reliance on exports even in the current context of the decline of trade preferences and the intensification of international competition.



What is most required for successful diversification is fullest national commitment to the process of fundamental economic restructuring i.e. not simply the selection and introduction of a replacement crop for bananas. This also needs a result-oriented approach focussing on assisting and encouraging investment in new areas of productive activity and ensuring the transmission of clearer market signals to entrepreneurs that identify international competitive advantage.

The role of Governments is central to the diversification process. It entails providing a predictable, stable and supportive environment for local and foreign business enterprises with investment incentives, support with exportation, technology and quality improvement and the upgrading and adaptation of the labour force and of managers, through appropriate technical education and skills training. Investment incentives and inducements though must be coherent with a government policy of diversification into new areas of existing or envisaged international advantage. The signals sent to investors, particularly through incentives etc., must be rational and clear with no masking of market realities pertaining to international competitiveness. Whilst incentives are essential to promote investment, where the beneficiaries are in activities with no economic viability or future, they will invariably prove counter-productive.

Despite Government’s commitment, the Windwards are often castigated for the lack of progress in adapting to market changes but diversification is not really a public sector activity, but one that is taken forward by investors notably in the private sector. This is partly because even when the right signals and institutional and other support facilities are provided, entrepreneurs, particularly in new or non-traditional activities, often face severe financing difficulties principally of interest rates that are too high, repayment periods which are too short in relation to the project’s income generation patterns and excessive collateral requirements.