The Implications of European Union Sugar Price Cuts, Economic Partnership Agreement, and Development Aid for Fiji

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The year 2007 was decisive for the future of the special relation between the European Union (EU) and the African Caribbean and Pacific (ACP) countries for it marked the expiry of the 2000 Cotonou Agreement and the prospective signing of the Economic Partnership Agreement (EPA), which was to come into force by January 1, 2008. The Cotonou Agreement, which followed from the sugar protocol laid down since the 1975 Lome Convention, was an established instrument of the EU's trade-based aid to some 18 ACP economies in the form of high sugar prices, which were about three times more than the world sugar price. Although the expiry of this agreement would see the loss of the EU sugar subsidy for the ACP countries, the EU has taken responsibility to provide development aid to assist ACP countries with their transition through this period. The commitment to do so amounts to about [euro]650 million over an 8-yr period beginning from 2008. (1) It is also expected that the EPAs will take effect then. The EPAs are trade arrangements between the EU and regional groupings within the ACP countries group to progressively remove trade barriers among them and enhance cooperation in other areas related to trade. The EPA is also intended to go beyond a trade agreement with implications for development in a wider context.

In light of these developments, it is timely to analyze the impact of the EPAs, the loss of EU sugar preference, and development aid on the ACP economies. Previous studies such as Alexandraki and Lankes (2004), Milner et al. (2004), LMC International and Oxford Policy Management (2003), and Herrmann and Weiss (1995) used partial equilibrium models to study the impact of the loss of EU sugar preferences on the ACP countries. More recently, Perez (2006), Karingi et al. (2006), Keck and Permartini (2005), and Levantis et al. (2005) have used the more extensive general equilibrium model for analysis. (2) All but the last of these studies used the Global Trade Analysis Project (GTAP) model to look at the effect of EPA arrangements on the ACP region, Eastern and the South African countries (but not Egypt and South Africa), and South African Development Community, respectively. (3) The study by Levantis et al. focused on the loss of EU sugar preferences and development aid on Fiji in particular.

The contribution of this paper to the existing literature is threefold. First, Fiji makes a good test case for the study of sugar preference erosion as it is the recipient of the second-largest EU sugar quota allocation, and given the high level of heterogeneity within the ACP region, a single country analysis has more to offer by unmasking impacts on a wide range of macroeconomic variables as well as the effect on key sectors of the economy. More generally, Panagariya (2005) warns that the impacts of liberalization vary for developing and developed countries within a particular region. Thus, results can be expected to be different for Fiji, which is a lower middle-income economy. We use the dynamic CGE model of Levantis et al. (2005) but update the 1999 information using the recent 2002 input-output tables to incorporate structural changes in the economy after the May 2000 coup. (4)

The second contribution is that, unlike previous studies, we consider concrete information on the EU price cuts and development aid to the ACP to allow more precise and realistic policy environments to be analyzed. The third contribution is in the analysis of scenarios combining development aid with the loss of sugar preferences and the EPA. While this could not be done in the single-region CGE analysis of ACP undertaken by previous studies, Levantis et al. (2005) on the other hand considered EU's development aid under some assumptions with no attempt to combine the aid scenario with the loss of sugar preferences. For instance, price cuts were simulated simplistically as a 2.9% annual cut in gross domestic product (GDP) over 10 yr. …