The Future of STABEX
Issues Paper prepared for the Summit of ACP Heads of State and Government
Libreville, Gabon, 6-7 November 1997
The most interesting question with regard to Stabex is whether there is still a rationale for a compensatory finance scheme to stabilise export earnings of developing countries (let aside the geographical scope). Of equal importance is the question whether the European partners have the political will to maintain such a system and to find adequate funding.
Stabex - the EC’s compensatory finance scheme to stabilise export earnings of the ACP countries - was set up under Lomé I and has been working now for more than 20 years. Its objectives are laid down in Article 186 of the fourth Lomé Convention: to remedy the harmful effects of the instability of export earnings and to help to overcome one of the main obstacles of development.
In the context of discussions about the future relations between the EU and the ACP countries beyond 2000, not only the future design of the Stabex but also its existence has been questioned. This paper examines whether there is still a rationale for a compensatory finance scheme to stabilise earnings deriving from exports of agricultural commodities. ACP countries are still highly dependent on exports of traditional, agricultural commodities.
A range of factors makes agricultural commodity markets work imperfectly: they are characterised by large supply disturbances, structural oversupply, strong competition, and volatile prices that lead to revenue variability for their producers and exporters. Constantly deteriorating terms of trade have led to massive losses of foreign exchange earnings for commodity-producing developing countries.
Instability of export earnings has to be considered as one of the main obstacles to sustainable development because it causes disruptions in the investment planning process and has negative effects on the productivity of capital. It also entails problems of the balance of payments and can lead to increasing internal as well as external indebtedness. In addition, instability of earnings strongly affects farmers and their living conditions.
Commodity producers and exporters in developing countries have hardly any instruments at their disposal to offset the adverse effects of instability of their earnings. Most domestic stabilisation schemes (marketing boards or "caisse de stabilisation") which protected producers in developing countries from price volatility in world commodity markets have been abolished. On the international level, the performance of instruments to remedy the negative effects of unstable export earnings is not much better. Many international commodity agreements have ceased to function because of lack of funding for their buffer stocks. The use of modern risk management instruments is not yet widespread among commodity-producing developing countries. Therefore, compensatory finance schemes, such as Stabex, offer an alternative to offset the adverse affects of unstable export earnings.
Stabex has been experiencing a number of modifications with the aim of improving its design (conditions for compensation) and its performance (financial endowment). Under Lomé IV, stricter conditions concerning the use of funds have been introduced. Nevertheless, some important shortcomings of the system have often been raised and they ought to be resolved. First, its partial nature (geographical and product coverage). Second, shortages of resources which means it is unable to meet eligible transfer claims (especially during the commodity crisis of the 1980s - early 1990s). Third, slow disbursement. Fourth, its weak performance with regard to its stabilisation goal (due to its product-by-product approach and delays in disbursement), and redistributive and allocative impacts (due to the "fungible" nature of transfers).
Despite these shortcomings, all ACP countries benefiting from Stabex have gained from the system. Stabex funds are welcomed as a kind of unconditional aid and are used to finance, for example, general or sectoral import programmes, debt relief, reforms to restructure the sector concerned or compensatory payments to farmers and stabilisation of producer prices.
In the absence of adequate other instruments, in particular the lack of a comprehensive international commodity policy and because diversification takes time and needs sufficient financing, compensatory finance schemes, such as Stabex, are still necessary for the foreseeable future.
Basically there are three main options for Stabex. First, maintain its substance together with some reforms. Second, make substantial changes to the system, and third, phasing it out.
The system should return to its original design, namely, a quick-disbursing instrument to mitigate the adverse effects of variable export earnings, and mechanisms have to be found that funds are better targeted. Option 3 which entails a simple topping up of National Indicative Programmes or structural adjustment programmes with Stabex funds is not recommended. The first option also has serious shortcomings.
Option 2, in which Stabex money should be used to set up a "guarantee fund" to ensure the financial liquidity of the sector, is recommended. Disbursements would speed up, the fund would be self-replenishing and the money could be better targeted to the producers. The fund would also strengthen diversification efforts.
Since the 1980s, the value of the Lomé trade preferences has declined and the ACP countries were not able to maintain their market share in the EU. ACP exports to the EU have been no exception to this generally poor trade performance (2% in global trade) and their share of the EU market has declined from 6.7% in 1976 to 2.8% in 1994. Despite a growing EU market, the ACP countries were not able to maintain their production and export levels and thus their basis for foreign exchange earnings. The ACP share of EU imports has declined in favor of a growing market share of the Asian developing countries (see table). Dependency on trade with the EU remained high with about 40% on average of the ACPs’ export earnings.
Developing Countries’ Share of EU Imports, 1976-1994 (%)
| 1976 | 1980 | 1985 | 1990 | 1992 | 1994 | |
| ACP | 6.7 | 7.2 | 6.7 | 4.7 | 3.7 | 2.8 |
| Asia | 4.2 | 5.9 | 6.5 | 11.0 | 13.6 | 13.1 |
| Latin America | 5.3 | 5.1 | 6.5 | 4.6 | 5.1 | 5.4 |
| Mediterranean | 6.1 | 6.1 | 8.1 | 6.5 | 6.2 | 6.1 |
| All developing countries | 44.8 | 42.4 | 34.7 | 31.2 | 29.2 | 34.2 |
A dependency on traditional export products (over 80% of the ACP total export earnings come from commodities) increases vulnerability to price shifts, terms of trade risks and economic crises. Excepting a few export growth success stories and a good economic performance, most ACP States, in particular African countries, have failed to diversify exports and to make the fullest use of preferences.
World trade in primary commodities is much smaller and is growing more slowly than in manufactures: annual growth rate, based on real 1980 US-$ measures on average 1.7% for commodities and 4.9% for manufactures (World Bank, 1991).
Agricultural commodity markets can be characterized by large supply disturbances, structural oversupply and volatile prices which lead to export revenue variability for exporters and strong competition.
World commodity markets are where producers and consumers meet and prices play their regulative role to determine the relation of supply and demand and to restore the equilibrium. In general and in a medium-term perspective, prices and world production of commodities are inter-dependent and interactive in this manner. But a range of factors prevent the market-price mechanism from adequately fulfilling its role and have led to recurrent imbalances between supply and demand in commodity markets.
Let aside the short-term, sometimes spectacular price movements, price-series over three or four decades show more or less amplified waves over several years, reflecting the succession of phases of abundance and shortage (disturbances) in the supply of the commodity (Calabre, 1995). Thus, in the last decade (commodity crisis of the 1980), the markets for a number of commodities have suffered a prolonged situation of depressed prices with supply exceeding demand for much longer than past cycles. Commodity markets can therefore be characterised by the existence of "structural oversupply". The following factors determine production levels and world supply:
Thus, fundamental human, social and political as well as environmental aspects of commodity activities are at the root of rigidities in their supply. This tends to make commodity supply inelastic vis-à-vis falls in prices, or even to respond perversely.
Political factors also influence the demand on agricultural commodity markets. Demand for raw materials seems to be exogenous and determined by the economic development in the main consuming countries, i.e. industrialised countries. The evolution of world demand for agricultural commodities in response to price developments seems to be delayed and variations in consumption can increase the volatility of commodity prices. Over a longer period of time, world consumption of most of the commodities has increased although at a slower pace since the 1970s. World demand has been influenced by technological changes through substitution processes of traditional raw materials. Large speculations on commodity markets make it difficult for suppliers to estimate the real development of world demand and they destabilise prices.
For food and beverages, unanticipated weather disturbances and their effects on commodity supplies are reflected in notoriously volatile prices.
Although accumulated stocks tend to smooth variations in prices, there may still be considerable volatility, especially when stocks run short or accumulated stocks can no longer be financed and are released all at once on unsuspecting markets.
Primary commodity prices are determined in flexible "auction-type" markets which respond more readily to macroeconomic events and expectations. Large speculative funds flowing in and out of the main terminal markets, as for example coffee, cocoa, sugar, increasing price instability.
Since the early 1980s, the dominant feature of the international commodity markets has been a sharp downtrend in prices (often compared to the Great Depression of the 1930s), though short-term instability has also remained excessively high for many commodities (Maizels, 1994).
Agricultural commodity markets with structural oversupply are highly competitive, given the relatively high degree of product homogeneity of primary commodity exporters and the difficulties to diversify their export base. Individual producers have negligible market power. Only where a single country has a high proportion of total world supply of an agricultural commodity can it create market power. The so-called "adding-up problem" where the expansion in exports of a commodity by a country lowers the world price so as to reduce net revenues is pronounced only for coffee, cocoa and tea. An appropriate policy response for commodity producers to this phenomenon, is to improve efficiency in production, processing and marketing.
In the absence of any mechanism to regulate world production, supply and/or prices, the market mechanism and competition between producers and consumers would lead to the phenomenon of "overreaction", including a cycle of successive overproduction and shortage (Calabre, 1995). The overreaction of the market would be the result of the delayed reaction of both sides, production and consumption in response to price developments - as described above. This free competition would imply a constant redistribution of market shares. Less competitive producers would be marginalised and finally disappear from the market, losing opportunities for foreign exchange earnings.
Developing countries as commodity producers and exporters have hardly any instruments at their disposal to hedge against the adverse effects of instability of export earnings.
Managing commodity price risk and stabilising export earnings are still important policy issues for virtually all low income commodity exporters.
Constantly deteriorating terms of trade for primary commodities during the 1980s have led to massive losses of export earnings for developing countries. The loss had risen from annual averages of some $5 billion during 1981-85 to $34 billion in 1986-88, and to $54 billion in 1989-91.
For the whole period (1980-91), the annual average terms of trade loss was equivalent to nearly 25% of the value of commodity exports in 1980; by 1989-91, the corresponding relative loss had doubled (Maizels, 1994).
The highly commodity-dependent countries, particularly the least-developed countries of Africa and the Pacific island region, experienced the largest incidence of shortfalls relative to their export earnings (UNCTAD, 1993).
But even in times of booms, most developing countries have not been able to take full advantage. Any boom in commodity prices also increases government revenues. Then, governments were often tempted to make long-term spending commitments based on what turns out to be short-term price rises. Thus, booms were often mismanaged and when prices fell, these economies were left in worse shape than before. Moreover, increasing foreign exchange earnings in times of higher commodity prices, can lead to an excessive appreciation of the real exchange rate. This could make some tradable sectors less competitive in global markets and, ultimately, lead to a decline in domestic production in other, non-booming sectors. This is sometimes known as "Dutch disease" (Varangis, et al., 1995). Thus, mis-management of commodity booms results in lost opportunities and reduces economic welfare.
Among the most important effects of variability of export earnings at the macroeconomic level are:
At the microeconomic level, unstable earnings strongly impacts farmers and producers and increases their risk aversion. Cash crop producers are tempted to neglect obviously non-profitable crops. In the case of sharp income drops, farmers cannot buy the necessary fertilizers or new seedlings with all consequences for quality and competitiveness if activities are resumed later. Unstable earnings might thus discourage farmers from producing for export and can lead to a future fall in export earnings and GNP. Cash crop producers who suffer from earning shortfalls will also cut back their consumption, which affects the basis of public finances. The persistence of abnormally depressed prices during the 1980s has also resulted in a sharp reduction in the living standards of developing countries. Thus export-earning instability has to be considered as a development problem because it dampens the growth rate, particularly as a result of its negative effect on productivity of capital.
Earnings
To mitigate the above-mentioned negative effects of export earning fluctuations, stabilisation measures will focus upon the following aggregates:
Stabilisation measures can be realised internally by governments, using domestic stabilisation schemes or externally by the international community, using different instruments with or without market intervention.
Domestic stabilisation schemes easily become hidden subsidies, are expensive to administer and can create heavy demands on government budgets. Instruments to stabilise income of individual smallholders include variable export taxation or the institution of stabilisation funds (single or multi-product marketing boards, "caisse de stabilisation"). National marketing organisations have been used in many developing countries (particularly in Africa). Protecting producers from price volatility in world markets was considered a desired social objective. Such a policy may, however, have weakened the link between supply and world price signals, reducing the risks associated with price fluctuations, and thereby contributing to oversupply.
Until now, the performance of internationally coordinated schemes is rather disappointing. Taking into account the two sources of instability - export volume or price instability - different policies should be used.
Concerning instability of export volumes, a strategy aiming at export diversification in general and measures to stabilise supply of agricultural products by using agronomic research and new technologies would be the most appropriate. With regard to price fluctuations of commodities, price stabilisation policies seem to be more suitable.
The most common instrument of market intervention are International Commodity Agreements (ICAs) using buffer stocks and export quotas, as they existed for coffee, cocoa, tin natural rubber and sugar. Most of these Agreements have been abolished, leaving behind a rugged market and depressed prices. Along with the problem of lack of resources, most of the ICAs simply tried to keep the prices high instead of focusing more at the stabilisation of the price around its actual trend. Moreover, diverging interests of members with different production costs, market shares, consumption preferences, funding capabilities, and reliance on revenues from the commodity in question made it difficult to agree on export quotas and control. In addition, buffer stock stabilisation is an expensive instrument. If the fall in prices is due to structural causes, no fund, however substantial, could avert the breakdown of an instrument created to absorb and store products that will never be sold at a profit (Fusco, 1988). Meanwhile the international climate has turned against this form of market intervention.
Another way to influence commodity-producing countries’ export earnings is a preferential system of limited geographical scope or a non-market institutional system with purchase and price guarantee, such as the Commonwealth Sugar Agreement.
The fourth option to offset the adverse effects of export earnings instability is a compensation scheme without market intervention which works worldwide or in a regional context. It can act as short-term or long-term financing, It can compensate automatically or conditionally. Compensation can be made for shortfalls in total export earnings or for specific (primary) commodities considered separately.
According to these principles, several schemes are in operation; the Compensatory Financing Facility of the IMF, which compensates export earnings’ shortfalls of IMF member countries facing problems of their balance of payments. Its importance for developing countries is steadily decreasing due to growing conditionally since the 1980s. Stabex is the most important institution working according to these rules as an "ex-post insurance system". Furthermore, a Swiss compensatory finance system and Sysmin belong to this scheme.
New forms of market-based risk management instruments seem to offer an alternative to traditional stabilisation schemes. Commodity swaps and commodity-linked debt can accommodate the hedging needs of most commodity exporting countries. In addition, forward futures contract and options can provide risk protection tailored to each country and its producers or consumers. However, the use of these instruments among developing country governments and traders is not yet widespread or is still in the stage of trial and evaluation, because of lack of familiarity, restrictive domestic regulations and lack of international creditworthiness.
At the same time it appears unlikely that developing countries' primary producers, especially smallholders, that account for the bulk of agricultural commodity production, can stabilise their own revenues by using these new instruments of risk management. This throws the stabilisation question back to the governments of producing countries.
Stabex - the compensatory finance scheme to stabilise export earnings - started operations in 1975 with the entry into force of the first Lomé Convention between the European Community and the ACP countries. Stabex was a genuine innovation of the EC and seemed to offer an answer on the vehemently discussed questions of primary commodities on the international scene in the early 1970s. Moreover, it was designed to act as part of a comprehensive international commodity policy, based essentially on good functioning ICAs.
The system is designed to smooth the negative effects of export earning shortfalls and its expressed objectives remain unchanged since the beginning. "With the aim of remedying the harmful effects of the instability of export earnings and to help the ACP States overcome one of the main obstacles to the stability, profitability and sustained growth of their economies, to support their development efforts and to enable them in this way to ensure economic and social progress for their peoples by helping to safeguard their purchasing power, a system shall be operated to guarantee the stabilisation of export earnings derived from the ACP States’ exports to the Community or other destinations ... of products on which their economies are dependent and which are affected by fluctuations in price or quantities or both these factors." (Article 186 (1) of Lomé IV)
The shortfall of export earnings on which a transfer is made, is based is the gross sum of the shortfalls in the individual exports of different agricultural products (commodity by commodity) - now counting 50 products and product groups. In addition to the constant increase in products covered by the system and the widening of the geographical scope, the EC and the ACP agreed to a number of changes. These included the compensation conditions over the years - thus lowering the dependency threshold, abolishing the trigger threshold under Lomé IV, changing the reference level and introducing an excess clause under Lomé IV. Other provisions dealing with the derogation clause, exchange rate and the statistical cooperation were also altered.
The financial endowment of the system has increased considerably over time. In addition, under Lomé IV the principle of replenishment of transfers, of which only the least-developed, landlocked and island countries have been exempted hitherto, was finally abolished. All transfers out of Stabex henceforth took the form of grants. For the period covered by the first financial protocol of the fourth Lomé Convention, Stabex was allocated 1,5 billion ECU’s, for the second financial protocol, 1,8 billion ECU’s.
Under the first Lomé Convention, the system worked smoothly. But since the 1980s, insufficient resources became a serious problem: In 1980, 1981, 1987 - 1989 the system ran out of resources and Stabex was unable to meet eligible claims. With the persistence of low world market prices for coffee, cocoa, oil seeds, cotton and tea throughout the early 1990s, the financial crisis of Stabex continued. During the application years 1990, 1991 and 1992 only 40% and in 1993 60% of eligible transfer claims could be covered.
Prior to Lomé IV, the Stabex system had very low conditionalities concerning the use of funds. Nevertheless, soft conditionalities were gradually introduced. Lomé I required a report to the Commission on the use of funds. Lomé II required a proposal on the intended use and a report on the actual use of funds. Under Lomé III, reports on the use of funds had to be sent within twelve months of signing of the transfer agreement.
Lomé IV has made substantial changes: all transfers had to be used in accordance with a "framework of mutual obligations" (FMO) established by the ACP state and the Commission following the provisions of articles 186 and 209.
Transfers shall be devoted, in accordance with a FMO, "either to the sector, interpreted in the widest possible sense, that recorded the loss of export earnings and be used there for the benefit of economic operators adversely affected by this loss, or, where appropriate, to diversification, either for use in other appropriate productive sectors in principle agricultural, or for the processing of agricultural products." (Article 186.2 of the fourth ACP-EEC Convention)
The preference given to use Stabex funds in the sector recording the loss is based on the idea that a loss of export earnings of a certain product only reflects deeper structural problems of the sector. Thus, the objective of the intervention of Stabex funds is to:
This hierarchy of objectives of Stabex interventions does not necessarily exclude the use of Stabex funds with the aim of product diversification.
Based on the idea that Stabex transfers "replace" money that, had the market been working perfectly, would have been paid to the producers, any different allocation of that money would deprive producers of their salaries. Hence, the Stabex money should not be used as a contribution to the balance of payments (even if the money is accounted to the BOP), nor should the transfers support the foreign exchange reserves of Central Banks nor should the transfers be considered as an undifferentiated budgetary support or as a remedy to indebtedness (European Commission, 1996a).
The first criticism is that Stabex has a limited scope and does not cover all products expected by the ACP. By definition, it excludes minerals, products covered by the Common Agricultural Policy as well as processed and manufactured goods, with some exceptions such as certain oils, cocoa and coffee products, leather, cotton linters and sawn wood. Stabex could encourage excessive export of products covered by the system and could therefore lead to trade distortion.
To some extent, Stabex provides few incentives to vertical or horizontal diversification, although a use of funds for diversification is not excluded. But "the scheme remains, however, much more strongly linked to individual agricultural products in its triggering function than it does once the financial transfer has been made" (Hewitt, 1987). Because Stabex has failed to support the diversification efforts of ACP countries, there is pressure to abolish the system. But there are far more important barriers of entry into processing and diversification, not to forget the time horizon. "It is too much to suggest that the mere availability of Stabex transfers dissuades ACP States from diversifying their economic structure and switching to processing their commodities for export. The financial importance of Stabex is too modest for this, though it could have this effect at the margin." (Hewitt, 1987). Under Lomé I, II and III, three products, namely coffee, groundnuts and groundnut products and cocoa received 60% of all Stabex transfers.
Second, looking at the country distribution of transfers under Lomé I, II and III, a few countries benefited over-proportionally from transfers: Côte d’Ivoire received 18.8%; Senegal 10.4% and Cameroon 9.2% of all Stabex funds. This bias was exacerbated by maintaining the dependency threshold. The pattern with cocoa and coffee, which swallowed most Stabex funds (90% in 1990), changed slightly when large Stabex transfers were made for bananas to Caribbean States during the first five years of Lomé IV.
Third, the lack of resources has always given adequate reason for discussion. The persistent funding difficulties during the 1980s and early 1990s as well as the changes made to the methods of claiming and determining transfers, have made Stabex less automatic and quick disbursing.
Fourth, Stabex does not stabilise terms of trade. The system cannot claim to provide compensation to achieve full coverage of import requirements, and certainly not in real terms. Transfers are not adjusted for inflation nor for any changes in import cost levels (Hewitt, 1987).
Any evaluation of positive and negative features of Stabex must be based on the assumption that Stabex is a partial scheme with the EU as the only donor and that it can solve only part of the problems that exist worldwide. The system must be evaluated against the background that Stabex is an instrument designed to work together with other instruments and means (especially functioning ICAs) of a comprehensive international commodity policy. Stabex is, by definition, not a stabilising policy. Thus, many of the shortcomings of the Stabex system arose on account of the absence of a complementary world scheme rather than from its inherent deficiencies.
The efficiency of Stabex as an instrument for stabilisation, redistribution and allocation has been examined by Herrmann for 48 countries which received payments from 1975 up to 1987 (Herrmann, 1990). He found out that the overall impact of the Stabex system on export earnings instability of ACP countries was weak. Not a single stabilisation effect was larger than 10%. On the contrary, Stabex payments destabilised export earnings in all four countries who received the highest transfers: Côte d’Ivoire, Senegal, Sudan and Papua New Guinea (Herrmann, 1990).
The reason behind this weak stabilisation performance is that compensation is made after a delay of 12 months to 4 years following the year of shortfall. In this case, stabilisation effects are coincidental, as they depend on the level of export earnings in the year(s) following the earnings shortfall. Stabex thus becomes an imperfect counter-cyclical instrument. Furthermore, as Stabex calculates earning shortfalls on a gross sum of each commodity, which need not be correlated positively with national export earnings shortfalls, destabilising effects on national export earnings may occur when losses of one commodity are overcompensated by booming exports of other products.
On the other hand, in years with declining world market prices Stabex funds proved to be too low to stabilise export earnings effectively (Herrmann, 1990). There might, however, be some stabilising indirect effects to the extent that compensation payments under Stabex become predictable for the user countries and for the banking sector. The willingness of the banking sector to give short-term credits to potential Stabex users could increase. In such cases, optimal adjustments by the users, including debt-management, could lead to export earnings stabilisation even if the direct effects of Stabex are destabilising. This indirect and uncertainty-reducing effect of Stabex might lead to a significantly more positive evaluation of Stabex from the stabilisation point of view (Herrmann, 1990).
With regard to the redistributive impacts of Stabex, Herrmann also found a poor performance of the system. According to his analysis, per-capita stabilisation payments are not allocated to ACP countries according to need. The highest Stabex transfers did not go to those countries with the lowest per capita income. The openness and the export structure, however, are crucial for the distribution of Stabex payments across ACP countries (Herrmann, 1990).
Concerning the impact of Stabex on resource allocation, Herrmann states that it is possible that Stabex induces allocation effects due to its specific provisions. From the reports of ACP countries on the use of Stabex funds, there is evidence that payments have gone to national stabilisation funds or marketing boards (Lomé I, II and III). These marketing boards could pay the producers higher prices than in a non-Stabex situation, if the Stabex payments were given to the sector that recorded the loss. That was, however, not always the case. Producer prices would then contain a grant equivalent: world market prices plus Stabex grants.
The evaluation from the beneficiary country’s point of view is much more positive due to the grant elements (under Lomé I, II and III), and grant nature (Lomé IV) of funds which induces a welfare gain for the individual ACP country (Herrmann, 1990). When ACP governments were not tied to specific purposes, Stabex transfers were welcomed as a contribution to government budgets to reduce deficits and to support the balance of payments.
Stabex resources often constituted a very substantial supplement if compared to the total amount of export earnings of the beneficiary states. Stabex payments for cocoa to Sao Tomé and Principe made up 48% of the total export earnings of that country in 1991. Iin Uganda, the transfer for coffee was in a range of 26% of total export earnings in the same year (European Commission, 1993).
Stabex funds become even more important if the transfer for a product is compared to the export earnings deriving from that product. The transfer for leather, hides and skins for Burkina Faso is in a range of 41% of total proceeds from that product in 1991, the transfer for copra products for Tonga 71%, the transfer for copra products for Western Samoa 365,8% (European Commission, 1993).
Lomé IV introduced the FMO to define, ex ante, the use of each transfer for each application. The growing conditionality concerning the use of Stabex funds, in particular, the objective to deal with possible structural causes which lay behind the earnings shortfall in the sector (which is rather an objective of a long-term strategy by using funds out the National Indicative Programmes) seem to have deprived the system of its automatic character. But its automatic functioning was a precondition for quick disbursement and thus its counter-cyclical stabilising function.
A study (Kairi Consultants Ltd., 1994) undertaken by the ACP Secretariat found that the time between the signing of the transfer agreements and the completion of negotiations on the FMO (when the first tranche is released) has been steadily increasing since the 1990 application year. The average time has risen from 188 days in 1990 to 344 days in the 1991 application year, with more than 600 days for the Central African Republic, more than 660 days for Rwanda and Kenya, and more than 540 days for Burundi, Tanzania and Comoros.
The study concludes that delays of this length and the objectives to deal comprehensively with declining production or diversification have turned Stabex into an instrument of sector adjustment lending. In such circumstances, Stabex cannot be said to be quick-disbursing. Recommendations of the study included making clear distinctions between a FMO that just has to be designed to preserve cash flow to farmers in situations of adverse export earnings, with no conditions, and one that involves a clear long-term decline in production that requires structural change and where some conditionality is acceptable (Kairi Consultants Ltd., 1994).
With regard to the new provisions on FMOs under Lomé IV, it is interesting to look at the actual use of Stabex transfers. For the application year 1990 for example, 13.7% of all Stabex funds were used for general import programmes, 32.3% for sectoral import programs, 28.2% went into internal debt relief measures, 10% were spent for the stabilisation of prices of agricultural products, and 7.8% were spent on projects (European Court of Auditors, 1995).
Compensation payments to farmers with Stabex money were particularly successful in Tanzania in 1993 out of the transfer for the 1990 application year by using counterpart funds, and in 1994 out of the 1991 application year. Papua New Guinea has used Stabex transfers for 1990 and 1991 application year to stabilise and to support prices of producers. This turned out to be successful because export production of coffee, cocoa , copra and palm oil increased in 1992-93.
Concerning the 1991 application year, funds concentrated more on restructuring activities in the relevant sectors or in other sectors facing difficulties (Burkina Faso). Cameroon received large transfers for cocoa and coffee and funds were to be used to support the recovery plan for the industries, including support for the restructuring of cooperatives, financing of a rural credit scheme, research activities etc. Côte d’Ivoire agreed in its FMO to use transfers for coffee and wood from 1991 to improve the production and marketing of cocoa and coffee by restructuring the "caisse de stabilisation", to improve the living conditions of producers affected by falling export revenues, to restructure the forestry industry and to support diversification. Out of the large transfers that Ethiopia received for coffee and hides and skins for 1991, 70% were allocated to export development programmes while the rest would pay for farm inputs by sectoral import programs. In Kenya, Stabex transfers financed a fertilizer import program, while the counterpart funds went to finance a quick-disbursing program in the coffee sector (European Commission, 1994).
More or less the same pattern concerning the use of funds appears for the application years 1992 and 1993. Activities to restructure the sectors in difficulties, support for structural adjustment programs, infrastructure projects, marketing activities, restructuring of marketing boards, etc. (European Commission, 1995).
Yet, it is too early to see concrete results with regard to the structural performance of the sectors, quality improvements, increased exports and growing market shares for ACP countries after this reorientation of Stabex. But evaluations of compensation payments to farmers, for example, demonstrate that these Stabex payments helped to restore farmers confidence in the export crop and export production. Indeed, farmers used the money in a very sensible way: for investments in the farm (seedlings, fertilizers, etc.), consumption and education of their children, etc.
Instability of export earnings - caused by volume or price instability of exports - is still one of the main obstacles facing developing countries. Governments have then to cope with serious disruptions in the investment planning process, problems of balance of payments, import strangulation and budgetary problems. In the context of structural adjustment programmes, joint expenditure reviews of all donors might help to mitigate some of the negative effects of variability of export earnings at the macroeconomic level, including better management of booms.
But at the microeconomic level, farmers’ exposure to instability of their earnings has often more direct and more disastrous effects and can result in their ruination. In fact, after liberalisation of their agricultural sector and commodity marketing, most of the domestic stabilisation funds and marketing boards have disappeared and farmers are no longer cushioned against the often large fluctuations of world market prices.
Fluctuations in commodity prices have a very important impact on the welfare of a very large number of people, since most agricultural export crops are produced by smallholders and are often the major source of employment, in particular for women.
In the medium and long term, the best solution for problems of unstable export earnings is of course diversification. But diversification away from the production of commodities in chronic oversupply takes time and needs adequate financial support.
In addition, the market structure of most agricultural commodities does not hold many prospects for creating processing industries in developing countries because processing capacity is in the hands of multinationals. Other barriers of entry are erected, including escalating tariffs on processed goods and non-tariff barriers, such as technical, sanitary and phytosanitary standards, environmental and social regulations, etc. Nonetheless, it is necessary to support efforts by developing countries to create their own processing industries and to ensure their access to markets where their commodities are consumed.
However, horizontal diversification has also its limitations on the macro- as well as microeconomic level. Terms of trade of almost all primary commodities are deteriorating and horizontal diversification leads to competition among manufacturers from other countries. Thus, overproduction can increase even more and causes downward pressure on prices (Ministry of Agriculture, Nature Management and Fisheries, 1994).
Besides diversification, an appropriate policy mix is necessary to intervene in imperfectly working commodity markets and to tackle the problems of unstable export earnings. Nothing speaks against a parallel use of supply management schemes (a new type of International Commodity Agreement which respects the trend of world prices and gives the right signals to producers), improved technology to reduce fluctuation in production and comprehensive information flows to make speculations more stabilising, encouragement to producers to participate in future markets as well as extension and improvement of compensatory financing.
But the use of financial instruments to reduce market risks of exporting commodities from developing countries must be expected to grow rather slowly over the coming decades. Consequently, the existence of futures and derivatives should not be used as an argument against the negotiation of new international commodity stabilisation agreements or a system of international buffer stocks covering all the main traded commodities which would act as a substantial stabilising element in the international economic system (Maizels, 1994).
While the outcome of negotiations of new international agreements is also very weak and the whole range of instruments for a comprehensive international commodity policy is still to be developed, short-term compensatory financing mechanisms should continue to assist countries with export earnings shortfalls when required (UNCTAD, 1993).
Since the number of developing countries drawing on the CFF of the IMF has decreased steadily since the 1980s, developing countries are even more dependent on a guarantee of compensation for earning shortfalls out of Stabex.
The Stabex system is a defensible instrument even in terms of a market economy and is indispensable for poor countries reliant on primary resources. Disputes over Stabex appear to be an expression of a deeper crisis of confidence that persists between the EU and the ACP States. Accordingly, a solution will be found only when this crisis of confidence has been settled (Lingnau, 1996).
During more than 20 years of its functioning, the system has been refined considerably though its original function as an automatically-triggered, quick-disbursing instrument had to be maintained. Stabex has always proven its ability to adapt to changing circumstances.
Its objectives might have been too ambitious, which became obvious when the system ran out of resources during the commodity crises, and certainly Stabex can offer only a partial solution to the problems of unstable export earnings. But it is the best solution available at the moment, in particular with regard to the rather gloomy perspectives for a comprehensive approach at the international level. It was thought that many of the shortcomings of Stabex could be overcome by developing it into a world scheme, at least for commodities (Hewitt, 1987), but the present climate is not very much in favor of a globalisation of Stabex.
Its current mechanisms are obviously inadequate to cope with the problems arising from long-term structural imbalance (oversupply) in the world markets of the major commodity exports of ACP countries. This is particularly the case for coffee and cocoa. In this respect, consideration needs to be given to adapting its mechanisms to better meet the needs of beneficiary countries.
Stabex should return to its original design, namely, a quick-disbursing instrument to mitigate the adverse effects of instability of export earnings, in particular at the microeconomic level.
Mechanisms have to be found that ensure a better targeting of funds to the beneficiaries by avoiding leakage into the government budgets or into inefficient parastatal institutions.
Basically there are three main options for Stabex: Maintain the substance of the current system, with some reforms; substantially change the system and substituting it; and phase it out.
The coverage of a future Stabex system depends on the outcome of negotiations on post-Lomé cooperation. The maintenance of the system might require its extension to cover at least all other least-developed countries currently not belonging to the ACP group. But this decision would require a substantial rise in the financial endowment of the system.
Reform proposals thus focus on the triggering mechanisms and financial aspects. The system’s automatic triggering mechanism, based on the calculation of earning shortfall commodity-by-commodity and its grant character should be changed into a compensatory credit line (revolving fund) to stabilise net commodity export earnings or net total export earnings. To increase stabilisation efficiency, developing countries experiencing surpluses have to repay their transfers with interest and at regular intervals, thus replenishing the fund. Transfers would be established on the basis of total export earnings shortfalls in commodities, according to a formula, using a five-year average of three past and two projected future years earnings as the reference level.
Such a self-replenishing stabilisation fund in which all parties, including claimants, have responsibilities, would of course be much smaller and less costly (Hewitt, 1987; BMZ, 1997).
The decrease in the number of claims on Stabex and the possible solution of the financial problem would not, however, contribute to a structural improvement of the export position of the ACP countries. Moreover, by making payments conditional on the total export earnings, Stabex will lose its character of a stabilising mechanism for commodity-export earnings and would move even closer in the direction of a general support of the balance of payments (Ministry of Agriculture, Nature Management and Fisheries, 1994). Individual countries would thus be obliged to offset a shortfall in earnings from one export sector by increasing exports of another product. A diversified export basis is in this case a sine qua non but rarely met especially in the poorest (non oil-exporting) ACP countries. In addition, the negative effects of unstable export earnings on the microeconomic level, e.g. instability of farmers’ income, would thus be not addressed.
Other reform proposals focus on the use of the funds and how to deal with structural problems of export sectors. Certainly, Stabex funds can be very useful to strengthen the export position of the ACP countries by using money to improve the quality of their production, marketing and for capacity building at the human and institutional level.
Thus one recommendation is to use part of the Stabex money to support diversification (horizontal and vertical) activities of ACP countries and to give ACP countries the opportunity to organise their own marketing facilities in the EU and other countries. The European partners should back this strategy by guaranteeing better market access to a certain degree, such as by relaxing the rules of origin and approving preferential treatment of ACP exports to the EU, and introducing a quality mark (Ministry of Agriculture, Nature Management and Fisheries, 1994; Liaison Committee, 1997).
Furthermore, where countries are implementing structural adjustment programs, Stabex and the structural adjustment facility should complement each other to gain synergy effects (see also European Commission, 1996: 9).
Reform proposals are also made to speed up disbursement procedures of Stabex and thus to increase the stabilising impact of the system. Procedures have to be simplified, they have to be more precise and transparent. Such an exercise should establish an operational classification of situations with a special FMO tailored to each situation requiring transfer. It should establish a framework for implementation that relates to the use of funds, types of acceptable conditionalities, coordination with other donors and links with other aid instruments (Kairi Consultants Limited, 1994).
This option is based on the idea that stabilisation has to be done on a structural level and that particular attention has to be paid to producers and their risk exposure. Its intention is to make Stabex a quick-disbursing instrument again, giving short-term compensation for instability of export earnings and working as an insurance scheme where both parties have their obligations. The review of the use of Stabex funds under Lomé I, II and III shows that a simple support of agricultural projects or agricultural policy with Stabex money in insufficient to direct funds to cash crop producers. Therefore, mechanisms have to be found which allow a better targeting of funds to the producers.
In order to come back to its initial objectives and to ensure the right utilisation of funds, Stabex money can be used to set up a "guarantee fund" (European Commission, 1995a). This will ensure the financial liquidity of the sector by: allowing purchasers to pre-finance the producers, financing credit lines for the purchase of inputs, the realisation of diversification operations and guaranteeing producers a stable minimum income.
An important precondition is to restructure marketing boards of domestic stabilisation funds such as "caisse de stabilisation" which had serious drawbacks because the funds they accumulated when prices were high were used to finance public spending and so were not available to finance subsidies when prices were low (Guillaumont and Guillaumont, 1990). Most of these marketing boards have thus mismanaged resources and were highly indebted when they eventually broke down. Farmers have lost confidence in this kind of organisation.
One of the main problems is thus the right targeting of funds to the producers by avoiding leakage into the government budget and mismanagement by parastatal institutions. The stabilisation of a guarantee fund has therefore to be de-linked from the public treasury. At the same time, provisions for directing the funds must allow sufficient control of efficient use of resources by the European side.
Another reason for the need of a better targeting of Stabex money is connected to the "Dutch disease" effects of large transfers of Stabex funds, e.g. their effect on the relative prices on the detriment of real revenues of agricultural producers.
This option furthermore offers the possibility to leave it up to the cooperation partners to choose "à la carte" among different mechanisms for the utilization of Stabex money which could be agreed ex-ante and controlled to a different extent ex-post. Stabex funds could thus be disbursed quickly to support domestic stabilisation schemes on the basis of new marketing boards or "caisse de stabilisation", farmers associations and cooperatives, cooperative banks or rural credit institutes. The aim would be to stabilise producer prices or to give producers the means to shield themselves better from price risks or earning risks by providing them access options contracts, for example.
At the same time, governments need assistance to tackle the problems of unstable export earnings in their budgets without burdening the export sector with high taxes.
Based on the argument that the system has become a simple hidden, product-based financial transfer and that compensation of export earnings shortfalls actually belongs to the CFF of the IMF, it is thought that the objectives could be better attained through conditional financial aid (topping up National Indicative Programs for example) which is not product-related. The resources which remain after the phasing out of Stabex could be used to increase the structural adjustment facility, to compensate at least partially for balance of payments problems caused by structural adjustment programs or instability of export earnings.
Although the argumentation for this option indirectly admits that unstable export earnings are a major development problem for commodity producers (European Commission, 1996), it reduces the negative effects to the macroeconomic level (BOP) only. Clearly, structural problems of the export sector, in particular, and the economy as a whole must be tackled by structural adjustment on a longer time horizon. However, this does not exclude complementarity with a counter-cyclical, quick-disbursing instrument of compensatory finance to even out instability of export earnings. The negative effects of variable export earnings at the microeconomic level will no longer be addressed if this option was realised.
Despite a number of shortcomings of the system - in particular its partial coverage, the insufficiency of resources and the sometimes important delays in disbursement - Stabex has nevertheless proven its value for the beneficiary countries as a whole and the farmers as cash crop producers in particular. Even under very unfavorable conditions of imperfectly working commodity markets and in the absence of complementary instruments on the international level, Stabex has helped the ACP countries and their populations by paying (at least partial) compensation for losses of export earnings. The system has been regarded as exemplary for North-South cooperation and has proven that can adapt its mechanisms to changing conditions.
Stabex has to be maintained because it is the only instrument guaranteeing compensatory financing under relatively low conditionalities and addressing all adverse effects of instability of export earnings - on the macro- as well as microeconomic level. In the absence of a comprehensive international commodity policy, Stabex offers the best solution for developing countries facing instability of foreign exchange earnings at the present time and for the foreseeable future. Mechanisms have to be found which guarantee that the system can better meet its goals and objectives. The best solution would thus be to develop the system into a "guarantee fund" (option 2).
BMZ. 1997. Perspektiven der EU-AKP-Entwicklungszusammenarbeit nach dem Jahr 2000. Stellungnahme des Wissenschaftlichen Beirats beim Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung. Bonn: BMZ.
Calabre, S. 1995. Matières premières. Marchés mondiaux, déséquilibres, organisation. Paris: Ed. Economica.
European Commission. 1993. Report from the Commission to the Council on the operation in 1992 of the export earnings stabilisation system under the fourth Lomé Convention. SEC (93) 845 def., 4.6.1993. Brussels.
European Commission. 1994. Report from the Commission to the Council on the operation in 1993 of the export earnings stabilisation system under the fourth Lomé Convention. SEC (94) 1636 final. Brussels.
European Commission. 1995. Report from the Commission on the operation in 1994 of the export earnings stabilisation system under the fourth Lomé Convention. COM(95) 501 final. Brussels.
European Commission. 1995a. Terms of Reference for "guarantee fund" study. Brussels: European Commission.
European Commission. 1996. Green Paper on relations between the European Union and the ACP countries on the eve of the 21st century. Brussels: European Commission.
European Commission. 1996a. Note for the utilization of Stabex resources on occasion of the information seminars on Stabex. Brussels: European Commission.
European Court of Auditors. 1995. Special Report No. 2/95. Luxembourg: Court of Auditors.
Fusco, N. 1988. Primary Commodities, Price Stabilisation Agreements and Compensatory Financing. Journal of Regional Policy 8(4): 607-624.
Gilbert, C.L. 1996. International Commodity Agreements: An Obituary Notice. World Development 24(1): 1-19.
Guillaumont, P. and S. Guillaumont. 1990. Why and How to Stabilise Producer Prices for Export Crops in Developing Countries. UNDP-World Bank Trade Expansion Program Occasional Paper 6. Washington DC: World Bank.
Herrmann, R. 1990. Economic effects of financial stabilisation schemes in EC’s development policy: Stabex, Compex and Sysmin. Agrarökonomische Diskussionsbeiträge, Universität Giessen.
Hewitt, A.P. 1987. Stabex and Commodity Export Compensation Schemes: Prospects for Globalization. World Development 15(5): 617-631.
Kairi Consultants Limited. 1994. Stabex: Implications of the bottlenecks and delays of the framework of mutual obligations on ACP States. Tunapuna, Rep. of Trinidad and Tobago.
Liaison Committee of Development NGOs to the European Union. 1997. Au-delà de Lomé IV. L’avenir des relations entre l’UE et les pays ACP. Document de discussion des ONG. Bruxelles: Comite de Liaison.
Lingnau, H. 1996. Perspectives of the Lomé Cooperation. Berlin: Deutsches Institut für Entwicklungspolitik.
Maizels, A. 1994. The continuing commodity crisis of developing countries. World Development 22(11): 1685-1695.
Ministry of Agriculture, Nature Management and Fisheries. 1994. Stabex in motion. The Hague: Ministry of Agriculture, Nature Management and Fisheries.
Stabex Beneficiaries’ Handbook. Fourth ACP-EC Convention of Lomé, Second Financial Protocol, October 1995.
UNCTAD. 1993. Compensatory Financing Mechanisms. Review of developments in the field of compensatory financing of export earnings shortfalls. GE. 93-53460. Geneva: UNCTAD.
Varangis, P., T. Akiyama and D. Mitchell. 1995. Managing commodity booms - and busts. Washington DC: World Bank.
World Bank. 1991. Global Economic Prospects and the Developing Countries. Washington DC: World Bank.