THE BLUE BOOK ON COTTON BON by variablepitch339

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									International Trade Negotiations and Poverty Reduction:

The White Paper on Cotton

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International Trade Negotiations and Poverty Reduction:

The White Paper on Cotton
PREFACE by His Excellency The President of the Republic of Mali Amadou Toumani TOURE

EDITED by Eric HAZARD Enda Prospectives Dialogues Politiques

Occasional Papers, n° 249 enda editions, Dakar, 2005

Enda Prospectives Dialogues Politiques Rue 15x Corniche, Immeuble El Hadj Elimane NDOUR PO Box 7329 Dakar – Soumbedioune Senegal Tel: +221 823 53 47. Fax: +221 823 67 13 E-mail: diapol@enda.sn

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Acknowledgements
This publication is the fruit of a collective effort. Many people have contributed to its production, and to them all we extend our heartfelt thanks. We would like to thank in particular His Excellency, the President of the Republic of Mali, Amadou Toumani TOURE for his invaluable support. Our gratitude also goes to all those who have assisted us over the past four years in this effort, particularly our partners who have supported this project and without whom this book could not have been produced: Oxfam America and the Department of Overseas Development and Cultural Activities of the French Embassy of Dakar. We also express our deep thanks to the African Cotton Association (ACA), the Association of African Cotton Producers (AProCA) and the International Centre for Trade and Sustainable Development (ICTSD) for their tireless commitment in time and effort, which has made this project possible. A special mention goes to Sally Baden, researcher and policy advisor on cotton for Oxfam International, who has shown deep commitment over a number of years and who has worked to create a close and productive partnership between our respective organisations. We also extend our acknowledgements to François TRAORE, whose integrity and vision have given us direction. Finally, we would like to express our appreciation to all our colleagues and partners who have read the papers and who have offered their constructive criticism at the different stages of this project, particularly Alexis ANOUAN, Romain BENICCHIO, El Hadji DIOUF, Bachir DIOP, Noma CAMARA, Jean-René CUZON, Gawain KRIPKE, Moussa MBAYE and Kimberly PFEIFER. This book is dedicated to all the producers, both in the South and the North, who are suffering as a result of agricultural subsidies and unfair trade.

ISBN 92 9130 058 2 ISSN 0850-8526 @enda tiers monde, Dakar, 2005 PO Box 3370 Dakar Senegal. Tel: +221 823 63 91/822 98 90 Fax: +221 823 51 57/822 26 95. E-mail: editions@enda.sn

Preface
His Excellency President of the Republic of Mali Mr Amadou Toumani TOURE

After Cancùn in September 2003, the world now has its sights fixed on Hong Kong, which will host the sixth World Trade Organisation (WTO) Ministerial Conference in December 2005. This meeting has been eagerly awaited by all African countries, but it has particular significance for those among them that are cotton producers. Cotton is by no means the only issue at stake in the agricultural sector in the Doha Round negotiations. But it must be recognised that, between Cancùn and Hong Kong, cotton has become the symbol of the African fight for fair and equitable trade, a fight that is supported by various international non-government organisations. A few years ago, cotton was a source of wealth for us. Now it has become a burden, and a factor in increasing poverty. This trend has become worse over the past few years, which have been marked by a major fall in global prices. Although a number of factors have led to this situation, agricultural subsidies are the main cause of market disruption, which has serious consequences for our economies. In addition to the macroeconomic impact of losses in government revenue, due to subsidies paid by developed countries to their producers, 15 million people in West and Central Africa, of whom over three million are farmers, depend directly on cotton for their livelihoods. These people are suffering the socio-economic costs. The current situation generates poverty in the rural areas of Africa, and particularly in the cotton-growing regions. This poverty in turn is causing an exodus of people from the rural areas. The paradox of the situation is that, while African cotton is the most competitive in the world, African farmers can no longer manage to survive by growing it. In a context marked by the double handicap of basic technology and a precarious climatic environment, African cotton farmers have risen to the challenge to produce in both quantity and quality, but this has been at a huge cost.

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The crisis in the cotton industry eloquently demonstrates that it is not enough for our countries to produce efficiently in order to hope for fair recompense for the efforts of our farmers. Rich country subsidies for production and exports deprive our States of the necessary resources to build schools and health centres, and add to the increasing poverty amongst the poorest of our people, especially in the rural areas. The Sectorial Initiative in Favour of Cotton, proposed at the WTO by African producer countries, aims to avert the threat that hangs over our cotton industries and our economies. Recourse to the WTO is in itself an expression of the trust our countries place in the regulation and dispute systems that govern international trade. The failure of negotiations in Cancùn came close to undermining our hopes, but the extraordinary mobilisation of certain of our partners, non-government organisations and civil society associations has meant that cotton has remained on the international agenda. I would like to salute all the men and women who, through their efforts and the strength of their lobbying, have succeeded in raising awareness of, and awakening consciences to, the injustice done to cotton and to African cotton farmers. All those involved today in the debate on cotton, and fair trade in general, are clearly in agreement on the analysis of the problems; we now simply need to have the courage to adopt the appropriate solutions. In Hong Kong, it will not be too late to do so….

Introduction
Eric HAZARD*

At the dawn of the 21st century and after more than a decade of reforms, often with high social costs, the cotton industries of West and Central Africa (WCA) have become the most competitive in the world,1 with production costs far below those of the cotton farmers of the United States of America, the world’s second largest producer of cotton and its primary exporter, and those of the European Union. In a rare agricultural and industrial success story, cotton exports from producing countries in West and Central Africa in 2001 represented 17 per cent of global exports. In an era of poverty eradication policies, the competitiveness of African cotton, and its high quality, provide a livelihood for between 10 and 15 million people in West and Central Africa and for close to 20 million in the 33 African cotton-producing countries. However, despite this success, the acknowledged comparative advantage enjoyed by African cotton farmers is no longer sufficient to compensate the fruits of their labour. The subsidy policies of Northern countries combine to depress international cotton prices, and the main consequence of this is a major deterioration in living conditions for African cotton farmers and their families. The subsidies paid by Northern countries risk excluding the most competitive producers from the global market, in favour of their American and, to a lesser degree, their European counterparts, who are not as competitive but who are highly subsidised. Though unaccustomed to moving in international circles or to the debates surrounding unfair trade policies, African farmers, in conjunction with industrialists, their governments, certain development partners and civil society organisations, have nevertheless brought their problem of survival to the arena where it counts most: that of international trade negotiations.

* Eric HAZARD is an agroeconomist by training and holds a doctorate in development economics. He is currently responsible for programmes on the sustainability of trade policies in West Africa on behalf of the Prospectives Dialogues Politiques team, part of the NGO Enda Tiers Monde.
1 In 2001, the WCA cotton industries were the most competitive in the world, with an average production

cost of around 42 cents per pound of cotton. Since then, because of financial problems following the decline in international prices, it has been difficult for these industries to renew industrial equipment, maintain rural roads and develop appropriate research. The price falls are thus beginning to undermine their international competitiveness, but it nevertheless remains greatly superior to those of the USA and the EU.

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In April 2003, four African countries, amongst the poorest on the planet, used the forum of the World Trade Organisation (WTO) in Geneva to seek a solution to the problem posed by the subsidy policies of Northern cotton-producing countries. Beyond all expectations, the ‘cotton case’ has become the focus of extensive media coverage and has garnered much support, to the point of becoming one of the leading topics of discussion at the Ministerial meeting in Cancùn. The WTO was faced with a textbook case of how globalisation can have damaging effects and of the difficulties faced by countries of the South in extracting any substantial gains from the process. The interest of Southern countries in continuing to pursue WTO negotiations, which have yet to yield positive results, is in large part dependent on the capacity, or otherwise, of the WTO to respond to the expectations of African cotton farmers. The future of millions of small family farms and jobs in rural areas throughout the African continent now rides on what for the uninitiated are the hostile and uncharted waters of the WTO negotiation process, which is characterised by arcane technical complexities as well as hard political bargaining. At each step of the way, there are new twists in the winding road to Geneva, sometimes creating diversions, sometimes shedding light on fundamental questions of interest, not only for the future of African cotton farmers, but also more generally of all farmers in the South and their governments. Despite inadequate representation in Geneva and the limited means at their disposal, African countries, though unfamiliar with the internal workings of the WTO, have demonstrated an unusual degree of political tenacity in supporting their farmers and industries against the biggest global power, the USA, and Africa’s main economic partner, the EU. The strategies adopted and the somewhat fragile alliances that have been built around this case have, at times, given rise to tensions and questions regarding its implications for the farmers of the South. In spite of what some consider to be the failure of Cancùn, the subsidies paid to US cotton farmers have been condemned by the WTO. But, with the development of a new Farm Bill2 that is contrary to commitments made to the international community to reduce subsidies, US agriculture policy is still out of kilter with the liberal discourse employed at the WTO. Worse, the USA continues to do exactly the opposite of what is implied in its catchphrase “Trade not aid”. In 2005, 40 per cent of global subsidies to cotton continued to sustain some 25,000 US producers, with disastrous consequences for millions of small farmers in the South due to the consequent fall in international prices.
2 The Farm Bill is a US agriculture act which set the American Senate against the House of Representatives in May 2002. This law, which received the support of President Bush, massively increases US state subsidies and brings the total of federal aid to agriculture to US$175 billion over ten years, which is an increase of US$73.5 billion on the programme it replaces. This is a major about-turn on the previous “freedom to farm” law, which had been voted into law in 1992 in an effort to rationalise agricultural subsidies.

Introduction

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On the eve of the sixth WTO Ministerial Conference, it is important to note that the failure to resolve the cotton issue constitutes a major barrier to the development of many Southern countries. Underlying this, however, are also broader concerns, namely the sustainability of policies at national and international levels, coherence between the trade and development policies of numerous Northern countries, and even the imbalance in power relations that enables rich countries to use international law for their own ends, and which prolongs the scandal of poverty. This situation demands a rigorous and objective analysis, free of dogmatism and rooted in the reality of rural Africa. This publication is neither an essay nor a work of literature, and even less a piece of academic research. Its contents derive from a workshop organised by Enda Tiers Monde, the African Cotton Association (ACA) and the Association of African Cotton Producers (AProCA), which was held in Saly, Senegal, on 6–7 May 2005, with a view to reviewing the progress of the cotton issue at the WTO and related developments. The authors have substantially revised the papers that were presented at this workshop in the light of the debates that took place there. Other writers with different geographical horizons – from Europe, the USA and Africa – have also been invited to contribute to this publication, in order to expand its coverage of the varied and complementary questions raised by the Sectorial Initiative in Favour of Cotton. Following a review of the history of the Cotton Initiative in part one, the second part of the book re-examines the power relations and alliances that have formed around this case. The third section highlights the varied forms of resistance to change, but also the room for manoeuvre that actually exists around the issue, on the eve of the sixth WTO Ministerial Conference. Before concluding, the fourth part widens the debate beyond the Sectorial Initiative itself, to explore key questions affecting farmers. These are indissoluble in the long term from the questions raised in Geneva, particularly that of how to reduce the impact of volatility in international prices. This publication will have met its principal objective if it succeeds in creating, in the context of Hong Kong, new opportunities for dialogue and reflection on some of the issues cited above, as well as on the sustainable development of African cotton industries and Southern agriculture in general. Enda and its partners will also have moved towards their objectives if it helps to clarify some key structural issues for the future of Southern countries.

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PART I:

Genesis of the Cotton Case at the WTO

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The cotton farmers’ road to Hong Kong: Initiatives by producer organisations and an assessment of the debate
Interview with François TRAORE* Various conflicting figures have been circulated on the number of people who make their living from cotton in West and Central Africa. What is the correct figure, according to you? The contradictions in figures will continue. You know, every day there are people changing over to cotton. There are newcomers, particularly due to the fact that the number of inhabitants in cotton-producing countries is increasing. For example, in Burkina Faso, which has gone from producing 116,000 tonnes of cotton a year in the 1990s to 630,000 tonnes currently, the number of people involved has obviously increased. But if I had to estimate the number of people who make their living from cotton in West and Central Africa, I would say it is around 15 million. In how many countries? Throughout Africa, 33 countries produce cotton. Right now, the number of individuals is increasing. The 15 million people I mentioned are only in West and Central Africa. What exactly does it mean to “make one’s living from cotton”? Let me use my own example to explain that to you. I started growing cotton in 1979. In the area where I went to farm, I arrived with nothing more than a horse, a plough and just a little to eat. A few years later, I was still growing cotton, but I had started to raise livestock and, on the side, I managed to grow some cereal crops. Today, thanks to the income from cotton, I have been able to buy equipment and, as well as raising cattle, I have become a major cereal producer. The crop rotation system, in addition to cotton, allows me to grow cereals. Today, I am one of the biggest cereal producers in Burkina Faso, but that does not stop me from sending my children to school. Currently, I pay more than one and a half million CFA francs (FCFA 1,500,000)1 a year in tuition fees for one of my children who is at university. And I have five others in secondary school. Of course, they all had to go to primary school first. Thanks to cotton, we also manage to build primary schools in the villages, using our own means. Imagine what that means to us. In Burkina Faso, we call cotton “the driving force of agriculture”.
* François TRAORE is a cotton farmer from Burkina Faso. He is also the President of the Association of African Cotton Farmers (AProCA) and President of the National Union of Cotton Producers of Burkina Faso (UNPCB). 1 Equivalent to approximately €2,280: €1 = F.CFA 655,957.

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So, in other words, cotton farmers are the leaders of the country’s economy? Yes. For example, in 2005 cotton brought FCFA 130 billion2 into the rural areas. I am really talking about the rural areas. You often hear them talking about billions on the television or on the radio, but most often it is not in the rural areas. Cotton revenues go to the rural areas. That does not take into account the revenue that the government takes in from the industry, nor does it include the “spill-over effects” that I mentioned on cereal production. Two years ago, Burkina Faso produced a million tonnes of cereals a year. And 80 per cent of the harvest came from cotton producers. Imagine the financial value of that amount of cereals! The way you describe the situation, one might wonder what is behind all the current debates about cotton and why so much fuss is being made about it. Ah, but imagine what I have said and what the cotton farmers are getting. Before the development of cotton, the people of Burkina Faso used to leave the country. They went to Côte d’Ivoire, Benin and Ghana. Everyone aged between 15 and 30 used to move away and just leave the old people behind. Today, cotton means that able-bodied workers can stay in their villages. And if you take into account everything that I’ve told you, what cotton can do for people, then you can understand why the people who depend on it have to take action. That is why the African response on this issue has come from the farmers. The first appeal was launched in 2001, through my organisation, the Union Nationale des Producteurs de Coton du Burkina Faso (National Union of Cotton Producers of Burkina Faso), by my spokesman and myself. We realised that global overproduction was due to the subsidies that powerful countries give their producers. But these subsidies do not take into account the cost of marketing. Let me give you an example: American producers receive 72 cents a pound, before they even grow their cotton, but the market price rarely reaches 70 cents, even when it is high. So that means that they can do whatever they like. It does not matter to them if the market is high or low. So there you have it! When someone who has proper equipment does not have to worry about the market, you inevitably get overproduction. And when that happens, supply outstrips demand. So, at a certain point, if supply is greater than demand, the price goes down. And when prices go down, who suffers the most? Unsubsidised farmers and their families. In this country, most of the work is done by hand. You have the young people who need income to go to school, to buy clothes. The families react, and you have to react, too. And because you are not alone, and there are several million other people who make their living from cotton, inevitably the reaction is heard everywhere.

2 Equivalent to around €200 million.

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So, when we reacted and spoke out against the reason behind the drop in cotton prices, all the producers who lived in other countries also responded and supported the appeal, throughout Africa. And that made the authorities react. Because when the people take action, they cannot remain indifferent, especially since the government is also earning income from cotton. And if we are taking action, that means production could be held up. In that case, although it might hurt us, the governments will be hurting even more. All the traders, all those who depend indirectly on cotton for their livelihoods, will also feel it. That is what brought about the response on cotton. On the other side of the Atlantic, both in America and Europe, governments subsidise producers in response to their civil society and to their producers, whom they fear as voters. That is why the USA and the European Union implement policies contrary to the laws of international trade. We are talking about the interests of two very different societies: ours is poor, very poor, barely able to survive. On the other hand, they are very well off, and want to remain so at any price, even if the industry is no longer profitable for them. Their governments have the means to maintain them, even if that could lead to cotton disappearing in Africa. Countries that do the work by hand are competitive in the market, particularly in terms of quality. We cultivate by hand while they harvest their cotton mechanically, which means there are a lot of undesirable elements in their cotton that affect its quality. African cotton is in direct competition with cotton from those countries. If they can undermine African cotton and make it lose market share to American producers, then they have to do so. That is why, on both sides of the Atlantic, in the USA and in Europe, there has been movement. They are under pressure from their producers. But we cannot give in either, because what we receive to support our troubled industries, the donations we receive, do not fill the gap. Moreover, donations and assistance never go into the pockets of the heads of households, to help them support their families. In fact, that is not what they are meant for – development is not like that. Development is achieved through the sweat of its stakeholders. Is that why you decided to take the matter to the WTO? We raised the issue by launching an appeal in 2001, which you can find on the website of one of our partners, Father Maurice Oudet.3 In 2002 we launched a second appeal, supported by various other producers. Even Brazil reacted after we did. But our governments decided to deal with it in their own way and decided that it was not appropriate to lodge a complaint. Otherwise, we would have lodged our complaint a good while before Brazil. Still, we did take action. And four countries – Burkina Faso, Mali, Chad and Benin – made an application to the World Trade Organisation saying that, “We are LDCs (Least Developed Countries). At Doha, you made the commitment to make the WTO a development tool, and cotton is a development tool for us. What you are doing through the trade policies of the most powerful countries is destroying our economy.” That is what happened to push things forward in Geneva, and that led to Cancùn.
3 http://www.abcburkina.net

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I was in Cancùn, and I can assure you that on the first day neither the WTO Director General, the World Bank representative, nor the Mexican representative said more than five words without mentioning the African cotton issue and the need for a solution. We thought that our appeal had been heard. Unfortunately, at the end of the conference, there was still no solution. At that point, I said to myself, “What motivated the big people of this world? Nobody can possibly think that they were bribed to say those things that they said on the first day. There must have been some realistic reason for them to speak like that.” We had gone beyond the stage of games and appearances; they did not use such language just to keep their producers happy. It was more than that. Their level of responsibility had gone beyond that. Even though in the end there was no solution, I had a hard time understanding their position, related to their commitments and their declarations. And then we told ourselves that the WTO needs to change its face, otherwise it cannot really call itself a global trade structure. Not only would it not really be a global structure, it would also run the risk of failing to meet the commitments it made at the development round in Doha. We gave them an opportunity to respond to the issue at Doha. But they either did not know how to, or could not, or would not answer. That is the question. But the Cotton Initiative is still ongoing, nevertheless? Of course it is ongoing, since we the stakeholders are depending on it. We are still here and we continue to keep an eye on it, together with our partners, the NGOs,4 and even with our governments. Our trade ministers, our agriculture ministers, our heads of state continue to fight for a solution to this problem. Following the failure of Cancùn, what strategy do you intend to put in place for the future? I wouldn’t say it was a failure. We did not get what we wanted, but on the other hand we were able to block the decisions that the USA and the EU wanted to push through. That was a change from previous meetings, where the poor countries signed up to the consensus without getting anything positive for our own states, our own governments, our own countries. Consensus used to be reached against the interests of the majority and against the interests of African civil society. But this time we said “no” to the proposal because it did not solve our problem, although the rich countries had proposals for their own problems. The fact that we said “no” in Cancùn meant that solutions were not found to other topics of debate.

4 Non-government organisations.

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All right, we African producers did not achieve what we wanted. As a leading producer, I had nothing concrete to show the members of my organisation. But it was, and indeed it still is, recognised that the cotton issue has changed the face of the WTO and opened up a new debate between the West and Africa. Now we can see what has actually been done for Africa: they talk about development for Africa, when in fact the opposite is true. When we went to Shanghai for a meeting, the Ugandan President said that Africa was the real donor. Raw materials come from Africa and create employment in the West. People think they are helping us, when it is our raw materials that allow them to have employment in their countries. As stakeholders in civil society, we feel we have the right to tell our decision-makers what we want. That is what already happens over there in the West. Their political leaders do not go and negotiate what they want. They negotiate for what their civil society stakeholders want. Cancùn taught that to African civil society. That is to say, you have to tell your politicians what they need to take into account. And you have to follow up. And continue to follow up! And what you want is to see an end to subsidies? Of course! And in the meantime, what are you doing? Firstly, Europe is starting to make a bit of progress, even if we cannot see any concrete results yet. Furthermore, we have changed the terms of the debate. We are no longer just yes-men. The debate now is that Africans are reclaiming their rightful place in trade. Recently, I had a visit from an adviser to the United States Department of Commerce. The Americans are also telling us that they are thinking about what can be done. We know that this is something new. They are having trouble adapting to African demands that are shared not only by the decision-makers but also by civil society. That is really a problem for them. So we will continue to tell them that the days when you could phone up a head of state or politician and tell him what to do and how to do it are over. We keep on telling them that. But I must say they have difficulty taking it in. And things cannot go on this way. Today, China is making the USA and Europe suffer. Africa thought it could just behave like a model child: “Never do any harm, and let civil society just cope.” That is just not possible! Civil society did not know that it needed to stand up for itself, but now there are examples that prove that it has to react, on every front. Africa has to wake up. I think that the cotton issue has allowed other issues to be raised, and that civil society will continue to fight for those issues. I can assure you that if there is a solution one day, they will call it something else. They will arrange things so that it will never be said that Africa was right.

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Peter MANDELSON, the European Commissioner, said in Mali that Europe was willing to abolish all internal support mechanisms for its cotton producers, and the Americans for their part have said that they are ready to eliminate certain forms of support and that everyone should undertake to make the same efforts. When you listen to Western negotiators, don’t you feel like you are watching a game of ping-pong? That is just what I was saying. They are surprised at a reaction of this magnitude from Africa. Their ping-pong game does not make us forget that there are times when they do talk to each other. Our awakening has surprised them, but they have said to themselves, “Let’s play the game a bit so that the Africans don’t realise that they can upset the applecart.” So they are going to tell the Africans that they understand what they are saying, in the hope that this will appease them, and then continue to lob the ball back and forth in an attempt to stall our momentum. You can bet that the USA and Europe are still trying to find the best way of dealing with this problem. We are aware that a solution will not come quickly. But I read the following anecdote somewhere: a European minister said to the Chinese authorities, “Your textile industry is bothering us in the West.” And they replied, “How many metres of textiles do we need to buy an Airbus?” The debate ended there. It is a matter of interests. If they want the Chinese to buy their planes, they have to let Chinese products into their markets. Africa believed that, as an act of charity, the West would one day give it development. It doesn’t work like that, and that should be a lesson for all of Africa and not only for producers. They have to understand that it is not charity, but a debate among equals. I call this “peaceful combat” by civil society. It is only through this means that we have a chance of making our living from the sweat of our brows. And time is of the essence, because our raw materials are running out and that will force us to ask the question of where development will ever come from. You recently met with Paul WOLFOWITZ, the new President of the World Bank, when he visited Burkina Faso. It seems that when he came out of his interview with you he admitted that he was ashamed to be an American. What did you say to him that made him so ashamed? Quite simply, we showed him that we are ordinary farmers who work by the sweat of our brows, and that we want to be able to earn a living that way. We even told him that we have no arms, just little hoes to scratch out our living from the earth. And that the policy of a powerful country such as his is making us even poorer. So if, as the head of the World Bank and as an American citizen, you are coming to talk to us again about development, what is going to happen? That is what we told him. And, as an American and the head of the World Bank, he felt, to use his own words, that is was “a shame”.

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And what did he promise you? Oh! There were promises. We will help you, we will fight to stop those subsidies… But even before he became head of the World Bank, I wrote to him when we heard he had been nominated. I said, “If you, the General of Iraq, become the head of the World Bank, then don’t choose the wrong sort of tools for development. You were an expert on tanks in the Iraq war. But what we need are machines that can build dams and public utilities, roads and tracks.” I warned him so that he would not bring us tanks. So he had to talk to us about development. However, I would like to add that our leaders need to understand that civil society is not their enemy: it serves as a guide and it suggests ideas. This is what it wants to do and it should be encouraged and allowed to do so. There should be partnerships between civil society and decision-makers to discuss civil society proposals and how to put them into action. We need to understand that we are not against each other. That is how we can make progress. The problem is not the power of the West, but rather our own power. You have, however, pointed out that Western countries are also under pressure from their own producers… That is nothing! Westerners have a peculiar way of adapting. Very often, they ask us to adapt. We try, but they have only 2–3 per cent of producers and a lot of mechanical equipment. How can they have problems adjusting in order to let Africans live? If they cannot make that effort, then they have to acknowledge the inconsistencies in what they say when they talk about support and aid for development. Today, we tend to put humanity at the service of capital, when in fact capital should be used to serve mankind. I have seen in America what capital means today. African slaves contributed to the development of that country. That is where American capital came from, and now American capital opposes the development of their grandsons in Africa. What kind of strategy can be developed now? The most important thing is to create alliances between the different components of civil society. I know that in the West, both in Europe and in the USA, civil society is beginning to awaken. Dialogue is possible, so that we can understand that we are not necessarily against one another. With their standard of living, letting us have the basic minimum would not stop them from living their lives. I had a talk with José BOVE of the Peasant Confederation of France. I explained to him that I agreed with him on some points, but that I was faced with realities that he knew nothing about, and because of that, things could not be the same for us. His producers have running water in their houses, paved roads running past their fields; they have telephones and can watch television. But more than half of our farmers drink from waterholes. I have seen animals walk into the waterholes to drink.

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When they came out, the women go in to get drinking water. I told those French people, “Even I who stand before you have drunk from waterholes.” When you are at that level and the other farmer is on another level, you need to explain things. You have to tell him, “I am not against you, but I just want the basics. Can it create a problem if I drink clean water? For me to eat my fill and send my children to school, is that a problem?” There are people who have no idea how we live, who we are, or how we got into this situation. Is there a possibility, then, of an alliance between civil societies in different countries? It is already happening, in fact. But we have to be careful. There is a lot of interference in those kinds of relationships. You have to be sure that you are talking to the right people, and that they say what they think. Another thing for Africans is that there has to be a certain level of organisation. The thing that helped the cotton sector’s demands get a certain amount of support was that in all the countries the civil society stakeholders, beginning with the producers, were organised. That also applies to the United States. The USA has only 25,000 cotton producers, but they are so highly organised that they can shake a country that big. Organisation is not about raising a ruckus, but about knowing that you have a real impact on the economy, an impact that can influence the decision-makers. For example, you asked what the State had to gain from this business. It is the same thing as groundnuts for the Senegalese economy. If the people involved are very well organised and each time they shake the tree the whole country jumps, then everyone is obliged to listen to them. If problems are dealt with on an individual basis, nobody will listen to you. How is this organisation reflected in the cotton sector? The message has got through in all the countries, even to people working in the informal sector. When we spoke out, people immediately followed suit of their own will. We achieved this through the Internet. Everyone declared support on a website. We did not send a delegation around telling everyone to do this or do that. That demonstrates the level of organisation in the sector. Then the NGOs joined us, followed by the governments. But primarily, the producers learned to work together across borders. In each cotton-producing country, there are national associations for cotton producers. But their impact at the regional or international level was limited. Even though dialogue has existed in the past, this time the meetings were systematic, so that things progressed at an international level. Producers from West and Central Africa understood that unity was power. This led to the founding of the Association of African Cotton Producers (AProCA), of which I am the president.

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Nevertheless, one gets the impression that producers of other products are feeling a bit left out by the prominence of the cotton case in international negotiations. I think it is all a matter of interest. The problems in the cotton sector forced members to be together more often and to be better organised. An organisation that is not based on defending the interests of each of its members cannot work. And this kind of organisation is not necessarily what our partners in the West are looking for, especially if you realise that, to begin with, the majority of our associations are supported by funds from those same partners. So you have to be very careful to ensure that organisations are genuinely based on the interests of the stakeholders, before you tell governments to support them and to do exactly what their members want. When one finds an interest in something, one hangs on to it. I personally grow cotton, but also cereals. I am a member of a cereal marketing organisation and the president of the peasant confederation of Burkina Faso, which includes cotton producers, livestock farmers, market gardeners and fruit farmers. It is true that we have not all reached the same level of organisation, but what Africans need to understand is that the cotton case is not only about cotton. It highlights the problems in Africa and for African farmers. If we win, then the whole of Africa will benefit in international trade negotiations, and not just cotton producers. The cotton producers’ struggle goes on. What is the final word from François TRAORE? We cannot understand the fact that 80 per cent of African people are farmers and that they cannot support themselves from their livelihood. We cannot accept that more than 60 per cent of the poor in Africa are from rural areas, which is not the case in the West. We have to work to change that situation. Stakeholders need to organise, to make decision-makers understand that the days of glossing over their reports are over. The time for making people believe that everything is fine, when nothing is going right, is done with. It has to stop. I was asked my opinion when NEPAD was created, and I replied that I did not believe in it. Because it is still the same people. They are not going to convince us that they have changed their management habits. If they have not taken stock of the way they have done things over the past 40 years, changing the name of the organisation is not going to make them change their ways. So, once again, I am calling for civil society to organise, so that in all its diversity it can challenge the politicians. Decision-makers need to listen to us and understand that it is in everyone’s best interests for producers to be able to live off their labour. That is real patriotism.

Interviewed in Dakar by Mohamed GUEYE,
Economics Desk of the newspaper Le Quotidien mgueye@lequotidien.sn

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Consequences and challenges of the July Framework agreement for the cotton case
Samuel AMEHOU*

Introduction
In the past few years, the World Trade Organisation (WTO) trade negotiations have rekindled public interest due to the publicity surrounding the agriculture problem, with particular emphasis on the issue of agricultural subsidies, allocated mainly to cotton producers in the USA and Europe. The cotton industry occupies an important place in the economies of several African countries and it is easy to understand the disaster that the slump in international cotton prices has brought in its wake. The ruling by the WTO on Brazil’s complaint against the United States serves to confirm that this subsidy surplus creates distortions, leading to falls in international cotton prices. This represents a major victory and is the culmination of several years of socio-political mobilisation. It is essential to capitalise on this interim victory, but the fact remains that the problems facing cotton farmers can only be resolved by attaining two objectives. First, it is important to keep international public opinion focused on a problem that is of crucial interest to our countries, in the sense that the survival of our national economies and that of millions of people, already living below the poverty line, depend on its resolution. Second, it is important to engage in constructive, forward-looking reflection and to discuss strategies for overcoming the crisis in the African cotton industry, associated with the slump in international prices. In order to do this, it is useful to review the different stages in the trade negotiations since the failure of Cancùn, what they have achieved and the actions taken, and to put them into perspective. This exercise can be centred around three main areas. First, a review1 summarising previous developments, in order to better understand the current position of the Sectorial Initiative in Favour of Cotton in the context of the Doha Round of trade negotiations. This will be followed by a brief recapitulation of the actions carried out since the decision of the General Council, detailing the commitments made in Geneva, in the July 2004 Framework Agreement to include cotton in the agricultural negotiations dossier. We will also look at the consequences of this decision, as well as the possible opportunities and risks associated with it in the context of the current negotiations.
* Samuel AMEHOU is Ambassador of the Republic of Benin to the World Trade Organisation in Geneva.
1 The timescale covered here runs from May 2003, the submission date of the Sectorial Initiative, up tothe WTO General Council Session in July 2004 and the subsequent decision taken (WT/L/579 of 2 August 2004).

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Finally, there will be an assessment of the next steps and key moments and the strategy to be adopted in monitoring the cotton case in the lead-up to the Sixth WTO Ministerial Conference, scheduled to take place in December 2005 in Hong Kong. The submission of the Sectorial Initiative in Favour of Cotton and the evolution of trade negotiations Cotton production is an agricultural activity carried out in over half of all African states. This activity is vital to the economic and social life of these countries: in West and Central African countries, for example, it contributes around 12 per cent of GDP, 40 per cent of total export revenue and 70 per cent of agricultural revenue, and employs 15 million people. Today 33 countries grow cotton, 13 of which are in West and Central Africa: Benin, Burkina Faso, Côte d’Ivoire, Cameroon, Central African Republic, Ghana, Guinea, Niger, Nigeria, Mali, Senegal, Chad and Togo. The cotton produced in West and Central Africa remains among the most competitive in the world: its current cost of production (around 42 cents a pound) is lower than the estimated production costs in some developed countries. In the USA, for example, where the cost of production is estimated at around 75 cents a pound.2 However, despite this undeniable competitive edge, the production and export of African cotton is subject to fierce competition from developed countries, such as the USA and, within the EU, Greece and Spain. This unfair competition is made possible through the proven abuse by developed countries of domestic supports to producers and export subsidies levied on the international trade of cotton. The main effect of these excesses in support and subsidies is lower cotton prices on the international market. Lower prices have severe repercussions for producing nations in Africa, which face large budget deficits when they attempt to sell their cotton. This situation is also fraught with social repercussions for farming communities, who face enormous problems, including dire difficulties in meeting health costs and school fees for children, paying for food and housing, etc. These consequences are even more severe for the four countries of West and Central Africa that are producers and exporters of cotton (Benin, Burkina Faso, Mali and Chad). Cotton represents an important source of revenue and foreign currency for their economies, and a vital source of income for the bulk of the population, who depend directly on cotton-related activities for their livelihoods. For these four Least Developed Countries (LDCs), faced with mounting difficulties, the situation had become untenable. For this reason they decided, on 16 May 2003, to submit a “Sectorial Initiative in Favour of Cotton” to the relevant authorities at the WTO.3 By doing this, they aimed to seek, within the framework of the Doha Round of multilateral trade negotiations, sustainable solutions to the grave problems faced by their cotton industries, due to distortions in international trade.
2 According to statistics supplied by Oxfam International. 3 Initiative submitted to the WTO under the reference NT/AG/GEN/4.

Consequences and challenges of the July Framework agreement for the cotton case

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In their submission, the four countries that co-authored the Sectorial Initiative demanded: • In Cancùn, the establishment of a mechanism to phase out support for cotton production, with a view to its total elimination “early harvest”; • Transitional measures in the form of financial compensation for cotton-producing LDCs to offset their losses of revenue, until support for cotton production has been completely phased out. The four countries also submitted to the members of the WTO their proposed modalities for the assessment of criteria and evaluation of levels of compensation.4 The huge support garnered for the Sectorial Initiative, both among WTO members and in international public opinion, coupled with the pressure brought to bear by negotiators from the countries involved, led to the inclusion of an item on the cotton issue on the agenda at the Cancùn conference in September 2003. Unfortunately, with the failure of this conference, no tangible results were achieved within the framework of the initiative. In the weeks that followed the breakdown of the Cancùn conference, a number of attempts were made by certain members of the WTO to bog down the negotiations on cotton that were taking place in Geneva. But the Geneva delegations of the four co-author countries remained adamant, and mobilised themselves and other delegations from African countries, who shared the same ambitions on the cotton issue. These efforts led to the WTO regional workshop on cotton for the benefit of African countries, held in Cotonou (Benin) on 23–24 March 2004. At the Cotonou workshop, important clarifications were made on developments in the cotton case and two distinct, yet strongly complementary and inseparable components, were identified: • the trade aspects, which should be dealt with strictly within the framework of trade negotiations in Geneva; and • the aspects linked to development, an area in which the WTO Secretariat has been invited to play a proactive role, by facilitating a meeting of interested parties from the spheres of trade and development, in order to study the aspects of the initiative as it relates to development aid. It should nevertheless be emphasised that one important question is yet to be resolved: the framework for trade negotiations on cotton. In view of the urgency and specificity of this issue, the co-author countries, as well as several other member states, argued that it should be dealt with separately. Others, however, were of the view that it could only be addressed within the global framework of agriculture negotiations.
4 Document WT/GC/W/511 of 22 August 2003.

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The decision of the WTO General Council at the end of July 2004 and the status of cotton negotiations Following the deadlock at Cancùn, the Cotonou workshop and the resumption of work in Geneva, WTO members finally decided, at the end of July 2004, to discuss four specific objectives. These were, first, to consider the cotton issue within the global agricultural framework in “an ambitious, expeditious and specific manner” and, second, to respect the link between the trade and development aspects of cotton. Thirdly, they agreed to take into account the importance of cotton production and exports for certain African countries, particularly the LDCs and, finally, they agreed to set up a cotton sub-committee. The development aspect of cotton The development aspect of cotton involves the mobilisation of the financial and technical assistance that is needed to promote the cotton industry in Africa. It was decided at the March 2004 WTO conference in Cotonou to disassociate trade issues from those linked to development. During this meeting, the developed countries of the WTO offered technical and financial assistance to the sponsor countries of the Initiative. This support would be enough to deal with the problems encountered by African cotton farmers and, in return, development issues would cease to be dealt with at the WTO. Offers of technical and financial assistance were made at two levels. The multilateral intergovernmental organisations identified useful financing programmes and promised to lend additional technical and financial support in their respective fields of expertise. In addition, bilateral donors proposed to strengthen their support programmes. Once the key areas had been identified,5 the EU supplied further details on its initiative for African cotton, while the USA did the same with regard to the Millennium Change Account (MCA). At the same time, Japan detailed the advantages to be gained from its TICAD programme, while Canada and China reiterated their commitment to supplying increased technical and financial assistance. Reviewing now the promises made, it is clear that only the EU has started to implement its pledge of direct budget support to African cotton producers. Even though this aid is starting to have an effect, there is little information available as to its amount, the modalities governing its utilisation or the share allocated to cotton farmers. The USA, for its part, has chosen to tie its assistance to the implementation of its MCA programme, which unfortunately is subject to numerous conditions. The implementation of development tools has therefore fallen far short of the commitments made and the hopes raised at the Cotonou conference.
5 Reform of national industries, improving methods of growing African cotton, promotion of exports,

promotion of policies for agricultural diversification, the creation of research programmes co-ordinated by regional organisations, the rehabilitation of textile industries, etc. were among the possibilities that were proposed.

Consequences and challenges of the July Framework agreement for the cotton case

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This is even more disappointing since the WTO, represented at Cotonou by its highest-ranking decision-makers, promised to spearhead a thorough analysis of the development issues, within a separate framework from that of trade issues. Furthermore, in formulating the Framework Agreement at the end of July 2004, the General Council gave “instructions to the Secretariat to continue to work with the development community and to make periodic reports to the Council of all new pertinent findings.” It also instructed the Director General “to hold consultations with relevant International Organisations, including the Bretton Woods Institutions, the United Nations Food and Agriculture Organisation and the International Trade Centre, to direct existing programmes in an effective manner and to direct all additional resources towards development of the economies in which cotton assumes vital importance.” The WTO Secretariat has indeed reported periodically to its members at the General Council sessions6 on the technical and financial assistance provided by bilateral and multilateral partners. The WTO Director General has also drawn up his first report7 on the development dimension of the Sectorial Initiative in Favour of Cotton, and this was presented to the members of the WTO on 13 December 2004. More recently, the new Director General of the WTO, Pascal Lamy, has asked that an update be prepared on how far the commitments made by the developed countries have been implemented. However, is it possible, despite all these efforts, that the opportunity to deal separately with development issues has been misconstrued? The solution proposed at Cotonou, to deal exclusively with development issues, seems to have been adopted in a bid to “refrain from breaking up the WTO system”. In that case, the formulation in the Initiative of a request for compensation is certainly original, but it is not catered for within the trade system. As it stands, the WTO does not seem to be in a position to entertain this proposal, without running the risk of “creating a precedent”. And should this precedent become common practice, the whole WTO system would be compromised. In light of this, it should be understood that the Cotonou agenda was a unilateral step taken by the WTO secretariat. For their part, the African countries have come to the conclusion “that something had to be accepted to stop the industry from dying off” and that WTO members must “remain true to the urgent nature of the problem evoked in the Initiative”. The separation of the trade aspect from the development aspect of the dossier has therefore been validated by the African countries. The separation is presented as an element of a strategy, albeit “a makeshift measure that offers some respite to small farmers”. It also recognises the fact that the trade dimension will be taken up should the international context prove to be more conducive at a time in the future.

6 In total, three meetings dealing with the development aspects of cotton have been organised in Geneva,

on 25 August 2004, 22 October 2004 and 18 November 2004.
7 The report on the development aspect was presented in the documents WT/GC/83 and Add.1 on

3 December 2004.

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The trade aspect of cotton The July Framework Agreement stipulates in paragraph 4 of Annex A, that: • negotiations will be carried out on all three pillars on which the international cotton trade rests, i.e. market access, domestic support and export competition; • ambitious, expeditious and specific results should be obtained, given the vital importance of the cotton sector for some countries that produce and export cotton, especially LDCs; • coherence between trade and development aspects will be observed. A sub-committee was created following a decision adopted by the Agricultural Committee at its extraordinary session of 19 November 2004, with a mandate to treat cotton in an “ambitious, expeditious and specific manner” within the framework of the agriculture negotiations. It was agreed that “work shall encompass all tradedistorting policies affecting the sector in all three pillars of market access, domestic support and export competition, as specified in the Doha text and this Framework text”.8 The foundations have thus been laid for a thorough examination of the issue, now that the Cotton Sub-Committee9 mandate is clearly defined, together with its proposed work programme.10 On 21 April 2005, the WTO African Group, on the basis of the proposals made by the four co-author countries of the Sectorial Initiative in Favour of cotton, circulated a document outlining the proposed working methods for negotiation on cotton. This document, published by the WTO,11 recalls in its first part the historic circumstances surrounding the submission of the Sectorial Initiative by Benin, Burkina Faso, Mali and Chad. It then follows the progress of the dossier, from its submission to the reactions of WTO members within the framework of the decisions adopted by the General Council at the end of July 2004. Concrete working methods were proposed and submitted for approval by members on the basis of these General Council decisions, taking particular account of the adoption by the WTO Dispute Settlement Body, at its 21 March 2005 meeting, of the report by the Appeals Body on the Upland cotton case, as well as the panel report, as modified by the Appeals Body. The proposed methods centred on the three following pillars: • Market access: a marked improvement in the degree of access to cotton markets is required, in the form of free access, on a consolidated basis and without restrictions for cotton and its derivatives, for cotton producers and exporters from LDCs.
8 Document TN/AG/13. 9 Document TN/AG/13 of 26 November 2004. 10 Document TN/AG/SCC/1 of 29 March 2005. 11 Publication of the working methods in TN/AG/SCC/GEN/2 of 22 April 2005.

Consequences and challenges of the July Framework agreement for the cotton case

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• Domestic support: the domestic support measures creating trade distortions in the international cotton trade should be eliminated by 21 September 2005 at the latest. Specific disciplinary measures should be put in place to avoid the transfer of domestic supports from one WTO-designated “box” to another. Furthermore, ambitious and specific criteria for cotton are envisaged for authorised measures governing the Green and Blue boxes. • Export competition: all forms of export subsidies for cotton should be eliminated by 1 July 2005 at the latest. This proposal by the African Group also emphasises the necessary balance to be observed between trade negotiations and measures to be taken on the development front. Among other measures to be adopted, the paper reiterated one of the African Group’s main concerns, the setting up of an Emergency Support Fund for cotton production. The main concern is to put in place a safety net of measures that have the potential to ensure the survival of the cotton sector, pending the elimination of the anomalies in the multilateral trade system that so seriously compromise the business of cotton production. The resources allocated to this fund would correspond to 20 per cent of the value of the cotton produced in the best of the previous three years, for each country concerned. It would be managed by a tripartite commission made up of representatives from donors, producers and governments, and its resources would be reduced in tandem with the level of elimination of developed countries’ domestic support measures and targeted subsidies. From the perspective of the African negotiators, the response to this proposal has been far from satisfactory. During the most recent meeting of the Cotton Sub-Committee on 18 July 2005, Benin, supported by Mali, Chad, Zimbabwe and Côte d’Ivoire, deplored the lack of progress in the discussions and the absence of written responses from other members to their proposal. The EU representatives pointed out that they had responded during previous meetings and proposed to frontload responses to the sections of the agriculture agreement concerning cotton. As for the US negotiators, they simply gave an account of proposed measures for the elimination of subsidies that the WTO deemed illegal in its ruling on the USA-Brazil cotton dispute. With international cotton prices facing a new slump, the African countries stressed their displeasure at the fact that progress on the cotton case has been tied to progress in the wider agriculture negotiations. The African delegations to the WTO believe that they are justified in expecting tangible progress that goes well beyond that agreed on in the July Package. A few weeks before the next Ministerial conference in Hong Kong, discussions on the mandate of the sub-committee are immaterial. It has been clearly decided that not only will its decisions be used to encourage members to act, but that it has a more urgent responsibility to examine substantial issues than to dally over questions of procedure. Nonetheless, it is still the case that the sub-committee remains under the wing of the agriculture committee.

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Finally, even though concerns remain over the inclusion of cotton in the agriculture negotiations – the driving force in the current round of talks – it should be remembered that any progress will also benefit cotton. The “specific” and particularly “expeditious and ambitious” nature of the results should not be overshadowed. The unfolding struggle, termed in certain quarters “the cotton war”, calls for general mobilisation and a synergy of all our actions in support of our common cause. We must propose a strategy geared towards the success of our approach. The lead-up to the Sixth WTO Ministerial Conference: strategies and perspectives for the resolution of the cotton case In December 2005, WTO member states will come together in Hong Kong for the sixth Ministerial Conference. The July 2005 meeting of the General Council summed up the different positions that will be discussed in Hong Kong. The upcoming negotiations are very important, and require special groundwork. In this context, the activities of the countries that co-initiated the Sectorial Initiative in Favour of Cotton should be deployed in two main areas: • the technical defence of the Sectorial Initiative in Favour of cotton case; • strategic lobbying aimed at stakeholders likely to contribute to the rapid resolution of the cotton case. Technical defence of the cotton case The countries that co-authored the Sectorial Initiative need to make use of all available support in terms of expertise at this stage of the negotiations, as they become more focused and more technical. All the partners involved (research institutes, civil society organisations, think tanks, etc.) should be approached and their intellectual resources should be used to the full. The main task will involve consolidating the arguments to be used in defending the cotton case, to support the working methods proposed by the African Group in its document of 21 April 2005.12 Strategic lobbying This is justified by the fact that the more technical the cotton case negotiations become, the more necessary it becomes to back up the technical work with political measures, at all levels of the decision-making process. This lobbying should be carried out at different levels. It should be done in Geneva, by sustaining the support garnered for the Sectorial Initiative from certain groups of countries – the African Group, the ACP Group and the LDCs. The support of certain strategic partners should also be strengthened (e.g. Brazil, Paraguay, Pakistan, India, the G20). Furthermore, the Permanent Missions of the co-sponsor countries of the Sectorial Initiative (now all represented in Geneva) should continue to co-ordinate their actions, and strengthen these actions as much as they can. The necessary human resources, materials and financial means should be put at their disposal.
12 Contained in the document TN/AG/SCC/GEN/2.

Consequences and challenges of the July Framework agreement for the cotton case

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In the capitals of the four co-author countries, the relevant national authorities should keep in close contact with the local diplomatic representations of development partners (both countries and international organisations). Furthermore, all four countries should be represented at all major international meetings, at the highest level possible, in order to lend support to the initiative, Ministers of the four countries should be systematically and continually in contact with the major finance ministries, particularly those of European capitals and in North America. Sympathy garnered from ministerial departments of developed countries responsible for co-operation and development should be extensively exploited. Finally, an effective media campaign should be mounted with the aid of civil society organisations, in order to maintain the mobilisation of international public opinion and sympathy for the cotton cause. These are the key elements of the strategy that needs to be put in place to buttress the cotton case in the run-up to Hong Kong. While this strategy is not etched in stone, it is desirable that all those who have shown unflinching commitment, co-operation and mobilisation for this common cause do not falter, and it is essential that they make their own contribution.

Conclusion
Cotton is produced in more than half of all African countries and is the economic mainstay for some of them. Today, the crop is subject to strong – and unfair – competition. This gives rise to serious budget deficits for the African economies dependent on cotton and to abject poverty amongst rural populations. The Sectorial Initiative in Favour of Cotton presented by Benin, Burkina Faso, Mali and Chad has met with mixed reactions from the different delegations and negotiating groups at the WTO, but it has garnered tremendous support from African delegations, LDCs, the ACP group and Brazil. Other stakeholders have also espoused the cause, seeing the resolution of this crisis within the framework of a “single undertaking”. This is notably the case for certain members of the European Union, the United States and Japan. The proposed emergency support fund for cotton production and the deadline for the elimination of agricultural subsidies, however, have not enjoyed the same success. The idea of a support fund has been greeted with reticence while the timetable for the elimination of subsidies has been deemed utopian. Nevertheless, during a further meeting held on 18 May 2005 in Cotonou, the International Monetary Fund (IMF) and other participants arrived at a consensus regarding four points essential for Africa: the preservation of macroeconomic stability; the use of development programmes to increase production and competitiveness; the elimination of subsidies that have a distorting effect on trade and are prejudicial to developing countries; and the protection of the poor during periods of adjustment.

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The announcement that has recently been made regarding the cancellation of debt for the poorest nations in the world, many of them in Africa, certainly has a direct correlation with the solutions sought in the development aspects of the cotton case. In other words, even though important concessions appear to have been made by the Northern countries of the WTO, the success of the dossier should be measured in wider economic terms. Another positive aspect is that the participation of the smaller countries of the WTO has been dramatically brought into perspective. It is no exaggeration to say that if the thorny question of subsidies has found a privileged place in the July Package, with firm commitments to reduce and even eliminate them, it is due in part to the pressure brought to bear on the USA and the EU through the Sectorial Initiative. Even if there is no guaranteed success in the short term, the Initiative is in itself a success, for it has meant that numerous barriers have been broken down that would otherwise have remained intact . Last but not least, even though the timescales proposed in the 21 April 2005 document – for the elimination of domestic supports and export subsidies and the creation of an emergency fund – are now obsolete, the claims remain topical and will remain on the agenda. As we approach the Ministerial Conference in Hong Kong, it is essential that we are mobilised and that we act in order to put an end to the universally acknowledged situation of unfair competition. The political support and declared will to resolve this problem, as quickly as possible, and in a way that satisfies all parties must be translated into concrete action. This is certainly one of the major issues at stake in Hong Kong – not only for African cotton farmers but also, especially, for the credibility of the WTO and the current trade negotiations.

The WTO ruling on the Brazil-US cotton dispute: Implications for African countries and agriculture negotiations
Romain BENICCHIO*

Introduction
Between 1999 and 2003, some 25,000 American cotton producers received a total of US$12.47 billion in cotton subsidies. At the same time, more than 10 million producers in West and Central Africa (WCA) faced a drop in their incomes following the biggest collapse in world prices, in terms of constant price,1 since 1793.2 If the question of cotton subsidies occupies a special place today on the World Trade Organisation (WTO)’s agenda, it is there because of a combination of factors that have made it an example of the issues at stake in the current round of negotiations. The case of cotton demonstrates the existing problem with trade rules and agriculture: that some agricultural support programmes in the West have an adverse impact on the trade in agricultural products on which farmers in developing countries depend. Even though other agricultural products are affected, the case of cotton is one of the most striking. The sums of money paid for the benefit of a minority of American producers are incredible, and their impact on the price of international trading has been recognised by the Dispute Settlement Body (DSB) of the WTO. It is essential to remember that the countries that would benefit from fairer regulation of the cotton market are amongst the Least Developed Countries (LDCs). The fight over cotton is distinctive in that it is being carried out in parallel by Brazil and by a group of West and Central African countries. While Brazil opted for the legal route by filing a complaint with the WTO, the African countries adopted a political approach by imposing the cotton issue on the agenda of the current round of WTO negotiations. These two approaches in fact complement each other, by ensuring that constant political pressure is maintained on the USA. Thus, it seems unlikely that an agreement is possible at the WTO Ministerial Conference in Hong Kong in December, unless the cotton issue is first resolved.

* Romain BENICCHIO is an economist and a political adviser on trade for Oxfam International, based in Geneva, Switzerland. 1 “La compétitivité du coton de la zone franc dans le marché mondial”, Gérald ESTUR, Statistician for the International Cotton Advisory Committee, speech made at the Ministerial meeting for regional co-operation on the cotton industry in the WAEMU zone, 18 June 2003 in Ouagadougou, Burkina Faso. 2 Date of the invention of the cotton gin.

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The Brazilian complaint and the DSB decision In September 2002, Brazil filed a consultation request regarding cotton subsidies paid to American producers: this is the first step in the dispute settlement system of the WTO on the way to a formal complaint. On 21 March 2005, after a long and difficult process, the reports by the panel and the Appellate Body of the WTO were adopted by the organisation’s members, thus confirming the illegality of US cotton subsidies. This date marks a milestone for two reasons: • It is the first time that an international tribunal has proved that the agricultural subsidies of developed countries have a negative impact on producers in developing countries. • By adopting these reports, WTO members legally confirmed the claims presented in the Sectorial Initiative in Favour of cotton,3 submitted to the WTO in June 2003 by Benin, Burkina Faso, Mali and Chad. The elements of the Brazilian complaint were multiple, but were based around two major components. First, Brazil called into question the implementation by the USA of the Uruguay Round Agreement signed in 1994. More particularly, Brazil considered that the notification of the various US subsidy programmes was not in accordance with the classification system in force under the WTO’s Agreement on Agriculture. According to the Brazilian submission, the USA did not respect its commitments, and several of its support programmes for cotton production should be considered illegal export subsidies. Furthermore, the Brazilian complaint contended that US cotton subsidies were creating serious prejudice for other cotton producers by “depressing prices to a significant degree or preventing price increases, which otherwise would have occurred, to a significant degree”, as stipulated in Article 6.3 of the Agreement on Subsidies. By completely isolating US producers from market signals and by allowing them to artificially increase their levels of production and exports, US subsidies have also had the effect of pushing down global prices. Nevertheless, before it could consider the substance of the Brazilian case on serious prejudice, the panel had to first consider whether the complaint passed the peace clause test. Economic impact or serious prejudice Article 13 of the Agreement on Agriculture, better known as “the peace clause”, is a measure which protected the majority of agricultural subsidies from complaint under the Agreement on Subsidies, for a period of nine years.4 Even though this clause has now expired, it was incumbent on the suing party to demonstrate that the level of subsidies in question was higher than those observed in the reference year (1992).

3 TN/AG/GEN/4, http://docsonline.wto.org 4 The deadline for the peace clause was 31 December 2003.

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In the case of cotton, the WTO panel noted that the levels of US subsidies during four consecutive years (1999–2002) were higher than those of the benchmark year, and that the Brazilian complaint was therefore allowable. It was then possible to consider the substance of Brazil’s case on serious prejudice. Brazil’s claim in this context relates to the impact of US subsidies on international trade. The correlation between US subsidies and the fall in cotton prices is at the core of its complaint. According to the documents submitted by Brazil, US cotton subsidies artificially raise the level of cotton production in the USA and artificially stimulate exports. By extension, they lead to a reduction in global prices and a loss in market share for other producers. Between 1998 and 2003, the USA’s share of global cotton exports increased from 17 per cent to 42 per cent. This commercial success, however, owed more to the generosity of the US government than to the competitiveness of local producers. Indeed, in addition to the export subsidies highlighted by Brazil, US producers have access to a whole series of domestic support programmes: • Marketing loans, which are a short-term financing tool that allocates funds to producers to help them meet their costs, while storing their harvest as security. This programme guarantees an income of 52 cents per pound of cotton produced. If world prices are lower than this level, the American government covers the difference.5 • Counter-cyclical payments, which are made on the basis of an indicative price of 72 cents per pound. These payments allow levels of production to be maintained independent of the level of world prices.6 • Finally, the US government also offers subsidised insurance programmes to cotton producers (against poor weather conditions, disease or price falls).7 The WTO panel ruled that three US programmes – counter-cyclical payments, marketing loans and Step 2 payments (essentially an export subsidy scheme – see below), which between them represented a total of $2.6 billion dollars in 2002/03 – caused serious prejudice to other cotton exporting countries by “preventing a significant rise in world prices”.8 The Appellate Body confirmed its findings. Neither the panel nor the Appellate Body set a specific deadline for the elimination of the negative effects of these subsidies. Nevertheless, Article 7.9 of the Agreement on Subsidies stipulates that the party concerned has a deadline of six months from the date on which the DSB adopts the report of the Appellate Body, to take appropriate measures to eliminate the negative effects of subsidies or to eliminate the subsidies themselves. The DSB adopted the reports on US cotton subsidies by the panel and the Appellate Body on 21 March 2005: therefore the USA should have taken the necessary measures before 21 September 2005.
5 US$ 898 million was spent under this programme in 2002/03. 6 US$ 1.309 billion was spent under this programme in 2002/03. 7 For a total of US$194.1 million in 2002/03. 8 WT/DS267/R, p.411, http://docsonline.wto.org,

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Export subsidies Export credit guarantee programmes, for cotton and for the majority of other agricultural products (e.g. rice, maize, soya) have been called into question by Brazil in the context of the cotton case. These programmes, which guarantee the reimbursement of dollar loans contracted by importers of US agricultural products, covered US$1.6 billion of cotton exports over the four years being considered by the panel. The relative costs of these programmes were not covered by the amounts invoiced to the importers, so the panel classified them as export subsidies. The “Step 2” programme, designed specifically for American cotton exporters, aims to maintain export prices at the same level as those of competitors with the lowest production costs. It allows the difference between the higher price of cotton from the USA and world prices to be covered, thus guaranteeing the relative competitiveness of US exports of cotton. In 2002/03, US$415 million was paid out under the Step 2 programme. The panel has demonstrated that this programme should be classified as an export subsidy and should not be placed in the Amber Box category. Since the USA did not reserve the right to use export subsidies for cotton under the Agreement on Agriculture, the panel declared that these programmes were prohibited subsidies under the Agreement on Subsidies and should consequently be abolished. In accordance with Article 4.7 of the Agreement on Subsidies, the implementation deadline set by the panel, and confirmed by the Appellate Body, for the withdrawal of these measures was 1 July 2005.9 Direct payments and the Green Box The Brazilian case also called into question direct payments. These are paid to producers on the basis of historic acreage and yields recorded between 1998 and 2001. They are independent of world prices and the beneficiaries do not even have to continue to produce cotton, or any other agricultural product, to receive them. Direct payments represent around 6 cents per pound of US cotton production, which in 2002/03 equated to a total of US$617 million. The current WTO rules do not limit the capacity of WTO members to have recourse to subsidies that have minimal trade-distorting effects – for example, subsidies that finance agricultural research or preserve the environment. Such payments, which are not subject to reduction commitments, are notified to the WTO by member countries as being part of the Green Box. The WTO panel has, however, recognised that these direct payments do not meet all of the criteria for the Green Box, and more particularly paragraphs 6(a) and 6(b) of Annex 2 of the Agreement on Agriculture. Specifically, it highlights direct payments that limit the flexibility of cultivation, i.e. a ban on cultivating fruits, vegetables and wild rice, on land that benefits from such payments.

9 WT/DS267/R, http://docsonline.wto.org

The WTO ruling on the Brazil-US cotton dispute: What implications?

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This decision by the panel has two important implications. First, it means that the USA will have to reclassify these programmes into the Amber Box, and thus risk exceeding the authorised limits for this category. Second, it implies that direct payments have been included in the peace clause deliberations. The implementation of the ruling and the limitations of third party status Once the principle has been recognised that US cotton subsidies are illegal, it remains to be determined what the impact of abolishing these programmes will be. Even though the exact consequences of such a move vary according to the different modelling exercises employed, most of them nevertheless agree that the impact on world prices, as well as on US exports, would be significant. The estimates presented to the panel by Brazil emphasised that in the absence of subsidies over the period 1999–2002, US cotton production would have been reduced, on average, by around 29 per cent, while exports would have decreased by about 41 per cent. During the same period, world cotton prices would, on average, have increased by around 12.6 per cent.10 While Brazil estimates that is suffered losses of up to US$478 million as a result of US subsidies over the period 1999–2002, African cotton-producing countries remain the worst affected. In West Africa alone, 10 million people depend on cotton for their livelihoods. Oxfam has estimated that Africa as a whole is losing more than US$400 million a year due to distortions in the cotton market.11 Similarly, the elimination of US cotton subsides for the period 2003–07 would have allowed an increase in global prices of around 10.8 per cent.12 The same study demonstrates that the programmes that have the greatest impact on world prices are marketing loans, counter-cyclical payments and Step 2. Over this same period, US exports would have fallen by about 44 per cent, thus creating new opportunities in terms of market share for African producers. Even though these figures illustrate the need for large-scale reforms in the USA, and although the WTO decision offers an opportunity for the US administration to revise its cotton support programmes, implementation of this decision involves a legislative process that risks postponing the elimination of the programmes. It should also be pointed out that, even if some African countries have participated in the Brazilian complaint as third parties, they would not be involved in the implementation phase of the decision. This underlines the limitations of third party status.

10 Statistics from the Brazilian submission: http://www.mre.gov.br/portugues/ministerio/sitios_secretaria/cgc/algodao.asp 11 “Who will be left to cheer the end of illegal US subsidies?”, Oxfam International briefing note, 3 March 2005. 12 Sumner Daniel, “A quantitative simulation analysis of the impact of U.S. cotton subsidies on cotton prices

and quantities”, presentation to the WTO cotton panel.

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Third party status While the decision of Benin and Chad to participate in the Brazilian complaint as third parties should be put into the wider context of their strategy on cotton, it also illustrates the limitations of the WTO dispute settlement system in its current format. Even though the question of African countries participating alongside Brazil as complainants was first raised in 2002, the technical, financial and especially political obstacles inherent in the legal process have clearly acted as barriers for countries in West and Central Africa. The WTO celebrated its tenth year of existence in 2005 and is regularly championed as a major step forward in the multilateral trade system, but it is important to remember that no LDC has yet taken part in a case as a complainant. Virtually the same is true of the participation of LDCs as third parties: there has been only one single instance between 1995 and 2003.13 Even though these statistics raise questions about the dispute settlement system in its current form, they also emphasise the importance of Benin and Chad participating as third parties in the Brazilian complaint. The participation of WCA countries was essential in allowing the panel to consider the impact of US cotton subsidies on countries beyond Brazil. The Understanding on Rules and Procedures Governing the Settlement of Disputes14 defines in its Article 10 the status of “third party”. It stipulates that: “Any Member having a substantial interest in a matter before a panel […] shall have an opportunity to be heard by the panel and to make written submissions to the panel. These submissions shall also be given to the parties to the dispute and shall be reflected in the panel report.” The panel and the appeal body of the WTO thus heard evidence provided by Benin and Chad regarding the effects of US cotton subsidies. This evidence complemented the arguments supplied by Brazil and emphasised the fact that the negative impact of cotton subsidies are not confined to one single country. Similarly, the submissions of Benin and Chad15 to the panel allowed some of the essential points contained in the Sectorial Initiative in Favour of Cotton to be brought out. Both countries highlighted the importance of cotton to their economies (it accounts for 75 per cent of exports in Benin and 25 per cent in Chad), before presenting various studies demonstrating the difficulties encountered by African producers as a result of US cotton subsidies. Benin also stated in its submission that it “did not seek to obtain special and differential treatment in the context of this present dispute”. It simply asked the panel to ensure that the “relevant measures of the WTO Agreements […] should be interpreted in the spirit in which they had been negotiated.” 16

13 Towards A Development-Supportive Dispute Settlement System in the WTO, ICSTD, 2003. 14 Annex 2 of the Uruguay Round of Agreements. http://www.wto.org/english/docs_e/legal_e/28-dsu.pdf 15 Annexes B36, C7, E17, F19, J3 and J14 of the panel report (WT/DS267/R). 16 WT/DS267/R/Add.1, p. C16.

The WTO ruling on the Brazil-US cotton dispute: What implications?

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However, even though the participation of Chad and Benin meant they were able to provide evidence to the panel, this status does not provide the same rights as those of the party bringing the complaint. Thus, in the event that the decision adopted by the DSB is not implemented, the imposition of retaliatory measures is not a possibility offered to third parties. This underlines the limitations of third party status and shows that the African countries are now dependent on an implementation of the DSB decision in good faith by the USA or, if this fails, on the political pressure that Brazil is able to exert on the USA to withdraw its illegal programmes through the imposition of retaliatory measures. Implementation of the decision Even though a rapid implementation of the WTO decision would have a significant positive impact on other producing countries as a result of increasing global prices and opportunities in market share, the intentions of the US government and Congress as yet remain unclear. In accordance with the dates fixed by the panel and confirmed by the Appellate Body for the elimination of illegal subsidies, the Bush administration has already introduced an administrative reform of the export credit guarantee programme, on 30 June 2005.17 Nevertheless, this reform is insufficient as far as these guarantee programmes are concerned and, furthermore, has not addressed the Step 2 programme, which should also have been eliminated by this date. On 5 July 2005, the US authorities finally presented a second proposal, which should allow the USA to respect the DSB’s decision on illegal subsidies, notably by proposing an elimination of Step 2.18 However, this proposal has first to be introduced to Congress, and then voted on. It is difficult at the moment to predict the outcome of the issue, let alone to be able to set a precise timeline for the adoption of any new measures. This means that the elimination of cotton export subsidies currently remains more of a possibility than a certainty. Faced with the US government’s inability to eliminate its illegal programmes by 1 July 2005, Brazil requested authorisation to take retaliatory measures against the USA during the DSB’s meeting on 15 July 2005.19 However, Brazil recognised that the US administration had made a first step by submitting its reform proposal to Congress and so signed a bilateral accord with the US side, which led to the arbitration procedure being suspended in order to give the USA more time to follow through the legislative process for eliminating the subsidies.20 It is important to note that this bilateral agreement guarantees Brazil’s rights to take appropriate measures in the case of unsatisfactory implementation. Brazil also made clear at the DSB meeting in July that the agreement applied only to the finding on prohibited subsidies, and did not excuse the USA from taking the necessary measures on subsidy programmes causing serious prejudice between then and 21 September 2005.
17 http://www.usda.gov/documents/0093RiskBasedFeesGSMSCGP.doc 18 US Department of Agriculture, press release No. 0242.05, 5 July 2005. 19 WT/DS267/21, http://docsonline.wto.org 20 WT/DS267/22, http://docsonline.wto.org

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Finally, it should not be forgotten that the two subsidy programmes declared illegal by the DSB were apparently the least sensitive ones politically. The principle of a reform of the export credit guarantee programmes had already been accepted in the context of the current WTO negotiations on export subsidies. Moreover, the fact that the Step 2 programme applies only to cotton, unlike other support programmes called into question by this case, ought to make its elimination politically easier. The stumbling blocks encountered at this stage in the implementation process are therefore bad omens for the future. Indeed, the USA must still eliminate or drastically reform its counter-cyclical payments and marketing loans. Given that these two programmes represent more than 60 per cent of all subsidies paid to US cotton producers in 2002/03, the Bush administration will have to show a real political commitment to obtain their elimination. The good news is that Brazil appears determined to make full use of its rights. It has already announced that it plans to suspend some of its obligations under the Treaty on Trade-Related Aspects of Intellectual Property Rights,21 if the USA does not respect its obligations. The imposition of retaliatory measures could have two objectives: to obtain financial compensation, or to exercise political pressure through targeted measures in order to obtain implementation of the DSB’s decision. In the present case, it is likely that Brazil is seeking to obtain an elimination of cotton subsidies that have been judged illegal. It would indeed be difficult for the US administration to defend subsidies paid to a minority of cotton producers, if Brazil suspended its obligations to open its market to services and other US industries saw their access to Brazilian markets reduced. Implications for the Sectoral Initiative in Favour of Cotton and the Doha round Since Cancùn, the Sectoral Initiative in Favour of Cotton has remained one of the key issues on the WTO’s agenda, together with agricultural negotiations, industrial tariffs and services. The recent ministerial meetings of the LDCs and the African Union have reaffirmed the support of developing countries for the cotton issue. Nevertheless, even though the Framework Agreement adopted by the WTO General Council on 1 August 2004 includes a commitment to deal with cotton in an “ambitious, expeditious and specific manner” 22 within the agriculture negotiations, hardly any progress has been made since that date. Several meetings of the Cotton Sub Committee have been held during 2005, but no negotiations have taken place on the core issues. It has been suggested that the lack of progress on the agriculture dossier as a whole is holding back any solution on cotton, thus linking any specific progress on cotton to a wider consensus on agriculture. There are two objections to this: first, this approach goes completely against the July Framework Agreement and, second, it does not take
21 WT/DS267/21, http://docsonline.wto.org 22 WT/L/579, http://docsonline.wto.org

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into account the fact that the programmes called into question by the Sectorial Initiative have been declared illegal by the DSB. Furthermore, despite the fact that African countries have been flexible on procedural issues, accepting that the issue be transferred to the agriculture negotiations last July, they are unlikely to sign any possible agreement in the Doha Round that does not respond to their legitimate concerns. The very relative progress that has been seen, both in the negotiations and in the implementation of the DSB decision, strengthens the links between the objectives of the Brazilian complaint and the African Sectorial Initiative in Favour of Cotton. Thus co-ordination between the various stakeholders is essential in the context of a substantive solution on cotton, either through the implementation of the DSB’s decision, or in the framework of an agreement at the next Ministerial meeting of the WTO. The latest “Proposed Elements of Modalities in Connection with the Sectorial Initiative in Favour of Cotton”, presented by the African group in April 2005, is a perfect example of this.23. The implementation dates proposed for the elimination of export subsidies and other internal support measures that have a distorting impact on trade are coherent with the dates fixed by the panel and the Appellate Body. Similarly, Brazil and its partners in the G20 support without reserve the African position in the meetings of the Cotton Sub-Committee. Nevertheless, it should be noted that the USA has still made no written response to the new African proposal, corroborating doubts over its willingness to make commitments within the sub-committee. The USA has every interest in replying to the demands of these countries and reforming its cotton production support programmes before the end of the year. Otherwise, the risk of seeing the Hong Kong conference stumbling over cotton is very real. In addition to bearing the responsibility for this failure, the USA would also have to face the imposition of counter-measures by Brazil. Cotton in perspective: what are the implications for the Doha Round? The Brazilian complaint on cotton is part of a wider strategy by that country regarding the WTO, as it aims to attack dumping created by the agricultural support policies of the USA and the European Union. In parallel with its cotton complaint, Brazil has also filed a complaint against the EU’s sugar policy. Furthermore, Brazil is now a major player in negotiations on agriculture, through its involvement in the G20. This group, active since the summer of 2003, has presented proposals on the three pillars of agriculture negotiations and constitutes a counterweight to the USA and the EU, particularly on issues of export subsidies and domestic supports.

23 TN/AG/SCC/GEN/2, http://docsonline.wto.org

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The decision of the WTO on cotton reinforces politically the claims put forward by Brazil and other developing countries against certain agricultural subsidies. The fact that it has been proved that the USA (in the cotton dispute) and the EU (in the sugar dispute) are contravening WTO regulations seriously weakens their political positions during negotiations. Consequently, is there any reason that developing countries should continue to make concessions during the Doha Round, if it is obvious that the WTO members maintaining the biggest subsidies have not respected the relatively modest commitments that they subscribed to in the Uruguay Round? As regards domestic support measures, the decision of the WTO panel clearly demonstrates that the subsidy programmes currently used by the USA have disastrous consequences for world markets. This strengthens the position of those who are demanding large-scale reductions in all forms of domestic support in the current round of negotiations. More specifically, the decision on cotton shows that latitude in the definition of the Blue Box, allowing for a reclassification of US counter-cyclical payments, would go against the objectives of the Doha Round. In addition, on the basis of the Framework Agreement of July 2004, such a redefinition would allow the United States to increase its agricultural subsidies at the end of the current round of negotiations.24 Similarly, one of the key demands of developing countries is to obtain a more restrictive redefinition of the criteria for subsidies placed in the Green Box category. The cotton panel’s report supports these countries by showing that certain payments currently classified in the Green Box have an influence on levels of production and have a trade-distorting impact. This certainly calls for an in-depth re-examination of all payments currently classed as Green Box, in order to ensure that they really measure up to the objectives of rural development, protection of small farmers or protection of the environment, which payments in this category are supposed to demonstrate. Beyond its impact on the agricultural negotiations, the DSB’s decision on cotton subsidies has given an undeniable legal base to the Sectorial Initiative in Favour of Cotton. Nevertheless, the delays inherent in the WTO process, whether in negotiations or in the dispute settlement system, make it an inadequate mechanism for a response to the urgent situation of African producers. The credibility of the multilateral trade system depends on the ability of the WTO to respond to the demands of all its members, and within reasonable time limits. It is therefore imperative that the demands of African countries with regard to cotton find a Favourable outcome before the Ministerial meeting in Hong Kong. A solution on cotton is now a prerequisite to an agreement in the Doha Round.

24 cf. “A Round for free, how rich countries are getting a free ride on agricultural subsidies at the WTO”,

Oxfam Briefing Paper No.76, juin 2005. http://www.oxfam.org/eng/pdfs/bp76_dumping_roundfofree_050615.pdf

PART II:

Actors, Strategies and Alliances

.

The African cotton set in Cancùn: a look back at the beginning of negotiations*
Denis PESCHE and Kako NUBUKPO**

Introduction
In late April 2003, Benin, Burkina Faso, Mali and Chad submitted a negotiating proposal to the WTO entitled “Poverty Reduction: Sectoral Initiative in Favour of Cotton”. In September 2003, at the Cancùn WTO Ministerial Conference, Africa took centre stage in the discussions on cotton. As the standard-bearers of West and Central Africa (WCA), the four co-sponsors of the initiative symbolise the contradictions inherent in the current conditions for cotton production throughout the world and, by extension, the parameters for the integration of African countries into a globalised world. World cotton production stands at around 20 million tonnes of cotton fibre annually. The main producing countries are China, the United States, India, Pakistan and, to a lesser extent, Uzbekistan and Turkey. Asia is the focal point for cotton production and industrial consumption. The European Union and the non-producing countries of Southeast Asia are the traditional importers of cotton, and they have recently been joined by the major Asian producing countries (China, India and Pakistan), whose consumption is outstripping production. The main exporting countries for cotton fibre are the USA, significantly the largest with close to 40 per cent of the world market, followed by francophone Africa (around 15 per cent), Uzbekistan (13 per cent) and Australia (10 per cent). The basic facts of the problem present a polarised situation. On the one hand, cotton constitutes 30–40 per cent of export earnings for the four WCA countries that proposed the Sectoral Initiative. Their production stood at around 1 million tonnes in 2002, or 17 per cent of the global market, as opposed to 4 per cent in 1980. Cotton is a source of livelihood for 10 million people in these countries and can be considered one of the rare African success stories. On the other hand, the two economic superpowers, the USA and the EU, are disrupting the global market by subsidising their cotton producers.
*This article reviews and brings up to date issues initially examined in issue 28 of the journal “Politique Africaine”, October 2004. ** Denis PESCHE is a sociologist and Kako NUBUKPO is an economist. Both are part of the ARENA Collective Action, Policies and Markets research unit of the Centre for Cooperation in International Research for Agricultural Development (CIRAD), based in Montpellier, France.They would like to thank Maurice Oudet (ABC Burkina Faso) and Eric Hazard (ENDA Diapol) for all their information and comments, without which this article would certainly have lacked a certain zest.

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The USA accounts for 40 per cent of global cotton trading and allocates 68 per cent of global subsidies to its 25,000 producers.1 Even though it does not export any cotton, the EU, with its mere 2.5 per cent production level, still provides 18 per cent of the global subsidies granted for the crop. Other countries too subsidise cotton production (e.g. China, Turkey), but in a much less obvious way and their action does not, a priori, appear to disrupt the global market. According to analysts, the 2001 downturn in cotton prices is largely to be attributed to the US policy of subsidies for its cotton producers. Comparisons of the relevant figures, exposing the disproportions and blatant inequity involved, won widespread sympathy and much support for the African initiative at the Cancùn Conference. The main stumbling block at Cancùn was the refusal of developing countries to debate the “Singapore issues”, such as competition, investment, facilitation of trade and transparency of public markets, which were a crucial sticking point between them and the the EU. However, it was the disagreements over agricultural issues in general, and on cotton in particular, that shaped the course of debate during the conference. For the first time, international trade negotiations faltered over an African claim, which was deemed legitimate by the majority of countries. This unprecedented situation raises many questions. How did we get here, and with the ongoing cotton debate, has Africa reached a new stage in its development, with new capacities that would carry weight in international negotiations? What were the motives of the stakeholders who took the lead in preparations for the Cancùn conference? What was the starting point of this process? Have Africans allowed themselves to be dragged into a liberal crusade against agricultural subsidies? And now, two years after Cancùn, what prospects are in store for African countries and for their cotton farmers, in concrete terms? What lessons can be learnt from analysing the various gameplans that exist in the realm of international negotiations? First, this article will briefly examine the relative significance of the “instrumentalisation theory” in order to understand what appears to have happened at Cancùn. This will be followed by an examination of the origins of the conference and the creation of the “cotton case”. This will allow a closer analysis of the motives and show the chain of events that culminated in the dossier. Initially set in motion by farmers’ representatives, the dossier was introduced into the arena of trade negotiations with the support of international NGOs, cotton companies and liberal agro-exporting countries. Finally, a few lessons will be drawn on how to analyse the process of building alliances and multi-actor strategies.

1 According to Oxfam International, US subsidies topped US$3.9 billion in 2001/02, double the 1992

level. This figure is higher than the GDP of Burkina Faso, and higher than the production value of the 25,000 American cotton producers. Three-quarters of these subsidies benefit just 10 per cent of the biggest American planters. Oxfam International (2002), “Cultivating Poverty: The Impact of US Cotton Subsidies on Africa”, OI briefing paper no.30, p.37.

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Is the cotton case just a decoy? In order to analyse what has happened, one should bear in mind that lurking behind the perceived strength of the African position is the alternative theory of instrumentalisation, aimed beyond Africa and cotton at other goals. In certain respects, the cotton question might appear to be a Trojan horse for wider or different conflicts. On the one hand, several countries, well-known for their liberal position, were quick to support the Africans on their position, especially on the abolition of agricultural subsidies (this is true, for example, of Canada, Australia and Argentina, who are active members of the Cairns Group). This looming threat could explain a certain reticence on the part of the EU to make a firm commitment to supporting the cotton case at Cancùn, fearing harsh criticism of the reform process for its own Common Agricultural Policy (CAP). On the other hand, civil society organisations also quickly seized on the cotton case, recognising it as a classic textbook case that highlighted the inconsistencies between the trade policies and the overseas development policies of the EU and the USA. For a number of NGOs, cotton is also an ideal communications medium to challenge the legitimacy of the international institutions that regulate trade and economic development. For African states, the cotton case offered a good opportunity to boost their profile. The WCA governments and their representatives appeared on the international stage as heroes of the fight against poverty and champions of their people, despite the fact that examples abound of their failings in the areas of economic and social development within their own countries. A scrutiny of the origins of the cotton case illustrates that African society is veering more and more towards the informal sector. Farmers’ associations, NGOs and cotton companies are coming together to make their legitimate demands heard, even though by their very nature they tend to compromise the credibility of the African state from within. The denunciation of an external enemy and the identification of a simple target (US subsidies) allow African states to gloss over any analysis of their own responsibilities regarding the difficulties facing their cotton industries. Finally, by belatedly seizing on a cause initially brought up by cotton farmers’ organisations, the African states demonstrated their ability to find a place in the general context of privatisation. However, they also displayed the difficulty they faced in being proactive and proposing their own agenda and vision of development. Even though it would probably be over-simplistic to advance the theory that Africa was instrumentalised at Cancùn, one must not lose sight of the fact that African countries, undermined by 25 years of structural adjustment, are the underdogs when it comes to international trade negotiations, not only vis à vis the major powers, but also the emerging ones (grouped together at Cancùn in the G202). These countries have the productive base and the capacity to react to global market indicators that surpass by far the meagre assets of the African economies, at least in the short term.
2 The G20 groups together Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, the Philippines, South Africa, Tanzania, Thailand, Uruguay, Venezuela and Zimbabwe.

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Thus, caught between different trading powers looking to increase their global market shares, and with governments seeking legitimacy, the African cotton farmers appear at first glance to have set in motion a process that they do not necessarily control. However, it helps to put the facts of the theory of instrumentalisation into perspective, and to be wary of appearances. Indeed, an in-depth analysis of the process leading up to Cancùn shows the intricate interplay of interests amongst those involved and compels us to look at the evolution of relationships between governments and civil societies in Africa3 and, equally, at the relationships between Southern countries and those from the North. Thus, to bestow overriding importance on the instrumentalisation games that took place could overshadow recognition of the fact that committed African stakeholders were strengthened in the process that contributed to the failure of the Cancùn conference, and would be to disregard the learning curves that arose from confrontation between the various stakeholders. The evolution of the cotton case In November 2001, African cotton producers were the first to step forward on the international stage with a declaration denouncing the negative effects of US and European subsidies on cotton prices. Under the leadership of the national union of cotton farmers of Burkina Faso (UNPCB), four other farmers’ organisations (from Benin, Mali and Cameroon, followed by Madagascar at the beginning of 2002) committed themselves internationally and challenged their respective governments on the issue. The declaration emphasised the contradictions that existed between trade policies and development policies. “As soon as it came to fighting poverty, West African cotton farmers immediately understood that it would only be through their own efforts that they could change their lot in life. They set to work and no sooner had they managed to top their production figures than the world cotton prices suddenly crashed. We have to ask ourselves if there is a real will amongst the rich countries to reduce poverty amongst poor countries.”4 At about the same time, in February 2002, a study carried out by two NGOs5 on the sustainability of cotton industries in Africa brought together cotton farmers’ representatives in Dakar. During this meeting, contacts were forged between the producer organisations (POs) and the NGOs; their objective was to be more visible at international meetings on cotton and to make known the position of the producers. The POs and the NGOs were invited to a meeting on the future of the cotton industry organised in Lomé, Togo by the West African Development Bank, although of the 180 participants, only three were producers.
3 This is the theory put forward by Eric Hazard, in Hazard E, (2004), De Bobo à Cancun, deux ans de campagne sur le coton: bilan et perspectives avant Genève, ENDA Diapol, Dakar, p.13. 4 See the declaration on the website http://www.abcburkina.net/coton.htm. This website, managed by Maurice Oudet in Burkina Faso, has played an important role in making the African cotton producers’ initiative known and in garnering support for it. 5 ENDA Prospectives Dialogues Politiques (Senegal) and Oxfam UK. This work culminated in a study (of which 2,500 copies were published) entitled “Production cotonnière et conditions de vie en milieu rural en Afrique de l’Ouest” by Peter Ton, Etudes et Recherches, n°219, 2001, Enda, Dakar, p.87.

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This scenario puts into question the mechanisms in place for representing African producers through the auspices of their organisations. Briefly, tensions can be identified within the West African farmers’ movement between a vertical logic, which concentrates on defending specific interests, often structured around a single product and based on an economic (or industrial) logic, and a horizontal or cross-cutting thinking, aimed at defending and promoting an agricultural model based on the family concern (the vision defended by ROPPA6). These two ways of thinking are inherent in the creation of most of the producers’ organisations. The word “tension” should be understood in the sense of a dynamic of creation and not as a binary opposition between two ways of thinking, embodied by the organisations or by specific individuals. The Conference of West and Central African Ministers of Agriculture (CMA/CWA) organised a meeting in June 2002 in Abidjan, where the cotton case started to take shape, along with the involvement of producers’ representatives, backed by NGOs. At the time, the demands of African producers were not taken seriously at an international level and African governments were divided in their approach towards rich countries. Some advocated attacking the EU and the USA at the WTO by complaining to the DSB (Dispute Settlement Body) and running the risk of reprisals, while others counselled seeking to negotiate directly. In the end it was decided that the second option should be adopted. At the end of June 2002 in Abidjan, CMA/CWA was mandated to analyse the impact of subsidies on cotton industries and to negotiate with the USA and the EU. Following the Abidjan meeting, the African Cotton Association (ACA) was created, bringing together the main cotton groups of the sub-region. The formulation of a clear agenda on the international front (i.e. abolishing subsidies linked to cotton) facilitated new alliances between cotton companies and representatives of West African producers who were members of national platforms affiliated to ROPPA. The process gained momentum in September 2002, with the complaint lodged at the WTO by Brazil against the USA on cotton subsidies, and the publication of a damning report prepared by Oxfam International.7 In addition to the findings of CMA/CWA, WAEMU (the West African Economic and Monetary Union) and ECOWAS (the Economic Community of West African States) published similar studies, detailing the impact of subsidies on African cotton production. Ablasse Ouedraogo of Burkina Faso, who finished his tour of duty as assistant director-general of the WTO in November 2002, offered his services to WAEMU. A Geneva-based office, IDEAS, headed by Arthur Dunkel (former director-general of GATT (General Agreement on Tariffs and Trade)), lent its expertise to the African negotiators in Geneva. The outcome of all this was the submission of the Cotton Initiative to the WTO by the four African countries on 30 April 2003, initially with the support of ECOWAS and then, later, of WAEMU.
6 Réseau des organisations paysannes et de producteurs agricoles d’Afrique de l’Ouest (ROPPA),

a network of West African farmers’ organisations and agricultural producers, was created in July 2000 and brought together farmers’ organisations from ten West African countries. Its general mandate is to represent its members at both regional and international levels (see www.roppa-ao.org). 7 Oxfam International (2002), Cultivating Poverty: The Impact of US Cotton Subsidies on Africa, Oxfam Briefing Paper no. 30, p.37.

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Another Geneva institution, ICTSD (International Centre for Trade and Sustainable Development), also played a pivotal role in supporting the process, underlining the growing influence of NGOs on international trade negotiations. The tardy commitment of African governments could be interpreted as the result of growing pressure from cotton producers, supported by the NGOs and the media, who used African sub-regional forums to disseminate their messages. Farmers’ representatives and NGOs8 succeeded in building up a network of support, bringing together diverse expertise centred on Geneva-based offices that specialised in supporting developing countries in international trade negotiations (“the Geneva Group”). In this way, a link was made between African negotiators and WTO headquarters. Despite the enthusiasm of African representatives to the WTO, the mechanisms in place were quite fragile, since only two of the four countries involved had a permanent ambassador to Geneva: Benin, which oversees co-ordination between the four countries, and Mali. In addition, Burkina Faso charged its permanent ambassador to Brussels to deal with this issue. The need for these ambassadors to refer to their capitals to consult on political decisions further complicated their work, whilst limiting their capacity to react in a timely manner. However, African unity behind the cotton case did little to hide the rivalries that escalated in the run-up to the conference. In June 2003, the release of the WAEMU study gave rise to heated debate amongst experts on the approach to be adopted in the two months leading up to Cancùn. At stake was control over the expertise to the African negotiators on the cotton case. Rivalries were also stoked by appreciable divisions in international outlooks, with a range of positions running from liberal options to an extreme of anti-globalisation, with more pragmatic attitudes in the middle. A final preparatory meeting was organised in Saly, Senegal, and involved all the African stakeholders, with a view to building a coherent strategy to defend the cotton case in Cancùn. Tension was also perceptible between ECOWAS and WAEMU: the plethora of sub-regional forums and their rivalries doubtless helped to open up gaps for the producers and the NGOs, who were adept at using the regional organisations to increase pressure on their governments and to consolidate their positions. Despite these divisions and the heightened tension a few months before the meeting, Africa and cotton were at the centre of the agenda at the Cancùn conference. Just before the conference began, a “cotton tour” was organised in France, Belgium, Holland and then the USA, involving representatives from the WCA countries. These meetings ensured that the main points of the cotton case were transmitted to the general public and that dialogue was initiated with political representatives. A petition from 250,000 African producers was submitted to the African trade ministers going to Cancùn, maintaining pressure on them to defend the cotton case.

8 Mainly Oxfam and ENDA Diapol, which built alliances with Geneva-based organisations e.g. ICTSD,

ACICI. Other NGOs and civil society organisations were involved, though less directly, prior to Cancun.

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The failure of Cancùn Two days prior to the opening of the conference, a “cotton day” was organised under the auspices of the German Overseas Ministry, which allowed delegates to test their arguments and to begin wooing the media.9 At the opening of the conference, the four ministers from the African countries submitted the cotton text to the WTO. The EU delegation sought to shirk its responsibilities by arguing that its members were not cotton-exporting countries and did not have support mechanisms for exports. The USA, the main target of the cotton case’s demands, rejected any idea of concessions on subsidies and proposed a wider approach encompassing cotton and textiles. The importance given to the dossier was undeniable: the director-general of the WTO was invited by the chairman of the conference – the Mexican Foreign Affairs Minister, Luis Ernesto Derbez – to personally conduct consultations on it with all the countries involved. Press conferences and a number of bilateral meetings punctuated the few days of the conference. However, the revised draft of the ministerial declaration practically repeated the proposals made by the US delegation, whereas the African partners had in fact rejected this in its entirety. The first problem confronting the conference chairman was the choice of a suitable text for discussion. A dispute over agricultural issues had set several developing countries on a collision course with the EU and the USA over a draft text published by the WTO on 24 August, which was intended to serve as a basis for negotiations in Cancùn. In order to break the deadlock, a group of countries – the G20, which included Brazil, China and India – submitted a new text, followed by another drawn up by the African countries. A solution was proposed by the chairman, but this turned out be fraught with pitfalls. The idea was to break up the discussions into five distinct working groups: agriculture, development, non-agricultural products market access, the “Singapore issues”, and other questions. The facilitators designated to preside over each working group were tasked with the responsibility of drawing up draft projects, based on the deliberations within their respective groups. The result of this system was a total breakdown in the negotiations. The centre of activities quickly moved from the negotiating rooms to places were informal contacts could be made. The concrete outcome of the situation was the creation of a new alliance, the G90, which brought together Least Developed Countries (LDCs), countries of the African Union (AU) and countries from the African, Caribbean and Pacific states (ACP). It also led to the formation of an EU/USA coalition that insisted on discussions on the so-called “Singapore issues” as a prerequisite for any possible concessions on other subjects, notably in agriculture.

9 Information regarding the Cancun conference was taken from Hazard E., (2004), De Bobo à Cancun,

deux ans de campagne sur le coton: bilan et perspectives avant Genève, ENDA Diapol, Dakar, p.13; from an interview with the author; and from several interviews carried out by the cotton observatory with African agricultural leaders present at the conference (for a presentation on the cotton observatory see http://www.inter-reseaux.org/publications/graindesel/gds19/GDS19c6.htm)

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With the intransigence of the different groups of stakeholders and the limited timeframe of the conference (10–14 September 2003), the meeting ended in deadlock. This fittingly summed up the declared objectives, hidden hopes and perhaps the ulterior motives of the various stakeholders. What are the stakes post-Cancùn? Not long after Cancùn, cotton was adopted as one of the four priority issues to be dealt with by the WTO. Two contradictory arguments were at play. First, there was disagreement over the proposal to include cotton within the larger context of agricultural negotiations. The USA and the EU10 were in favour of this option, while African countries opposed it, fearing that cotton would lose its specific status and that this would delay the adoption of concrete decisions. However, it was the option to include cotton issues in the wider agricultural dossier that gained the upper hand after the July 2004 negotiations. Second, international discussions as a rule distinguish between questions of trade and questions of development. Thus the unity of the African initiative in favour of cotton found itself torn between the trade aspect (subsidies) and the development aspect (financial commitments in favour of cotton industries). African countries sought to oppose this division, while international organisations advocated for a separation of the two issues, while highlighting the links between them. Paradoxically, having referred the questions of development back to the Bretton Woods institutions, in March 2004 the WTO took the initiative, holding a meeting on the cotton industry in Cotonou. Does this about-turn illustrate the institution’s unease, and its desire to cover up the lack of progress on trade questions? Since Cancùn, cotton has continued to mobilise stakeholders, albeit as an item on the “development” agenda. France, then the EU, sought the support of the donor community to consider actions aimed at strengthening the African cotton industries. The EU forum, “Africa on Cotton”, which was held in Paris at the beginning of July 2004, focused almost exclusively on issues related to the development of the cotton industries, despite the insistence of African states on the need to find possible solutions for trade questions. While African representatives waited for clear signs of a European commitment on the trade aspect, the European leaders and donors urged them to use the financial means to which they already had access, through state development aid, to support the industries. Nevertheless, this forum presented an opportunity for debate on important questions surrounding the future competitiveness of the industries, especially possible mechanisms for regulating cotton prices and also biotechnology (i.e. genetically modified cotton).

10 It should be noted that there are differences in attitude, partly linked to differences in position, between

the USA and the EU, regarding relationships with African stakeholders on the cotton case. While the American attitude since Cancùn has been closed to any thought of trade concessions on the cotton case, the EU appears more receptive and seeks to support the African cotton industries

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In Geneva, at the end of July 2004, an agreement of intent was signed between the USA and the African countries co-sponsoring the cotton case. This accord put an end to the “cotton exception” by reintegrating cotton into the more general international negotiations on agriculture. Contrary to the proposals put forward by Benin, it did not specify target numbers or deadlines, but simply stipulated that cotton would be treated in an “ambitious, expeditious and specific” manner and that a cotton sub-committee would meet regularly to discuss the issue. The African initiative at Cancùn seemed a distant memory and it seemed as though everyone had gone back to their own concerns, guided by specific agendas: the US elections, international agricultural negotiations, the change of leadership at the European Commission, and so on. Had the cotton case only been a flash in the pan? The answer in the short term is probably “yes”, bearing in mind the results anticipated from the African countries’ Sectoral Initiative in Favour of Cotton. Nevertheless, the hypothesis can be put forward that the incursion of the cotton case into the international public arena has promoted the idea that the agricultural sector needs regulation that the mechanisms of an international, liberalised market alone cannot provide. The African producers have understood this: during a ROPPA meeting in Cotonou in May 2004, they highlighted the importance of ensuring the development of the cotton industry in the wider framework of improving and safeguarding producers’ incomes, by reducing the industry’s dependence on international markets, in favour of regional markets. African producers also emphasised the importance of an approach centred on family agricultural concerns, whose potential for production must be maintained, whilst protecting the environment.11 These decisions demonstrate, despite obvious tensions, a stage in the construction of a movement of African peasant farmers, a budding link between the representation of specific interests in a single product and the more global defence of a vision of the future of family agriculture in West Africa. Nevertheless, the tensions remain. The creation in December 2004 of the association for African cotton producers (AProCA), has added an important piece to the already complex institutional chequerboard of African producer organisations. Above and beyond cotton, the real challenge is without doubt that African countries (and, more broadly, developing countries in general) have to arm themselves with agricultural policies that will allow them to guarantee an adequate income to their farmers, while still contributing to the economic development of their countries.

11 ROPPA, 2004b, “Plan d’actions du ROPPA et des OPPA pour le développement durable des filières africaines de coton”, ROPPA, Cotonou, “By carrying out advocacy and lobbying activities on the cotton industry, ROPPA is in fact defending all agricultural products affected by international trade: cereals, oil-producing products, coffee, cocoa, livestock, meat, milk… Thus the first challenge for ROPPA is to establish a defence strategy of all speculations and major agricultural products from family farming concerns.” ROPPA, 2004a, “Initiative paysanne en faveur du développement de la filière coton en Afrique: contribution provisoire pour discussion et débat”, ROPPA, Ouagadougou, p.6.

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What lessons can be learned? In conclusion, this experience is a good illustration of the limitations inherent in interpretations that take into account only stakeholders on a national or international scale: for example, the African states or the European Union. Numerous examples demonstrate the limitations of this kind of analysis, which often remains superficial in relation to the real gameplans of players in the debate. A few serve to illustrate the point. A number of European countries (France, Holland and Germany) played an active role in trying to encourage a positive outcome for the cotton case in Cancùn. As one observer stated: “The EU had a strong willingness within itself to make concrete proposals, but this constructive approach remained frustrated to the end of the conference.”12 France’s position on the cotton case is often presented as being favourable to the African demands: its benevolent attitude, however, should not be allowed to obscure the French Agriculture Minister’s reluctance to support any position that implied the abolition of agricultural subsidies. The commitment of African states to the cotton case was, throughout most of 2002, one of the main focuses of pressure by cotton producers and NGOs. These same states, which stand in the frontline of the international fight for African cotton industries, are no less ambiguous in their behaviour towards their own national industries.13 In these examples, it is clear that “macro stakeholders” do exist, but that they can themselves be considered the fruit of internal balances. On the evidence of visible and official positions (stated through declarations or communiqués), it is interesting to consider them also as a challenge unto themselves, and to decipher the influence brought to bear by interested parties. The analysis of the cotton case also illustrates the importance of the different geopolitical interests involved. For example, the plethora of actors in the African sub-regional area (WAEMU, ECOWAS, CMA/CWA, etc.) has been extensively used by cotton producers and NGOs to progressively persuade African states to commit themselves to the cotton case. France is seeking to convince Europe of the importance of assuming an open-handed position and to bring the debate around to development issues, in view of the impossibility of progressing on trade issues. It could be said that certain stakeholders can be considered key actors in this dossier (producers’ organisations, NGOs, etc.), while others are more “relay actors” or “target actors”, who need to be persuaded to reach an expected position.

12 Hazard E., (2004), De Bobo à Cancun, deux ans de campagne sur le coton: bilan et perspectives avant Genève, ENDA Diapol, Dakar, p.13. 13 Benin, the co-ordinating country for the cotton process, does not necessarily exemplify a state that impartially guarantees the decisions or respects the commitments made by the professional management of the cotton industry.

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Finally, analysis of negotiations primarily assumes that alliances and longer-term gameplans are taken into account at a given moment. Many analyses concentrate on the jockeying for position among stakeholders, without always considering the historical dimension of alliance-building or the initiations into different ways of thinking between actors during discussions and negotiations. The analysis of negotiations as a process allows an understanding of the origins of different standpoints and the evolution of alliances, and underlines the fact that all these processes also constitute a time for learning and training for everyone involved. One result of this is that we can probably no longer talk of “cotton producers or of other stakeholders (e.g. cotton companies, African states) in the same way in 2005 as we could in 2001

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Sectorial initiative on cotton: a balancing act of alliances in Africa and at the WTO
El Hadji DIOUF and Eric HAZARD*

Introduction
The GATT Rounds and the World Trade Organisation (WTO) have never been the preferred arenas for African countries to make themselves heard. Indeed, it has been difficult to find any evidence of African initiatives either in GATT/WTO negotiations or in contentious proceedings. The link that has finally been proved between US subsidies and deteriorating living conditions for cotton farmers on the continent has shed a new light on the WTO for African Least Developed Countries (LDCs), who now view it as a potential framework for solving their problems. The whole world delighted in the incursion by the poorest countries into the heart of the trade system, demanding that the Northern countries open their markets wider. Beyond the natural sympathy aroused by its content, the Initiative has been a dazzling success in the media, attracting the attention of international public opinion to the great injustice arising from the rules that govern international commercial trade. Nevertheless, whatever the impact the publicity has had on international trade negotiations, it is not in the media that WTO negotiations are held. In order to ensure that issues are addressed, it is not enough to place them in the public eye; they must also be backed up by technical arguments proving that the positions put forward are in accordance with the aims of the WTO. The African states were quick to understand that, beyond the original consensus on the legitimacy of their case, they also had to deal with the subtle and interminable work of weighing up different (but inextricably interlinked) interests. The process of drawing up the Initiative was punctuated with productive dialogues on directions to be taken, strategies to be adopted, alliances to be nurtured, pitfalls to be avoided, and improvement work to be done. The prolonged lack of use of the WTO mechanisms by the countries involved did not favour the adoption of cut-and-dried, immovable positions. Consequently, certain points of tension arose that were difficult to resolve. These crystallised around the credible alternatives to the procedural approach. The available options all possessed a logic and a credibility that could have given rise to a positive result, although some were more easily dismissed than others.
* El Hadji DIOUF is a lawyer by training, and head of African business programmes for the International Centre for Trade and Sustainable Development (ICTSD).

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Should classic poverty-reduction methods be used on an international scale, or should countries position themselves as fully-fledged actors within the trade system and reap the ensuing benefits? Should co-operation be favoured over a contentious approach? Should the cotton issue be separated from the overall negotiation strategies of African countries at the WTO? Much later, when the Initiative had finally established its legitimacy, problems were posed as to its implementation. Its presumed success raised the stakes. The original stakeholders were joined by a number of beneficiaries, all equally motivated. Legitimate questions started to be asked with regard to the definition of criteria for determining potential beneficiaries. Nevertheless, the players involved did not lose sight of the capital importance of their technical arguments, nor of the fact that the status of their financial, administrative and human capacities did not guarantee immediate success. It has since emerged that stakeholders in the Initiative glossed over divisions and points of tension that were sometimes quite serious. On each decision, it proved necessary to go through a difficult process of arbitration over conflicting strategies – particularly during the design phase (see section I below), although the implementation phase also required careful balancing acts (see section II). Without prejudging the effect of the choices made on the outcome of the Initiative, the points of analysis that follow try to shed a clear light on the management of what remains to this day the strongest case made by Africa to the WTO. Difficult arbitration regarding conflicting strategies at the design phase of the Initiative Upon close inspection, the development of the Initiative resulted from a series of attempts to balance divergent, even irreconcilable, stances and from a rapid apprenticeship in the working mechanisms of realpolitik. The points of friction were numerous on the ideological direction and even the systemic orientation that the proposals formulated in the Initiative should take. Principally, they concerned conflicts between trade and development issues; the delicate choice to be made between negotiation and legal proceedings; and the more general strategy of integration into the trade system for African countries, either through differentiated treatment or unrestricted acceptance of the rules of liberalisation. Trade and development in the Sectoral Initiative: examining WTO priorities Is the WTO an appropriate forum for dealing with development or poverty reduction issues? The question was raised during the drafting of the Sectoral Initiative and constituted one of the main sources of tension regarding the systemic direction to be given to the African submission. The problem posed by the cotton initiative is multifaceted. While it is social and economic in origin, its international manifestation involves a perception of unfairness arising from the disregard of a certain number of international trade rules. Although apparently straightforward, it took almost three years of analysis and sparring to reach

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a consensus on the diagnosis. Even now, the remedies to be applied still need to be defined, and this despite the ruling of the Dispute Settlement Body (DSB) in favour of Brazil, and thus of Africa. The difficulty assuredly arose from the need to strike a balance between the nature of the problems raised, the means available for a possible solution and the judicious choice of forum for the complaint. Consequently, there was good reason to review what should be negotiated, where it should be negotiated, and with what tools. In its heading, the Initiative calls for poverty reduction. This struggle is closely linked to that of development, and it is in this sense that the WTO committed itself during the Doha Round. This round of international negotiations, whose completion was initially scheduled for December 2005, proposed to establish the conditions and rules necessary for the development of the majority of WTO member states. And yet, in the area of trade, this participation in the development effort still often takes the form of unilateral offers of trade concessions, such as the General Preference System. Furthermore, the workings of the international system (World Bank, IMF, etc.) are so complex that, historically, forums have been organised with the aim of harmonising mechanisms for bilateral and multilateral economic intervention. However, it has proved very difficult to achieve the coherence sought between the different institutions. This certainly explains the creation of a Policy Coherence Unit within the OECD, and is also the reason why this question is the focus of increasing debate in various international forums. In the case of cotton, diagnosis of the precariousness of African farmers’ living conditions indicates that these are partly the result of the depreciation in cotton prices – which is not due to an invisible regulatory hand in the market, but rather to state policies that overprotect a handful of powerfully organised producers. In this instance, the Uruguay Round produced a framework for the regulation of agricultural issues, particularly that of subsidies. While commitments remain minimal and their impact on the level of subsidies almost non-existent, the framework states that any infringement that could be prejudicial to any member may be submitted to the international trade authorities, with a view to obtaining the application of the law and determining effective means of guaranteeing undistorted trade. Consequently, while the issue of poverty reduction remains relevant to the objectives of the Doha Round, as does coherence between the trade policies and development policies of the Northern partners and international multilateral institutions, there is reason to question the focus on that issue by an institution whose mandate is to deal exclusively with matters of trade. Withdrawal of these subsidies would allow African cotton to gain market share and would have a direct influence on poverty reduction. Moreover, the fact remains that this goal is not a unilateral concession based on moral considerations, but is based rather on the principle of non-infringement of common commitments, taken independently of any party’s level of development. By focusing the Initiative on poverty reduction, Africa may give the impression that it is asking for a favour, when in fact it is merely asserting its rights. And in negotiations as heated as those currently under way at the WTO, this loophole has been extensively used, firstly by the infringing parties involved, and secondly by the WTO itself.

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Has the request been properly understood, however? Could what has been construed as a weakness in the case actually be a strength? Basically, the major strength of the Initiative has always been exactly the fact that it is in perfect accord with the stated aim of the WTO, which is the elimination of obstacles to trade in a multilateral framework. After all, the Initiative proposes the elimination of subsidies that distort trade. Development and poverty reduction are secondary aspects, aimed at highlighting the urgency of the situation and the need for rapid action. Evoking poverty reduction has also given more weight to the Initiative by attracting the attention of the media and the public. In the end, no-one – except for the USA – has ever questioned the fact that the African demands regarding cotton subsidies are justified. This partly explains the undertaking by the WTO Secretariat in support of the C4 (Benin, Chad, Burkina Faso and Mali) countries before Cancun. The media aspect may certainly have seemed excessive, compared with the technical means mobilised to defend the case. But perhaps this imbalance simply reflects the historical difficulties that Southern countries, and particularly the C4, have in investing a portion of their limited means in the type of expertise whose potential benefits may only be seen in the long term. This “under-investment” can also be explained by the painful lessons learned by the C4 members in the art of WTO negotiations, although that does not justify the desperate lack of qualified people working full-time on the case. This issue is vital, and involves African states, sub-regional and continental institutions and even the African Union. More specifically, two essential elements of the Initiative have been put forward in this case: the claim for compensation and the desire to place cotton in the “special products” category. In both regards, the reference to development and poverty reduction has sometimes been used against the interests of African countries. The compensation claim aimed to introduce a new practice into the WTO, though one that the WTO itself did not wish to integrate beyond the mechanisms already set out in the framework of the DSB. In a show of good will, or an in attempt to distance itself from development issues, the WTO offered its services to help seek solutions to these questions, which were outside its own area of operation. The outcome of this was the Cotonou Conference, which gave the then director general of the WTO, Supachai Panitchpakdi, the opportunity to state that, for the most part, debate would deal with the “aid element” of the cotton initiative. From there, it was easy to stress the unusual participation of the WTO, followed by institutions such as the World Bank, the IMF and the OECD, in a forum for co-operation and negotiation on development policy, even though the underlying causes of the complaint were trade issues. Whilst it is easy to recognise today that the issue of compensation was, and still is, problematic in the framework of existing WTO tools, the commitment of the WTO Secretariat to the development aspect tends to validate, after the fact, the African argument, which stated that as long as subsidies continued, some form of compensation was necessary. The form taken by the compensation is of secondary importance. Further down the line, we can also point to a pre-supposed link between trade and development.

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With regard to the proposal made to include cotton in the special products category, the African countries may have appeared to be going against the grain of the trade-oriented and liberal focus of their case. In the framework of the WTO, special products apply to defensive interests that involve the protection of a leading sector, for reasons other than trade. A special product is therefore, by definition, subject to special and differential treatment. This is confirmed by its use in the Harbinson Draft and later in the July Package. Special product status can only be claimed when the product in question is not inherently competitive on the international market. This does not apply to African cotton, whose problems arise from the distortion of the rules of the trade system caused by subsidies. The intrinsic value of African cotton guarantees a competitiveness that Africans producers are the first to pride themselves on. Seen from this angle, cotton cannot be considered a special product, even though the underlying arguments are not of a trade nature. The Initiative tried to extend the concept of special products to offensive use. However, the African negotiators soon realised the limitations of their argument, and the Initiative was refined over time. The concept of an offensive special product was subsequently dropped by the C4. Similarly, the elimination of all forms of support for cotton was changed to the elimination of subsidies having an impact on trade. In the end, the request for compensation did not raise the subsidiary debates that might have been expected, such as the effectiveness of the DSB for Southern countries. Furthermore, the trade-related nature of the request was not given the necessary attention in terms of the means made available by the countries involved. Consequently, it sometimes gave the impression of fading into the background and lacking a certain freshness at various stages of the negotiations. While there is no doubt that the cotton case surfed on the media wave and the sympathy expressed by various member states, it will now be difficult for it to gain new impetus within the WTO and to reach a favourable outcome for producers, unless it has additional resources in keeping with the importance of the issues raised by the African countries. This issue is a particularly serious one, as it calls into question the importance accorded by African governments to international trade negotiations, at the WTO and elsewhere, and the resources they marshal when they enter into them. Only by providing appropriate resources can they have any hope of obtaining suitable outcomes. Negotiations or lawsuits: which option for which result? Although the cotton case has proved to be a learning experience for African countries in terms of the operating methods of the WTO, the continent’s low level of involvement in the various rounds of negotiation and participation in legal procedures within the institution have confirmed its passive role in the decision-making process. It is no exaggeration to say that any benefit African countries have derived from the trade system has been more the result of a unilateral resolve or a desire for balance on the part of the other members than of a resolute, argued claim by themselves. Consequently, the Initiative involved a sally into the inner circles of the WTO, which raised the question of the method that should be adopted. Negotiation or legal proceedings: which way to a solution?

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The decision was not easy, partly due to a lack of knowledge about the workings of the WTO, but more particularly because of the calibre of the protagonists in the opposing camp. The African countries had both the USA and the EU in their sights. Consequently, any African option would have to go beyond the traditional instruments for measuring objectives and take account of political considerations. According to the advocates of trade negotiations, the USA is an economic and political ogre that the LDCs of the continent should avoid confronting. Any initiative that might upset this ogre could have economic repercussions that go well beyond the damage presently being caused by the subsidy policy. In such a context, the most direct approach would be to negotiate for an effective reduction of support for agriculture, within the framework of the ongoing agriculture talks at the WTO. This multilateral strategy has the advantage of allowing African cotton producers to seek out alliances with other developing countries and thus increase their weight in negotiations. It is not the only option, however. The possibility also exists of exploring avenues of bilateral negotiation, notably within the framework of the Cotonou negotiations with the EU or the African Growth Opportunity Act1 (AGOA) with the USA. Seizing the AGOA opportunity would mean expanding American trade preferences, which have proposed to grant a prominent place to African textiles, in order to arrive at common agreements on the intertwined interests of the two parties. One might well ask what sort of logic the Americans could use to justify the obvious contradiction between the unilateral promotion of the African textile trade and the serious threat against it posed by US agricultural policy. Facilitating access to US markets for LDCs is part of an overall trade policy that supposedly takes into account the lack of competitiveness of small economies and their difficulties in adapting to today’s competitive trade framework. Through AGOA, despite the fact that the conditions for eligibility were debatable, the USA initiated a preferential trade system for Africa. However, while the success of AGOA has been quantified in terms of the number of African countries that have access to it, it is important to note that it has not really been a success overall. This was confirmed by the recent sacking of its representative, with a view to relaunching negotiations with African countries. Events seem to have proved the African countries right when they quickly understood that it was not in their interest to pursue this line of negotiations. The other option to be explored was that offered by the Cotonou negotiations on the Economic Partnership Agreements (EPAs) between the EU and the Economic Community of West African States (ECOWAS), which began in September 2002. These negotiations include both a trade dimension – which naturally includes agriculture – and an aid dimension. Beyond the fact that they do not cover all of Central Africa (notably Chad), negotiations on the lines of AGOA or EPAs can only offer supplementary aid or preferential access, which has doubtful real trade benefits, particularly if the fact is taken into account that the original rules in force under AGOA stipulated that all textiles exported to the USA had to contain US cotton. The approach to the problem
1 Legislation passed by the US Congress to promote African exports to the United States.

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with regard to the EU should therefore focus on co-operation, which could translate into EU support for the African cotton industry. This assistance could take the form of aid to the cotton industry in its regional dimension, for example by seeking to reduce production costs. These discussions appear to be the most advanced, in the form of an EU-Africa “road map”, on which progress is starting to be made. This new stance of “friendly confrontation”, as it was so aptly dubbed at its inception, reflects a totally new approach. In the first place, the LDCs actively participated in international negotiations. But more importantly, they took positions that ruffled the feathers of their traditional partners, with whom they often have friendly relations. While it is both fair and relevant, this approach has brought out into the open serious differences between political and technical partners with regard to development issues and the reality of trade partnerships. In so doing, it has brought to light tensions between African countries and also between different stakeholders within the various countries. The option of contentious action had been held out ever since the harmful effects of US subsidies on African cotton were proven and following the Farm Bill of May 2002. In view of the reluctance on the part of the countries concerned to start legal proceedings at the WTO, a class action was considered. Unfortunately, only individual members of the WTO can apply to a panel. While the Conference of West and Central African Ministers of Agriculture (CMA/CWA) is recognised as a political organisation or interest group, it does not have the necessary status to start legal proceedings. This is also true of ECOWAS and WAEMU. Although an overall group strategy can be adopted, the application must be individual. At best, to avoid the pitfall of an individual complaint from one country that does not satisfy the others, it is possible for each cotton-exporting country to lodge its own complaint or to join the dispute as a third party, as authorised by Article 10 of the Memorandum of Understanding. In addition, a number of preliminary questions linked to the dispute were put forward, making recourse to the DSB too risky for the African countries. Indeed, they needed to demonstrate that the peace clause, which is contained in Article 13 of the Agreement on Agriculture and which ruled out all disputes in this area for nine years, was void, due to the volume of US subsidies compared with the reference year of 1992. Then, an argument needed to be built on the level of the USA’s commitments; were its subsidies above or below the level to which it had committed itself? The uncertainties surrounding these issues and the lack of internal expertise were put forward as impediments to a credible dispute procedure involving the DSB. In the end, the arguments in favour of a complaint rested essentially on the need for the African countries to demand their rightful dues via legal paths, and on their desire to test the mechanisms of the WTO system. This path was not chosen, perhaps due to a lack of knowledge, and undoubtedly due to a lack of means and expertise. However, the major political issues raised by the dossier played a decisive role. The separate decisions of Benin and Chad to become third parties to Brazil’s complaint to the WTO showed, on their part, a sovereign analysis of the situation beyond any participatory process. The Sectoral Initiative was launched by four brave countries, which were only later joined by other African states and the sub-regional or continental institutions of which they are members.

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Global negotiations and sectoral strategies: liberalisation and/or Special and Differential Treatment? Today, the problem of the integration of African countries into the multilateral trade system hinges on the recognition of the need for a special status, which entails rights and obligations different from those pertaining under common law. The special and differential treatment that they are seeking to obtain could allow them to protect certain sectors of local production in order to ensure a minimal level of competitiveness; it would also guarantee them access to markets in the North. Whether defensive or offensive, these interests share a common foundation: adjusting the speed of liberalisation to the economic situation in poor countries. With regard to the Sectoral Initiative, a new and fairer discourse is emerging, but it constitutes a special case and one that is totally at odds, by necessity, with the classic model of differentiation due to necessity. For once, the rules of the system seem to be tailored to the interests of African countries, which are calling out for liberalisation. They are advocating open markets and denouncing state interference in the workings of the economy, in the form of subsidies. Citing the competitiveness of their product, they are waiving any kind of weighting of the rules of the system, in the form of special or differential treatment. They are demanding equal treatment, which entails a strict application of market rules and the disqualification of measures that have a distorting effect on trade. Some African countries are encouraging market liberalisation and even seem to be enjoying it. This way of thinking is sometimes tempered by various stakeholders in the Initiative, who feel that the issue lies not so much in opposing the principle of subsidies as in condemning support policies concentrated on a minority, which constitute both incomes and real trade weapons for producer countries. Nevertheless, it should be stressed that the “liberal” standpoint that has sometimes appeared in the dossier could create a problem of overall consistency with the differential strategies on principle that prevail in the rest of the negotiations. Does not the existence of competitive niches on the continent undermine the idea of introducing special and differential treatment, not as a set of exemptions, but as an unconditional reality of the system? Does the existence of an SDT based on situational considerations, linked to the competitiveness of the sectors, leave any credit for a structural regime of discrimination? Is it possible to build an offensive argument in support of cotton around the virtues of free trade, and still continue to lead a struggle against the principle of neo-liberal globalisation? In truth, the stance stakeholders have adopted gives rise to an ideological muddle, wherein they focus strictly on their own best interests. Well, good for Africa! For this means the dawn of an era when the development of trade negotiation agendas and public policies is no longer structured around ideological cliques, but rather around the concerns of the people and those of African people in particular.

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A subtle balancing of the divergent interests in the implementation phase In addition to the substantive issues mentioned above, there are other issues that are apparently less significant, but which have nevertheless played an important role in the building of alliances around the cotton case. They include the issue of compensation, linguistic and historical issues, and capacity issues. Compensation: The question of beneficiary criteria In addition to calling for far-reaching trade reforms, the Initiative proposed by the four LDCs also called for pecuniary damages. This innovative claim sometimes gave rise to counterproductive tensions with regard to two recurrent aspects: the target group and access to resources. Some developing African countries that produce cotton soon felt that they were being excluded from the claim in terms of benefiting from possible dividends. During the EU-Africa forum, some highlighted their concerns about being able to profit from possible benefits that the development partners might grant them. More recently, during the African Union Conference of Ministers of Trade in Cairo, the financial issue raised by the application was once again the centre of debate and a source of tension. Convinced that the C4 countries had received cash payouts, some representatives of developing countries, particularly from Central Africa, once again opposed the final resolution of the conference on grounds that it only referred to the cotton-producing LDCs. Many long hours of talks and several “green rooms” were needed to sway the reticent countries. During the Livingstone Conference in Zambia, a similar round of backroom meetings and diplomacy was necessary to avoid the cotton case spoiling the meeting and holding up the final declaration. Once again, some delegations wanted to expand the definition of the beneficiary countries of the Initiative, to make certain they would have access to any benefits it brought. While it is obvious that, in terms of strategy, a claim involving all the developing countries or LDCs that produce cotton has no chance of succeeding, some questions still remain unanswered. What is at stake in this dossier is definitely more than damages that would scarcely cover the African countries’ losses. The real point is to establish trade regulations that are fairer and that would enable African producers and states to live by their labours and to reap the benefits of globalisation, without being stuck in the position of an eternal adjustment variable. Apart from tensions between potential beneficiary states, emerging frictions at the national level have been avoided, perhaps because the damages have never been enforced. As soon as the claim was formulated, questions were raised regarding the role and place of the different protagonists in the management of the case: does the supremacy of the state over the producers mean that the state should be the only interlocutor? What role should be devolved to cotton marketing companies, according to whether they face competition or have a monopoly? What action should the producers take? The implied dominance of the state in the process raised other types of questions

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from producers regarding the distribution of indemnities: who are the victims of the subsidies? How can the impact of damages be determined? What are the criteria for allocation? Should the state and marketing companies have a role in technical assistance and mediation? What would be the basis of such a mandate? Answering these broad questions could help anticipate potential tug-o’wars, in the event that the commitments made by international economic institutions and developed countries to address the development issues in the dossier actually take shape. Linguistic and communication divisions: a delicate balance of alliances Although less sensitive than money allocation issues, other questions linked to the history of the continent have nevertheless frustrated developments, to the detriment of producers. The cotton industry has developed along different lines in different countries, be they English-, French- or Portuguese-speaking, in line with the legacies of the colonial era. While cotton has been a genuine success story in the French-speaking states, the hasty liberalisation process carried out in English- and Portuguese-speaking countries has greatly destabilised the industries there. This means that there is no valid basis for comparison of their respective shares in macroeconomic terms, and so it appears that the African cotton industries hardest hit by the unfairness of the US subsidy programmes are those of French-speaking West and Central Africa. It was only in June 2005, under the impetus of certain NGOs, that representatives of southern African countries, such as Mozambique and Zimbabwe, appear to have truly measured the impact of cotton subsidies on their economies (in terms of rural development in particular) and the need to involve themselves more seriously in the defence of the Initiative. This reaction, which was delayed to say the least, is very surprising. The representatives of 33 African cotton-producing countries have been watching the different stages of the negotiations since 2003: first in Geneva and then in Cancùn. The WTO African Group holds weekly meetings with a view to finding consensus and pushing forward the different dossiers that concern it. A “cotton group” has been created and remains open to all African countries that wish to join it. Under these circumstances, it is not easy to understand the tardy mobilisation of governments of certain countries whose producers, to varying degrees, also suffer from the negative impact of US subsidies. Communication problems between countries with dissimilar histories may explain these problems in part. A work overload certainly prevents the different ambassadors present in Geneva from following every single proceeding and reporting on them to their governments. Still, this is not enough to explain the difficulties that continue to be met by the initiators of the Initiative and the sometimes unpredictable support provided by their African counterparts. The hesitation of some countries to commit themselves is undoubtedly a response to deeper issues, linked for example to the preservation of international relationships. This seems to be the case for Senegal, which, according to the state of its relations with the US, has sometimes demonstrated reserved support and sometimes more open support, but never steady support. Thus, the C4 has regularly become the C5, only to return subsequently to its smaller format based on four countries.

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However, it is also important to focus attention on certain limitations inherent in the C4 itself. Although determined, the C4 approach can appear very compartmentalised at times. It undoubtedly promotes frustration and is a source of tensions. For instance, while respect for form remains important, care should be taken that it does not stall the process of discussion and dialogue. As a case in point, the late arrival of the C4 spokesperson at the Cairo conference greatly delayed and disrupted the proceedings on cotton. Indeed, due to his status as the institutional memory of the cotton case, no one has been found thus far who can ably replace the representative from Benin. Consequently, the various representatives of the C4 in Cairo preferred to delay the start of the proceedings on cotton in order to let their spokesperson defend the dossier and ensure that the commonly agreed-upon viewpoints would be defended. Was it a matter of form? Or rather a hesitation in taking on negotiations with members other than the C4? Whatever the reason and whatever the contradictions with the commitments made in Geneva, the reluctance to negotiate in the absence of certain key people can be construed as a lack of willingness amongst partners in the Initiative to advance their case and to extend it to all African countries. Above all, it raises the question of the resources available to the negotiating teams in terms of support from their states. Technical arguments on a complex issue: the problem of capacity Unaccustomed until recently to the inner workings of the WTO, the WCA countries have patchy knowledge of the issues involved and have few specialists at hand who are able to enlighten them in that respect. The small number of African countries present in Marrakech in 1994, or more recently in Seattle, bears witness to the low priority they have granted to technical negotiations, which are costly and whose content is in any case more or less sewn up in advance between the EU and the USA. Apart from the real difficulties some LDC countries have in paying for their delegations to attend such meetings, the lack of expertise continues to crop up as one of the main problems to be overcome. By way of illustration, in Cancùn, the ministerial delegations of the WCA countries that are members of the C4 numbered on average fifteen people while the US delegation, with which they had to negotiate on the cotton case, comprised several hundred experts. Whatever the availability and the good will of institutions specialising in trade issues, or of NGOs who support the LDCs present in Geneva, the support afforded them remains insufficient to make them fully-fledged citizens of the WTO. Thus, while the technical expertise that has been mobilised has often demonstrated solid negotiating skills, the fact remains that it is sometimes hard to compete on a level playing field, when the available means are so disproportionate. In contrast with some emerging countries such as Brazil, the countries submitting the Initiative have very limited internal financial capacities, either private or public. Suffering from the drop in world prices, the cotton industries, as well as the producers, are in no position to support their governments, whose economies are also weak.

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On the eve of the WTO conference in Hong Kong, the mobilisation of additional resources to strengthen expertise, from sub-regional or pan-African bodies that support the dossier, still remains theoretical, or else subject to complex and inappropriate procedures. This calls into question the effectiveness of these political structures, which propose eventually to negotiate on behalf of their member countries. Until recently, some countries present at Cancùn had no representative in Geneva. The ambassadors to the EU in Brussels were most often called upon to follow the some 3,000 annual meetings that take place in the WTO on topics as diverse as they are technical, and this with a severely limited staff. Above all, the plenipotentiary ambassadors in Geneva have a mandate that allows them to attend ongoing negotiations and to represent their countries. Most of the progress and the complex technical issues discussed at the WTO require the endorsement of the Ministers of Trade responsible for the dossier. The current nature of procedures between the ambassadors and their capital unfortunately does not seem to be suited either to the pace of the negotiations or to the rapid decision-making process that prevails at the WTO. Conclusion Whatever the apparent tensions surrounding the strategies deployed, the African countries that submitted the Initiative have succeeded in putting the expectations of their cotton producers onto the international trade negotiation agenda. In so doing, they have had the merit of not only surprising a number of WTO member states but also, and above all, responding to the aspirations of their people, by redefining the role and place of the states in the negotiations. The cotton case illustrates fully the need for African and Southern countries to take an active role in negotiations that have long been controlled by the USA and the EU. It has also brought to light some of the inherent weaknesses in the international trade system in its current format. Above all, by refusing to put their signatures to the established consensus on the Singapore questions, the African countries have developed unaccustomed offensive strategies, by using the formal tools available to them at the WTO. Since Cancùn, the cotton case has made little progress – though, if we compare these delays with the blockages in the negotiations on agriculture, we can put them into perspective. Still, the Hong Kong meeting cannot afford to reach a consensus that is not based on concrete action on a dossier in which the responsibilities have been clearly set out by the WTO itself. By continuing to play on the complementary aspects of the dossier rather than on divergences, the countries putting forward the Initiative have been able to rally states that sometimes have conflicting interests around a single common denominator: that of the place of Southern countries in globalisation. In the run-up to Hong Kong, Africa has managed to consolidate its unity, both on the substantive issues and on the form of the dossier. The unity and commitment of African countries will undoubtedly be grounded in their capacity to accept or reject an instrument that establishes specific undertakings on cotton.

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Innumerable topics and positions can be used by the African countries to obtain concrete results on the dossier. Issues of policy coherence, the limitations of the dispute process for Southern countries, the inappropriate length of the negotiation rounds (several years of negotiation, followed by ten years of implementation), the urgency of economic, social and to a lesser extent political expectations: all these issues have still to be addressed or refined. They reflect, however, the importance for African states of investment and involvement in the different international negotiation agendas, in order to assert their rights and make their expectations heard. There is no doubt that many steps still remain to be taken, particularly in terms of building up the available human resources. But the first stone has been carefully laid by a small group of bold and determined countries. The biggest issue remains to provide this initiative with resources equal to its symbolic status as a comeback for Africa in the place where it was least expected: the inner sanctum of international trade.

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PART III:

Resistances and potential for reform

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King Cotton: abdicate or subjugate? The political economy of US cotton and prospects for a pro-development policy reform
Gawain KRIPKE*

Introduction
When Brazil and four West African cotton-producing countries challenged the United States to reduce the trade distortions caused by US government subsidies, they could hardly have expected the massive media and political attention that followed. In launching a dispute under WTO legal rules, Brazil essentially charged the USA with cheating on international commitments. In submitting a negotiating position as part of the Doha Round, Benin, Burkina Faso, Chad and Mali (collectively known as the “cotton four”, or C4), made a powerful moral argument and enlightened the world as to the poverty impacts of US farm subsidies. However, in taking on cotton, Brazil and the C4 have chosen one of the most politically powerful adversaries in the USA. Few industries are as well organised, as influential, or as entrenched as cotton is in the United States. It is, perhaps, instructive to remember that cotton played a large role in the deepest political crisis of US history: the American Civil War (1861-65). While the war was fought over slavery, slavery itself was largely a function of the cotton economy in southern American states. The plantation aristocracy responded to the economic challenge of the anti-slavery movement with war. At the time of the American Civil War, the interests of the cotton farmers were separated from the interests of cotton mills and the textile industry, both politically and geographically. Cotton was grown in southern states, but milled and woven in northern states and in the UK. Since then, however, these interests have combined into an integrated political association called the National Cotton Council. Wars are no longer fought over cotton in the USA, but cotton still has a deep and sometimes emotional influence on US politics. This influence is manifested in many ways, most notably in the massive subsidies that are paid to the 25,000 US cotton producers. The influence also can be observed in large subsidies for cotton processors and exporters. In addition, the US cotton industry wields a heavy influence on the country’s trade policy, enforcing a highly protectionist tariff and rules of origin regime that is designed to benefit US textile
* Gawain KRIPKE, a graduate of Harvard College, is Senior Policy Advisor for Oxfam America, based in Washington, DC.

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producers and to encourage consumption of US cotton. For example, to qualify for favourable tariff treatment, a common US rule of origin is that textiles or garments must contain US-produced yarn. As Brazil and the C4 have now demonstrated, subsidising US cotton in this way is causing poverty around the world and creating political frictions for the USA itself. The status quo is not sustainable. There are signs that the Bush administration is responding to global as well as internal pressures for reform: however, whether a real reform is possible, or only a “whitewash” which leaves intact the existing inequities, is very much undecided. A picture of US cotton: harvesting subsidies The USA is the second largest world cotton producer after China. It produces approximately 15 million bales, or just over seven billion pounds, of cotton per year (1 bale = 480lb). This is approximately 20 per cent of global production. The total value of the US cotton crop is approximately US$4.6 billion, while export sales averaged US$2.1 billion from 1997 to 2002. US farmers have increased cotton production due to the unattractivenessof other competing crops thanks to slumping prices, as well as the attractiveness of cotton, due to the benefits of cotton subsidies. The acreage planted to cotton has increased and productivity per acre has also risen, as a result of technological advances, including new seed varieties, fertilisers, pesticides and machinery. The vast majority of cotton is produced in five areas in the “Cotton Belt” that runs across the southern part of the United States. These clusters include the Texas High Plains, the Mississippi, Arkansas and Louisiana Delta, the San Joaquin Valley in California, Central Arizona and Southern Georgia. Texas has the most cotton farms (11,237 or 32 per cent of all US cotton farms), as well the largest share of cotton production (4.5 million bales or about one-third of all cotton). Mississippi is the second largest producer, with Georgia and California close behind. While the USA produces a lot of cotton, there are relatively few farmers involved. In 2002, fewer than 25,000 farms produced cotton. The number of cotton farms has steadily declined over the past 30 years, and the average farm size has doubled since the 1980s.

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While the USA is number two in world cotton production, it is number one in cotton exports, accounting for 40 per cent of the global total. Since 2001, an average of 56 per cent of US cotton production has been exported each year. The proportion of cotton exported has grown in recent years as the US cotton processing industry (including milling and textile production) declines. In all, 30 per cent of the world’s consumption of cotton fibre crosses international borders before processing, a larger share than for wheat, corn, soybeans or rice. US cotton exports are dominated by a few private trading companies: Allenberg Cotton, Cargill Cotton and Dunavant Enterprises between them claim 85-90 per cent of the international cotton trade. Cottonseed milling is dominated by the Anderson Clayton Company, while cottonseed sales are dominated by Monsanto, which has 87 per cent of the US market. Figure 2: US cotton production, use and exports

Congressional Research Service.

In the USA, cotton has gained the nickname ‘poverty weed’ as a consequence of its high cost of production and its low market price.1 As the prices of fertilisers, chemicals and recently, energy, have increased, the costs of producing cotton have risen across the USA, throughout the 1990s and into the early 2000s. Cash receipts for cotton have failed to keep pace with the cost of production, with the exception of good years in 1994 and 1997. Government payments make up the difference. Some economists now believe that cotton farmers are likely to become increasingly dependent on government payments in the future (Richardson et al. 2001).
1 Source: “Cotton Production in Mississippi’s Delta, the Texas High Plains and the Central Valley of California”, report for Oxfam America, US Program, by Rachel Slocum, 20 July 2004 (unpublished).

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The lack of good returns relative to total costs means that most cotton farms in the USA are economically marginal. Research by economists at Texas A&M finds the position of Texas cotton farms poor: “Eight of the nine cotton farms are projected to have greater than a 50 per cent chance of cash flow deficits in 2001-05. Seven of the nine will face high probabilities of losing real net worth. Seven of the nine cotton farms will be in poor financial condition by 2005 – two are marginal and none are in good financial condition.”2 Even the largest farms with the highest rates of return are marginal. The conventional wisdom is that a US cotton farm must be 500 acres at a minimum to be economically viable, to give the economies of scale needed to justify the high capital costs and investment in machinery involved in the US production model. Harvesting subsidies Economic viability for US cotton producers, processors and exporters is dependent on government subsidies. Production and export subsidies provide comprehensive support for producers. US farmers who have produced cotton in the past are eligible for both direct and counter-cyclical payments. On their actual production, farmers may utilise marketing loans and loan deficiency payments. Protection against low yields is available through subsidised crop insurance, and in some years the US Congress has approved additional disaster payments. When US market prices rise, and there is a risk that competitors might capture more of the world export market and even sell to US yarn and fabric mills, so-called Step 2 user payments are made to US cotton exporters and to mills if they purchase US cotton. For producers, the core support comes from three subsidy programmes: direct payments, counter-cyclical payments and marketing assistance loans. Direct payments are “decoupled”3 from production and based on historical payments. Counter-cyclical payments are also based on historic production (rather than current production), and are made to producers if the price of cotton falls below 72 cents per pound. Marketing assistance loans are essentially price guarantees (of 52 cents per pound) made to producers, under which the government agrees to pay a determined price if producers are unable to find buyers for their cotton. These programmes reflect contradictory intentions from the 1996 and 2002 Farm Bills, These, in turn, reflect the fact that commodity prices – including that of cotton – were much lower in 2002 than in 1996. All of the subsidy programmes have the effect of reducing risk to cotton farmers, and, generally, of increasing US cotton production.

2 Blair Fannin, “A&M Study: More Problems in Farm Country” on Texas Agriculture website:

http://www.txfb.org/TexasAgriculture/2001/040601ATM.htm, 6 April 2001.
3 However, in a recent WTO dispute, Brazil successfully argued that direct payments are not fully

decoupled and will need reform to qualify as decoupled payments.

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Table 1. U.S. Upland Cotton Program Outlays, Fiscal 1991-2004
Fiscal year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Average : 1991-2001 Total Outlays ($ millions) 382 1,443 2,239 1,539 99 685 561 1,132 1,882 3,809 1,868 3,307 2,889 1,659 1,678

Source: USDA, Farm Service Agency, Budget Division, History of Budgetary Expenditures of the Commodity Credit Corporation, Books 3 (April 9, 2001) and 4 (July 15, 2003), available at [http://www.fsa.usda.gov/dam/bud/bud1.htm].
Congressional Research Service.4

For US cotton processors and exporters, other government subsidies provide assistance. The Step 2 programme makes payments to exporters and to US mills to compensate them for purchasing higher-priced US cotton. The export credit guarantee programme supports exports of US cotton by providing favourable credit terms to purchasing countries. From 1991 to 2003, farm subsidies for cotton production cost US$1.76 billion per year, on average. This is the annual equivalent of 21 cents per pound of US production. When the 21 cents per pound average farm subsidy is added to the 57 cents per pound average market price, US producers made an average of 78 cents per pound of cotton from 1991 to 2003. This level of revenue is more than enough to cover average variable costs of 50 cents/lb, and just enough to cover the average total economic cost of 78 cents/lb. Variable costs in some of the competing cotton-exporting nations are about half those of the USA.

4 In some US regions, including California, Arizona and Texas, irrigated water is provided at subsidised rates and, in effect, is a large production subsidy for many cotton producers. However, water subsidies are not discussed in detail here.

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Exercising influence While US cotton production is large by global standards, by the USA’s own economic standards cotton is a modest player. In 2003, cash receipts for cotton lint and seed were estimated at US$5.5 billion, from a total planted area of 14 million acres. This accounted for 5.1 per cent of estimated total receipts from all US crops (US$106.7 billion) and 2.5 per cent of total crop and livestock receipts (US$212.4 billion). Table 2: Acreage and cash receipts for major US crops, 2003 Crop Cotton lint and cotton seed Corn Soybeans Wheat Rice
Source: US Department of Agriculture (USDA)

Areas (million acres) 14 71.1 72.3 52.8 3.0

Cashreceipts (US$ billion) 5.5 18.7 15.7 8.0 1.1

More broadly, agricultural production itself is only marginally important to the US economy, constituting about 2 per cent of the economy and 2 per cent of the workforce. However agriculture, and cotton in particular, have a disproportionate level of influence on US politics. This is partly an historical legacy, but also reflects the political realities of regional representation in Congress.

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Figure 3: US cotton-producing regions

Source: NOAA/USDA. Joint Agricultural Weather Facility (NOAA/USDA).

A casual observation of the cotton map and a map representing the affiliations of the US Congress will demonstrate why cotton wields undue power. In 2005, five of the 18 most powerful Congressional leaders come from cotton-growing regions or states.5 While still a powerful lobby, this is actually a significant reduction since 2003, when eight of the 18 came from cotton districts. Nonetheless, representatives of southern cotton-growing states such as Texas, Georgia and Tennessee hold disproportionate power in Congress. It is also notable that President Bush comes from Texas, the largest cotton-producing state. The strong political representation for cotton regions, combined with a powerful and well-organised lobby, explains the large subsidies for cotton production.

5 House and Senate leadership, Chair and ranking for Ways and Means, Finance, Appropriations and

Agriculture Committees.

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Figure 4: Election map of the USA, 2004. Grey = Bush, black = Kerry

Source : “ Wikipédia” Free encyclopedia online.

The main lobby representing the US cotton industry is the National Cotton Council (NCC), a private organisation that advocates on behalf of the entire cotton industry, including producers, ginners, storage suppliers, merchants, cottonseed co-operatives and manufacturers. In addition, the NCC is affiliated with separate organisations that promote increased cotton consumption through advertising and public relations programmes. The organisation is also affiliated with the Cotton Council International, which promotes the consumption of US cotton by foreign buyers. The NCC seeks to mediate the diverse interests of cotton-related industries and to settle disagreements internally, rather than expose political leaders or the public to any conflict. The ability to resolve and unify diverse interests makes the NCC more influential, because it represents a broader and more powerful set of economic interests than simply those of cotton producers. It testifies frequently before Congressional committees, and closely consults with US government agencies – particularly with the US Trade Representatives (USTR) office in relation to the WTO cotton dispute and the C4 negotiations. The NCC also sponsors academic research to rebut critics and to support the rationale for continued cotton subsidies.

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On the C4 negotiations, the NCC has recognised that there is a political problem in the WTO, and has sought to assist the USTR in negotiations. For example, it has promoted several efforts to exchange information with producers and officials in West Africa. In July 2004, it hosted agriculture and commerce ministers from Benin, Burkina Faso, Chad and Mali on a week-long tour of US cotton production, processing, marketing and research facilities. In addition, NCC officials have travelled to West Africa several times. The NCC is proud of its efforts: “African farmers need assistance in improving agronomic practices, establishing a reliable classing system, improving infrastructure and ginning, privatisation of marketing and distribution, and assistance in building expanded markets in order to improve farm income. The US cotton industry, working co-operatively with USDA and USAID, has initiated several development programmes designed to assist African farmers in achieving these results.”6 On the other hand, the NCC adamantly opposes any cotton-specific trade negotiations: “…Singling out cotton as a separate issue is both unfair and inappropriate. Unfortunately, this initiative has been influenced by poor economic analysis. Particular emphasis on US cotton is unjustified and unwarranted – the world cotton market is much more than the United States. The US has not increased cotton production, but we have seen a surge in foreign production, particularly in China and Brazil.”7 US negotiating positions at the WTO and its legal strategy closely mirror the positions of the NCC. Prospects for reform The Bush administration’s approach to cotton subsidies is contradictory. On the one hand, the USTR is aggressively resisting reform at the WTO. On the other, the administration has proposed cuts to agricultural subsidies. In February 2005, President Bush proposed a 5 per cent overall cut in commodity payments. He also proposed to limit farm payments to a maximum of US$250,000 per farm. Such a limit would cut cotton payments disproportionately more than other commodities. The USTR has strongly resisted the Brazilian complaint against US cotton subsidies, using the dispute settlement mechanism of the WTO. However, now that Brazil has prevailed in the case, the Bush administration has moved quickly to comply with the decision. In July, the US Department of Agriculture proposed legislation to bring the USA into compliance with the decision, by eliminating the Step 2 cotton export subsidy programme and reforming the USA’s export credit guarantee programme.
6 “EU Abandons Single Undertaking, Jeopardizing Doha Round”, press release of the National Cotton

Council, 20 April 2005, http://www.cotton.org/news/releases/2005/euresponse.cfm.
7 “NCC Has Concerns with WTO Framework Text”, press release of the National Cotton Council,

2 August 2004, http://www.cotton.org/news/releases/2004/WTORESPONSE.cfm

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In negotiations to produce the 2004 July Framework for the Doha Round, the USA agreed to the creation of a cotton sub-committee under the aegis of the agriculture negotiating committee. Since then, however, US negotiators have sought to minimise the scope and function of this sub-committee. First, the USTR opposes any form of compensation fund, arguing that there is no precedent or modality for this concept as part of the WTO negotiations. Nonetheless, the USA expresses non-specific support for “development” assistance for the African cotton sector. Second, the USTR advocates the position that the job of the cotton sub-committee is not to negotiate, but rather to monitor progress of the broader Doha Round. In effect, the USTR argues that the negotiations of the cotton sub-committee are not part of the “single undertaking” of the Doha Round. The USA has not formally responded to specific negotiating texts offered by the African group, nor to more general inquiries about the US position. Little progress can be expected until the Hong Kong Ministerial conference in December 2005. At the time of writing, the US Congress had yet to act on proposals by the Bush administration to reform farm subsidies to comply with the WTO ruling. At present, there is no way to predict whether these subsidy cuts will be enacted, or whether the USA will fully comply with the WTO decision on cotton subsidies. What is slowly becoming clear, however, is that there is an internal conflict within the USA about farm subsidies, and about cotton in particular. Many politicians and experts believe that US farm subsidies are excessive, and recognise that they create trade distortions. There is strong support for reform among newspapers and economists, think tanks and religious organisations. There is even a growing internal demand for reform among farmers, based on the domestic inequity of farm programmes: most US farmers get no payments at all, and the vast majority of those who do receive payments get only small amounts.While the Bush administration has resisted reform in the Doha negotiations and in WTO disputes, it has also sought to reform farm subsidies in budget legislation and to comply with WTO dispute rulings. In the US Congress, representatives and senators from agricultural regions – particularly cotton-growing regions – fiercely oppose reform and pressure the administration to resist at the WTO. However, a large majority in Congress also supports the WTO system and compliance with international obligations. Pressure coming from the WTO, and in particular from Brazil and African countries around cotton, is helping to shift the internal balance in the USA on the issue of farm subsidies.

Cut subsidies, beware diversionary tactics and don’t miss the Hong Kong window of opportunity
Louis GOREUX*

Introduction
African cotton producers went to Cancùn in 2003 with a strong case for reducing cotton subsidies in industrialised countries. But the Cancùn conference of the World Trade Organisation (WTO) ended in failure, and very limited progress has been achieved in the two years since then. On the eve of the WTO conference that will open in Hong Kong on 13 December 2005, the pressure for reducing cotton subsidies has to be stepped up. The first part of this paper summarises the arguments for cutting subsidies. Doing so would reduce poverty for 10 million Africans, at no cost to the European Union or the United States. It would be a win-win situation for everyone. In high-income countries, only a tiny fraction of the population would lose out, and most of the losers would be those who today benefit from income acquired through skilful lobbying. The second part of the paper deals with the responses made to the African request. The claim of African countries for compensation has been rejected, but the need to reduce subsidies has been recognised. For public relations purposes, a series of proposals has been made: some are useful, others are not, and these should be treated as diversionary tactics. The final part shows that African countries today stand to benefit from a combination of favourable circumstances. Hong Kong provides a window of opportunity not to be missed, because such a favourable set of circumstances may not arise again for several years. Why should subsidies be reduced? The Sectoral Initiative in Favour of Cotton submitted by four Least Developed Countries (LDCs) to the WTO in May 2003 contained a powerful message: “Eliminate cotton subsidies in the USA and the EU. This will alleviate poverty for 10 million Africans living on less than one dollar a day; and it will cost you nothing, since the losses of your producers will be more than compensated by the gains to your taxpayers”. Two years later, this message needs to be reiterated more loudly.

* Louis GOREUX is a statistical engineer and holds a PhD in economy, agronomy and law. He was previously IMF Deputy Director for Africa, and is now an international consultant.

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The elimination of subsidies will alleviate the poverty for 10 million Africans It is widely recognised that the expansion of cotton growing has contributed to reducing poverty in the Sahel region of Africa. Following the WTO resolution of the dispute between Brazil and the USA, it is now recognised that US cotton subsidies cause prejudice to other cotton exporters by depressing the world cotton price. Since the world price is affected by a number of factors, the specific effect of subsidies has to be isolated from the effects of all the other factors in order to assess the prejudice they cause. For this purpose, an econometric model has to be constructed, with and without subsidies. This is what the author of this article did to arrive at the loss of US$250 million quoted in the Initiative by the four African LDCs.1 A similar approach was followed by Daniel Summer, who found that US cotton subsidies had the effect of reducing world cotton prices by 11.6 per cent; this was the critical finding for establishing that US subsidies caused prejudice to Brazil.2 Adding the effect of EU subsidies to that of US subsidies leads to a 15 per cent reduction in world cotton prices and, in turn, to the prejudice of US$250 million quoted in the Initiative. The credibility of the message of the four LDCs has therefore been reinforced by the WTO judgement published in March 2005. The world price measured by Index A (see Figure 1 below) is the price paid for African cotton delivered to the port of the importer. However, almost half of the costs incurred by African countries in growing seed cotton, for processing it into fibre and for shipping the fibre are not affected by variables in Index A; these include transportation costs, input costs, fixed costs and financial fees. Consequently, a 15 per cent increase in prices could result in a 30 per cent increase in the net income of African cotton farmers. The elimination of cotton subsidies would therefore be an effective way of reducing poverty for 10 million Africans living on less than one dollar a day. Furthermore, the elimination of subsidies would conform with the free trade philosophy of the WTO and the Bretton Woods institutions. This first message has already been heard. It needs to be repeated, or it will not lead to major advances. The second message states that the elimination of cotton subsidies is in the interests of both the EU and the USA. The taxpayers of these countries have not been well informed, and this second message should be widely disseminated in order to reach them.

1 “Prejudice Caused by Industrialised Countries to Cotton Sectors in Western and Central Africa”, Louis Goreux, June 2003, pp.26-34. 2 Technical report by Daniel Summer submitted on 09/0/03 to the Dispute Settlement Body of the WTO, in support of the Brazilian claim against the USA.

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The elimination of subsidies is in the interests of the European Union The problem of cotton subsidies did not exist when the EU was limited to nine countries, since none of the original nine grew cotton. The problem arose in 1981 when Greece joined the EU. Cotton was grown in one of the poorest parts of Greece and cotton subsidies were established to reduce poverty in a disadvantaged area, which was a generous idea. These subsidies should have induced a progressive shift from an unprofitable activity towards activities with positive value added; unfortunately, they instead led to the rapid expansion of the unprofitable activity. Subsidies to cotton farmers and subsidies for the establishment of new ginning factories were so generous that cotton acreage tripled over the 13 years following Greece’s accession. At that point, the European Commission (EC) took measures to avoid further increases in cotton production. Nonetheless, the EU guaranteed price still remains the highest in the world: it was fixed in 2001 at €1.063 (700 CFA francs) per kilo of cottonseed, which is three-and-a-half times the price paid to African farmers, for cotton with a lower fibre content than that grown in Europe. When Spain joined the EU, cotton farmers in Andalusia also benefited from the special treatment granted to their Greek colleagues. The EU spent almost US$1 billion on cotton subsidies in 2001/02 and will spend more than that amount in 2004/05. The cotton produced in Greece and Spain could have been imported for a third of the cost of producing it locally. If Turkey had been part of the EU in 2004/05, the cost would have risen to US$3 billion. The Commission will have to solve the cotton issue before negotiating the conditions under which Turkey could join the EU. On the eve of the Cancùn conference, the EC announced that it would progressively replace coupled subsidies with decoupled ones (i.e. subsidies that are not linked to current production); from 2007, 65 per cent of EU cotton subsidies will be decoupled. The EC made a further positive step with the speech made by Peter Mandelson in Bamako on 13 April 2005 – a speech that was sufficiently favourable to African farmers to provoke the anger of the USA’s National Cotton Council. Europe could be amenable on cotton, but it accounts for only 2 per cent of world cotton production. The key is held by the USA, which accounts for almost 40 per cent of cotton exports globally. The elimination of subsidies is in the interests of the USA Cotton is part of US folklore. For the past two centuries, the USA has been by far the leading cotton exporter. Over the past decade, US cotton production has remained broadly unchanged because it has been subsidised; however, the use of cotton by the US textile industry has fallen and will fall further, due to the abolition of import quotas on textiles. As a result, US exports have increased from 38 per cent of US cotton production in the 1990s to 64 per cent during the past four years. Subsidising cotton production to the tune of US$3 billion a year, while exporting two-thirds of it at a loss cannot be in the interests of the USA. However, it is in the interests of a small number of major cotton producers and these are very influential in the National Cotton Council (NCC), which is probably the most powerful farm lobby in America.

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The 255 cotton farms in the USA that are larger than 3,000 acres received subsidies averaging US$1.2 million per farm in 2002/03 and US$1.8 million in 2004/05.3 Large cotton farms are more profitable than small ones for two reasons: they have lower production costs per bushel due to economies of scale and they receive larger subsidies per acre because their yields are higher. As a result, large farms have been able to buy up small farms, which has led to a dramatic process of concentration: the total number of cotton farms in the USA fell from 1.1 million in 1949 to fewer than 25,000 in 2002. The US administration knows that the bulk of cotton subsidies go to big farmers, and it submitted a draft budget to Congress in which cotton subsidies would have been substantially reduced and subsidies would have been limited to US$250,000 per beneficiary. The NCC reacted violently and asked congressmen and senators to exert pressure on the administration to withdraw the proposed ceiling. By fighting this proposal, the NCC showed that it was defending the privileges of a small group of well-to-do farmers receiving large subsidies paid by taxpayers – who, for the most part, were a lot poorer than those benefiting from the subsidies. Why has the African request not yet received a satisfactory response? The rejection of financial compensation In their Initiative of May 2003, the four African countries demanded the swift elimination of cotton subsidies that caused prejudice to LDCs and, pending their elimination, financial compensation for the prejudice suffered. Compensation during a transitional period did not appear unreasonable, but the idea was not well received. The four LDCs reformulated their request by replacing the idea of a compensation mechanism with that of a support fund, but this idea was no better welcomed than the previous mechanism. This negative reaction can be explained by various reasons. Providing financial compensation to African cotton exporters when prices fall due to excess world supply would have the same effect as giving them a subsidy; this would stimulate world production at times when it should be reduced. Moreover, since this compensation would account for only 5 per cent of the global cost of subsidies, it would not be large enough to induce the EU or US authorities to reduce their own subsidies. Assessing the degree of prejudice and the compensation required would raise a series of technical issues: for example, the choice of elasticity co-efficients of supply and demand, and the differential treatment applicable to subsidies, depending on whether they fell into the Green, Blue or Orange boxes. Moreover, since the classification of subsidies by box takes three years to take effect, the compensation would be received too late to stabilise the incomes of African cotton farmers.

3 According to the 2002 agricultural census, 255 cotton farms exceeded 3,000 acres (equivalent to

1,214 hectares).

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These technical arguments aside, a number of partners are not prepared even to recognise the harmful effects of subsidies. Last but not least, it could be argued that awarding compensation for cotton subsidies would open a Pandora’s Box that would lead to compensation requests for many other commodities – a situation that industrialised countries want to avoid. The WTO stated that it did not have the power to determine levels of financial compensation and that it was not equipped to manage a fund. In order to express its understanding of the LDC cause, the WTO organised a development workshop in Cotonou in March 2004 – but this was in fact a way of passing the buck to development institutions. The EU made it known in diplomatic terms that it was not interested in a compensation mechanism, when it organised the Paris Forum in July 2004. African countries were invited to present a development framework for their cotton sectors, in order to allow their partners to harmonise their assistance programmes. A follow-up meeting to this forum was held at the OECD in January 2005. Here African countries proposed the creation of a support fund for the cotton sector, but there was no support for this proposal, nor for the one presented in April 2005. The World Bank did not want to manage a support fund for cotton, either. The IMF could not manage a fund dealing with a particular sector, though it can compensate countries for temporary shortfalls in export earnings when the country has a balance of payments need. The compensatory financing facility (CFF) was widely used between 1976 and 1980, but it has been seldom used over the past 20 years.4 In the mid-1980s, subsidised interest rates were made available to LDCs under a number of facilities other than the CFF. The creation of a “shock facility” offering subsidised interest rates has been recommended by the monetary and finance committee of the IMF, which met on 24 September 2005 in Washington. An African country that has suffered an exogenous shock due to a fall in cotton prices and an increase in the cost of energy and nitrate fertilisers could make use of this facility, provided it had a balance of payments need. This facility was expected to become operational by the end of 2005, though it does not apply specifically to cotton. In summary, the various partners with an interest recognise that the survival of the cotton industry is an essential factor in the fight against poverty, but they are not prepared to establish a compensation mechanism as set out in the Initiative, nor a modified version of the mechanism. Since the cotton initiative has had an impact on public opinion, a series of workshops has been organised in an attempt to respond. Of the various proposals made, some are promising and should be put into practice i.e. improving productivity and securing the future of the cotton sector. Others should be seen as diversionary tactics i.e. accelerating liberalisation of the sector and processing fibre locally.
4 “Compensatory Financing Facility”, by Louis M. Goreux. Pamphlet Series, No 34, IMF 1980, pp.2-3: “From January 1976 through March 1980, there were 107 drawings totalling SDR 4.0 billion under the facility; these accounted for 31 per cent of the total credit extended by the Fund to all its members, and 45 per cent of the total if the United Kingdom is excluded, during this period…. The compensatory financing facility has, therefore, become a major facility for providing payments assistance to member countries, especially those heavily dependent on commodity exports.”

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Increasing productivity in the cotton sector The growth of cotton production in the CFA franc zone has been remarkable. However, this has been due to an increase in the acreage under cultivation and, over the past decade, yields have been steady or declining. With declining world prices (see Figure 1 and Table 1), improvements in revenues per acre require higher yields. On this essential point, African farmers and their partners are in full agreement. Figure 1: World cotton prices, Index A in CFA francs per kg, January 1994 – August 2005 (Former Index A north Europe delivery)

Source : Louis GOREUX

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Table 1: Price cycles for cotton: peaks and troughs Trough in % From proceding peak Cents/lb Jan-94 Mar -95 Aug 96 Aug 97 Dec-99 Nov-00 Oct 01 Nov 03 Dec 04 Aug-05 69,2 110,5 76,3 81,2 44,2 64,0 37,2 76,8 48,6 54,0 CFAF/ US$ 592,8 514,4 500,3 628,2 648,8 767,1 725 560,8 496 534 CFAF/kg 904,4 1253,1 842,0 1124,1 632,2 1082,4 594,6 949,6 531,4 636,2 56 89 55 94 36 38 56 75 39 22 67 29 40 Peak Number of months

Trough Peak to Peak Trough to Trough

Sources: First column: Cotlook Liverpool Index A monthly average (delivery to ports in northern Europe). Second column: exchange rate monthly average from IFS, published by IMF.

Measures aiming at increasing cotton production should go hand-in-hand with those aiming at reducing subsidies, if African countries are to benefit from lower subsidies in the medium term. Otherwise, reduced production by the EU and the USA will be quickly offset by an increase in production by countries such as Brazil and Australia, where the price elasticity of supply is high. Africa could meet the challenge, since West Africa’s share of world cotton production has increased rapidly and could increase still further. In Burkina Faso, for example, cotton production has quadrupled over the past nine years.5 Securing the cotton sector The rapid growth of cotton production in the CFA franc zone is partly due to the minimum guaranteed price, which has generally been announced just before the crop is planted. This practice, however, to which farmers seem much attached, raises two problems. One is linked to price fluctuations during the cotton year, and the other to price fluctuations from year to year.

5 Production increased from 64,000 tonnes of fibre in 1995/96 to 260,000 tonnes in 2004/05.

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By fixing the minimum producer price a whole year before delivering the fibre to the importer, the cotton ginner takes a risk against which he should protect himself. The method most often used to reduce this risk is to sell part of the expected production on a forward basis. By selling half of the crop before announcing the floor price in April, the ginner cuts his risk by half and he can deposit his forward contracts with the banks, which have to provide crop credits starting in October. There are other techniques for risk management, such as the purchase of put options or contracts on the futures market. However, a study looking at the past 17 years has shown that forward sales would have been the most profitable technique. The other options (in so far as they would have been available at reasonable rates) would have been easier to manage than contracts on the futures market, but they would have been the most onerous solution.6 Cotton ginners could use a mix of instruments, depending on market conditions. Forward selling reduces the price risk encountered by the cotton ginner within a particular year, but it does not reduce the price risk encountered by producers, since price fluctuations from year to year are not reduced. In the absence of any stabilisation mechanism, if Index A falls by 22 per cent from one year to the next – which is not abnormal (see Figure 1 and Table 1) – producers’ net income would fall by half (Table 2).7 This could have dramatic consequences for households depending on cotton for most of their monetary income and would be inconsistent with the fight against poverty. According to a survey conducted in Mali at the beginning of 2005, farmers planted cotton because it provided them with an assured monetary income and a source of credit.8 To eliminate the floor price would plunge millions of Africans into a precarious situation.

6 Paper delivered by Gérald Estur at the annual meeting of the International Task Force on Commodity Risk Management, Interlaken, Switzerland, 19-20 May 2005. 7 This estimate is based on data provided by SOFITEX covering the five years ending 2004/05. As the cost of going from FOB to CIF is roughly equal to the proceeds of cottonseed, it is assumed that the sector would break even when the FOB cost was equal to Index A. For simplicity’s sake, Index A and cost at the FOB level are both taken as 100 at the break-even point (Table 2). Producers receive 60, of which 20 is spent on inputs; the producers’ net revenue is therefore 40. From collecting cottonseed at the village gate to delivering fibre at the FOB level, the cotton company receives 40, of which 25 covers costs that cannot be adjusted with regard to fluctuations in Index A, and 15 covers costs that can be partially adjusted. When Index A falls by 22 per cent from 100 to 78, the 20 for inputs and the 25 for fixed costs remain unchanged; if partially adjustable costs were reduced, from 15 to 13, producers’ net income would fall from 40 to 20. 8 Paper by Kako Nubukpo and Manda Sadio Keita: “Reform of the price mechanism used to determine the price paid to cotton growers in Mali and consequences in the context of falling world prices”, July 2005.

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Table 2: Effect of a 22% fall in world prices on net income of producers FOB Cost = FOB Price Cost FOB Company costs Non-adjustable costs Fixed costs Interest Cost from factory to FOB Partially adjustable costs Producers’ gross income Cost of inputs Producers’ net income 100 40 26 11 4 10 14 60 20 40 22% fall in FOB price 78 38 26 11 4 10 12 40 20 20

Source: the costs shown as percentages in the first column have been calculated by the author from the accounts provided by SOFITEX; they correspond to the five-year averages from 1995/96 to 2004/05 and are rounded up to the nearest whole number. In the second column, the FOB price is assumed to fall by 22 per cent. Non-adjustable costs remain unchanged and the company costs that are partially adjustable are reduced by 14 per cent. The producers’ net income is calculated as residual.

Yearly price fluctuations can be reduced by contributing to a fund when Index A is high, and drawing from the fund when Index A is low. However, a fund of this sort cannot change the medium-term trend. When Index A follows a downward trend, producers’ prices have to be adjusted accordingly, which means that production costs have to be reduced if the sector is to remain competitive. Reducing fluctuations from year to year is not easy, but it can be done. In Burkina Faso and Cameroon, for example, support funds have been reasonably well managed. These funds should not be eliminated, but their management could and should be improved. In its submission to the Paris forum in June 2004, Burkina Faso stated that it needed €10 million for its support fund, but it did not receive any offers of assistance. By contrast, it received numerous unsolicited offers to help it improve its risk management through the use of put options and various types of insurance. The negative response to the support fund idea may be due to the fact that, in some quarters, the stabilisation scheme used by Burkina Faso is not considered consistent with the free market model. Liberalizing the cotton sector Experience has shown that liberalisation generally leads to increases in production and reductions in costs. Some observers have concluded that greater liberalisation of the cotton sector is the solution. If prices fall, the pace of reform has to be accelerated and there has to be free access at all levels of the supply chain in order to intensify competition. However, liberalisation of the cotton sector has not been without

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its problems, as shown by a comparative study of six African countries carried out in 2003.9 Production has increased most quickly in the CFA zone, where liberalisation was less advanced (in particular, in Burkina Faso and Mali) than in the rest of Africa, where the reforms were more advanced (particularly in Ghana and Tanzania). The monopoly enjoyed by SONAPRA in Benin was abolished in 1995 and the country saw the arrival of private cotton ginners, but production did not increase from 1995/96 to 2004/05, while in Burkina Faso it quadrupled over the same period. It is necessary to liberalise the sector, but reforms have to be conducted with care; the market must be privatised, but also regulated. It is worth noting that cotton growing is far from liberalised in the USA and the EU. In the 2002 US Farm Bill, the target price was set at 72.4 cents per pound. The actual price did not fall below this target in any of the four years in which the law was in operation, although the target exceeded the world price by 40 per cent on average. In the EU, the difference between guaranteed price and world price was even greater; the Doha Round negotiations have shown the difficulties encountered by industrialised countries in reducing cotton subsidies. Processing fibre locally Another solution proposed to the African producers was for them to process their cotton locally into textile products. By exporting finished products instead of raw fibre, African producers would no longer be penalised by the subsidies granted to US farmers, runs the argument. However, this has been tried before. Textile industries have been set up in West Africa over the past 50 years, but the results have been disappointing. Twenty years ago, Benin, Burkina Faso, Côte d’Ivoire and Mali processed 22 per cent of their fibre production locally; today they process hardly 5 per cent. The Sahel region has a comparative advantage in the production of cotton fibre, since cotton is cultivated manually in an area where the cost of family labour is very low. But the region does not have any comparative advantage in processing the fibre into yarn, as this process requires little unskilled labour and a large amount of electricity, which is very expensive here. With the recent increase in energy prices, the problem has only been exacerbated. A study presented in June 2003 in Ouagadougou considered that, in order to attract investors, it would be necessary to guarantee them a 30 per cent subsidy on their purchases of cotton fibre, for a period of at least 15 years.10 It would be dangerous to follow such a path when textile mills are closing in industrialised countries, after the abolition of import quotas on textile products. This does not mean that countries in the Sahel should not process a greater proportion of their cotton into textile products for export. However, this will be a lengthy process and farmers cannot be expected to heavily subsidise textile mills for 15 years.
9 “Reforming the Cotton Sector in Sub-Saharan Africa”, by Louis M. Goreux. Second edition. Africa Region Working Paper Series, No 62, November 2003. 10 “Etude d'identification et de promotion d'unités industrielles régionales dans la filière coton de l'UEMOA, March 2003, p.65”

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A window of opportunity not to be missed African countries should not expect to be compensated financially for the prejudice caused by the subsidies granted by industrialised countries to their cotton farmers. However, they may obtain external assistance to improve the productivity of their own cotton sectors. They were invited to present a development framework for their cotton sectors at the Paris forum, held in July 2004. They did so, but to date this has not led to much additional assistance. African countries must follow up by designing programmes and projects that are financially viable, and they must exert pressure to obtain the additional resources that have been promised. The main objective should remain the elimination of subsidies that cause prejudice to African cotton producers. On the eve of the Hong Kong WTO conference, the time has come to intensify the pressure. The timing is right, at the end of the 2004/05 cotton year, since cotton subsidies in the EU and the USA have never been so high. Subsidies to Greek and Spanish cotton farmers constitute only a small element of the Common Agricultural Policy (CAP), which has long been considered an unshakeable pillar of the European structure. In July 2005, British Prime Minister Tony Blair asked EU members to tear up the old CAP and to start again from scratch, something his French counterpart Jacques Chirac could not accept; this disagreement prevented the new European budget from being adopted. This episode shows that a fundamental revision of the European agricultural subsidy policy is no longer unthinkable. In the USA, the proposal to reduce cotton subsides and to limit them to US$250,000 per beneficiary came from the White House. The proposal was made by President Bush at the beginning of his second term, which is traditionally the best time for pushing difficult measures. It should have been considered by Congress in mid-September, on the eve of the new budget year beginning 1 October. However, with a big increase in federal spending resulting from the damage caused by Hurricane Katrina, the adoption of the new budget was postponed. There are good arguments for reducing cotton subsidies. Granting large subsidies to producers to grow cotton, and exporting two-thirds of their production at a loss, cannot be in the interests of the USA. This anomaly persists because it is defended by a powerful lobby protecting the interests of big cotton farms, which for the most part could be profitable without subsidies. For large-scale farmers, subsidies are the icing on the cake, allowing them to buy up small farms and to further increase their profits due to economies of scale. The ultimate anomaly is that the subsidies received by big farmers are financed by taxpayers, who for the most part are a lot poorer than the farmers themselves. Reducing cotton subsidies could be politically appealing, at a time when the growing budget deficit is a subject of controversy both within the USA and internationally. Circumstances are at present favourable because the new heads of the IMF, the World Bank and the WTO are well informed on the cotton issue. On 15 May 2005, Rodrigo de Rato (Director General of the IMF) held constructive talks in Cotonou on the cotton problem with representatives of the four LDCs who submitted the Initiative.

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On 14 June 2005, Paul Wolfowitz (the new President of the World Bank) visited Bobo Dioulasso, the cotton centre of Burkina Faso, where he severely criticised the subsidies awarded to US cotton farmers. On 25 September 2005, Pascal Lamy (the new Director General of the WTO) brought up the cotton issue in his address to the Development Committee. Big farmers will fight to safeguard their privileges for as long as possible. According to the National Cotton Council in the USA, it would be unreasonable to change the rules of the game before the 2002 Farm Bill expires. It is too late to modify the rules for the 2005/06 cotton year, since the cotton is already partly harvested. Amendments could only be made for the 2006/07 season, which is the last year covered by the current farm law. It would be unwise to modify some aspects of the law without taking into consideration all the interactions involved, and this could only be done when the next agricultural law is designed.11 If the next law were to be approved by Congress six years after the previous one, the vote would take place in May 2008, six months before that year’s presidential elections, which would not be a propitious time to undertake serious reforms. It might therefore be necessary to wait for the Farm Bill after that, which could be approved in May 2014. To conclude, African cotton producers have a strong case and Hong Kong presents a window of opportunity that should not be missed. However, Africans will not be able to take full advantage of lower subsidies without improving productivity in their own cotton sectors.

11 In an attempt to delay reforms, it has been proposed to extend the 2002 Farm Bill by four years.

If such a proposal were accepted, the USA's margin of negotiation in Hong Kong would be severely curtailed.

PART IV:

Beyond the sectoral initiative: Towards coherence in trade and development policies on cotton

.

Between a rock and a hard place: the case for support to Africa’s cotton sectors
Sally BADEN* Introduction: from compensation to support funds The original version of the Sectoral Initiative in Favour of Cotton, submitted to the WTO in May 2003, was centred on two key demands: the elimination of cotton subsidies and a transitional compensation mechanism to offset the damages caused by subsidies to Least Developed Country (LDC) cotton exporters, pending their elimination.1 While proposals for cotton subsidy reform remain squarely on the agenda, despite the lack of progress, the idea of transitional measures in the form of financial compensation for cotton-producing LDCs to offset their loss of revenue was greeted with outright rejection by WTO member states in Cancùn, notably because the proposal did not fall under the existing prerogatives of the WTO.2 Subsequently, the request of the “Cotton Four” (C4) for compensation has been repackaged in the form of a “cotton sector support fund”, but this too has met with a consistently negative response, in spite of attempts to make it more palatable to the donor community.3 Fuelled by the renewed price crisis in 2004, and by their determination to seek a global solution to the cotton problem, the C4 countries have nevertheless continued to push forward on this demand.4 The proposal for modalities on cotton put forward by the Africa Group in April 2005 proposes an emergency support fund for cotton production,5 with a level of funding of 20 per cent of the value of production in the countries concerned. This would decrease in proportion to the “pace of elimination of the domestic support measures and subsidies at issue.” Multilateral and bilateral development partners have been given a deadline of December 2005 to develop, approve and finance this fund to support the cotton sectors of all African cotton-producing and net exporting countries.
* Sally Baden is Cotton Research and Policy Adviser for Oxfam International, West Africa. This article is an individual contribution and does not represent the position of Oxfam. 1 World Trade Organisation, Committee on Agriculture Special Session, 2003, WTO negotiations on agriculture. “Poverty Reduction: Sectoral Initiative in Favour Of Cotton,” Joint Proposal by Benin, Burkina Faso, Chad and Mali, TN/AG/GEN/4, 16 May 2003 (03-2613). 2 No mechanism exists for financial compensation for damages in the WTO. Countries experiencing damages due to the actions of other members can take their case to the Dispute Settlement Body which, if it rules in their favour, can authorise the use of retaliatory trade measures. 3 See Goreux, this volume. 4 See e.g. “Bamako Declaration” of January 2005, signed by ministers of the C4 countries; OECD-DAC, 2005, “DAC Briefing: The Development Dimensions of African Cotton: A contribution to the follow-up of the WTO Regional Workshop on Cotton held in Cotonou 23-24 March 2004”, OECD-DAC/Club de Sahel, DAC Chairman’s Statement, January 2005. 5 African Group (WTO), “Proposed Elements of Modalities in Connection with the Sectoral Initiative in Favour of Cotton: Communication from the African Group,” TN/AG/SCC/GEN/2, WTO, 22 April 2005.

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Parallel to the WTO stalemate on the support fund question is a similar blockage in dialogue between African cotton stakeholders and donors around the role of national-level support funds – formerly referred to as stabilisation funds – in providing protection from price risk and volatility for small farmers in Africa. One of the major consequences of the repeated price crises that have occurred since 20016 is the depletion of remaining reserves available nationally for stabilising producer prices in West and Central Africa. Farmers’ organisations, governments and other stakeholders in African cotton sectors have been attempting to negotiate with development partners on the replenishment, or establishment, of cotton support funds at a national level, but so far to no avail. No-one is suggesting a return to old-style stabilisation funds, and no doubt there are hard lessons to be learned from previous experiences. Existing initiatives also need to be adapted to a changing institutional environment. Rather than throwing the baby out with the bathwater, however, it is urgent to examine the different concerns and positions regarding support funds, and to investigate whether there are realistic alternatives to help secure the livelihoods of small farmers in the short to medium term. This article first looks at the rationale for support funds at the national level, then reviews some prevailing donor positions on this question, as well as alternatives currently being proposed. Finally, it makes a case for rehabilitating support funds nationally, to secure the cotton sectors and the livelihoods of farmers, to ensure coherence between “trade” and “development” questions, as undertaken in the July Framework, as well as to move forward a negotiating process that is at risk of becoming bogged down. The rationale The basic idea of support funds at a national level is that they provide a minimum guaranteed price to small farmers, and reduce the risk of price fluctuations in commodity markets at the farmer level. They go hand-in-hand with existing systems in West and Central Africa (WCA), where prices are set in advance of the growing season, to give a clear signal to farmers of what price they might expect for their crop. This system transfers the risk of cotton sales on the world market from the farmer to the cotton company which, via use of forward sales and other methods, is better placed to manage the risk. In cases where world prices are unfavourable, the funds are used to offset the gap between the price for cottonseed announced at the beginning of the season and the final price at which the cotton fibre is sold on world markets, minus the various charges and fixed costs that companies bear in transformation, transport and other essential functions. In periods of favourable world prices, reserves can be accumulated and bonuses distributed to farmers.

6 Following the severe crash in world cotton prices in 2001, there was a recovery in 2003, only for prices to fall steeply again in the second half of 2004.

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In the WCA region, and indeed in most of Africa, small farmers – for whom minimising risk may be more important than maximising revenue – are the main cotton producers. A number of different accounts stress the value that farmers place on the guaranteed price system.7 It is also true that few other markets for agricultural products offer any such certainty. While it may be true that producers have sacrificed higher prices for price stability, this may be regarded as a positive trade-off. Given current price trends on world markets, the rationale for funds of this nature is stronger than ever. Not only have prices been in decline by an average of 2 per cent annually over the past decade, but price volatility has also been increasing, in part due to exchange rate factors.8 Exposing small farmers directly to these fluctuations, in such unfavourable circumstances, could have a disastrous effect on their revenues and on poverty levels. The impact that volatile prices for cotton fibre have on the price of cottonseed is also magnified because of the inflexible fixed charges involved in processing, transportation and so on. This means that the “variable of adjustment” becomes the farm household itself and, in particular, the associated labour.9 In other words, the direct impact of such volatility on poor people is extremely high. Not only will poverty increase, but the viability of the cotton production system in West and Central Africa risks being undermined if mechanisms to provide a minimum of stability in prices and internal markets cease to function or are withdrawn. Farmers may accumulate debts or be pushed out of cotton production, but without any obvious alternative to assure either access to inputs for food production or cash incomes. Declining producer incomes and, potentially, production levels would also have an impact on government revenues, on the efficiency of the sector overall and potentially on overall demand and economic growth. The trouble with cotton support funds Support funds are currently characterised by some donor agencies as unwarranted subsidies to cotton farmers in Africa, which drain government (and donor) resources away from poverty reduction priorities. Overall, both multilateral and bilateral agencies – though with some notable exceptions10 – are unfavourable to the idea of support funds linked to minimum or target cotton prices in the African context. Within the development debate around cotton, this issue has surfaced repeatedly. At the EU-Africa Cotton Forum in Paris in July 2004, both the Malian and Burkina Faso delegations put forward requests concerned with setting up or replenishing support funds.11
7 Goreux, 2003; USAID, 2005; Keita and Nubupko, 2005 (this volume). 8 Gergely, 2005. While subsidies have been linked to price suppression in world markets (e.g. Sumner

2003), their impact on price volatility has not been analysed. 9 Goreux, 2005a. 10 See Gergely, this volume. 11 Republic of Mali, 2004, ‘Le programme de reforme du secteur coton au Mali: Mesures et état d’execution,’ communication of the Malian delegation to the EU-Africa Cotton Forum, July 2004; Republic of Burkina Faso, 2004, ‘Cadre stratégique pour le développement de la filière coton au Burkina Faso,’ Ouagadougou, 18 June 2004.

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The Agence Française de Développement (French Development Agency) also presented a proposal for a three-tier “insurance” mechanism for the West African cotton sector which, while distinct from existing systems, would be based on similar principles. A major innovation of the French proposal was the creation of a regional fund that could be drawn on by national cotton sectors in the case of exceptional difficulties, and which would initially be funded by donor agencies. However, it soon became clear that there was little enthusiasm among other donors for funding these proposals. EU officials have made their opposition clear; the emphasis in the EU commodities action plan is squarely on the use of market-based mechanisms, with short-term recourse to the FLEX mechanism[explain FLEX?] and budget support to shore up deficits.12 This emphasis was reinforced in the January 2005 update on the EU-Africa cotton partnership, which stated that “reserve funds do not suffice any more to manage the effects of the price risks… hedging price risks should be considered.” While it may be true that the existing funds are exhausted, due to the recent price crises, this does not mean that the function they served is no longer valid. In Mali, while reform of the price mechanism was finalised in January 2005 to reduce pressure on government budgets, this mechanism still effectively relies on deficit financing to uphold the price floor agreed with farmers (i.e. FCFA 160, 24 per cent less than the price of FCFA 210 in 2004/05).13 Cotton stakeholders in Mali clearly favour the idea of the support fund, and the Mission de Restructuration du Secteur Coton has launched a feasibility study to look into it.14 However, there is still no indication that there is any external engagement to provide resources for this initiative. Similarly, a request by Burkina Faso in advance of the EU-Africa Forum for donor support to replenish its existing, but depleted, support fund fell on deaf ears.15 The problem is not one of availability of donor funds. Bilateral and multilateral agencies, though reluctant to give explicit support to the cotton sector, are nevertheless underwriting implicit subsidies through budgetary support.16 Equally, donors appear willing to consider funding a whole raft of initiatives to increase productivity, quality, value added and co-ordination in African cotton sectors or, in the case of the IMF, to provide additional financing to cotton-dependent countries.17 Some of these are no doubt important initiatives,18 but they do not directly address the issue of how to provide a minimum of livelihood security to small farmers, faced with further price declines and volatility in world markets.
12 “EU Action Plan on Agricultural Commodities, Dependence and Poverty and a Specific Action Plan for Cotton”, DG Development, European Commission, May 2004, p.8. 13 See Keita and Nupubko, this volume. 14 The terms of reference for this study were drafted in June 2005 and the study is under way, with funding from the French Development Agency. 15 Goreux, this volume. 16 In Mali, for example, the EU is providing up to €15 million in budgetary support on cotton. 17 European Union, “Road Map to Implementing EU-Africa Cotton Partnership”, 6 July 2004; USAID, “Summary and Findings of the West Africa Cotton Assessment, 25 September-14 October 2004”, USAID, Washington DC, 12 January 2005. 18 Goreux, this volume, indicates which are helpful and which are distractions from the main issues.

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USAID, in its 2005 review of the problems of the C4 cotton sectors,19 provides a useful analysis of the complexity of the issues surrounding support funds. It nevertheless concludes that such funds, and the associated practice of setting minimum prices pre-season, create the wrong incentives. This could be viewed as a case of policy incoherence, or of blatant double standards, given the level of incentives provided to US farmers to produce cotton, regardless of world market conditions. In May 2005 the IMF engaged publicly in the cotton debate in West Africa, when Director General Rodrigo de Rato visited the region and a conference was held in Cotonou. The declaration of the meeting20 stressed the need for continued market-based reform, pricing mechanisms based on the world price at the country level, and increased intra-regional integration of the different cotton sectors. While the IMF, alongside the World Bank, reiterated its strong support for subsidy reform, the idea of an emergency fund received no backing. Similarly, the declaration stated: “The potential adverse impact of the decline in prices on poverty should be addressed by well-targeted and temporary measures to protect the poor, rather than price supports.” More development resources were recommended “to help the most vulnerable segments of the population cope with the impact of exceptional price volatility”, as well as for supply-side measures to increase productivity. The IMF also announced possible additional financing for C4 cotton countries. However, this raises the question of whether creating new debt to cushion commodity market shocks is a viable strategy. The ideal of the liberalised and privatised cotton network is very strong in the donor community, despite its mixed record on the ground,21 and support funds are considered incompatible with this model. Even proponents recognise, however, that cotton sector reforms do not solve the fundamental problem of the lack of functioning rural credit and input markets, which explains why small farmers often produce cotton even at loss, as is currently happening in Mali. To the extent that price support mechanisms are funded through government budget allocations, with or without donor support, this clearly constitutes a subsidy to small farmers.22 The principle, though, is not one of systematic, institutionalised subsidy, but rather one of support funds that are “internal” to the sector, i.e. fed by surpluses when prices are higher and providing a floor price when world markets dip. This is a qualitative difference from the EU and US subsidy regimes. In fact the support fund in Burkina Faso, which is largely internally generated, successfully cushioned the country’s farmers from the shock of one of the worst price crises in recent years.
19 In spite of the focus on the C4, the one problem not mentioned in this review is US subsidies. Ministers

of the C4 took the opportunity to remind the US visitors diplomatically of their two key priorities – ending subsidies and setting up the support fund (Bamako Declaration, January 2004). 20 International Monetary Fund, 2005, “Declaration by Participants at the Benin Cotton Conference”, Press Release No. 05/121, Washington, 23 May 2005. http://www.imf.org/external/np/sec/pr/2005/pr05121.htm. 21 Goreux, 2003. 22 In 2001/02, when prices reached an all-time low, government support was provided to hold up producer prices in Benin (FCFA 45) and in Côte d’Ivoire (FCFA 15). Goreux, 2003 p.6.

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Equally, the floor price may be fixed for shorter or longer periods (e.g. three years in the case of Burkina Faso) but it can be adjusted periodically to ensure that it does not become unsustainable against long-term price declines. Meanwhile, it is worth noting that the level of price support enjoyed by US and EU farmers now far exceeds global price trends, as average prices have declined by 2 per cent a year in the past 10 years. Downward adjustment in price supports to US farmers has not yet occurred, while African countries have accepted lower prices to reflect global trends or have ceased the practice of paying bonuses to farmers.23 To the extent that resources from within the cotton sector are insufficient to provide protection against price fluctuations, and that companies and producers are able to push for government support, there is an opportunity cost in terms of government – and indirectly donor – resources. These are resources which, it is sometimes argued, could be better used for poverty reduction – through investing in social sectors, for example. There are complex questions of distribution here, but it is not an either/or situation. In the context of West Africa, where coverage of basic services is extremely weak, the cash incomes of small farmers themselves contribute directly to poverty reduction, through both household expenditure on social services and investment in community facilities by farmer associations. Moreover, the current request of West Africans for a support fund in the WTO context underlines that it is not the intention of governments to divert resources from other priorities: rather, they are seeking additional funds. Another criticism levelled at support funds is that they enable corruption and rent-seeking behaviour. With the old-style stabilisation funds, there were undoubtedly cases of serious mismanagement by cotton companies. These funds were often drawn on for other purposes, so that resources were not available when they were really needed.24 But times have changed. Producer organisations are better structured, more professional and more prominent in the management of the sector than was previously the case. The relatively good management of funds by producers in Burkina Faso and Cameroon, for example, testifies that the problem is not the fund per se, but rather the institutional and organisational context around it and the way it is managed. What are the alternatives? Favoured “alternatives” for mitigating price risk that are currently in vogue are mainly market-based risk management mechanisms such as put options. The World Bank and other donors, via the International Task Force (ITF) on Commodity Risk Management for developing countries – notably the Dutch government and its associated

22 In 2001/02, when prices reached an all-time low, government support was provided to hold up producer

prices in Benin (FCFA 45) and in Côte d’Ivoire (FCFA 15). Goreux, 2003 p.6. 23 Keita and Nubupko, this volume. 24 The Compagnie Malienne de Développement des Textiles, (CMDT, the Malian Company for the Development of Textiles) is a case in point, and one over which producers still have a grievance.

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private sector partner, Rabobank – have promoted these mechanisms heavily in the six years since the ITF was established.25 However these instruments, like forward sales, are most relevant to management of global market price volatility and risk within the annual production cycle by cotton companies or by financial institutions. Support funds, on the other hand, are about smoother and more predictable national prices for farmers over a period of many years. A recent analysis26 underlines the fact that the existing practice of forward sales has been, in most cases, a more reliable price risk management mechanism than put options or futures, the main market-based instruments that are being proposed. Forward sales enable protection against short-term price risks, help to plan sales, establish a minimum price and facilitate access to credit. However they are costly, and they do not reduce price uncertainty beyond a single season. While cotton companies could benefit from selective and better use of these instruments, ginning companies currently have little experience or skill in applying them and it may take some years to develop their capacity. In addition, market providers are not always willing to extend such facilities to new clients, without credit guarantees or collateral.27 Alternatives clearly do need to be considered to optimise prices and to reduce the risk faced by African cotton companies. However, there is a range of considerations at stake here, including marketing strategies and access to market information, not just hedging. Given the institutional constraints, it is also unlikely that the use of marketbased mechanisms will become widespread sufficiently rapidly to provide an alternative in the near future. It is recognised that while producers are hurt by world price fluctuations, smaller farmers in particular are hurt in the liberalisation process and that there is a need to limit their vulnerability. Rather than provide price support, an idea being proposed by the IMF and others is that these impacts on livelihoods and poverty levels could be offset by targeted exceptional aid – through the provision of basic services in cottonproducing countries, diversification and “safeguarding producers from excessive external price shocks”.28 Specifics are lacking on how this might work, in terms of the criteria and duration of “exceptional” aid, how targeting of poor farmers would be made operational and how cost-effective such a scheme might be. One is tempted to venture that putting cash directly into the hands of farmers might be a far swifter, less administratively complex and less costly route to welfare outcomes than safety net programmes of this nature.

25 http://www.itf-commrisk.org/index.htm. 26 Estur, G., “Role of Price Risk Management in Cotton Sectors”, presentation to the annual meeting of

the ITF, Interlaken, Switzerland, 19 May 2005, ICAC. 27 Bryla, 2003. 28 “Statement of the EU Dutch presidency on behalf of the EU cotton partner countries concerning partnership in the EU Africa cotton partnership.”

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Diversification is regularly invoked as a solution to the cotton problem. Reduced dependence on cotton is clearly essential in the medium to long term, both for farmers and for African economies. But the question remains, diversification into what? Food crops are an integral part of the existing cotton farming system, but it is the cotton that provides cash incomes. In the absence of reliable or remunerative markets for other crops, the idea that farmers can quickly diversify out of cotton into other crops is simplistic, especially as cotton provides access to the inputs needed for the whole farm enterprise. Rehabilitating support funds A clear advantage of support funds is that they have been around for a while, which means that there is significant experience to build on – positive as well as negative – and that in at least some cases, the institutional framework exists, although it lacks resources at this point. Nevertheless, there is clearly a need for some rethinking and reform of existing or earlier mechanisms. Issues that need to be addressed include: who should manage the funds and how this can be made transparent; how to ensure that the benefits of good years are well used to prevent future deficits and, similarly, that producers get some benefit from price hikes as well as protection from price falls; how to ensure overall that the system builds in incentives for improving performance and productivity in cotton companies as well as among farmers, to offset long-term price declines; and how to ensure that such systems do not create a tendency towards systematic subsidies that will be unsustainable. Both past experience and changes in the policy environment mean that direct management of such funds by cotton companies is not an appropriate option, especially where there is, or is likely to be, more than one such company. Depending on the type of fund, and the existing environment, producer organisations or the inter-professional bodies that exist or are being set up in cotton sectors may have a role to play. Where producers manage funds to limit the impacts of price volatility, they have the responsibility to ensure that they provide adequate protection against bad years, although if prices continue to slide, clearly there will have to be external support. Another issue is the way in which bonus payments (called “ristournes” in WCA) have historically been calculated and paid out – i.e. based on a share of cotton company profits and distributed during the following season. This is problematic as it creates incentives for cotton companies to hide their profits. Another issue is that the payment of bonuses with a built-in delay can create perverse effects, particularly by tying farmers into the following year’s production and rewarding those who produce more in the current year.

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Answers are now being found to some of the questions. Possible solutions include a two-step payment system with a minimum floor price and the setting up a regional insurance fund that would provide additional financing to national support funds in cases of successive price falls, under specific conditions.29 The calculation of profit or loss to the sector – and hence bonuses to farmers – needs to be based on objective criteria, not on information supplied by companies (which in any case may become less accessible with privatisation). There needs to be benchmarking of the relevant costs, which would also serve to encourage improved performance by the companies. Moving beyond the current deadlock means engaging in this debate. For their part, producer organisations have a particular role and responsibility in ensuring that proposals are developed that serve their interests as well as the interests of long-term sustainability. Conclusion: towards coherence? The negative impact on African countries of trade-distorting subsidies is by now well documented and widely accepted, but to date the WTO framework has not proved adaptable to the demands for redress of poor, cotton-dependent countries. Large economies such as Brazil can effectively retaliate against violations of trade rules with trade measures, as Brazil is now planning to do following the March 2005 panel decision of the Dispute Settlement Body on US cotton subsidies. Small African economies do not have this leverage, and there is no existing mechanism or precedent for financial redress for damages caused by the violation of trade rules. It is in this context that the C4 countries are pressing for a support fund via the WTO. There can be no doubt that world markets for cotton, in part due to subsidies, are in long-term decline and are increasingly volatile, particularly for countries in the CFA zone, which currently have to deal also with unfavourable exchange rate fluctuations. There is no doubt either that falls in the cotton price to farmers lead to increases in poverty.30 Rather than support funds draining money away from poverty reduction, they should be seen as a means to limit the impact of commodity crises on levels of poverty. While some price adjustment may have to occur, to ensure the sustainability of the sector, this does not need to be brutal or chaotic. Overly sharp reductions in prices to farmers will have knock-on effects in the wider economy, which would multiply and deepen poverty and make recovery slower. A pragmatic approach concerned at least in part with protecting the incomes of poor farmers requires further exploration of this option in the medium term.

29 Goreux, 2003; Goreux, 2005; Gergely, 2005; Gergely, this volume. 30 See e.g. Minot and Daniels, 2002.

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In the July 2004 framework, the trade and development questions of the cotton issue are explicitly linked, and in reality the discussions are increasingly parallel. Since the idea of compensation has been whittled out of the Sectoral Initiative on cotton and the development debate has been widened to cover a multitude of questions – from biotechnology to classification systems – there is no longer any organic link between the negotiations on trade and those covering development issues. Indeed, the development agenda is increasingly diluting discussions on the trade dossier. In a communication to the WTO cotton sub-committee in April 2005, the Burkina Faso delegation stated: “While these conferences provide diagnoses and devise strategies and action plans, millions of African cotton producers continue to wait, in extreme poverty and with less than one dollar a day, for concrete action in their favour.”31 One way forward would be to seek greater coherence between the proposal for a cotton sector support fund, as envisaged by the C4 proposal, and pro-development actions at the national level, starting with the establishment or replenishment of national-level support funds in the C4 countries or the WCA region.

31 Sub-Committee on Cotton (WTO), “Ouagadougou Declaration on the Cotton Situation since the Adoption of the July 2004 Package”, Communication from Burkina Faso TN/AG/SCC/GEN/1, 7 April 2005 (05-1452).

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References
African Group (WTO), “Proposed Elements of Modalities in Connection with the Sectoral Initiative in Favour of Cotton: Communication from the African Group”, TN/AG/SCC/GEN/2, WTO, 22 April 2005. Bryla, Erin G. (2003), “Making volatility work for small farmers: mitigating inter-season price volatility”, International Task Force on Commodity Risk Management for Developing Countries, http://www.itf-commrisk.org/documents/interseason.pdf, 5 April 2003. Cotton Steering Committee of the EU-Africa Cotton partnership (2005), “Update on the EU-Africa Cotton Partnership (July 2004-January 2005)”, January 2005. Estur, Gerald (2005a), “Role of price risk management in cotton sectors”, presentation to the annual meeting of the ITF, Interlaken, Switzerland, ICAC, 19 May 2005. Estur, Gerald (2005b), “Commercialisation et gestion des risques de prix du coton. Seminaire introductif”, ICAC, Cotonou, 12 April 2005. Estur, Gerald (2004), “Commodity risk management approaches for cotton in West Africa”, ICAC, Washington, June 2004. European Commission (2004) “New EU Action Plan on Agricultural Commodities, Dependence and Poverty and a Specific Action for Cotton”, Directorate General for Development, Brussels, May 2004. European Union (2004) “Road Map to Implementing EU-Africa Cotton Partnership”, 6 July 2004, Paris. Gergely, N. (2005), “Proposition pour le mise en place d’un mécanisme d’atténuation de la volatilité des cours du coton’’May 2005. Goreux, Louis (2003) “Reforming the Cotton Sector in Sub-Saharan Africa”, Africa Region Working Paper series No. 62, Second Edition, The World Bank, November 2003. Goreux, Louis (2005a), “Modèle Regionale”, paper for Association Cotonnière Africaine (ACA) Annual Meeting, Ouagadougou, 15 March 2005. Goreux, Louis (2005b), “Réduire les subventions et combattre les mesures de diversion: Hong Kong, l’occasion à ne pas manquer”, Governments of Benin, Burkina Faso, Chad and Mali, “Bamako Declaration on the Development of the Cotton Industry in West And Central Africa”, Bamako, 13 January 2005. International Monetary Fund (2005) “Declaration by Participants at the Benin Cotton Conference”, Press Release No. 05/121, 23 May 2005, Washington. http://www.imf.org/external/np/sec/pr/2005/pr05121.htm Keita, Sadio and Kako Nubupko (2005). “Réforme du mécanisme de fixation du prix d’achat du coton au producteur malien et conséquences dans un contexte de chute des cours mondiaux’’

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Minot, N. and L. Daniels (2002) “Impact of Global Cotton Markets on Rural Poverty in Benin”, IFPRI Discussion paper no. 48, November 2002, IFPRI, Washington DC. OECD-DAC (2005) DAC Briefing: The Development Dimensions of African Cotton: A contribution to the follow-up of the WTO Regional Workshop on Cotton held in Cotonou 23-24 March 2004”, OECD-DAC/Club de Sahel, DAC Chairman’s Statement, January 2005 Oxfam International (2004) “White Gold Turns to Dust: The Way Forward for the African Cotton Sector”, Oxfam International Briefing Paper No. 58, Oxford, March 2004. République du Burkina Faso (2004) ‘‘Cadre stratégique pour le développement de la filière coton au Burkina Faso’’, Ouagadougou, 18 June 2004. République du Mali (2004), ‘‘Le programme de reforme du secteur coton au Mali: Mesures et état d’exécution’’. Communication of the Malian delegation to the EU-Africa Forum on Cotton, Paris, July 2004. Sub-Committee on Cotton, WTO (2005), “Ouagadougou Declaration on the Cotton Situation since the Adoption of the July 2004 Package”, Communication from Burkina Faso TN/AG/SCC/GEN/1, 7 April 2005 (05-1452). USAID (2005) “Summary and Findings of the West Africa Cotton Assessment”, 25 September14 October 2004, USAID, Washington DC, 12 January 2005.

Reform of the fixing mechanism for the purchase price for Malian cotton farmers and its consequences in the context of falling world prices1
Kako NUBUKPO and Manda Sadio KEITA* Introduction Faced with unfair competition internationally from massively subsidised production and dumping originating in Northern countries, notably the USA and the European Union, the African countries that instigated the Sectoral Initiative in Favour of Cotton, accompanied by others, have vigorously denounced these trade-distorting practices, which are at odds with the neo-liberal discourse of the offending governments.2 Cotton is amongst the few products for which African countries in the CFA franc zone have seen an increase in their share of export markets. However, the mechanisms for determining the purchase price for the producers of this cotton are far from transparent: the price is defined in relation to other prices that are invisible to most agents, including the anticipated price on the international markets, and costs and margins for marketing and processing by cotton companies.3 Moreover, in a context of the liberalisation of cotton industries, both the price level and the method for determining the producer price are increasingly transferring uncertainty and risk in the cotton sector onto the farmer, thus increasing his vulnerability.4 Furthermore, the strong dependency of West African economies on cotton means that shocks affecting the cotton industry are immediately transmitted to the economy as a whole, via transmission channels well known to economic theory.5
* Kako NUBUKPO is an economist for CIRAD, Department of Policy and Market Research, based with the Cotton Programme of the IER in Bamako, Mali. Manda Sadio KEITA is an economist for the IER, Network Economy Programme, Bamako, Mali. 1 This article arises from a study financed by the NGO Oxfam Great Britain (Oxfam GB), West Africa Regional Management Centre, and carried out by the authors. As well as the remarks made by participants at a workshop held on 5 July 2005 in Bamako, the authors have also benefited from written remarks by Sally Baden, Eric Hazard, Louis Goreux and Tom Bassett, to whom they extend their thanks. The authors of course remain solely responsible for the opinions expressed, as well as for any errors or omissions that may remain in this article. 2 Nubukpo, 2004; Pesche and Nubukpo, 2004. 3 Araujo-Bonjean and Brun, 2001. 4 Araujo-Bonjean and Boussard, 1999; Nubukpo, 2000. 5 Abbott and McCalla, 2002; Timmer, 2002.

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For cotton industries, this state of affairs is particularly worrying due to the considerable instability of the global cotton price (Cotlook Index A). Subject on the one hand to volatility resulting from the imbalances of supply and demand in the global market and, on the other, to the instability arising from fluctuations in exchange rates between the US dollar and the CFA franc, cotton prices have become increasingly unpredictable since the beginning of the 1970s. Some writers have observed that “major changes in price tend to be followed by other large-scale changes; in other words the volatility of prices is serially correlated”, while there is also a widening of the range over which prices fluctuate.6 And these writers conclude that “liberalisation of the cotton industries in the CFA franc zone of Africa is taking place in a particularly unfavourable context: the expected returns from exports are relatively low compared [with] the 1960s, but the risks involved are more and more substantial.” The subsidies allocated by Northern countries (essentially the EU and the USA) to their farmers are one factor that is regularly cited to explain the persistent decline in world cotton prices. In the specific case of Mali, a study by Adjovi, Wetta and Sanogo (2004) reveals the negative impact of EU and US subsidies on the Malian economy for the year 2001.7 In the opinion of these authors, “it appears that world cotton prices determine at once the level of cotton production in Mali, the price for the producer and agricultural income. However, the impact of world prices is much less significant on the generation of value added by the farm enterprise.” Northern country subsidies exert an impact on the Malian economy on at least two levels: • Via the classic channel of reducing world cotton prices and, consequently, the export receipts for Mali, which is a “price taker” on the international market; • Via the modification of the rules by which the cotton purchase price for the producer is determined, which in turn affects the distribution within the sector of the value added generated. This article aims to analyse in greater detail the second channel, which to date has received less attention than the first, but which is likely to have a considerable impact on the living conditions of cotton producers. The Malian example is particularly significant in that, following the fall in international cotton prices, and taking into account the large deficit of the CMDT (Compagnie Malienne de Développement des Fibres Textiles, which has a monopoly on the purchase of cottonseed), a new mechanism for determining the purchase price of cottonseed from the producer was adopted in January 2005. The adoption of this mechanism led to a lowering of the minimum guaranteed price, from FCFA 210 per kilo of “top grade” cotton in 2004/05, to a price range of between FCFA 160 and FCFA 175 per kilo, starting from the 2005/06 growing season. It also led to the effective end of the guaranteed minimum price system.
6 Araujo-Bonjean and Brun, 2001. 7 From a correlation matrix and elasticity calculations, the authors have obtained the following results:

a direct fall in receipts of 1.6 per cent for the public treasury, a decrease by 1.8 per cent in global revenue, an elasticity of 0.3 between poverty indicators and world prices; an elasticity of 0.87 between cotton revenue and poverty indicators.

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The lower end of this price range is, according to the available data, lower than the average cost of production per kilo of cottonseed, and thus raises the issue of what adjustments will be made by farmers, and by the Malian cotton industry as a whole, to ensure the viability of production in the short and medium terms. The aim of this article is to analyse the expected impact on the Malian cotton industry and economy of the implementation of the new fixing mechanism for the price paid to Malian cotton farmers, taking into account production costs and also the ongoing institutional changes within the industry (i.e. planned privatisation of the CMDT and the transfer of new responsibilities to farmers’ organisations). This work is based on surveys done in the cotton-growing zones of Mali and the creation and use of a social accounting matrix for the country as a whole. The first section of the article presents the new purchase price mechanism for cottonseed for the producer (section 1), before analysing its microeconomic impacts (section 2) and macroeconomic impacts (section 3), and finally drawing some conclusions and making some recommendations. The new price mechanism for purchasing cottonseed from the farmer In January 2005, the Malian government, the state cotton company CMDT and the cotton farmers’ unions signed a protocol on a new mechanism for fixing the purchase price of cottonseed. This new agreement brings about a radical change in the base price of Malian cotton, which will henceforth be directly linked to the international price (Cotlook Index A), rather than being derived essentially from production costs. This change comes at a time when the industry is facing major difficulties in terms of CMDT’s financial balance. At the same time, input costs are increasing and yields are declining in many cotton-growing areas, while the support funds to underwrite the new price mechanism do not yet exist. The old mechanism The mechanism applied in Mali for determining the purchase price per kilo of cottonseed before the January 2005 reform was based on bipartite negotiations between the CMDT and representatives of producer organisations. This mechanism suffered from the practical difficulty of differentiating the minimum guaranteed price from the initial price offered to farmers. However, in practice, its implementation allowed producers to obtain an initial price of FCFA 200 per kilo and a definitive campaign price of FCFA 210 per kilo for “top grade” cottonseed in 2004/05. Moreover, the old mechanism implicitly recognised that the initial price would be higher than the minimum price and, in turn, that the definitive price would be higher than the initial price. However, the Malian government, under pressure from the donor community and fearing for the long-term sustainability of supporting the cotton industry deficit and the repercussions of the CMDT’s financial problems, accepted demands to re-open negotiations on the mechanism for determining the cottonseed purchase price.

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The new mechanism The Malian government opted for a new mechanism to determine the purchase price of cottonseed for the producer, which resulted in a drastic revision downwards of the guaranteed minimum price. It fell from FCFA 210 per kilo to FCFA 160-175 per kilo from the start of the 2005/06 season. Furthermore, two articles in the protocol signed by the Malian government, the CMDT and the producers (represented by the GSCVM8) seem particularly important, as they introduce new elements into the process for determining the price paid to producers. In this protocol, which was initiated by the World Bank in a Memorandum dated 14 November 2004 (Technical Monitoring Mission for the SAC IV Program) and subsequently adopted by the Malian government, a specific innovation is Article 8, which states that in case of force majeure, the signatories to the protocol can decide on a reduction in the purchase price of cotton, which could therefore fall below the lower limit of the agreed price range, i.e. below FCFA 160/kg. This article assumes a particular significance when read in conjunction with Article 2, which states that the new pricing mechanism “must be implemented whether the support fund be subscribed to or not” i.e. that the support fund intended as a guarantee to the effective functioning of the new price mechanism is in no way a prerequisite to its application. Currently, the creation of a support fund is under study and a consultant’s report commissioned by the MRSC9 is expected. The protocol also states that, every three years, the price range is to be revised in agreement by the various parties. Finally, Articles 4 and 5 set out, respectively, the ways of dividing the industry’s revenues between the CMDT and farmers, and the methods for determining the final remuneration paid to cotton farmers. In the context of this balance of power, which is unfavourable to cotton farmers, an objective evaluation is needed of the likely micro- and macroeconomic consequences of the application of the new cotton price mechanism, taking into account underlying trends in cotton production costs. Macroeconomic impacts (impacts microéconomiques) Production costs in the cotton-growing zone of Mali The farms that were the subject of the study were classified according to the typology described below (A, B, C and D) and used by CMDT in the cotton-growing zone of Mali: • A farm of type A is one that is equipped with at least two pairs of ploughing oxen, a plough, a multi-cultivator, a seed drill, a cart (either donkey- or ox-cart) and a herd of at least six head of cattle over and above the working oxen. These farms have at least two ploughing units (two pairs of working oxen and two ploughs and/or multi-cultivators);
‘‘Groupement des syndicats cotonniers et vivriers du Mali’’ (Group of Cotton and Food-Producing Unions of Mali). 9 ‘‘Mission de Restructuration du Secteur Coton’’ (Cotton Sector Restructuring Mission).
8

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• A type B farm has one ploughing unit at its disposal; • A type C farm has one incomplete ploughing unit, but has experience of plough cultivation; • A type D farm is one that has no equipment and where all the work is done manually.. Table 1 shows the distribution of the different types of agricultural production unit (APU) in the study zone: Table 1: Distribution of farms by type Type Type A Type B Type C Type D TOTAL
Source: CAMFPGP,10 growing season 2003/04

Pourcentage 34,9 46,3 10,3 8,5 100

Table 2 gives an overview of cotton production costs per hectare, according to the APU type. The main difficulty in determining cottonseed production costs lies in fixing the cost of daily farm labourers’ wages. The daily wage rate used in this study is FCFA 750, which corresponds to the estimates of researchers from ESPGRN/IER11 in Sikasso, following group discussions with producers in November 2004, and is in line with current practice in the cotton-growing areas of Mali.12

10 ‘‘Commission d’Application du Mécanisme de Fixation du Prix du Coton Graine aux Producteurs’’

(Commission for the Application of the Cottonseed Price Fixing Mechanism for Producers).
11 Keïta et al., 2004. 12 This daily wage is also the one used by the HORUS-SERNES study, 2002.

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Table 2: Overview of cotton production costs per hectare, according to APU type (all costs in CFAF)
Rubrique/Type UPA Average area (hectares) Allowance for depreciation (1) Salaried labour Family labour Total Cottoseed yield per ha (kg) Cotton fibre yield per ha (kg) Cost per kilogram of cotton (2) Cost per kilogram of cotton (3) Type A 5,41 25764 6750 71250 119997 1127,35 473,49 106,44 169,64 Type B 3,16 25955 3750 75000 103674 1108,86 465,72 93,50 161,13 Type C 0,73 17664 6750 59250 72999 859,31 360,91 84,95 153,90 Type D 0,48 8544 0 75750 35362 621,33 260,96 56,91 178,83 Average 2,45 19482 4313 70313 83008 929,21 390,27 85,45 165,88

(1) Annual payment per hectare calculated according to a linear depreciation of material and equipment, converted into per hectare terms. (2) Cost without family labour. (3) Cost with family labour. Source: estimations by the authors based on SEP/ESPGRN/IER Sikasso data and monitoring by CMDT. It should be noted that these results only cover the 2003/04 season.

Farms of type C and type D, which cultivate less than one hectare of cotton on average, tend to specialise in cereal production (with more than three hectares of cultivated area on average). They grow cotton only in order to take advantage of cotton inputs from the CMDT, which are then used for their cereal crops. Furthermore, they have yields that are markedly lower than those of farm types A and B. This is due to the fact that, being unequipped or poorly equipped, they begin production later, in order to make use of equipment and labour once the type A and type B farms have finished their operations. This means that the dates for ploughing and hoeing recommended by agricultural extension services are not respected. Moreover, farmers on type C and type D farms perform paid services for farmers of type A and type B when the latter are carrying out their ploughing and hoeing. All this has a negative effect on yields on farms of types C and D. Bearing in mind these production costs and the decreasing yields in Mali’s cottongrowing zone,13 the reduction of cottonseed prices for the producer from FCFA 210/kg to FCFA 160-175/kg raises some questions, specifically: - Will the new price range allow producers, on average, to make a profit? - How will farmers respond to the adverse price trend?
13 Nubukpo and Keita, 2005.

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The new price fixing mechanism and the profitability of cotton growing Calculations of production costs for Malian cotton converge around a range of FCFA 154 to FCFA 179 per kilo of top-grade cotton, with an average of FCFA 166/kg. Thus, the application of the range defined by the new price mechanism runs the risk that farmers will be operating at a zero or negative margin because the purchase price will be, for the most part, lower than the production costs. The general situation of the industry tends to reinforce this forecast. The Malian cotton sector is suffering from a weakening of support to farmers by the CMDT,14 a rapid rise in prices of cotton inputs (a consequence of the reduction in subsidies granted by the CMDT) and falling cotton yields. In this regard, the only conceivable rationalisation of production costs lies in a reduction of returns to the labour force. This is worrying, given official commitments to poverty reduction. The real problem in evaluating production costs lies in the estimation of family labour costs. This has long been the major point of disagreement between producers and the CMDT in fixing prices for producers, even under the old mechanism. In Mali, production is centred essentially on family labour, which in turn is at the root of the fragmentation of farms in the cotton zone. While the majority of farms use paid labour (see Table 3), this labour is mainly hired on a casual, task-specific basis.. Table 3: Percentage of cotton farms using paid labour Use of paid labour Yes No TOTAL
Source: CAMFPGP, growing season 2003/04

Percentage 79 21 100

Paid labour is hired mainly during hoeing (up to 26 per cent) and during the cotton harvest (60 per cent). Thus, a potential decrease in farmers’ incomes would have a negative impact on both operations. Hoeing is essential to ensure a good yield, while extra labour at harvest-time guarantees a better quality of cottonseed (by preventing last-minute pest attacks).

14 The current trend is for a “re-centring” of the CMDT’s management solely on activities linked to

cotton marketing.

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Response of Malian cotton farmers to falling prices Within the framework of the January 2005 IER/CMDT study group, which looked at the reasons behind declining yields in the cotton-growing zones of Mali, the sub-group on socio-economic aspects identified some foreseeable elements of the impact on producers of a decrease in the price of cotton, through interviews carried out with a sample of farmers in the cotton-growing areas. Farmers’ motivations for continuing to produce cotton and their likely responses to decreasing prices, confirmed during interviews carried out in the framework of the Oxfam study, are particularly interesting. Four main reasons were put forward by producers to explain their interest in continuing in cotton production, despite the difficulties encountered: • The benefits of monetary income in the context of a minimum guaranteed purchasing price for cottonseed; • Access to different kinds of credit, which are generally granted on the basis of guarantees linked to cotton production; • The positive knock-on effects of growing cotton in year ‘N’ on the yields of cereal crops in year ‘N+1’; • The great instability in prices of cereals, giving rise to uncertainty in incomes derived from cereal production. Regarding the first motive, the producers clearly indicated their interest in the security offered by cotton-growing in terms of income stability, due to the guaranteed purchase price system for cottonseed, the guaranteed market for cotton and the relative rapidity in payment to growers by the CMDT. Furthermore, cotton production provides indispensable collateral for access to credit in the CMDT zone, for inputs and equipment or for consumption, in terms of BNDA (Banque Nationale de Développement Agricole) loans or simply in terms of micro credit. The second reason for persevering with cotton production seems a determinant factor in understanding the rationale for farming practices in the cotton zone. For example, the input credits given for cotton can also be used for cereal production. Farmers are wholly dependent on the cotton industry for access to credit and this engenders perverse effects, as some farmers admit. Performance in terms of improved cotton yields is not always the primary objective of the farmers, notably the less well-equipped ones; rather, what keeps them in cotton production are the benefits from their membership of the “cotton club”, particularly access to credit which allows them to produce cereals, thus ensuring food self-sufficiency. The pertinence of this reasoning is underlined by the third motive – the knock-on effects of cotton production on cereal yields. Indeed, the use of chemical or organic inputs and the preparation and rigorous maintenance of the soil that is required by cotton production give rise, during crop rotation, to soils with higher fertility, which in turn means good cereal yields.

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The final motive put forward by producers is the instability of cereal prices. Ironically, the better the harvest and the higher the volume of cereals marketed, the lower the prices become. The producers are wary of this cereal price instability, and it seems that cereal production serves less to generate monetary income than to ensure food self-sufficiency for rural households. Overall, cotton producers are obviously unhappy about the fall in the initial price for cottonseed. However, for the most part, they have restated their intention to grow cotton, despite the decrease announced in the price, and to adapt themselves to this situation. One of the responses envisaged by producers is a future reduction in cotton acreage.15 This response seems logical since, in addition, the costs of inputs, particularly those of fertilisers and phytosanitary products, have been continuously rising. This perspective is not, however, unanimously shared. Recent decisions by the competent authorities suggest that farmers can count on a fall of 6 per cent in the cost of inputs, following decisions taken in this regard by the relevant authorities. In view of this, in some villages the trend seems to be rather to move towards an increase in land planted to cotton. This willingness of producers to increase their production acreage nevertheless runs up against the problem of land pressure, as well as that of a lack of family labour and/or the cost of external labour. They have minimal room for manoeuvre on remuneration for labour. For these reasons, some cotton producers do not rule out being forced to sell some of their livestock to meet repayments of input credits, if the current trend should continue. Similarly, an extension of the acreage planted to cereals has been envisaged by some producers as a possible response to the fall in cotton prices, due to the amount of work that cotton-growing demands. To conclude, the price level seems less important than the minimum guaranteed price as a factor in whether or not producers decide to grow cotton. The price level has a greater impact on decisions regarding the acreage sown respectively with cotton and cereals. However, it should be stressed that too wide a gap between the initial price and the final price paid to producers would be likely to undermine farmers’ decisions, in so far as the initial price is announced in April of year N, before planting, while the final price is paid in July of year N+1, a good while after the harvest. One current argument that is employed in defence of the mechanism for determining the purchase price of cottonseed is that the initial price is much less relevant to the farmer than the higher final price. While this protects the CMDT in the case of a reversal in world markets, it underestimates the income shortfall in terms of lost cotton production (and export receipts) for Mali, which might arise from the announcement of a price that acts as a disincentive for the producers. It would be preferable to minimise the gap between the initial price and the final price, in order to optimise cotton production levels and thereby facilitate forecasts that are both viable and stable for the producers.
15 This option has also been accepted in the conclusions of the DNSI study (2003), which estimated

a reduction in acreage of between 10 per cent and 25 per cent and a decrease in cotton production of 25 per cent for a fixed purchase price of FCFA 160 per kilo of cotton.

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Macroeconomic impacts To estimate the macroeconomic impacts of the decrease in cottonseed prices, several scenarios have been tested, on the basis of data extracted from a social accounting matrix. The different scenarios are based on hypotheses of the prices for producers and the price elasticity of supply. Scenarios of decrease in price for the cotton producer, and their impacts Scenario 1: Impacts of applying a price for the producer of FCFA 160/kg, with no change in the volume of production By doing a simulation of the effects of fixing the price of cotton for the producer at CFCA 160/kg i.e. a 24 per cent reduction in the price for the growing season 2004/05, the following results were obtained from a social accounting matrix. In terms of effects, all else being equal, the loss of revenue for producers would be in the range of FCFA 29.5 billion.16 Supposing that this reduction results in a decrease in consumer spending by households, the secondary effects on the Malian economy would be the following: • A decrease in income for other households (non-cotton growing) of FCFA 18 billion; • A decrease in imports of FCFA 4.8 billion, leading to a decrease in the state’s receipts, in terms of various taxes, of around FCFA 3.3 billion; • A loss of revenue for industry of FCFA 11.3 billion. For the Malian economy as a whole, the probable loss suffered following a fixing of the purchasing price for cottonseed at FCFA 160/kg is estimated at FCFA 62.32 billion, which is the equivalent of a reduction in GDP of 1.86 per cent. Scenario 2: Impacts of a reduction in cotton production of 25 per cent, following the application of a price to the producer of FCFA 160/kg Supposing that, following a decrease in the price for the producer of FCFA 50/kg, producers respond by reducing cotton production by 25 per cent (hypothesis put forward by DNSI, 2003), total receipts from exports would diminish by FCFA 53 billion. This result is reached by supposing that the fibre is sold, at minimum, at the CIF cost price of FCFA 858.48/kg.17 The secondary effects for the Malian economy of this downturn in cotton production would be the following: • The producers’ income would decrease by FCFA 36.8 billion, all other things being equal; • The income of other households (non-cotton growing) would decrease by FCFA 22.8 billion; • Imports would go down to the tune of FCFA 5.9 billion;
16 The annual production of cotton seed in Mali for the growing season 2004/05 being 589,562 tonnes (source: CMDT/DPA, July 2005). 17 Cf. report by A. Wadell, 2005, Plan de sortie de crise.

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• Following this decrease in imports, government fiscal receipts would decrease by FCFA 4 billion; • There would be a loss of revenue to industry of FCFA 14 billion. Overall, in this scenario, the total losses for the Malian economy can be estimated at FCFA 136.5 billion, i.e. a reduction in GDP of 3.9 per cent. Scenario 3: Impacts of applying a price for the producer of FCFA 175/kg If the price for the producer is fixed at FCFA 175/kg, without a downward adjustment in production, the following repercussions can be expected for the Malian economy: • A lowering in producer income of FCFA 20.6 billion; • A loss in income for other households of FCFA 12.7 billion; • A reduction in imports of FCFA 3.3 billion, leading to a loss of receipts for the state in terms of port duties of FCFA 2.3 billion; • A loss of revenue for businesses of FCFA 7.9 billion. The total loss anticipated for the Malian economy as a result of fixing the price to the producer at FCFA 175/kg would be in the region of FCFA 43.6 billion, i.e. a reduction in GDP of 1.3 per cent. Summarising the different scenarios tested, it is obvious that fixing the price for the Malian cotton producer at FCFA 160/kg is likely to provoke negative repercussions that are more than proportional for the Malian economy as a whole. These consequences would be further aggravated if this price reduction were accompanied by a reduction in cotton production, as a reaction from the producers. The loss of export receipts from cotton are estimated at a minimum of FCFA 53 billion, for a price to the producer fixed at FCFA 160/kg and a downward adjustment of 25 per cent in production. Indeed, the most recent official study available of the impact on the economy of a price reduction for cotton18 estimates “the reduction in acreage as being between 10 and 25 per cent, and as 25 per cent the loss of cotton production for a purchase price fixed at FCFA 160 per kilo of cotton”. It also estimates that “a reduction in prices by 10 per cent would bring about a decrease in cottonseed production of 5 per cent and that would lead to a shortfall of FCFA 17.7 billion for the national economy. In the instance where the loss of production reaches 50 per cent, as was the case in 2000/01, the losses for the economy would rise to FCFA 113 billion”. The negative impacts on the Malian economy are significantly reduced if producer prices are maintained at a higher level. Indeed, with a price for the producer in the region of FCFA 195/kg, the consequences for the national economy would be reduced to a total loss of around FCFA 18.7 billion, which is almost the same as the deficit that

18 DNSI, 2003

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the cotton industry recorded in November 2004. In other words, in attempting to absorb the industry deficit of FCFA 18 billion by reducing the price to the producer to a level below FCFA 195/kg, the losses generated for the economy as a whole risk being greater than the initial deficit. It would seem clear therefore that, even though the need for the Malian cotton industry to tackle the question of the world market price appears justified in terms of the accumulated deficits of the industry, the fact remains that the interests of the industry and of the economy as a whole seem to lie in supporting the price to producers at a reasonable level. Methods for further analysis of macroeconomic impacts The use of a social accounting matrix for Mali permits an overall evaluation of the probable impacts on the economy of a reduction in the purchase price of cottonseed. However, to better understand this impact evaluation, it is necessary to have access to an econometric or calculable general equilibrium model that allows examination of the channels by which this reduction could affect the four indicators traditionally used by the International Monetary Fund in its performance reviews of macroeconomic policies: i.e. real sector, table of government finance statistics (GFS), balance of payments and monetary situation. The effects at the real sector level are discussed above. Regarding the impact on the GFS table, the consequences of the decision to reduce the producer price can be grasped through its implications for the budget of the Malian government. Initially, the budget will react positively to a reduction in the direct or indirect subsidies usually allocated in order to reduce the industry deficit. However, in the medium term, a reduction of revenue from the industry could give rise to a loss in fiscal revenues. Furthermore, a sustained rural exodus cannot be discounted, with the likely demands that this will place on government social expenditures in urban areas. Equally, Mali’s trade balance could suffer from a reduction in the price to cotton producers, due to the loss in production volume that could ensue. In all likelihood, cotton production levels should not significantly change for the 2005/06 growing season. However, as of the 2006/07 season, it is highly probable that the price elasticity of supply will change, with the consequences that Scenario 2 has tried to quantify. As regards the monetary situation, which is directly linked to the balance of payments, if there is a decrease in cotton export receipts, this could translate into a decrease in foreign exchange and therefore in currency reserves for the BCEAO (Central Bank of West African States) and WAEMU. A reduction in net external asset holdings, being a component of the counterpart of money supply, could translate into a loss in the coverage rate of monetary emission, in the context where three of the eight WAEMU countries (Benin, Burkina Faso and Mali) derive the majority of their foreign exchange earnings from cotton exports.

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Conclusion The analysis of the transmission effects of a reduction in the cotton purchasing price on the Malian economy as a whole has been possible through the construction of a social accounting matrix. It is clear that the attempt to reduce the deficit in the cotton industry through a drastic cut in the price paid to the producer risks having depressive effects on the Malian economy, the sum of which could prove to be higher than the budgetary savings envisaged in the first instance, as has been shown in the different scenarios envisaged. Indeed, the justifications given for introducing the new price mechanism – on the one hand, the need to link Malian cotton producers to the world market and, on the other, the projection of a rapid reduction in the dual deficits of the CMDT and the Malian government – seem to have overlooked the potentially negative effects linked to the application of this mechanism. Furthermore, the method of calculation for the range adopted needs to be clarified, with particular regard to the commonly held rules for fixing prices. Even if we accept that the new mechanism effectively aims to link the producer price to the global price, thus sanctioning the liberalisation process of the industry, the fact that the world price itself results from an imperfect and unfair working of the international cotton market puts this liberal argument into perspective. On the contrary, the introduction of such a mechanism, supported by the World Bank and validated by the Malian authorities, could exacerbate the existence a dual power imbalance: in the first place, between the cotton-growing countries of Africa, which are price takers on the global market, and other countries that subsidise their producers (the EU, the USA, China, etc.); and, in the second, between Malian cotton growers and other stakeholders in the industry (the CMDT, the state). In addition, the perspective of reducing the dual CMDT/government deficit is a short-term one, based strictly on accounting preoccupations. This is in contradiction with a closed economy approach, based on recognition of the multiplier effect of cotton.19 It goes without saying that the scale of this multiplier effect depends on the possibilities available for financing the industry deficit. This means that the risk cannot be ignored of an “eviction effect” caused by the transfer of resources to cotton from other sectors, particularly in a context where some donors increasingly favour budget support, to the detriment of targeted aid to specific sectors. Finally, due to the loss of income for cotton farmers and therefore for rural populations as a whole, the new pricing mechanism will probably contribute to a rise in poverty levels in the cotton-growing areas of Mali. Such an observation is worrying in view of the objectives that are officially sought by both the Malian authorities and the Bretton Woods institutions – though both have nevertheless validated this new mechanism. The search for greater coherence between, on the one hand, the desired effects of policies and the decisions actually taken and, on the other, the various policies of the government (macroeconomic, sectoral, etc.) is essential if poverty is to be reduced in Mali.
19 Hugon 2005

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The results obtained lead to the following recommendations: • The range determined for the purchase price for cottonseed from the growers needs to be revised. In particular, the lower limit should be increased, with the two-fold concern of: a) taking into account the adverse effects on the whole of the Malian economy due to the setting of an initial purchase price that does not take into production costs, and b) reducing the gap between the initial price and the final price, thus guaranteeing a greater stability for producers and relative accuracy in the drawing up of their production forecasts. • Article 8 in the text of the new mechanism, regarding the possibility of reducing the initial price during the growing season, should be withdrawn. Removing the minimum guaranteed price is likely to cause cotton to lose its stabilising role in an environment that is otherwise full of risks, with potentially negative consequences for the sustainability of the whole cotton production system. • A support fund should be created that could guarantee a purchase price for cottonseed for producers. This fund is particularly justified as it minimises the adverse effects of a price to the producer that is too low and, in particular, too unstable. It could be financed, over and above possible margins from the cotton industry, by a national solidarity tax, since cotton is so important for Mali, or by funds coming from international aid and, possibly, from emergency aid funds to the cotton industry, in line with the claims made at the WTO in the framework of the Sectoral Initiative in Favour of Cotton.

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REFERENCES Abbott P. and A. McCalla (2002) “Agriculture in the Macroeconomy: Theory and Measurement”, Handbook of Agricultural Economics, Gardner, B. and G. Rausser, eds., Elsevier Science, Vol. 2, 2002. Adjovi E., C. Wetta and O. Sanogo (2004) “Cotons d’Afrique face aux subventions mondiales: Bénin, Burkina et Mali”, Réseau d’expertise des politiques agricoles (REPA), Dakar, 2004. Araujo-Bonjean, C. and J.-F. Brun (2001) “Les politiques de stabilisation des prix du coton en Afrique de la zone franc sont-elles condamnées?” Economie Rurale, N°266, November-December 2001, pp. 80-90. Araujo-Bonjean, C. and J.-M. Boussard (1999) ‘‘La stabilisation des prix aux producteurs de produits agricoles: approches micro-économiques’’ Revue Tiers-Monde, Paris, 1999, T. XL, N°160, pp.901-928. Commission d’Application du Mécanisme de Fixation du Prix du Coton Graine aux Producteurs, Campagne 2003/04, ‘‘Les coûts de production du coton: Détermination du taux de rémunération de la main d’œuvre salariée en zone CMDT et OHVN’’, Ministère de l’Agriculture, de l’Elevage et de la Pêche, 2004. Direction Nationale de la Statistique et de l’Informatique (DNSI) 2003 ‘‘Impact de la baisse du prix du coton sur la croissance de l’économie malienne’’ , Etude commanditée par le Ministère de l’Economie et des Finances, Bamako, Février 2003. Horus Entreprises/SERNES (2002) ‘‘Etude d’un mécanisme de détermination du prix du coton graine au producteur’’, Mission de Restructuration du Secteur du Coton/Primature, Final report, February 2002. Hugon, P. (2005) ‘‘Les filières cotonnières africaines au regard de l’économie du développement’’, Communication aux Journées de l’AFSE, Clermont-Ferrand, May 2005. Keita, M.S., Nubukpo, K., Traoré, A. (2004), ‘‘Etude sur les coûts de production du coton au Mali’’, IER, Bamako, Novembre 2004. Nubukpo, K. (2000) “L’insécurité alimentaire en Afrique Subsaharienne: le rôle des incertitudes”, L’Harmattan, Paris, 2000. Nubukpo, K. (2004) ‘‘L’avenir des filières cotonnières ouest africaines: quelles perspectives après Cancun?’’ Communication à la Commission Economique de la Francophonie, Paris, 7 April 2004 (available on the cotton forum of the OCDE website: http://www.oecd.org/dev

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Nubukpo, K., and M.S. Keita (2005) ‘‘L’impact sur l’économie malienne du nouveau mécanisme de fixation du prix du coton graine’’, Report of a study commissioned by Oxfam International, Bamako, August 2005. Pesche D. and K. Nubukpo (2004) ‘‘L’Afrique du coton à Cancun: les acteurs d’une négociation’’, Politique Africaine, N° 95, Octobre 2004. Timmer, C.P. (2002) “Agriculture and Economic Development”, Handbook of Agricultural Economics, Gardner, B. and G. Rausser, eds., Elsevier Science, Vol. 2, 2002. World Bank (2004) ‘‘Mise en œuvre du mécanisme de détermination du prix du coton-graine au producteur’’, Technical monitoring system for the SAC IV programme, Bamako, 11 November 2004.

A proposal for the implementation of a mechanism for mitigating volatility in cotton prices*.
Nicolas GERGELY**

A containment mechanism is essential A survey of price trends for cotton over a long period reveals a structural downward trend of about 0.2 per cent annually over the past 40 years.1 This appears to have been more pronounced over the past decade, when the fall reached 2 per cent annually. The pace of decline has been faster in the case of cotton than of any other agricultural commodity, and this has compelled producers to constantly increase their productivity. At the same time, the volatility of cotton prices appears to have increased over the past few years, notably under the influence of market distortions combined, in the case of the CFA zone countries, with fluctuations in the euro/dollar exchange rate. This volatility is deeply destabilising for African cotton industries and for producers in rural areas. Short periods of prosperity are too uncertain for producers to be able to invest long-term in their farms. When the effects of falling prices are passed on to producers, they translate into rural poverty and a dramatic drop in production, which further destabilises the industry. When the effects of lower prices are borne by the state or by public cotton companies, it often results in severe cash shortages, which have a dramatic impact on the operation of cotton industries. As demonstrated by the crisis experienced in the early years of this decade, the sustainability of African cotton industries therefore requires the establishment of a mechanism designed to cushion the impacts of price volatility. At the same time, continuing efforts should be made to enhance competitiveness. Government intervention to stabilise the sector has been widely practised over recent decades but has proved to be largely inefficient; it can therefore be excluded right away.

*This paper was presented at the EU/Africa Forum held on 5-6 July 2004 in Paris, where it represented the position of the French Development Agency. A Cotton Working Group within the Agency is investigating the applicability of these proposals which, despite having being enhanced over time, have remained broadly consistent in their principles and philosophy. ** Nicolas Gergeley is an economist. He is an HEC graduate and an associate consultant with the GLG consultancy firm. 1 “Relevance of Risk Management Instruments for the Cotton Sector in West and Central Africa”, Gabriele Baecker, 2004

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Graph 1: Evolution of the COTLOOK Index A

Another mechanism that has been proposed is an insurance system based on futures market instruments. However, preliminary studies on such a system are far from being conclusive, due particularly to its exorbitant cost when it comes to guaranteeing a significant minimum price over a number of years. This paper therefore examines an alternative mechanism: that of a self-insurance system managed by the industries themselves. This option appears to be the most promising, in light of embryonic systems already tested in some countries (Burkina Faso and Cameroon). Desirable objectives and characteristics of the proposed mechanism The problem of containing price volatility is closely linked to the mechanisms used to determine prices and margins, as well as to the management structures of the global industry. It is therefore in this global context that the mechanism should be placed. The main objective of such a mechanism must be to cushion the impact of price volatility on the producer, while also pushing for a maximisation of the producer price. It is out of the question, however, to artificially maintain a fixed price for the producer that is disconnected from market trends. This would be financially unsustainable, because it provides producers with little incentive to achieve much-needed increases in productivity, and also because it generates additional distortions in a market that is already badly destabilised by the subsidy regimes of certain producing countries.

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The mechanism must also contribute to the attainment of the overall objective, which is to enhance competitiveness. This means that it must encourage each actor involved in the industry to maximise their performance in terms of cost, while at the same time guaranteeing the funds for certain critical functions (research, agricultural guidance, road maintenance in cotton-producing areas, and so on). This critical requirement pleads for a mechanism based on standard fixed costs, rather than on the costs posted by cotton companies (which in any case will be increasingly difficult to monitor, given the widespread inclination to privatise companies). It also pleads for a clear distinction to be made between the costs posted by cotton companies that correspond strictly to their commercial and industrial activity and those costs of critical functions that may, under inter-professional agreements, be borne by the state or by the industry as a whole. The mechanism must also be consistent and coherent with industry privatisation. Primarily this implies specific rules – for example, when determining prices, to avoid recourse to lengthy negotiations that might lead to political interference and economic instability. Secondly, it implies that cotton companies should invest, securing their results up to a minimum level in order to reduce their risk premium. Lastly, for the mechanism to win the confidence of the various actors involved, it must be collectively managed within the industry by an inter-professional authority, free of state intervention. Principles underlying the proposed system The proposed mechanism is inspired by the best practices observed in existing price setting systems, notably in Burkina Faso and Cameroon. It meets the requirements described in the previous section, and is based on three levels of intervention: A price smoothing mechanism (Level 1), managed by the producers themselves through their professional organisations. Operation of this first-level mechanism would, like the one in Cameroon, be ensured by the producer payment system. The initial harvesting price would be determined by cotton companies (CC), based on their own perceptions of market trends and existing sales. At the end of the harvesting period, the final price would be determined by a formula based on the real cotton prices over the period. The difference between the final price and the initial price which, if positive, constitutes the make-up price, is paid to producer organisations (POs) by the cotton company, and not directly to the producer. The payment is deposited in an account that can be used by the POs to finance a premium that is added to the initial price paid to producers by the cotton company during the next harvest. The price actually received by the producer is therefore equal to the initial harvest price plus, as applicable, a premium decided by the PO and financed from the make-up prices it received during previous harvests.

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As demonstrated by an analysis of the Cameroonian industry, this system allows a smoothing of the producer price, since the strategy of having the premium set by the PO tends, depending on the liquidity of the PO, to compensate for a possible decline in the initial price set by the cotton company. It offers the great advantage of making producer organisations really participate in the price setting process. Furthermore, it can be managed at a very affordable cost. Paying the premium, like the initial price, on delivery of cottonseed avoids having to pay an individual make-up price at the end of the harvest. Such payments can be very high in countries where this system is practised. On the other hand, the cotton company bears the risk of a negative difference between the final price and the initial price, a condition that would force it to set the initial price at a cautious level. A self-insurance mechanism (Level 2) managed by the inter-professional authority. Such a mechanism must be capable of covering a moderate risk of falling prices. It would involve setting a minimum producer price corresponding to the minimum level at which production is viable, combined with a mechanism that, beyond that level, would trigger levies payable into a self-insurance fund. The fund would be managed by the inter-professional authority and would pay compensation when prices fell below that level. This minimum price should presumably be the same for all countries of the region, with possible variations depending on the geographical location of a country in order to take account of differentials in input costs.2 The minimum price would be set initially through a survey of production costs and comparative incomes in the cotton-growing areas, and would be adjusted every four or five years. In order to avoid any disconnection from market trends, the minimum price should also be adjusted downward in the event of persistently falling prices – for instance, by automatically applying a slight reduction after each harvest, thus activating self-insurance payments, but cancelling this after two profitable harvesting periods (based on various simulations, the reduction might be in the range of CFAF5 per kg). A reinsurance mechanism (Level 3) managed with the assistance of donors. Such a mechanism could be resorted to in the event of an exceptional fall in prices, and would be accessible to industries that follow rules ensuring sound management of the internal self-insurance system. It would thus constitute a powerful incentive for the actors involved to improve industry management and to establish efficient mechanisms for determining prices and margins.

2 According to a rapid calculation, this differential might be in the range of 10 per cent for the extreme cases of a coastal country such as Benin and a completely landlocked country such as Chad.

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Related terms and conditions for determination of prices and margins Gross profit would be defined at the end of the harvest by the FOB average price (monthly average of Cotlook Indexes minus a CIF fixed sum), net of the following costs: • the negotiated inter-professional unit cost of critical functions (road maintenance, research, supply of seeds, etc) paid to cotton companies, producers’ organisations or private service providers, as applicable; • the fixed intervention cost of the cotton company (from collection of cottonseed to sale of fibre and seeds); this cost in turn comprises two sub-sets: - generic costs, which should tend to be fixed on the same unitary basis for all cotton companies in the region (industrial costs net of seed sales, overheads, harvesting period financing costs, etc.); - costs specific to the local context (mainly costs of fibre collection and carriage to port of loading, which depend on crop density and geographical location), which should be subject to a specific fixed cost based on each area-specific estimate; • a minimum remuneration for cotton companies, calculated such that they can remunerate their capital investment at the market rate;3 • the minimum producer price. The gross profit (calculated at the end of each harvest) would then be distributed in four directions, based on percentages pre-determined by contract: • taxes levied on the industry by the government; • additional resources for the self-insurance fund; • the cotton company’s share of profits; • producers’ share of profits. This would be added to the minimum price to form the final price for the harvest. Should it be higher than the initial price, it would result in the payment by the cotton company of an additional amount to the producers’ organisation. In the event that the harvest produces no profits, after all the elements described above have been taken into account, the deficit is borne by the self-insurance fund, which allows the cotton company to break even on its costs (though without any profit), on the basis of the minimum producer price. These calculating mechanisms are illustrated in the charts below, based on: • the estimated price for the 2003/04 harvest; • the average costs observed in Burkina Faso, Cameroon and Mali over the past three years; • the following hypothetical parameters: an initial harvest price of CFAF185 per kg from the cotton company; a minimum price of CFAF175 per kg from the cotton company; a self-insurance premium representing 30 per cent of gross profits of the harvest; a tax rate representing 13 per cent of profits; 10 per cent of the profits going to the cotton company.
3 This remuneration might be fixed as a unitary amount based on the net average fixed assets of the cot-

ton companies in the region.

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Based on these hypotheses, the self-insurance system will be triggered when the FOB average price is lower than CFAF697 per kg for lint (which corresponds to a CIF price of about CFAF737 or €1.12 per kg); beyond this ceiling, the industry would show profits, which would generate a reserve for the self-insurance fund.. Diagram 1: Calculation and distribution of the profit from the season (in the event of an excess)4

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If the reported FOB average price at the end of the harvesting period is insufficient to cover all the fixed costs and the minimum price, the self-insurance fund will pay the difference to the cotton company, as indicated in the previous chart. In the chart below, the average price is assumed to be CFAF660 per kg of lint, as fixed costs and the minimum price are the same as in the previous example. Diagram 2: Calculation of the contribution to the self-insurance fund (in the event of a deficit)

Simulations of the mechanism in operation Price trend scenarios To test the mechanism, simulations were carried out using data from the past ten years, according to various different scenarios of cotton price trends: • Scenario A, corresponding to a repeat of the past ten-year cycle. In this scenario, the CIF average price for the next ten-year period will be CFAF870 per kg; • Scenario B, more pessimistic, corresponding also to the past ten-year cycle but with a continuing downward trend of 2 per cent annually. In this scenario, the average price for the period is CFAF798 per kg; • Lastly, Scenario C, corresponding to an inverted cyclical trend of scenario B. In this scenario, the average price is still CFAF798.

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In all three cases, FOB prices are calculated by applying a CFAF40 per kg rebate on CIF prices. The three scenarios are illustrated in the following graph: Graph 2: Illustrations of price trend scenarios

Source: Nicolas GERGELY

Cost hypotheses and parameterisation This simulation was based on: • the average price paid by the cotton companies of Burkina Faso, Mali and Cameroon over the past three years (CFAF240 per kg, excluding interest charges on borrowings, of which 30 per cent are for critical functions); • a fixed rate of return on capital investments by cotton companies, on the basis of a net investment of CFAF300 per kg of lint (average for Sofitex and CMDT) and an interest rate of 10 per cent, giving a rate of return of CFAF30 per kg; • a tax rate representing 13 per cent of the profits achieved by the industry (to which is possibly added a tax on cotton company profits); • 10 per cent of industry profits going to cotton companies.

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• Thirty per cent of industry profits were retained as the rate of contribution to the self-insurance fund; as simulations progressed, this appeared to be the maximum level at which sufficient reserves could be formed without excessively squeezing the producer price. • The cotton companies’ initial price for the first harvest was set at CFA185 per kg; for subsequent harvests, it was assumed that, as cotton companies would be responsible for setting this price, they would take a cautious decision, based on the final price during the previous harvest and on price trends (the initial price can, however, not be lower than the minimum price). • The mimum price payable by the cotton companies is CFA175 per kg; by agreement, this is lowered by CFA5 after each intervention by the self-insurance fund and returns to its initial level after two profitable seasons, tracking market trends. • Production is assumed to be 100,000 tons of cotton lint (although only for the purposes of calculating in absolute terms the value of the various margins involved). Trends in producer price, minimum price and self-insurance fund Trends in the producer price, the minimum price and the self-insurance fund have been summarised for the three scenarios in the following table and graphs:
Scenario model Price trand hypothesis FOB average price for period Minimum price by 2013 Results Average producer price over period cumulative selfinsurance funds (million CFAF) 36 814 -1 391 4 297

A B C

Same cycle Same cycle-2%/an Same as B; inverted cycle

870 799 799

170 165 170

197 192 187

It appears that in Scenario A (repeat of the past ten-year cycle), the mechanism allows a relatively stable average producer price of CFAF197 per kg, which is more favourable than the prices actually seen in the past ten years. The minimum price drops slightly to CFAF170 per kg by the end of the period. The self-insurance fund is largely in surplus over the period, thus making it possible to prepare for any future deterioration in prices.

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Figure 3: Scenario A, trend in producer price

Source : Nicolas Gergely

Under Scenario B ( repeated cycle, but with an aggravated annual falling trend of 2 per cent), the mechanism is still able to ensure a relatively stable average producer price (though with a slight decline) of CFAF192 per kg, with a minimum price maintained at CFAF165 per kg. The self-insurance fund also succeeds in maintaining its position, despite a slight deficit by the end of the period.

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Figure 4: Scenario B, trend in producer price

Source : Nicolas Gergely

Scenario C (same trend as B, but with an inverted cycle) features specificity when compared with previous scenarios by starting with years in which prices are unfavourable. In this context, the mechanism also allows a relatively stable producer price and a minimum price to be maintained of around CFAF187 per kg and CFAF165-170 per kg on average, depending on the year. The self-insurance fund, however, shows a deficit by mid-term (a deficit of CFAF12 million in the sixth year), though it regains equilibrium by the end of the period. This scenario points to a need to combine the mechanism with a Level 3 mechanism that would provide additional resources to the self-insurance fund.

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Graph 5: Scenario C, cumulative balance of self-insurance fund

Source : Nicolas Gergely

These three scenarios show that the mechanism works, provided it is backed up by a reinsurance mechanism, even in a relatively unfavourable economic context such as the one experienced in the previous decade. A simulation based on an annual falling trend of 3 per cent, on the other hand, reveals the limits of the mechanism in the event of a persistent catastrophic situation. To maintain the balance of the self-insurance fund, it would then be necessary to reduce the minimum price so far that the mechanism could not ensure the survival of the industry.

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Impact of geographical location on the operation of the mechanism These simulations were carried out for production areas in average geographical locations. In reality, costs for cotton companies will be higher in landlocked areas as a result of differentials in transport costs and, therefore, prices for producers and contributions to the self-insurance fund will be lower, as shown in the graphs below.5 It must be concluded that it is more difficult to achieve a balance in the self-insurance fund in isolated areas and that such areas, therefore, would have to resort more often to the Level 3 mechanism in order to maintain their self-insurance capacity Graph 6: Scenario B, comparative trends in self-insurance fund according to degree of area isolation

Source : Nicolas Gergely
5 This assumes, in landlocked areas, fixed costs for cotton companies of CFAF260/kg (instead of

CFAF240/kg) and, in non-landlocked areas, costs of CFAF220/kg.

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Appeal of proposed mechanism to the various actors involved in the industry Cotton companies The mechanism allows cotton companies to secure a minimum rate of return on their capital investment (committed fixed costs), whatever the price fluctuations may be. This should encourage companies to invest in industrial infrastructure and to moderate their expectations in terms of profits, in anticipation of future hardship. Company profits will therefore depend on the cotton price and on the company’s own sales and management performance, in relation to the fixed prices used as the basis for calculating the theoretical result of the harvest and the volume of production that is processed (in other words, it will depend indirectly on its capacity to promote cotton-growing in its area). This is therefore a system that greatly encourages improvements in performance. Simulations show average annual profits (after tax) that range from CFAF 2.8 billion to CFAF3.1 billion, depending on different scenarios and assuming of course that costs and sales performance equal the fixed prices.6 At best, the mechanism has the advantages of setting price parameters that are known in advance and of minimising the need for negotiation within the industry, potentially avoiding uncertainty, conflict and political pressure. Producers Individual producers should be interested in such a mechanism, as it allows price regulation at a relatively high level and relative price security (especially through the Level 3 fund), while none of the existing mechanisms can do so. The mechanism protects producers from a long-term decline in cotton prices, at a time when there continues to be strong downward pressure on them. This is a situation that can only be addressed by a permanent search for increases in productivity across the industry and a diversification of activities that reduce cotton growers’ vulnerability to the economics of cotton. Should productivity gains turn out to be insufficient to maintain prices beyond the level of minimum viability, the mechanism would inevitably tend to concentrate cotton production in areas that have a better comparative advantage. This is indicative of an economic logic that should be accompanied by specific measures designed to support conversion. However, the mechanism would offer the advantage, in this pessimistic scenario, of attenuating the severity of the crisis. The purpose of the mechanism is also to strengthen producers’ organisations that: • participate in determining producer prices, thus acquiring greater legitimacy vis-à-vis their members and greater power across the industry; • receive, thanks to the make-up price paid to them, additional income, which they can decide to assign either to the payment of premiums for future harvests or to other actions of common interest.7
6 These results are of course adjustable according to the rules adopted for sharing profits from the harvest, without affecting the operating principle of the mechanism. 7 For instance, the simulations indicate by the end of period a surplus balance in the accounts of POs of CFAF12 billion in Scenario A, CFAF1.8 billion in Scenario B, and CFAF6 billion in Scenario C.

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Obviously, producers will be all the more interested in the mechanism if it is adequately backed by donors in order to ensure its sustainability. The state States would levy taxes under the proposed mechanism at two levels: on the result of the harvest and on the net profits of the cotton companies. The share of industry income retained by the state in the form of tax obviously depends on the tax rate on which the hypothesis is based. In any case, the mechanism offers the advantage of providing the state with a minimum income based on profits made by the cotton company. Beyond this minimum, the total amount of tax revenue depends on price levels, according to the tax rate applicable to the result of the harvest.8 The need for an additional fund Simulations show that it would be impossible to maintain equilibrium in the self-insurance fund account throughout the period should the range of price fluctuations be notably worse than in the previous decade, or should the cycle start with several successive years of deficit (prior to the formation of the fund). A Level 3 reinsurance fund therefore appears to be necessary to stabilise the mechanism. The purpose of this fund would be to cover price risks of a catastrophic and exceptional nature and not an aggravated falling trend, which can only translate into a corresponding decline in producer prices. The definition of the characteristics and desirable mode of operation of this fund calls for thorough reflection. However, the following are some of the avenues to be explored: • the fund should be established outside the industry and might be managed either by a group of participating donors or by an international financial institution; • it would come into play when there is a dramatic fall in prices, which has a macroeconomic impact on the countries concerned; • it would be accessible to the industries subject to strict and adequate implementation of the self-insurance mechanism; • its mode of intervention might consist of advances made to the industry on concessionary terms and repayable over a maximum period of three to five years, to allow a rapid replenishment of the fund following a disaster. As for the amounts to be provided, a very brief preliminary risk analysis leads to the conclusion that, to be efficient, the fund should be able to mobilise about €0.1 per kg of lint produced by the participating industries (in order to offset a fall of €0.1 from the intervention ceiling). This represents about €100 million in total if all regional producers participate (with a production of 1 million tonnes), or €70 million for the three largest producers (with a production of 700,000 tonnes).
8 In the simulations, the share of the state amounted to CFAF2.5 billion annually on average in Scenario

B (the most unfavourable) and CFAF3.1 billion in Scenario A (the most favourable).

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The rules that govern drawing on the fund should also be studied in detail. Special drawing rights might be considered for each participating industry as a function of the volumes exported during previous harvests (each industry having, in this case, the right to equal support for each kilogram exported). A formula of this sort would favour the most vulnerable and geographically isolated industries. The amount granted per industry might also be tied to the average balance of the self-insurance fund over previous years, which should encourage industries to maximise such funds. The rules of intervention should also be conceived so as to allow the possibility of interventions during two successive harvesting periods – for example, by setting the maximum intervention in the first year at 70 per cent of the fund’s available resources.

Conclusion
The appeal launched by African cotton farmers in November 2001 marked the beginning of a mobilisation that has led to a renewal of African political engagement in international forums. Contradicting the common pessimism on Africa, a coalition of actors from different socio-professional backgrounds has, with conviction and determination, succeeded in putting onto the international agenda issues of direct relevance to rural Africa, where the future of farmers is threatened by unfair trade policies. Although considered newcomers to the debate, the cotton-producing countries of West and Central Africa have nevertheless contributed to a major shift in the evolution of the WTO negotiation process, the pace of which was, until recently, determined by proposals from the USA and Europe. Though not without its limits, the Sectoral Initiative in Favour of Cotton draws attention to the incoherence between the trade and development policies of many Northern countries. It points out the limits of globalisation, the alleged positive effects of which are yet to be realised for many Southern countries. However, above all, it demonstrates the need for African farmers to incorporate sub-regional and international issues into their vision and to be engage in order to secure and develop the sustainability of their industries. While subsidies remain one of the main challenges to be resolved if African cotton is to survive, other issues such as the volatility of international prices and the need for African cotton industries to maintain their competitiveness are also imperative. These questions need to be answered if African cotton sectors are to remain sustainable. Contrary to some accepted ideas, the Cotton Initiative does not so much oppose agricultural subsidies in principle as shed light on and challenge the unfair nature of current support policies, whereby individual farmers in the USA receive in many cases more than US$1 million a year. It questions the astronomic benefits this system gives to a minority of farmers to the detriment of the majority, contrary to commitments negotiated jointly in international circles. Thus, the African approach highlights the aggressive and commercial nature of subsidies that are claimed to support the development of agriculture. More than any development programme or project, this process has been a real-life, hands-on learning experience for those involved in the defence of African cotton. African governments have enthusiastically engaged in unlikely alliances with industry representatives, farmer organisations and even NGOs. By promoting policy dialogue with these actors, they have effectively mobilised the complementary capacities of the different stakeholders and demonstrated the “win-win” scenario that can result. Finally, this collective process has massively strengthened the capacities not only of producer organisations, business people and NGOs but also those of representatives of African governments. The establishment of the African Cotton Association (ACA),

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the creation of the Association of African Cotton Producers (AProCA) as well as the opening of new African missions at the WTO in Geneva are concrete examples of this. However, since Cancùn, the WTO negotiations have scarcely progressed. With the sixth Ministerial conference fast approaching, the new Secretary General of the WTO appears determined to relaunch the overall negotiations and specifically those on agriculture, which have garnered much attention since Doha and which are the focus for the majority of tensions. The Americans and the Europeans have finally woken up to this by formulating, for the first time, concrete proposals backed up with figures, both on scenarios for market access and for the reduction of trade-distorting domestic support. These two issues have long been considered the major blockages to be overcome in order to arrive at an agreement in the negotiations on agriculture. While remaining circumspect on the real, as opposed to the political, impact of these latest announcements, it is important to ask why it has been so difficult to obtain similarly concrete undertakings for the Cotton Initiative. Despite the engagement in July 2004 to achieve “ambitious, expeditious and specific” results for cotton, in exchange for the reintegration of cotton into the overall agriculture negotiations, the WTO members directly implicated have to date refused to formulate specific proposals to the countries submitting the Initiative. In addition, the recent relaunch of negotiations is mainly being driven by the powerful players at the WTO, in a manner that is not fully transparent and which equally does not take account of the limited capacities of the Least Developed Countries represented in Geneva. Nevertheless, a number of factors, including the decision of the Dispute Settlement Body (DSB) in favour of Brazil, growing public opinion in the USA against the huge subsidies allocated to a tiny minority of cotton producers, the possibility of the introduction of a legislative proposal to the US Congress to limit subsidy payments to individual farmers, as well as the new proposal on modalities for cotton put forward by the African group in Geneva, are achievements that indicate a favourable shift in the international context, and which should encourage the WTO member states to move forward constructively on the cotton case. The delay in adequate treatment of the cotton case is in stark contrast with the claimed priority accorded to the Millennium Development Goals, the recent G8 declarations on strategies for poverty reduction in Africa and, especially, with the spirit of the Doha Round, also known as the Development Round, whose conclusion is scheduled for Hong Kong. Tens of thousands of small African farmers are struggling to eke out a decent living from their labour and are sinking daily a little deeper into poverty, in spite of their professionalism and the quality of their production. At the same time, industrial employment in numerous provincial towns and the economies of whole regions dominated by the cotton trade are seriously under threat. The very existence of the African cotton sectors is endangered.

Conclusion

143

Despite the flagrant injustices revealed by the Sectoral Initiative and the apparent willingness of various countries to find appropriate solutions to the issue, the urgency of which is no longer in doubt, the latest African proposal still awaits a specific response. This is what is at stake in Hong Kong. If this proposal does not find a satisfactory response, we, the actors concerned, would have every right to question the interests of African countries in signing a consensus agreement that ignores the stated ambitions of the WTO in Cancùn, reaffirmed in July 2004. The risk of a repeat of the Mexican scenario cannot be discounted; indeed, it is “cotton: make or break”, as one African WTO negotiator so aptly put it during the LDC Conference in Livingstone. During the LDC Trade Ministers' meeting in Dakar, in May 2004, the then European Union Trade Commissioner, Pascal Lamy, asked the representatives of African countries to reintegrate cotton into agricultural talks in order to “take the train of negotiations and not be left behind on the platform”. Today, in his new role as Director General of the WTO, Mr. Lamy is well positioned to ensure that cotton is not relegated to a second-class seat, while the overall negotiations continue in first class. Otherwise, the Development Round in its entirety and the whole raison d'être of the WTO risk being seriously called into question.

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ACRONYMS AND ABBREVIATIONS
ACA ACP AGOA AProCA APU AU BCEAO BNDA C4 African Cotton Association African, Caribbean and Pacific states African Growth Opportunity Act Association of African Cotton Producers Agricultural production unit African Union Central Bank of West African States (CBWAS) National Bank for Agricultural Development of Mali “Cotton 4” committee of four African Least Developed Countries, which presented the Sectoral Initiative in Favour of Cotton to theWTO CAMFPGP Committee for Applying the Mechanism of Cottonseed Pricing CAP Common Agricultural Policy CC Cotton company CFAF CFA franc (Franc of African Financial Community) CIF Cost insurance freight CIRAD Centre for Cooperation in International Research for Agricultural Development CMA/CWA Conference of West and Central African Ministers of Agriculture CMDT Malian Company for Textile Development DNSI National Direction of Statistics and Computer Science DSB Dispute Settlement Body of the WTO DTS Special drawing right (SDR) ECOWAS Economic Community of West African States ENDA Diapol Environment and Development of the Third World, ‘‘Prospectives Dialogues Politiques’’ EPA Economic Partnership Agreement ESPERN/IER Natural Resources Management and Production Systems Team EU European Union Farm Bill US agricultural law FOB Free on board GATT General Agreement on Tariffs and Trade GDP Gross domestic product GFS Government Finance Statistics GSCVM Group of Cotton- and Food-Producing Unions of Mali ICAC International Cotton Advisory Committee ICTSD International Centre for Trade and Sustainable Development IER Farming Management Institute (FMI) IFS International Financial Statistics IMF International Monetary Fund

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ITF LDC MCA MRSC NCC NEPAD NGO OECD PO REPA ROPPA SCAC SDT SODEFITEX SONAPRA TICAD UNPCB USAID USDA USTR WAEMU WB WCA WTO

International Task Force Least Developed Country Millennium Challenge Account Cotton Sector Restructuring Mission National Cotton Council (USA) New Partnership for African Development Non-government organisation Organisation for Economic Co-Operation and Development Producers’ organisation A network of expertises on agricultural policies A network of West African farmers’ organisations and agricultural producers Overseas Development and Cultural Action Department of the French Embassy in Senegal Special and Differential Treatment Senegalese Development Company and Textiles fibres National Company for Agricultural Promotion of Benin Tokyo International Conference on African Development National Union of Cotton Producers of Burkina Faso United States Agency for International Development United States Department of Agriculture United States Trade Representative West African Economic and Monetary Union World Bank West and Central Africa World Trade Organisation

MAPS, GRAPHS AND TABLES
MAPS 1 US cotton-producing regions 2 Election map of USA: grey = Bush, black = Kerry FIGURES & CHARTS 1 Concentration of US cotton farming, 1964-1997 2 US cotton production, use and exports, 1992-2002 3 World cotton prices, Index A in CFA francs per kg, January 1994 – August 2005 4 Trends in Cotlook Index A 5 Calculation and distribution of profit from the harvest (if results show a surplus) 6 Calculation of contribution by self-insurance fund (if results show a deficit) 7 Illustrations of price trend scenarios 8 Scenario A, trend in producer price 8a Scenario A, cumulative balance of self-insurance fund 9 Scenario B, trend in producer price 9a Scenario B, cumulative balance of self-insurance fund 10 Scenario C, trend in producer price 10a Scenario C, cumulative balance of self-insurance fund 11 Scenario B, comparative trends in producer prices according to degree of area isolation 11a Scenario B, comparative trends in self-insurance fund according to degree of area isolation TABLES 1 2 3 4 4 5 6 7 US upland cotton programme outlays, fiscal 1991-2004 Acreage and cash receipts for major US crops, 2003 Price cycles for cotton: peaks and troughs Effect of a 22% fall in prices on net income of producers Distribution of farms by type Overview of cotton production costs per hectare, according to APU type Percentage of cotton farms using paid labour Trends in the producer price, the minimum price and the self-insurance fund 77 78 89 91 113 114 115 133 74 75 88 126 130 131 132 134 134 135 135 136 136 137 137

79 80

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Partners organisations
ENDA TM: Prospectives Dialogues Politiques Enda is both the international organisation Environment and Development of the Third World and a programme common to several organisations. The Prospectives Dialogues Politiques section of Enda Tiers-Monde was conceived as a place for promoting frameworks for dialogue to create policies that take into account the interests of all individuals concerned, from the grassroots upwards. In order that these negotiations be held in a balanced manner, particular attention is paid to re-appropriation, through grassroots actors, of knowledge and control of their social, cultural, political, economic and physical environment. Finally, specific attention is given to places of social interaction, where social, economic and political practices are reinvented from real social dynamics that go beyond the ill-adapted models imposed from the outside. The activities carried out by Prospectives Dialogues Politiques in the framework of trade and the environment aim predominantly to take into account the interactions between political, commercial, social and environmental stakes in the fishing and cotton sectors in West Africa. They do this by, among other things, strengthening social dialogue and consultation between all the actors and sectors involved.
* * *

Oxfam America Oxfam America is an international development and humanitarian assistance organisation dedicated to developing sustainable solutions to hunger, poverty and social injustice throughout the world. Oxfam supports initiatives in development and social justice by organisations through financial, technical and partnership support. Oxfam also does advocacy work to national and international decision-makers, for the formulation of humane policies that attack structural obstacles preventing the eradication of poverty and hunger. Oxfam America is affiliated to Oxfam International.
* * *

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French Embassy to Senegal Overseas Development and Cultural Action Department The Overseas Development and Cultural Action Department of the French Embassy in Senegal is responsible for the development and implementation of Franco-Senegalese programmes in development, culture, education, science and technology. Franco-Senegalese co-operation is built on a historic and dynamic partnership that places France at the forefront of bilateral donors to Senegal. During the 12th Franco-Senegalese Commission, which was held in Dakar in 2002, the strategic lines of this co-operation for the following five years were marked out: • Evaluation of human resources, with particular attention to education, health and culture; • Promotion of good governance, especially in the fields of justice, public finances, the environment and the consequences of administrative reforms; • Improvement of economic competitiveness and support for civil society organisations; • Development of local public services.
* * *

Association Cotonnière Africaine The African Cotton Association (ACA) was officially created on 19 September 2002 in Cotonou, Benin. Its mission is to organise and defend African cotton industries threatened by anti-competitive trade practices, production and export subsidies. The ACA also aims to be a framework for exchanging ideas and experiences between African cotton industries in the fields of agriculture, industry and trade. Since 2002, it has used all the platforms available at national, regional and international levels, to carry out advocacy and lobbying in favour of African cotton industries, particularly at the WTO. Every year, the ACA organises, as part of its dinner debate, a technical seminar that brings together professionals from the cotton industries, including producers, traders and industrialists. The ACA is presided over by Mr Ibrahima Malloum, Director General of Coton Tchad. Mr Ahmed Bachir Diop, Director General of Sodefitex of Senegal is the First Vice President in charge of communication, and Mr Célestin T. Tiendrebeogo of Sofitex of Burkina Faso is Second Vice President in charge of establishing the ACA in Africa.
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Présentation des partenaires 151

Association des Producteurs de Coton Africains (AProCa) The Association of African Cotton Producers was created on 22 December 2004 in Cotonou, Benin. Faced with the crisis in the cotton industry, affecting more than 10 million people in West and Central Africa, cotton producers from six countries in the region (Burkina Faso, Togo, Mali, Benin, Cameroon and Senegal) met on 21-22 December 2004 to analyse the crisis and, together, to define mobilising strategies and actions that would allow them to defend their interests. This meeting of producers aimed to exchange ideas on the international situation in order to place the problem of cotton in a more global context, then analyse the situation in each country. This led to the creation of AProCa which took on the mission of defending the interests of African producers in a dialogue framework at a continental level. It pursues the following objectives: - bringing together all cotton producer organisations active on the African continent; - promoting solidarity between member organisations; - encouraging dialogue and co-operation between members to deal with issues of common interest; - collecting, processing and circulating to members any information related to cotton; - defending cotton producers faced with distortions on the global cotton market; - exchanging experiences amongst member organisations. Mr François Traoré of Burkina Faso has been President of AProCa since its inception and Mr. Moussa Sabaly of Senegal is Vice-President.
* * *

ICTSD The International Centre for Trade and Sustainable Development (ICTSD) was established in Geneva in September 1996 to contribute to a better understanding of development and environmental concerns in the context of international trade. As an independent non-profit and non-governmental organisation, ICTSD engages a broad range of actors in ongoing dialogue about trade and sustainable development. With a wide network of governmental, non-governmental and inter-governmental partners, ICTSD plays a unique systemic role as a provider of original, non-partisan reporting and facilitation services at the intersection of international trade and sustainable development. ICTSD facilitates interaction between policy-makers and those outside the system to help trade policy become more supportive of sustainable development. By helping parties to increase capacity and become better informed about each other, ICTSD builds bridges between groups with seemingly disparate agendas. It seeks to enable these actors to discover the many places where their interests and priorities coincide, for ultimately sustainable development is their common objective. ICTSD’s Director is Ricardo Melendez Ortìz.

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Table of contents
PREFACE: His Excellency President of the Republic of Mali, Amadou Toumani TOURE INTRODUCTION: Eric HAZARD PART I: GENESIS OF THE COTTON CASE AT THE WTO The cotton farmers’ road to Hong Kong: initiatives by producer organisations and an assessment of the debate Interview with François TRAORE Consequences and challenges of the July Framework agreement for the cotton case Samuel AMEHOU The WTO ruling on the Brazil-US cotton dispute: implications for African countries and agriculture negotiations Romain BENICCHIO PART II: ACTORS, STRATEGIES AND ALLIANCES The African cotton set in Cancùn: a look back at the beginning of negotiations Denis PESCHE and Kako NUBUKPO Sectoral initiative on cotton: a balancing act of alliances in Africa and at the WTO El Hadji DIOUF and Eric HAZARD PART III: RESISTANCES AND POTENTIAL FOR REFORM King Cotton: abdicate or subjugate? The political economy of US cotton and prospects for a pro-development policy reform Gawain KRIPKE Cut subsidies, beware diversionary tactics and don’t miss the Hong Kong window of opportunity Louis GOREUX 05 07

11

13

23

33

43

45

57

71

73

83

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PART IV: BEYOND THE SECTORAL INITIATIVE: TOWARDS COHERENCE IN TRADE AND DEVELOPMENT POLICIES ON COTTON Between a rock and a hard place: the case for support to Africa’s cotton sectors Sally BADEN Reform of the fixing mechanism for the purchase price for Malian cotton farmers and its implications in the context of falling world prices Kako NUBUKPO and Manda Sadio KEITA A proposal for the implementation of a mechanism for mitigating volatility in cotton prices Nicolas GERGELY CONCLUSION Acronyms and abbreviations Maps, graphs and tables Partner organisations Table of contents

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