21 691 DEVELOPMENT BRIEF Number 50 The World Bank March 1995 's banana ra rri a ~~~~~~~~~~get rid of these perverse incentives E U's ba n a n a ra m a and obvious inefficiencies. Instead, it opted for a unified scheme that is - sl pping worse than any of the national pro- grams replaced. The new policy The European Union's banana scheme is touted as limits competition, restricts trade, help for a group of small economies-but direct aid and allows officials removed from would be better and cheaper pressure) to make decisions affect- ing resource allocation in banana M ^ ore bananas are sold in sources. Every year European con- production, shipping, and market- world trade than any other sumers spent $1.6 billion to transfer ing. It relies on quotas to limit sup- fruit. And more of them $300 million to the 11 beneficiary plies and raise prices. It protects are peeled in the European Union economies. Transferring a dollar and improves profits for a few mar- (EU) countries than anywhere else. cost the European consumer $5.30 keting companies that benefited The EU countries consume almost because nearly 60% of the $1.6 bil- from the various national policies 400% of the bananas in the world lion-$917 million-was paid to and now have been handed by fiat market. Latin America is the most protected EU importers and whole- a piece of the Latin American trade. efficient, lowest-cost grower. The salers in the form of excessive mar- This distorted, illogical policy has region ships three out of four ba- keting margins. Some of the Euro- been extended across the entire Eu- nanas in world trade. But few of pean cost was outright waste: it cost ropean Union, at the expense of these go to Europe. more to grow the privileged ba- German consumers as well as those France, Greece, Italy, Portugal, nanas. Moreover, because one side- in the four countries-Belgium, Spain, and the United Kingdom effect of the European scheme was Denmark, Ireland, and the Nether- have long used import restrictions to force down prices elsewhere, lands-that previously imposed (quotas) to benefit inefficient, high- each dollar in aid took another 32 only mild tariffs on bananas. The cost growers in four territories and cents out of the pockets of the effi- average EU price of bananas has seven small African, Caribbean, and cient Latin Americans. gone up 12% and is now about Pacific countries. In unifying EU members' dispar- twice what it would be in a free A few European countries have ate import policies in 1993, the Eu- market. The annual cost to consum- interfered with the banana trade ropean Union had a golden-or at ers has jumped from $1.6 billion to only through mild tariffs. And Ger- least yellow-tinged-opportunity to $2.3 billion (see figure).* many has had a free market in the fruit. The results are no surprise. The protected suppliers are inefficient Consumers in the import-restricting Unit cost of production, including storage and countries paid more and ate less. merchandising costs and export taxes (ECU per kilogram) With the lowest prices, German 0.7 ________ - ACP countries and overseas EU territories consumers bought 14 kilos of ba- 0.6 nanas per person per year-com- 0.5 pared with 8 kilos in the United 0.4 Kingdom. 0.3 The policies of the protectionist 0.2 countries were an exceptionally in- 0.1 efficient method of transferrinig re- ° Latin Somalia Suriname Cameroon Carib- Canary Martinique Madeira America bean' Islands and 'For more details, see Brent Borrell, 'EU Bananarama III," Guadeloupe Policy Research Working Paper 1386, World Bank, Wash- ington, DC, 1994. What now? That new pro gramw?oesn't wantfor ... so European consumers pay too much The new program doesn't want for critics. Several studies have high- Average retail prices for bananas in 1990 (US$ per metric ton) lighted its cost, inefficiencies, and 3,000 conflicts with the General Agree- 2,500 ment of Tariffs and Trade (GATT) 2,000 pWCeo policy, competition law, aid to de- 1,500 indicator_ veloping countries, and consumer 1_ ___ welfare. Among those pushing for 1,000 dismantlement are Latin American 500 producers, the U.S. and German 0 producers, the U.S. andGermall 0 United Germany Other EU United France Spain and Italy governments, and the GATT. All States countries Kingdom Portugal the European Union has done so far is try to divide the Latin Ameri- ... yet the subsidized growers ... and remain dependent cans by offering Colombia, Costa still don't get much help ... on transfers while the world Rica, Nicaragua, and Venezuela a Total annual cost to EU becomes more efficient. package of increased quotas and consumers (US$ millions) World banana prices special privileges. Old (national) policies New policy (1990 US$ per metric ton) The European Union's policy is 0 1,000 as damaging to its supposed ben- eficiaries as to anybody else. To get 500 800 aid, they grow bananas. The Wind- i 0I0 ward Islands, for example, are now dependent on banana exports for 1,500 600 most of their export earnings. The artificial market locks the supplier 2,000 400 countries and territories into dependency. With no reason to in- 2,500 EU Commission taff revenue vest in new techniques or improved E Excessive monopoly profits 200 cultivation practices, few if any of * Net cost to EU their growers could compete in an I Additional annual cost to Belgium, 0 U Denmark, Germany, Ireland, and 1955 1965 1975 1985 1995 2005 open market. So a program nomi- the Netherlands nally intended to help ends up en- .inefient prod .ucin a. Dominica, Grenada, Jamaica, St. Lucia, and St. Vincent. couraging inefficient production b. The United States has no barriers to the entry of bananas, so world supply and demand determine U.S. retail prices. and using up land, labor, and capi- Source: Brent Borrell, "EU Bananarama IlIl, Policy Research Working Paper 1386, World Bank, Washington, DC, 1994. tal that other, diversified ventures could use more productively. administrators would buy Latin changed at some point. A complete If Europeans are willing to spend American bananas at world prices, loss of the aid could be disastrous $2.3 billion to transfer $300 million sell them at the protected European economically and socially for the to the supported areas, they ought prices, and use the spread for infra- small economies that now survive to be happy to slice their banana structure investments and other because of it. Yet the current aid bill and get more money to these means of encouraging sustainable program gives them no way to pre- small economies by separating aid local manufacturing and helping pare for economic independence. from fruit. If that is too unpalatable banana farmers shift to more eco- What's needed is to reduce the for the bureaucrats, they should nomical and profitable crops. uncertainty with a fixed timetable consider making the quotas trans- In the end, the areas benefiting and clear objectives, arrangements ferable by turning them over to the from the EU banana policy could be for transition, and direct, simple governments in the supported ar- its greatest victims. The silliness of economic support until the econo- eas, allowing them to fill the order the program is so apparent it is mies become self-sustaining. any way they please. Enterprising hard to predict that it will not be Dccelopment Briefs areissued by the World Bank toinform themedia,business,academic, and governmentpolicycommunities aboutdevelopmentpolicyanalysesand results from the Bank's research activities. They are drawn from the work of individual Bank researchers and do not necessarily represent the views of the World Bank and its member countries-and should not therefore be attributed to the World Bank or its affiliates. Briefs are issued periodically by the Research Advisory Staff, Development Economics Vice Presidency, The World Bank, 1818 H Street, NW, Washington, DC 20433. Tel: (202)473-3984, Fax: (202)477-0955. Briefs are not copyrighted and may be reproduced with the appropriate attribution.