The financial crisis, though having its origin in developed countries, has generated a global recession that has severe consequences for developing countries, including in Africa, in terms of their prospects for economic growth and development. This is notably through a decline of trade and investment flows, lower remittances, some lower commodity prices with a greater volatility, which appears to already lead to a reduction of employment opportunities and an increase in poverty and malnutrition for the most vulnerable people.
With more pessimistic growth expectations, most African, Caribbean and Pacific (ACP) governments, in particular in Africa, will be facing serious budgetary constraints and forced to make difficult choices for the future of their economies. In this context, it is worth asking what role EPAs can play, or should not play? Knowing that the situation of African economies vary from country to country, it is unlikely that a one-size-fits-all or a tailored-made approach would be suitable, however broadly two opposite options can be identified.
At one extreme stand the “EPA enthusiasts”, who believe EPAs can effectively contribute to address some of the systemic impediments to economic development in ACP countries. Combined with strong commitments on social, labour and environmental rules and accompanied by appropriate levels of development cooperation, as repeatedly pledged by the EU, EPAs could become an antidote to the global crisis and a credible guarantee against future backlashes and policy reversals that would erode the prospects for domestic growth. Or at least so goes the argument. The direct consequence for the negotiation process is that all interim EPAs should be signed and that regional full and comprehensive EPAs should be concluded with the remaining African (and Pacific) ACP regions concerned as soon as possible.
At the other end of the policy spectrum stand the ‘EPA fearful’ or ‘EPA sceptics’, who tend to view EPAs as another attempt by developed countries, in this case Europe, to impose an obsolete model of development based on too rigid neo-classical recipes. In a nutshell, some critics claim that EPAs, with their liberal agenda forced upon Africa will exacerbate, rather than alleviate the negative effects of the crisis and institute a new policy and regulatory framework that will ultimately undermine the African ACP countries ability to respond to similar crises in the future.
In particular, they argue that opening up local markets to international competition from EU products will further contribute to put domestic production under pressure at a time when international export market opportunities are dwindling and food security is under threat. In addition, the removal of custom duties from EU imports will exacerbate further problems of tightened budgetary constraints experienced by many developing and ACP countries as a result of the global crisis.
What do we know? In the short run, an EPA is unlikely to make much of a difference. EPA main commitments cover a period up to about 15 years, and implementation will be gradual. So, if EPAs can help address some of the fundamentals of African ACP economies, their effects will not be felt immediately. In this sense, EPAs are no quick fix for the global crisis. On the other hand, commitments under EPAs have to be made in a period of economic hardship. While most of the potential benefits of EPA reforms will be reaped in the longer term, adjustment costs – in terms of market opening, productive adjustments, infrastructure development, fiscal reforms, etc. – are likely to be borne in the short and medium term.
The challenges of facing adjustment costs could be partly addressed through the adoption and delivery of appropriate accompanying measures to EPAs, discussed with the EU in parallel to the EPA negotiations. But as the crisis is affecting mainly developed countries, donors will be increasingly at pain to deliver on their ODA commitments or beyond, raising doubts as to their ability to meet some African countries need for greater reliance on development assistance.
Beyond the loss of custom revenues by African ACP countries as a result of the general collapse of global trade, fall of trade flows with the EU could also have an effect on the liberalisation schedules to be negotiated in EPAs. Some products may become (temporarily) more sensitive and other less, depending on how they are affected by the crisis.
In view of the possible impact of the global crisis on the EPA approach, it is also worth considering that comprehensive EPAs aim at liberalising not only trade in goods, but also trade in services, possibly including the financial sector. If there is one general lesson from the financial crisis is that the financial sector needs careful and appropriate regulation. But the type of regulation required and the reforms needed are less clear.
Besides, while the creation of effective regional markets may contribute to foster development and thus partially alleviate some of the negative impacts of the global crisis, the EPA negotiation process has so far mainly contributed to strain regional integration processes in Africa, notably with the conclusion of interim EPAs with individual countries or groups of countries cutting across RECs.
Recommendations
With the global crisis having drastically changed the context under which EPA negotiations are conducted and under which EPAs are likely to be implemented, some adjustments to the current approach to EPAs are needed.
In spite of the potential merits of regional integration and EPAs in the medium and long term, they offer little prospects to address the immediate consequences of the crisis. In the short run, special attention should thus be given to the scope of commitments and their sequencing, to reflect the specific current conditions and development approaches of each country and region.
Perhaps even more important, all EPAs could include specific clauses providing for the possible revision of liberalisation schedules (as in the CARIFORUM-EU EPA), as well as better provisions to facilitate the adoption of safeguard measures, including for balance-of-payment purposes. To those African ACP countries interested in substantial liberalisation of services in an EPA, the EU should provide appropriate support to build regulatory capacity and make generous offers in response to requests, notably in sectors where these countries have a comparative advantage. Without such flexibility, EPAs may add to the pain of the crisis.
With the global crisis, there is an additional sense of urgency to respond to the need of the African ACP countries. Development assistance can be front loaded and its effectiveness improved, but the potential of such measures is limited. Nonetheless, such loadable efforts should be further encouraged and speedily implemented. Existing mechanisms should also be used – notably support through budget support or commodity funds to address price and exchange rate volatility – or adapted. In this respect, the proposal by the European Commission for ‘vulnerability FLEX’ should be carefully considered, with regards to its mechanism, funding and effective delivery.
Bilal, S., Draper, P. and D.W. te Velde. 2009. Global Financial and Economic Crisis: Analysis of and Implications for ACP-EU Economic Partnership Agreements (EPAs), ECDPM Discussion Paper 92
For related discussion see: Jones, E. and Martí, D. (ed). 2009. Updating Economic Partnership Agreements to today’s Global Challenges: Essays on the Future of Economic Partnership Agreements, GMF Economic Policy Paper Series 09