Report No. 31207 Food Safety and Agricultural Health Standards Challenges and Opportunities for Developing Country Exports January 10, 2005 Poverty Reduction and Economic Management Trade Unit, and Agriculture and Rural Development Department Document of the World Bank ACKNOWLEDGMENTS This paper was prepared by a team led by Steven Jaffee (PRMTR), and consisting of Kees van der Meer (ARD), Spencer Henson, Cees de Haan, Mirvat Sewadeh, Laura Ignacio, John Lamb, and Mariana Bergovoy Lisazo (consultants). The paper was prepared and the wider research program pursued with the management support of John Panzer (PRMTR) and Sushma Ganguly (ARD). Peer reviewers were Stephen Mink (EASRD), Benoit Blare1 (ECSSD), Richard Henry (IFC), and Laurian Unnevehr (University of Illinois). The task team thanks Kevin Cleaver (Director, ARD) and Uri Dadush (Director, Trade Department) for their support and guidance. A large team of consultants was involved in the preparation of the case studies upon which this synthesis is primarilybased. The team members were Winnie Mitullah and Julius Okello (University o f Nairobi, Kenya), P. Bonnet, S. Ehui, A. Nin Pratt, and M. Jabbar (International Livestock Research Institute, Ethiopia), Abmadou Aly Mbaye and Papa Ndary Niang (Consultants, Senegal), Omar Aloui (AgroConcept, Morocco), Lahcen Kenny (Hassan I1 Institute of Agronomy and Veterinary Medicine, Morocco), Mohammed Saqib (Rajiv Gandhi Institute for Contemporary Studies, India), D. Rajasenan (Cochin University o f Science and Technology, India), Sompop Manarungsan (Chulalongkom University, Thailand), Jocelyn Naewbanij and Tanapat Remgiakrabhet (National Food Institute, Thailand), Agnes Saborio Coze (University of Central America, Nicaragua), James Cat0 and W. Steven Otwell (University of Florida, USA), The0 Jonker (Wageningen University, The Netherlands), Hiroji Fujishima (Tokyo University o f Agriculture, Japan), Hiroshi Ito (Consultant, Japan), Jan van Roekel and Sabine Willems (AgriChain Competence Center, The Netherlands), Eva Roth (University o f South Denmark), Karl Rich (University o f Illinois), Felipe Canale (Consultant, Uruguay), and RobertBarclay andJulianVelez (Consultants, USA). The team extends its thanks to the many public officials, private companies, and association representatives, farmers, and other stakeholders who were interviewed as part of this work, and who shared data and insight on standards, agri-food supply chains, and trade. Several o f the individual case studies prepared under this research program have been published in the Agriculture and Rural Development Discussion Paper series or the Policy Research Working Paper series. All can be found at the Bank's web site (http:llw ww.worldbank.osa/trade/s~a~idards). i CONTENTS EXECUTIVE SUMMARY ................................................................................................... IX CHAPTER 1INTRODUCTION ............................................................................................ 1 1.1Setting .................................................................................................................................. 1 1.2Objectives and Main Issues ................................................................................................. 6 1.3Methods............................................................................................................................. -10 1.4Structure of this Report...................................................................................................... 11 CHAPTER 2 FOOD SAFETY AND AGRICULTURAL HEALTH STANDARDS IN INDUSTRIALIZED COUNTRIES: IMPLICATIONS FOR DEVELOPING COUNTRY EXPORTSOF HIGH-VALUE AGRI-FOOD PRODUCTS ........................ 13 2.1Standards in the Context ofEvolving TradingFrameworks ............................................. 13 2.2 Food Safety Events and Shaken Consumer Confidence ................................................... -16 2.3 OfJicial Responses to Food Safety Concerns..................................................................... 18 2.4 SelectedPrivate Responses to Consumer Concerns and Food Safety Events...................26 2.5Emerging Dynamics in Trade-Affecting Animal and Plant Health Standards..................29 2.6Implicationsfor Developing Countries.............................................................................. 32 CHAPTER 3 STRATEGIES FOR COMPLIANCE WITH INTERNATIONAL AGRI-FOOD STANDARDS ................................................................................................. 35 3.I Standards as a Strategic Issue........................................................................................... 35 3.2 Responding to Standards: Immediate and Broader Development Objectives...................35 3.3 Strategic Options: Exit. Voice. and Compliance............................................................... 37 3.4 Evidence on the Strategic Approaches Adopted by Developing Countries....................... 41 3.4.1 International `Voice' ................................................................................................... 41 3.4.2 National Compliance Strategies.................................................................................. 45 3.5 Factors Affecting the Viability of Alternative Strategies................................................... 62 3.6 Conclusions........................................................................................................................ 65 CHAPTER 4 AGRI-FOOD STANDARDS: THE COSTS AND BENEFITS OF COMPLIANCEAND NON-COMPLIANCE ..................................................................... 67 4.1 Introduction........................................................................................................................ 67 4.2 Understanding Costs of Compliance ................................................................................. 67 4.3 Benefits of Compliance...................................................................................................... 71 4.4 Measuring the Costs and BeneJits of Compliance............................................................. 73 ... ... 111 4.5 Evidence on the Costs and Bene$ts of Compliancefrom the Case Studies....................... 76 4.5.1 FishandFisheryProducts........................................................................................... 76 4.5.2 Horticulture and Spices.............................................................................................. -83 4.5.3 Meat Productsand Animal Health Controls ............................................................... 90 4.6 Conclusions........................................................................................................................ 94 CHAPTER 5 THE DISTRIBUTIONAL EFFECTS OF INTERNATIONAL AGRI- FOOD STANDARDS ............................................................................................................. 97 5.1 Introduction........................................................................................................................ 97 5.2Distributional Impacts of Standards.................................................................................. 97 5.3 International Distribution Effects ...................................................................................... 98 5.4Industry and Supply Chain Effects................................................................................... 103 5.5 Broader Spillover Impacts on the Domestic Economy .................................................... 109 5.6 Conclusions...................................................................................................................... 112 CHAPTER 6 TRADE-RELATED SPS CAPACITY BUILDING: TAKING STOCK AND DRAWINGLESSONSFROMRECENT DONOR-ASSISTEDPROJECTS .....114 6.1Scopeand Scale of Assistance ......................................................................................... 114 6.2 Targeting the Public Sector. Private Sector. or Both? .................................................... 117 6.3 Reflections........................................................................................................................ 119 CHAPTER 7 IMPLICATIONS OF AGRI-FOOD STANDARDS FOR THE WORLD BANK ................................. ........................... ............................................. .......121 7.1Rationalefor Bank and Other Development Agency Involvement .................................. 121 7.2 The ComparativeAdvantage of the WorldBank ............................................................. 124 7.3 Guiding Principlesfor Bank Involvement........................................................................ 125 7.4Entry Pointsfor the WorldBank...................................................................................... 127 7.4.1 Advocacy, Analysis andTraining............................................................................. 127 7.4.2 Priority-Setting and Development o f Country StrategiedAction Plans ................... 128 7.4.3 Lending andRegulatoryReform.............................................................................. 132 REFERENCES ..................................................................................................................... 134 ANNEX RESEARCHPROGRAMCASESTUDIES ..................................................... 141 i v TABLES Table 1.1The Changing Structure of Agricultural Trade (percentageof export value) 2 Table 1.2 Analytical Spheres for Standards andDeveloping Country Agri-Food Trade 5 Table 1.3 Emphases Givento Different Types of Standardsinthis Research 8 Table 1.4 Country and Commodity Case Studies inthe ResearchProgram 10 Table 2.1 Examples ofMajor Food Safety "Events" inIndustrialized Countries 16 Table 2.2 Product/Process Requirements for IndianDriedChilies inSelected Markets 24 Table 2.3 Product and Process Standards Facing Kenyan Fresh Vegetable Exporters in Selected Markets 29 Table 3.1 Strategic Responsesto Standards 38 Table 3.2 Actors inStrategic Responseto Standards 39 Table 3.3 Counter-notifications Relating to New Measures inthe SPS Committee, 1995- 2003 42 Table 3.4 Analysis o f Strategic Approaches to Compliance with Food Safety Standards for FishandFisheryProducts 47 Table 3.5 Analysis o f Strategic Approaches to Compliance with Food Safety and Phytosanitary Standards for HorticulturalProducts andSpices 51 Table 3.6 Comparative Experienceswith Animal Disease Control Strategies 61 Table 3.7 Factors InfluencingStrategyViability 62 Table 3.8 Common Food Safety and Agricultural Health Management Deficiencies in Focal Commodity Sub-sectors 64 Table 4.1 Examples o fRecurring andNon-recurring Costs of Compliance 70 Table 4.2 Examples o fRecurring andNon-recurringBenefits o f Compliance 72 Table 4.3 Costs of Compliance with Export Food-Safety Requirements in the Bangladeshi andNicaraguan Shrimp-Processing Sectors (US$ million) 77 Table 4.4 MPEDA Support for Factory Upgrades in India's Fish Processing Industry, 1996-97 to 2001-02 79 Table 4.5 Non-recurring and Recurring Costs of Compliance for Kenya's Industrial Fish Processors 83 Table 4.6 Indian Investments in Spice Quality/Food Safety Capacity, Mid-1990sto 2003 (Estimated, US$ Millions) 85 Table 4.7 Illustrative Net Profit Margins for Larger KenyanExporters 88 Table 4.8 Illustrative Costs o f Fruit andVegetable Shipments to the UnitedStates that are Detainedbut Later Released(US$) 90 V Table 4.9 Examples o f Recurring and Nonrecurring Costs of Complying with InternationalSanitary Standards 91 Table 4.10 Illustrations of Tangible Costs o fDisease Control Measures 92 Table 7.1 World BankProjectswith Components on Trade-RelatedAgricultural Safety 123 Table 7.2 Comparative Advantage ofthe World Bank inthe SPS Sphere 124 FIGURES Figure4.1 Compliance Cost Profile 69 Figure 4.2 Indian FishProcessing SMEs: Non-recurrent and Recurrent Costs inRelation to Company Turnover and UnitProduction Costs 80 Figure 4.3 Growth inKenyan Exports of FreshVegetables, 1991-2003 89 Figure7.1 HierarchyofTrade-RelatedSPS ManagementFunctions 129 BOXES Box 1.1Why are food safety and quality standards implemented? 9 Box 2.1 Demographic and Socioeconomic Trends Influence Food Preferences and Food- Safety Concerns 17 Box 2.2 The U.K.Food Safety Act (1990) 19 Box 2.3 Regulation of FoodandFeedControls inthe EuropeanUnion 20 Box 2.4 Discriminationinthe Application of SPS Standards? 25 Box 2.5 Important Changes inthe Structure and Conduct ofFoodMarketing 27 Box 3.1 Technical Assistance andReducing the Costs o fVoice: The Role of the ACWL 44 Box 3.2 Regulatory Changes and Private Sector Strategies in India-Fish and Fishery Products 48 Box 3.3 Capacity Issues inKenya's FishProcessing Sector 49 Box 3.4 Antibiotics in Farmed Shrimp: Responses by Thailand's Government and Industry 50 Box 3.5 Voice inthe IndianSpice Trade 54 Box 3.6 PeruvianAsparagus Exports: Success through Standards 56 Box 3.7 AddressingCitrus Canker inArgentina 57 Box 3.8 Altemative Approaches to Controlling Endemic Animal Diseases 58 Box 3.9 Argentina: Market Shifts And Voice InAn Emergency 60 Box 4.1 The Benefits of Voice: Some Examples from the WTO's SPS Committee 73 Box 4.2 How to Measure Costs of Compliance inPractice 75 Box 4.3 Shrimp Preprocessorsand Shifts inProcurementArrangements 81 Box 4.4 Impact ofFood Safety Standards on ShrimpProduction Costs inThailand 82 Box 4.5 Compliance with EUREPGAP: Insights from Morocco andPeru 89 Box 5.1 Cyclospora and the Migration of Raspberry Export Capacity from Guatemalato Mexico 100 Box 5.2 International (AndNational) DistributionO f Benefits From Mexican Exports O f Avocado To The UnitedStates 101 Box 5.3 Upgrading for BRC: The Challenge for a Smaller KenyanExporter 104 Box 5.4 Simulation of Export Certification Scheme 111 Box 7.1 SomeBasic Food Safety andAgricultural HealthManagement Functions 128 vii EXECUTIVESUMMARY Background Intemational trade in high-value food products has expanded enormously over the last decades, fueled by changing consumer tastes and advances in production, transport, and other supply-chain technologies. Fresh and processed h i t s and vegetables, fish, meat, nuts, and spices now collectively account for more than 50 percent o f the total agri-food exports o f developing countries. Their share o f developing country trade continues to rise while that of traditional commodities-such as coffee, tea, cocoa, sugar, cotton, and tobacco-declines. Pattems o f consumer demand and commercial development in both industrial and middle-income countries will reinforce this trend and continue to provide outstanding opportunities for competitive suppliers o fhigh-value foods. Besides demand-related factors, two important developments will affect the magnitude o f the opportunities, as well as the rules of the game, facing developing country suppliers. One i s the outcome of the current Doha round o f multilateral trade negotiations, during which changes are likely to be made in traditional forms o f trade protection and agricultural production support. Reductions in such distortions are likely to have far less impact on the level and direction o f trade inhigh-value foods than for certain traditional commodities. The second contextual force i s already well-advanced and will continue regardless o f the outcomes o f the Doha round. It is the proliferation and strengthening of food safety and agricultural health standards, a process occurring at the national and intemational levels, as well as inindividual supply chains. Although food safety and agricultural health standards are designed to manage risks associated with the spread o f plant and animal pests and diseases and the incidence of microbial pathogens or contaminants in food, standards also can be used as a trade protection measure. There is growing concern within the intemational development community that standards will undermine the competitive progress already madeby some developing countries and present insurmountable barriers to new entrants into the high- value food trade. There i s particular concern that: Emerging food safety and agricultural health measures will be applied in a discriminatory manner; Developing countries lack the administrative, technical, and other capacities to comply with new or more stringent requirements; The costs incurred to reach compliance will undermine the comparative advantage o f developing countries inthe high-value food trade; Institutional weaknesses and compliance costs will further marginalize weaker economic players, including smaller countries, enterprises, and farmers; and Inadequate support i s available for capacity-building in this area, despite the provisions made in the WTO Agreement on the Application o f Sanitary and Phytosanitary Measures. ix Scope The World Bank's research program on sanitary and phytosanitary (SPS) measures, the results o f which are summarized inthis report, was designed to improve understanding o f an emerging set o f policy and commercial issues in the area o f food safety and agricultural health.' The program's objective i s to inform policymakers, private sector representatives, development practitioners, and trade and agricultural policy researchers, and to define the scope and approach for World Bank operational activity to meet growing client demand in this area. The major themes and questions addressed in this research program have been: 0 Overall Context and Prominence. How difficult are the challenges posedby rising private and public SPS standards for developing country suppliers? What is the relative significance o f these challenges, compared with other factors affecting competitiveness? 0 Dynamics and Differences in Standards. What are the similarities and distinctive features o f the evolving standards for different product groups and in relation to different industrial country destination markets? What are the main driving forces behind the newer standards? What can be expected inthe future? 0 Strategies to Comply with or Influence Standards. What strategies have been used and have worked to meet the emerging requirements or influence their application? What have been workable combinations o f individual and collective action and public and private sector action? What are some key factors influencingthe viability and sustainability o f different approaches? 0 Costs and Benefits of Compliance. What are the nature, magnitude, and overall significance o f costs and benefits associated with supplier (and country) compliance with external market standards? 0 Structural and Distributional Implications. What are the implications o f standards-related barriers and compliance for market structures and for the participationo f small-scale farmers and firms inexport-oriented supply chains? 0 Lessons from Donor-Supported Programs. What have been the patterns o f capacity-building assistance in this field in recent years? What lessons can be drawn about the timing, institutional features, effectiveness, and sustainability o f capacity-building programs? 0 Operational Implicationsfor the WorldBank. What principles should guide future Bank operational work in this field? What roles can the Bank play inthis field, given its mandate, relative institutional strengths and weaknesses, and the prevailing challenges for clients? This research didnot cover other standards, such as labor, environmental, or animal welfare requirements. X Methods The research program has involved a series o f case studies covering selected commodity supply chains in nine low- and middle-income countries.2 The commodity chains are those related to fish, horticulture, livestock products, nuts, and spices. They were chosen because the products involved have posed SPS compliance challenges for a significant number o f developing countries and have been the subject o f many recent food safety "crises" inindustrialized countries. Countries were selected to capture regional diversity, varied market orientations, and a range o f experiences, from emerging to long-standing industries. Complementary "buyer studies" were also carried out, involving representative importers and retailers o f shrimp and selected fruits and vegetables in the United States, European Union, and Japan. This fieldwork was supplemented by a desk review o f selected development agency experiences in supporting capacity-building in SPS management, and by a broader review of literature and data pertinent to developing country experiences inthis field. Main Findings Context and Prominence of Food Safety and Agricultural Health Standards Food safety and agricultural health risk management should be considered as a core competence in the competitiveness of developing countries, especially in the context of trade in high-value food products. Effective capacities in SPS management are taking on increased importance among the wider set o f competitiveness factors, such as stable macroeconomic conditions, suitable climatic conditions, effective logistics, and trade facilitation systems. SPS-related challenges should be addressed within the broader context of competitiveness rather than through isolated interventions. Addressing SPS-related challenges, although important, will not improve competitiveness where other major weaknesses persist. Rather than representing a unique set o f circumstances, standards- related challenges (and opportunities) usually accentuate underlying competitive and capacity strengths and weaknesses in an industry or country. The picture that emerges from the study shows that where an industry has already made substantial progress in relation to quality control, logistics management, and so on, the capacity to meet emerging SPS requirements is also normally adequate, Where other fundamental competitiveness problems persist, related weaknesses (administrative, financial, or other) typically impede the resolutiono f SPS constraints. SPS measures may pose an absolute barrier to trade with some countries, where certain plant pests and animal diseases require very stringent controls or eradication measures. Such absolute barriers are comparatively less common in relation to food safety measures, although the cost o f meeting specified requirements may be high for certain suppliers. In either case, however, developing country suppliers rarely face all-or- 'Ethiopia, India, Jamaica, Kenya, Morocco, Nicaragua, Senegal, Thailand, and the countries of Latin America's Southern Cone. x i nothing choices when determining the changes and investments needed to conform to emerging standards. Suppliers need to weigh the costs and advantages associated with participating in different market segments-standards are one factor in the calculus. In some cases, there may be large and profitable opportunities to service the domestic market, the regional market, or market segments in industrialized countries that impose less stringent standards or allow more time to implement certainmeasures. Although new or more stringent standards can sene as a trade barrier, they act more often as a catalyst for progressive change. Stricter standards can provide a stimulus for investments in supply-chain modernization, provide increased incentives for the adoption o f better safety and quality control practices in agriculture and food manufacturing, and help clarify the appropriate and necessary roles o f government in food safety and agricultural health management. Rather than degrading the comparative advantage o f developing countries, the compliance process can result in new forms o f competitive advantage and contribute to more sustainable and profitable trade over the long term, as shown by the case studies o f Thai and Kenyan horticulture, Thai and Nicaraguan shrimp, andIndian spices. EvolvingIndustrialized Country Standards for High-ValueFoods Consumers in industrialized countries have long had concerns about certain dimensions o f food safety, especially the presence o f chemical residues and various contaminants in food. However, over the past two decades, consumers have been exposed to a continuous series o f food safety "scares", including major outbreaks o f food-borne illness, new scientific links between animal and human diseases, and discoveries o f tainted food and feed supplies. These developments and concerns accumulated, with each new event eroding consumer confidence in the safety and integrity o f their food and the trustworthiness o f national and regional systems o f regulation, as well as the science supportingthose systems. Governments and the private sector have responded to these developments in various ways. Their responses have yielded a new paradigm in food safety regulation and management. At the official level, regulations have been revised and significant institutional changes have been made in food safety oversight. Standards have been tightened on foods that have long raised concerns, while new standards have been developed for previously unknown or unregulatedhazards. Governmentsare increasingly adopting a production-to-consumption (or farm-to-table) perspective, requiring traceability of animals, products, and raw materials, while national systemsfor border inspections of food andplants have been scaled up. Spurred by these regulatory changes and the business cost o f food scares, supply-chain leaders such asfood retailers and major food manufacturers have led theprivate sector in making adjustments tofood safety and quality management systems and demanding similar changes on thepart of suppliers. I n addition to laying down and enforcing their own safety and quality requirements, the leaders are increasingly consolidating their systems of procurement, entering into longer term relationships with a more limited xii number of `preferred suppliers." Many different schemes are beingpromoted or imposed at the level o f individual companies, specific supply chains, national industries, regional groupings o f firms, and even, internationally. Several observations can be made about the evolving set o f standards which are affecting trade inhigh-value foods: 0 While much o f the general `standards as barrier' concern has centered on official regulations, in relation to food safety it i s commonly the case that private standards and protocols are comparatively more stringent andor more effectively enforced. Official regulations continue to exercise much stronger influence over marketaccessinrelation to plant and animal healthmatters; 0 While institutional and regulatory trends in different industrialized countries are moving in broadly similar directions and while there are on-going efforts to harmonize standards, there remains great diversity in the operative `rules o f the game'. There are some circumstances o f protectionist use o f standards, yet most o f the diversity in standards stems from other factors. Regulatory systems entail a mix o f old and new requirements, and reflect different perceptions o f risk, scientific traditions and climatic/geographical considerations; 0 Differential application o f standards i s the norm rather than the exception. Indeed, at country, industry, and enterprise levels, there i s a need to prioritize the hazards to be monitored and the control measures to be applied. As resources are scarce, it i s necessary to differentiate between alternative sources o f supply based on past experience, assessments/perceptions o f capacities, etc. Separating legitimate differentiation (Le. risk management) from non-legitimate differentiation (i.e. discrimination) is problematic and is the source o f various disputes; 0 Increasingly, industrialized countries (and certain supply chains, inparticular) are moving to a situation whereby potential international suppliers o f live animals, plants and certain food products need to be pre-approved based upon their pest and disease status or the audited hygienic conditions in their food export establishments. This trend will continue; and 0 The complexity of the standards setting for high-value foods i s likely to increase inthe future giventhe emerging tendency, especially withinthe private sector, to package together safety, quality, environmental, and social standards. This evolving set of standards has important implications for developing countries. First, relevant stakeholders face a major challenge in simply being aware o f the rules and requirements pertinent to particular markets and understanding how the game i s actually played. This learning curve gives incumbent countries and suppliers a large advantage over new entrants. Second, it i s more urgent than ever before that developing country stakeholders participate in standard-setting processes, whether through international organizations, bilateral discussions, or membership in private bodies. Third, there is an xiii acute need for a strategic approach to capacity-building related to standards. That approach would gauge the direction o f future standards, act in a preemptive fashion to address emerging risks, and, where possible, get ahead o f the curve by asserting competitive advantage through effective application o f standards. Fourth, although the diversity o f existing standards may sometimes increase transaction costs, it also may enable developing country suppliers to choose among markets for whose standards they can most readily meet. Given the diversity o f standards applied within and between countries, there is scope for different speeds on the highway o f standards compliance. This i s certainly the case when one considers the emerging opportunities for South-South trade inhigh-value food products. Strategic Options and Approaches Government and the private sector in developing countries should adopt a strategic approach tofood safety, agricultural health, and trade, one that takes into account broad commercial and developmental objectives. Among the factors that must be considered are the long-term costs and benefits o f compliance, and, for policymakers, the wider distributional and societal impacts o f the available responses. Strategic approaches can be crafted by individual private entities or public agencies, or through various types o f collective action. Once adopted, they are likely to require amendment in response to hrther changes inextemal standards and the broader trade environment. The report identifies and illustrates three types o f strategies available to developing countries inthe face o f evolving food safety and agricultural health standards. They are: 0 Exit, which implies switching away from certain markets, products, or buyers toward others whose standards may be more cost-effectively met. (Going out o f business altogether is another form o f exit.) 0 Voice, whereby developing country governments and exporters seek to influence the standards that they face through negotiations (with technical agencies in the countries o f trading partners, for example, or with a major buyer) or through formal complaints (via international venues such as the WTO's SPS Committee). 0 Compliance, whereby a set o f legal, administrative, technical, and organizational steps i s taken to conform with product or process requirements. In the case study industries covered in this study, each of these strategies has been applied to some degree, although the relative emphasis has varied. Given altemative market opportunities inthe high-value food business, various forms o f exit may indeedbe the most appropriate commercial strategy. In many if not most circumstances, the strategic choice i s not `comply or else'. Exercising effective voice is usually quite difficult for smaller countries and individual suppliers, although opportunities often arise for dialogue about how particular standards are to be applied. The report provides some evidence o f larger developing countries (Argentina and India, for example) influencing the rules o fthe game through their voice. xiv Compliance strategies receive the most attention in the report. Some o f those strategies are driven by the private sector; others involve more significant roles by governments in managing food safety and agricultural health risks. Several o f the industries covered in the report have succeeded inmeeting standards by adopting aproactive stance-staying abreast o f shifting technical and commercial requirements in their chosen markets and anticipating future changes. These firms have pursued and used higher standards to reposition themselves inmore remunerative market segments, sometimes by adding value to commodities. Inother cases, the private sector and government have only reacted to regulatorychange or acted only after trade interruptions-owing to food safety or agricultural health problems--occurred. The quality and effectiveness o f these responses have varied, both among countries and among different firms in the same industry. Many firms and farms proved unable to make the necessary adjustments. More often than not, there were other extenuating circumstances, including resource management problems and broader competitive pressures that exacerbated the challenge posedby rising standards. The analysis of particular commodity chains brought out some common constraints and capacity weaknesses. For example, among the horticultural industries common weaknesses related to the regulatory systems governing the import, production, sale, and use o fpesticides, and the capacities to implement quarantine measures and undertake pest risk analysis were found. Among the fish product industries, common problems included lack o f clarity about administrative responsibilities for inspection and certification o f facilities and products, and the persistence o f unhygienic conditions at some fish landing sites and processing facilities. Inthe meat sector, weak surveillance systems were one o f the most common weaknesses. The objective of capacity-building in thefood standards field needs to be recast away from coping strategies and technocratic problem-solving, and beyond a pure public sector focus. Future capacity-building efforts should be geared toward maximizing the strategic options available to both government and the private sector in developing countries whenfaced with new or more stringent standards. The proactive approach to standards compliance is most likely to succeed when underpinned with the necessary capacity in food safety and agricultural health control, and when policymakers have the confidence to speak out when they are concerned about the standards imposed by their trading partners andbuyers. Effective pro-activity requires certain national and industrycapacities, including those for channeling information and interpreting international regulatory and commercial trends, conducting risk analysis, undertaking hazard surveillance and monitoring, and applying contingency planning in SPS management. It also requires that policymakers, firms, and industry organizations adopt the perspective that effective SPS management is a core element o f overall competitiveness strategies. xv Costs and Benefits of Compliancewith Standards The cost o f complying with food safety and agricultural health standards has been a major source of concern in the international development community and among developing countries. Many commentators see standards as an absolute barrier to trade for poorer developing countries because the cost o f meeting them are assumed to be prohibitively high. However, the available evidence indicates that, in many instances, the costs are less than assumed, especially relative to the value of exports. Few generalizations can be made about the costs and benefits o f compliance. The level and relative significance o f compliance costs varies greatly from industry to industry, between different countries, and among different firms and farms within the same industry. Several factors contribute to this variability: 0 Typically there are several ways to meet a standard. Countries and firms that have chosen a proactive stance inthe evolving standards environment are better able to weigh and compare various options and to adopt those that are more cost- effective. Entities operating ina reactive mode or delaying compliance until after a crisis has occurred are likely to have less flexibility and may need to adopt costly measures simplyto restore market access. 0 Firms, industries, and countries are operating from different starting points and with varying assets obtained from past investments. For a relatively modern and mature industry, a change in standards may necessitate only incremental changes by producers or exporters and perhaps some modest adjustment in public sector oversight. However, for an underdeveloped supply chain, or where there i s a lack o f clarity on institutional roles, the new standard may necessitate major investments ininfrastructure and significant legal or organizational change. 0 Costs and benefits are also affected by industry structure, geography, and the effectiveness o f collective action-whether inthe private sector or through joint public-private entities. There are economies o f scale and scope associated with various SPS management functions, such as animal-disease control, and the realization o fthose economies is affectedbythe above factors, among others. 0 Market factors often affect the level and distribution o f certain benefits. In some industries, price premiums are paid for products labeled as "safe" or "sustainable," or bearing other evidence o f desirable attributes. Inother industries, competitive pressures have made such attributes the minimal norm or driven down the value o f suchprice premiums. Costs are often more readily apparent than benefits. Many potential benefits o f standards compliance are long-term, intangible, or accrue to stakeholders who do not incur the associated costs. The widespread, but often mistaken, perception that SPS compliance costs exceed the related benefits discourages needed investments and xvi deters proactive approaches, thus increasing the likelihood o f severe trade-related problems arising from adverse food safety or agricultural health events. DistributionalImpacts The costs and structural changes associated with compliance with food safety and agricultural health standards can cause significant redistribution o f welfare across countries, along supply chains, and in societies. These distributional effects can come through direct changes inproduct, labor, and land markets or through various secondary effects (in public health, for example, or in local environmental conditions). While the available evidence on this issue in developing countries remains fragmentary, several tentative conclusions can be drawn from the current research and complementary analyses. For example: Developing countries as a group are not suffering from the tightening o f SPS standards. Yet, differential approaches to the challenge o f compliance, and technical and administrative difficulties in ensuring compliance, are affecting the relative competitiveness o f some countries in high-value food markets. Larger, incumbent suppliers tend to have an incremental advantage, because they can realize economies o f scale, have better access to information, and benefit from well-established reputations (for example with overseas inspectors). Still, effective action can make a difference. There are examples o f well-organized industries and well-managed firms and supply chains in low-income countries (such as Kenya) that have maintained or even enhanced their competitiveness and market share during this period o f more stringent standards. Although compliance (and noncompliance) can bring about changes that have a negative impact on the poor, those who are able to participate in evolving supply chains may benefit. This can certainly apply to small farmers operating in suitable locations with adequate infrastructure, including effective producer organizations and long-term relationships with buyers. A key challenge is to reduce, through various types o f collective action, the transaction costs associated with monitoring and certifying farmers' compliance. The tightening o f standards appears- to be giving rise to increased off-farm employment opportunities, especially in product cleaning, handling, processing, and packing, and in a broad array o f process controls. The terms and conditions o f this employment in the formal supply chains, although not optimal, are almost certainly better than in the informal sector, inpart because many foreign buyers are imposing labor standards. Trade-RelatedSPS CapaciqBuilding Inresponse to specific trade interruptions and more general concerns about problems in meeting external market standards, developing countries have sought technical assistance and other capacity-building support from various development agencies and bilateral xvii donors. This report presents the summary findings o f a desk review o frecent andongoing capacity-building programs. Some of the major findings are as follows: Most interventions in the SPSjield have been driven by tension or emergency, such as trade disruptions or disputes, or a threat o f such an event. The sense o f urgency that has dominated donor interventions has profoundly affected project design and implementation. Much support has been geared toward damage control and restoration o f past trade, rather than toward forging a strategic approach to SPS management and investment. As a result, most interventions have involved little economic analysis-whether ex ante considerations o f the potential costs and benefits associated with altemative approaches or expost reviews o f the impact and cost-effectiveness o f the adopted measures. Sustainability of project outcomes has often been neglected-with the primary measure o f project success being whether the recipient country has overcome a trade-related crisis inthe short run. 0 Many technical assistance projects in this field have directed their attention to public sector agencies or private entities-but not both. This pattern o f attention stems from the specific mandates o f specific agencies, the particular requirements o f certain trading partners, or the need to be pragmatic inorder to get quick results in the face o f a trade disruption. Yet both the public and private sectors have fundamentally important roles infood safety and agricultural health management. At a minimum, their responses should be coordinated; ideally they should be integratedinto a concerted effort to address emerging standards. Conclusions and Recommendations Interventions to strengthen SPS management capacities can contribute to growth, poverty reduction, and the pursuit o f national and intemational public goods. Among low- and (to a lesser extent) middle-income countries, weaknesses in food safety and agricultural health management, both in the private and public sectors, constrain productivity and competitiveness. Such constraints will almost certainly take on greater importance inthe coming years, given trends in consumer attitudes and preferences, changes in supply- chain governance and market structures, the changing composition o f intemational food and agricultural trade, and continued advances in science and technology. This combination o f factors provides a powerful rationale for the World Bank and other development agencies to increase their support efforts inthis area. The research and a broad interpretation o f its results lead to the following recommendations for various entities and decision makers: Policymakers and Technical Administrators in Developing Countries Adopt aforward-looking and strategic approach to managing SPS standards and international market access. This means working closely with the private sector xviii to identify emerging challenges and opportunities, choose suitable strategies and needed investments, and make appropriate regulatory changes. The expected costs and benefits o f the alternative and the selected strategies must be carefully considered. Make clear distinctions between the challenges associated with agricultural health versus those for food safety. In a trading context, agricultural health problems may result inabsolute loss o f market access, while this is rarely the case with food safety. Addressing trade-related agricultural health problems may necessitate systemic approaches, controls, and risk analyses that extend beyond the sphere o f individual firms or supply chains. Move beyond control and policing to emphasize building awareness of quality assurance and SPS management. Most o f the day-to-day measures to achieve compliance must be undertaken by commercial entities and farmers. Therefore, collective action by firms and primary producers should be encouraged and facilitated. In countries with limited public administrative capacities (or strong private sector capacities), certain tasks may be delegated to the private sector, with public oversight. Recognizing the complexity o f SPS management and the potential for SPS-related barriers to regional trade, collaborate with neighboring and other regional countries to share or specialize in certain SPS managementfunctions. Examples include standard setting, accreditation, certification, and testing. ThePrivate Sector in Developing Countries Incorporate current and expected requirements related to SPS and other standards into business plans, including considerations o f product-market combinations, customer and supply relationships, production technology, logistics, and investments inprocessing and marketing facilities. Work through industry/trade organizations to advocatefor effective public sector support and to implement programs to build awareness, encourage adoption o f good practices and codes o f practice, and otherwise strengthen food quality and SPS management within the private sector. Industrial Country Governments Include in SPS regulatory assessments the prospective impacts o f the proposed measures on the market access and competitiveness o f developing countries and consider measures, including technical assistance, to mitigate potential adverse effects. Be aware o f the impacts o f private standards on exports o f agricultural and food products from developing countries and work with the private sector to find ways to facilitate compliance, for example, through technical assistance. Harmonize SPS product and process requirements with those o f other countries, including through the establishment o f international standards, where there i s an identifiedbenefit o f doing so. xix Through memoranda o f understanding, twinning arrangements, or other programs, work closely with developing country trading partners to achieve mutual recognition o f SPS management systems. Also, increase efforts to inform policymakers, technical counterparts, and private industry representatives in developing countries about regulatory changes that may affect their exports. ThePrivate Sector in Industrial Countries Move to harmonize or mutually benchmark the growing array o f overlapping and competing private protocols on good agricultural and manufacturing practices, hazard analysis and critical control point (HACCP) systems, and other process standards. Doing so would save own and supplier costs while enlarging and diversifying the base o fpotential supplier countries. 0 Increase consultations with developing country suppliers when developing or revising standards. Make their implementation and certification more user- friendly and cost-effective. Intensify efforts to convey information to developing country suppliers about evolving consumer preferences and developments in regulatory and private standards. 0 Enter into joint programs with governments and donor agencies to provide technical assistance to suppliers to enable them to meet emerging requirements. Bilateral and Multilateral Development Agencies 0 Increase technical assistance and other capacity-building support to developing countries for SPS management. 0 Improve the quality and sustainability o f this support by promoting the adoption o f proactive and strategic approaches, undertaking cost-benefit analyses, balancing support for public and private sector capacity-building, and balancing attention to very basic and decentralized functions (such as good agricultural practices and HACCP systems) with more technically demanding SPS capacity needs. Consider the distributional impact o f SPS measures and compliance, with particular attention to smaller and poorer countries. Develop and promote cost- effective approaches to certifying and tracing products from smallholder farmers and small and medium-sized enterprises. 0 Pay greater attention to the standards-related challenges and opportunities of South-South trade. Increase efforts to support regional initiatives to harmonize standards, address common (and cross-border) agricultural health hazards, and buildcomplementary SPS management capacities. The WorldBank In addition to the above recommendations for development agencies, the World Bank should: xx 0 Conduct further economic and policy analysis on the trade challenges and opportunities facing developing countries in relation to food safety and agricultural health. Continue to advocate for the interests o f developing countries-and for the poor inthose countries-in this field. 0 Advocate for the refocusing o f capacity-building efforts toward a strategic perspective. Urge developing countries to be more active in defining and addressing their SPS management needs. 0 Mainstream policy advice and investment lending pertaining to SPS management and market access within the Bank's wider operational program, especially in relation to the promotion o f agricultural competitiveness, smallholder commercialization, andtrade and regional integration. 0 Complement and integrate efforts in this field by technical agencies (Food and Agriculture Organization, World Health Organization, World Organization for Animal Health, United Nations Industrial Development Organization, Intemational Standards Organization) and bilateral donors, and closely cooperate with these agencies to pursue common mandates and to apply complementary expertise and resources. The recently established Standards and Trade Development Facility offers a platfom for such integration. xxi CHAPTER 1 INTRODUCTION 1.1Setting International trade in high-value food products has expanded enormously over the last decades, fueled by changing consumer tastes and advances inproduction, transport, and other supply chain technologies and methods. Freshand processed h i t s and vegetables, fish, live animals and meat, and nuts and spices now account for 50 percent of the total value o f agri-food exports o f developing countries, up from a 31percent share in 1980/81 (Table l.l).' These products have higher income elasticities o f demand and, in most instances, lower price volatility than many traditional developing country export commoditie~.~ The expansion of trade infish, spices, and horticultural products has been facilitated, in part, by comparatively low and declining tariff barriers,' as well as price pressure generated by expanding, year-round supplies. Trade in these products is, however, governed by a growing array o f food safety and agricultural health standards. These have been developed to address various risks including those associated with microbial pathogens, pesticides and veterinary pharmaceuticals, environmental contaminants (for example, heavy metals) and naturally occurring toxins (for example, mycotoxins), and the spread o f plant pests and animal diseases. The increased attention to food safety and agricultural health risks stems inpart from scientific advances, but it i s also substantially driven by shifts in consumer demand andby a series o f food safety scandals and disease outbreaks inindustrialized countries. Thus, the past decade has seen a proliferation and strengthening o f sanitary and phytosanitary (SPS) standards, in the public and private sectors alike. The standards regime continues to evolve internationally, nationally, and within individual supply chains. In the public domain, there have been significant institutional changes in food safety oversight and reforms o f laws and regulations. For long-held concerns (the impact o f pesticides on health, for example), there has been a tightening o f standards in developing as well as industrialized countries. At the same time, new standards are being developed and applied to address previously unknown or unregulated hazards. 'Developing country exports o f fresh and processed fruit and vegetables now exceed the combined value o f their exports of tropical beverage crops, cotton, sugar and tobacco. Spices are an exception. Some o f these (for example, black pepper and vanilla) have experienced high international price volatility. 'See Roheim (2005) and Diop and Jaffee (2005). 1 TABLE1.1THECHANGING STRUCTUREOFAGRICULTURALTRADE ERCENTAGE OF EXPORTVALUE) Total for developing Total for World exports countries industrialized 200o/o1 1980/81 2000/01 Traditionaltropicalproducts Coffee, cocoa, and tea F cou ries 1980/81 2000/01 1980/81 18.3 8.5 2.5 3.6 8.5 5.4 Naturalfibers 8.0 3.3 4.5 2.6 5.9 2.8 Sugar and confectionery 10.5 4.3 3.9 2.3 6.4 3.1 Nutsandspices 2.4 2.8 0.7 0.8 1.3 1.5 Subtotal 39.2 18.9 11.6 9.3 22.0 12.7 Temperate products Meats, fresh andprocessed 7.2 6.0 14.8 15.4 11.9 12.0 Dairy products 0.3 1.1 7.9 7.6 5.0 5.2 Grains, raw andprocessed 9.3 7.0 21.6 11.6 16.9 9.9 Oilseeds + edible oil 4.6 5.5 4.8 4.4 4.7 4.8 Animal feed 7.5 8.5 7.7 5.3 7.7 6.4 Subtotal 28.8 28.1 56.9 44.2 46.3 38.3 Fishand horticulture Fish,fresh andprocessed 6.9 19.4 5.5 8.0 6.0 12.2 Fruits, vegetables, and flowers 14.7 21.5 13.1 17.3 13.7 18.9 Subtotal 21.6 40.9 18.6 25.3 19.7 31.I Other products Tobacco and cigarettes 2.6 3.3 3.0 4.8 2.8 4.2 Beverages 1.1 3.6 6.9 11.5 4.7 8.6 Other products/processed foods 6.7 5.2 3.0 5.0 4.4 5.1 Subtotal 10.4 12.1 12.8 21.2 11.9 17.9 Total 100 100 100 100 100 100 Source: UNCOMTRADE. For many years, little attention was given to SPS standards and how they might affect the trade or competitiveness of developing countries. Such standards have been o f little importance in relation to the traditional agricultural commodity exports o f most developing countries, which include sugar, coffee, cocoa, tea, cotton, and tobacco. For these commodities, the primary bases for international competitiveness remain price and quality. Further, more traditional forms o f trade protection and preferences remain contentious issues for these commodities.6 But the changing composition of developing country exports has substantially altered the bigger picture. The steady expansion in global trade in perishable high-value foods, For the beverage crops, tariff escalation continues to be widespread. For sugar, cotton, and tobacco, tariff, quota, and producer subsidy distortions remain widespread. See various chapters in Aksoy and Beghin (2005). 2 together with parallel increases in problems connected with that trade, have drawn attention to the major disparities between countries in national standards for food safety and agricultural health, as well as the differential capacities o f public authorities and commercial supply chains to manage the potential risks associated with producing and marketingthese product^.^ Although a wide range o f developing countries have successfully expanded their exports of high-value and value-added agricultural and food products, there i s growing concern that the growing stringency o f food safety and agricultural health standards could undermine that progress, while posing insurmountable barriers to new market entrants within the developing world. The conventional wisdom, reflected in most analytical literature and public pronouncements, holds that the emerging product and process standards amount to a barrier to the trade of developing countries and, in particular, to small producers and ago-enterprises. Echoing criticism o f the wider trade regime for agricultural products, many analysts, commentators, and developing country policymakers view food safety and agricultural healthmeasures as disguised protectionist tools. `Scientific' justification is now used to prohibit or restrict imports. Discrimination occurs when higher standards or more rigorous enforcement applies to imports than to domestic supplies. Even if standards are not used intentionally to discriminate against imports, there is concern that their growing complexity and the lack o f harmonization among countries will impede the agri-food trade expansion efforts o f developing countries.s There i s also concern that many developing countries lack the administrative, technical, and scientific capacities to comply with emerging requirements, presenting potentially insurmountable barriers inthe short and medium term. A related concern i s that the initial investment and recurrent costs required to comply with emerging standards weakens the competitive position o f developing countries or compresses the profitability o f their export-oriented acti~ities.~ It is argued that the combined effects o f institutional weaknesses and rising compliance costs will contribute to the further marginalization o f weaker economic players, including small and poor countries, small and medium-sized businesses, and smallholder farmers.'O Much o f this pessimistic, standards-as-barrier perspective focuses on official, mandatory standards, emphasizing the growing number o f international disputes and complaints brought to the SPS Committee o f the World Trade Organization (WTO), the limited capacities o f developing countries to participate in international standard-setting organizations, the shortcomings o f the SPS Agreement itself, and the difficulties posed by the strengthening or broadening o f official SPS standards among major industrialized countries, especially the United States, Japan, and the European Union. Such analyses A small number o f developing countries are major exporters o f cereals and soybeans, the trade in which has been recently affected by environmental and food safety concerns related to genetically modified organisms (GMOs). See, for example, Orden and Romano (1996), Hensonand Caswell(1999), and OECD (2003b). For example, Stephenson (1997), Otsuki and others (2001), Jha (2002), Garcia Martinez and others (2002), Rotherham (2003), and Wilson andAbiola (2003) loSee, for example, Chan and King (2000) and Dolan and Humphrey(2000). 3 often conclude with recommendations for adjusting the rules o f the game or strengtheningthe ability of developing countries to negotiate trade rules, whether on an international or bilateral basis. Attention often focuses on the WTO and the standard- setting bodies explicitly mentioned in the SPS Agreement: the CODEX Alimentarius Commission (CAC), the International Plant Protection Convention (IPPC), and the Office International des Epizooties (OIE, also known as the World Organisation for Animal Health). An altemative andless pessimistic global perspective might emphasize the opportunities provided by the emerging standards and the possibility that certain developing countries could use those opportunities to their competitive advantage. From this viewpoint, many o f the emerging public and private standards represent a potential bridge between increasingly demanding consumer requirements and the participation o f distant suppliers. Many o f these standards provide a common language within the supply chain and raise the confidence o f consumers in food product safety. Without that confidence, the market for certain products cannot be maintained, let alone increased, in turn jeopardizing intemational trade." From this standards-as-catalyst perspective, the challenge inherent in compliance with food safety and agricultural health standards may provide a powerful incentive for the modernization o f developing countries' export supply chains and give greater clarity to the SPS management fbnctions o f government. For example, increased attention to the adoption of 'good practices' in agriculture and food manufacture may induce changes in domestic food safety and agricultural health controls. Such changes could also benefit the domestic population, producers, and the environment. A share o f the costs o f compliance could therefore be construed as necessary investment that generates direct and indirect spin-offs from the adoption o f new technologies and management systems. Rather than eroding the comparative advantage o f developing countries, the enhancement o f capacity to meet stricter standards could create new forms o f competitive advantage and generate new employment. Hence, the process o f standards compliance could conceivably provide the basis for more sustainable and profitable trade over the long-term-albeit with some highlyvisible winners and losers.12 Inadditionto consideringthe potential catalytic role ofemergingstandards, policymakers andanalysts must consider movements inprivate standards and supply-chain governance, both o f which have enormous implications for high-value and value-added agricultural and food products. Whereas oficial measures and restrictions continue to define trade and market access inmatters o f animal and plant health, inrelation to food safety (and a growing array o f other consumer concerns), private standards, industrycodes o f practice, l1 The array of recent food scares and their enormous short or medium term impacts on consumer demand and international trade in beef and selected other livestock products fully attest to the importance o f consumer confidence infood safety governance systems. '' While this is currently the minority view o f the impact o f SPS measures on developing countries, there i s an expanding catalogue o f cases where countries have been able to exploit market opportunities because o f their greater capacity to comply with food safety or animal healthrequirements. 4 and other elements o f supply-chain governance now rival the importance o f official mandatory standards (Garcia Martinez and Poole, forthcoming). Motivating these private developments has beenthe private sector's quest to avoid harm to reputations and to mitigate risks. For some products and industries these moves also have been part o f commercial strategies o f differentiation. The development o f private food safety standards has been especially marked in industrialized countries (notably among major food retailers, food manufacturers, and restaurant chains), but private standards are becoming increasingly important in middle-income and some low-income countries as a consequence o f investments by multinational companies and the competitive responses o f local firms.I3 The dichotomies between `standards as barriers' and `standards as catalysts' and between public and private standards (Table 1.2) suggest a complex reality. To understand the challenges and opportunities for developing countries o f evolving food safety and agricultural health standards, close attention must be paid to the specifics o f particular markets, products, and countries. It is also necessary to understand the strategic options and patterns o f performance o f individual developing countries in meeting those challenges and their ability to exploit emerging opportunities. Developing countries (and stakeholders therein) are strategic players in the evolving SPS and commercial environment-they are free to choose among and pursue alternative strategies. But as with most aspects o f developing country trade and broader economic performance, one finds considerable variety o f experience and skill in managing the challenges and opportunities presented by rising SPS standards. TABLE1.2 ANALYTICALSPHERESFORSTANDARDS Standards as barriers Standards as catalysts Publiclofficial standards Dominant focus inthe literature Little recent attention; older and dialogue literature on the value o f grades and standards Private standards and Some recent attention, especially Little attention inthe protocols related to supermarkets and the supplychains for fresh fruit and Understanding that variety and the range o f choices open to developing countries, and exploring how the World Bank can support those choices, are the primary objectives o f this report and of the broader research program on which it i s based. A key aim i s to rebalance the policy dialogue by examining experiences and trends that fall within all four quadrants o f Table 1.2. For the World Bank Group, food safety and agricultural health standards are relatively new areas o f involvement. Yet, because o f their strong linkages to economic growth and See the growing literature on supermarkets in developing countries, including Reardon and Berdegue (2002); Weatherspoon and Reardon(2003). 5 poverty reduction, both lie directly within the World Bank's mandate. Facing growing demand from clients, the World Bank expects that the level o f support it provides for strategic planning and capacity-building inrelation to trade, food safety, and agricultural health will increase considerably in the coming years. Addressing food safety and agricultural health requires a holistic approach, involving many sectors-among them agriculture, trade, infrastructure, and public health. The World Bank can provide the cross-cutting analytical skills required for a successful holistic approach. In the rapidly changing world o f global trade, timely policy adjustments and significant investments are often required; these, too, are areas o f strength for the World Bank. Both the public andprivate sectors play important roles inthe management o f food safety and agricultural health risks inrelation to trade, where the chances for market failure are many (Box 1.1). Some potential sources o f market failure are externality spillovers associated with disease and pest control, moral hazards in compliance with food safety controls, and the unequal access to information by different stakeholders. These conditions may require public sector interventions. The private sector, on the other hand, has the day-to-day responsibility for applying a range o f agricultural, post-harvest, and processing practices that minimize and manage food safety and agricultural health risks. Awareness and capacity-building support, alongside other investments, may be needed in both sectors. The various components o f the World Bank Group should work with their respective clients, in close collaboration with other development partners, to address those needs. 1.2 Objectives and Main Issues This report summarizes a program o f research coordinated by the World Bank and carried out from October 2002 to May 2004. The objectives o f the program have been to: Highlight the major dynamics inthe evolution o fimportant SPS standards inselected industrialized countries, covering both public and private standards and the driving forces behind the observed trends. Explore the room for maneuver o f suppliers o f agri-food products in developing countries in the context o f evolving regulatory (and commercial) changes and consider the range, appropriateness, and effectiveness o f various strategic responses to those changes. Such strategies might involve public sector measures, private sector investments and adjustments, or various forms o f collective action. The research considers the commercial, geographical, administrative, and other factors that facilitate or impair the pursuit o fparticular strategies. Develop a better understanding o f the nature and level o f the costs o f achieving and maintaining compliance with international and country-specific SPS standards. Illustrations o f the costs o f noncompliance are provided as well. The research also identifies and quantifies direct and indirect benefits that may flow from the adoption of the rules, systems, skills, and facilities required to comply with standards. 6 Develop a better understanding o f the implications o f emerging standards for market and industry structure and wider socio-economic effects. Evidence is sought on how compliance strategies (or the failure to comply with standards) have affected participation by smaller enterprises and farmers in export-oriented supply chains and (to a limiteddegree) their impact on employment patterns. Review the scope and nature o f ongoing programs o f international development agencies to provide technical assistance and other support for capacity-building in trade-related SPS management in low- and middle-income countries, and draw operational lessons from that experience. Draw out the operational implications o f these research findings and identify entry points for the World Bank and other development agencies working inthis field. Several other features o f the research program should be noted. First, the evolving challenges and opportunities posed by SPS standards are presented in a context o f changing market dynamics. SPS-related factors are but one element, albeit an increasingly important one, among the many that affect international competitiveness in the production and marketing o f high-value and value-added agri-food products. In reviewing trade performance trends, changes in industry structure, and changes in the distribution o f incomes and opportunities, one must be careful not to ascribe those changes solely to the effects o f standards, when other factors (new competition, logistical factors, macroeconomic developments, climate, and so on) may be o f equal or greater significance. Some o f the literature in this field falls into this trap and, therefore, may exaggerate the impact and compliance costs allegedly associated with changing standards. Second, this work was not designed to challenge the scientific justification or current status o f any particular SPS standard, whether set at the international level or by a particular country. Such challenges occur on a regular basis between bilateral trade partners and through the WTO's SPS Committee and international standard-setting bodies. Inconducting our case studies, we heard a wide variety o f concerns expressed by developing country regulators and private sector actors pertaining to specific measures being implemented in major destination markets. Those concerns are touched on in the case studies, but they do not feature heavily inthis synthesis report. Third, the range o f standards beingappliedto food and agricultural products is expanding steadily. The World Bank research program has focused on SPS standards, with comparatively greater emphasis on food safety measures and somewhat less on plant and animal health controls. This relative emphasis was driven by our perception or understanding o f the relative importance o f emerging challenges across a broad set o f countries. Addressing trade restrictions related to animal disease, such as the eradication o f Foot and Mouth Disease (FMD), are so costly that only a modest number o f developing countries are competitive enough to make it economically attractive to export to industrialized countries, although regional exports can be very important. In contrast, 7 dozens o f developing countries are active inglobal trade infruits and vegetables and fish products, where food safety issues have been prominent. Product quality and labeling issues have also received less attention in our research than food safety and agricultural health, although there i s often a strong degree o f overlap between quality assurance and food safety. For example, the implementation of I S 0 9000 is arguably a good basis for implementing a food safety management system such as hazard analysis and critical control point (HACCP). The research reported here also reflects relatively little attention to emerging environmental and social standards, which the private sector tends increasingly to package together with food safety in codes o f practice and supply-chain protocols. Table 1.3 denotes the relative emphasis given to various types of standards in this research program. Under each heading, illustrative examples o f standards are listed. TABLE EMPH.3ESGIVENTODIFFERENT 1.3 TYPES OF TANDARDSINTHIS RESEARCH GreatestEmphasis MediumEmphasis LeastEmphasis Foodsafety Plant/animalhealth Productquality Environmental Social Limits on pesticide use Surveillance requirements Product Controls on water, Labor and residues Quarantine requirements composition environmental standards Limitson veterinary standards contamination "Fair trade" pharmaceutical use and Pest risk assessment Product cleanliness Controls on standards residues requirements specifications endangered species Animal Limitson Sanitation requirements Grading schemes Environmental welfare microbiological Fumigationrequirements protection standards pathogens Controls on requirements Vaccination and disease nutritional and Controls on food prevalence requirements other claims Protectionof additives biodiversity Restrictions on uses of General labeling Packing certain livestock feeds and requirements Recycling house/processing plant pharmaceuticals, such as requirements hygiene requirements antibiotics and growth Organic production Traceability promoters standards requirements Traceability requirements Bio-security measures Finally, this research program has focused on how SPS standards are influencing exports from developing countries to industrialized countries. It has not examined the emerging issues pertaining to South-South trade, food exports by industrialized countries to developing countries, or the growing level of SPS-related friction between industrialized countries. The decision to focus on exports from developing countries to industrialized countries reflects the current policy debates in the field and the development objectives underlying the current Doha round o f trade negotiations. Given the growing level o f South-South trade in food and agricultural products, future research should investigate how that trade is being facilitated or constrained by standards and related management practices and capacities. 8 BOX 1.1 W H Y ARE FOODSAFETY AND QUALITY STANDARDS IMPLEMENTED? A well-functioning market provides incentives for firms to supply products that embody the characteristics o f safety and quality that consumers demand, both because firms derive greater profits from doing so and because their reputation is critical for repeat sales (Mitchell, 2003). C`nder certain conditions, however, markets may fail to provide the safety and quality that consumers demand or that is socially desirable. For example, consumers may be unable to judge the safety or quality o f a particular food product at the point o f purchase or prior to consumption. Because greater safety and quality can increase costs for firms, this lack o f informationmay reduce the firm's incentive to incur those costs. Firmsthat have a greater level of information about the safety or quality o f the products they supply may be able to gain a strategic advantage over consumers or over their competitors, leading to inappropriate price signals or false product differentiation on the basis o f safety or quality. This situation is compounded by the fact that the safety and quality characteristics associated with food are typically complex and significant costs can be imposed on consumers when searching for products that meet their own particular demands and assessing their actual characteristics. Such transaction costs can be an impediment to market development. When consumers eat unsafe food they not only impose costs on themselves (Le. loss o f income for time spent away from work), but they also impose broader costs on society as a whole, through the health care system. Normally, consumers do not take such costs--what economists call `externalities'-- into account when choosing the foods they buy and thus they tend to demand a lower level o f food safety than society as a whole would prefer. Conversely, there can be positive externalities, benefits that accrue to other parts of society beyond the consumers themselves. One example is the protection o f the environment when consumers buy `environmentally friendly' products. The government may implement food safety or quality standards in an attempt to address such market failures, as a means to achieve levels of safety or quality that are socially desirable and to reduce the associated costs. Inextreme cases these may take the form o f absolute bans on products. More generally, however, standards specify the ways in which food products are produced andlor their characteristics (for example ingredients, storage conditions etc.). Inthe latter case, govemments may specify the safety and/or quality characteristics o f the end product, but leave firms free to choose the most appropriate way in which to grow or manufacture such products. Further, in some cases they may also specify the information that must be disclosed to consumers and the format for this information. ,This `market failure' perspective presents public standards as instruments that correct inefficiencies in markets o f food safety and quality. However, even a cursory observation o f the prevailing standards environment provides illustrations where public standards have been implemented in the absence o f any apparent 'market failure' or some other action may have been able to correct the failure at lower cost. The political economy perspective on standards acknowledges that public authorities are influenced by the interest groups their actions affect, whether private businesses, consumers or taxpayers, and that the standards they implement will reflect, at least in part, the power o f these various actors. Thus, it is acknowledged that such private interests can `capture' regulatory processes and steer them in directions that are to their economic advantage. In such cases, public standards can actually aggravate existing market failures and have considerable distributive impact. Private standards are implemented by businesses and other entities, individually or collectively. Such standards evolve for very different reasons (see for example Henson and Caswell, 1999). Often they are devised to enhance economic efficiency, by facilitating communication between buyers and sellers or by ensuring the compatibility of product components or products that are consumed jointly. Or they can be the basis o f the competitive strategies o f firms-- a means to communicate with consumers and enhance reputation. Market signals are sufficient to induce the development o f private standards. The role o f the government is to ensure that such standards do not constitute or conceal anti-competitive practices. 9 1.3 Methods This report is based on a series o f case studies undertaken for this research program or in connection with complementary trade studies. One set o f studies covered specific countries and commodity supply chains (Table 1,4), focusing on a few commodities to make comparisons possible. The commodities and products selected for attention represent many o f the SPS `hot spots', in the sense that they are the subject o f a high number o f restrictions and interceptions o f trade consignments. Countries were selected to capture regional diversity o f experience, to include supply chains whose exports are focused on different destinations (for example, the United States, the European Union, or Japan), to provide a range o f experiences from very low- to middle-income countries and relatively small to quite large countries, to include both emergingand mature industries, and to buildon the research team's prior knowledge. Fish, shrimp, and fish products India, Jamaica, Kenya, Nicaragua, Senegal, Thailand Fruits and vegetables Jamaica, Kenya, Morocco, Thailand Animalsianimal products Ethiopia (live animals), Latin America's Southern Cone (beef and FMDcontrol) Nutsandspices India (spices), Senegal (groundnuts) The core methodology for the case studies is laid out inHenson and others (2002). The focus o f attention has been on export-oriented supply chains and the challenges, strategies, costs, and benefits associated with compliance with external market SPS standards. In some cases, the interface between exports, standards compliance, and the domestic market was investigated. Interviews with a representative range o f processors/exporters, public officials, and producerhdustry organizations were the primary source o f information for most o f the case studies. Some cases benefited from the existence o f earlier survey work at the farm or enterprise levels. In several others, limited surveys o f fanners, traders, and processors were carried out to provide stronger micro-level data. For two of the case studies, the research built on field work being done by doctoral students. For one case, a general equilibrium model was developed and applied to assess the distributional effects o f a previous export ban and the potential distribution o f benefits o f a proposed disease control scheme. For the most part, the case studies provide descriptive statistics and use cost accounting to estimate compliance costs, rather than employing formal statistical approaches. Complementing the countryhdustry case studies i s a series o f buyer studies, involving representative importers, brokers, retailers, and other distributors o f shrimp and selected fresh h i t s and vegetables in the United States, European Union, and Japan. These studies probed the changing dynamics o f official and private standards in these markets, 10 buyers' perceptions o f the capacities and performance o f their developing country suppliers in meeting standards, and the roles o f buyers in strengthening the SPS/quality management systems o f their suppliers. A combination o f formal and informal interviews was employed inthis work. The two sets o f case studies were supplemented by a review of selected development agency experiences in building capacity for trade-related SPS management in low- and middle-income countries. Resource constraints limited this work to a review of documents and interviews with managers and staff at selected development agencies. No field visits were made. Documentation was reviewed from 31 projects in order to characterize the types o f interventions being supported and, where possible, draw operational lessons related to project design and implementation. Selective rather than comprehensive, the review included projects from several multilateral and bilateral agencies. This report also draws on some of the broader literature in the field o f food safety and agricultural health, particularly that dealing with the structure and dynamics o f commercial markets for high-value food products, as well as case studies o f developing country responses to the emerging system o f public and private standard~.'~Use was also made o f data and information provided by the WTO's SPS Committee, especially those pertaining to trade disputes and dialogue on food safety and agricultural health issues. 1.4 Structureo f this Report Chapter 2 opens with an overview of industrial country markets for high-value perishable foods, with an emphasis on the evolving set of public and private standards governing the trade and distribution o f these products. The coverage is selective rather than comprehensive, the objective being to convey the growing scope and complexity o f standards facing developing country suppliers and governments. The strategic options available to developing country suppliers are explored in Chapter 3. Examples are drawn from our case studies and from other experiences to illustrate the application o f various strategies by the public and private sectors. The examples demonstrate that developing countries do indeed have some room for maneuver, especially when they plan ahead and adopt proactive measures. Pro-activity and planning are not yet the norm, however, and many countries and industries find themselves adopting defensive coping strategies in the wake of new standards or actual trade interruptions. Whatever the strategic approach adopted in response to emerging standards, there are associated costs and benefits. In Chapter 4 evidence is drawn from our case studies and other experiences to illustrate the incidence and relative magnitude of various types o f costs and benefits. Not surprisingly, there is enormous variability in such costs and l4Some very interesting and balanced perspectives are provided in Buzby (2003), Unnevehr (2003), and Josling and others (2004). 11 benefits, depending on circumstances. The apparent distributional effects o f international trade standards are reviewed in Chapter 5, based inpart on preliminary findings from the current research program. We find distributional impact at the international and industry- specific levels, in the (re-)structuring o f particular supply chains, and through spillovers into the domestic economy. Having examined the challenges for developing countries associated with food safety and agricultural health standards, we move on to a short overview o f current development assistance for SPS capacity-building, Chapter 6 highlights prominent patterns o f assistance and draws selective lessons based on a desk review o f projects. A key finding i s that much o f the assistance in this field has been driven by tension or emergency-in the context o f trade disruptions or disputes (or threats thereof)-and therefore has given little attention to strategic issues or to the underlying economics and sustainability o f measures adopted in response to, or in anticipation of, standards. Chapter 7 ends the report by deriving implications for future World Bank activity in this field. Guiding principles and pertinent entry points for greater involvement by the Bank are provided. 12 CHAPTER2 FOOD SAFETY AND AGRICULTURAL HEALTHSTANDARDSIN INDUSTRIALIZED COUNTRIES: IMPLICATIONS FORDEVELOPING COUNTRY EXPORTSOF HIGH-VALUEAGRI-FOOD PRODUCTS This chapter analyzes the changing environment that developing country exporters o f high-value food and agricultural products face as they penetrate industrialized country markets and strive to increase their market share. A series o f well-publicized adverse events in recent years-involving product tampering, inappropriate use o f farm inputs, contaminationby food-borne pathogens, animal diseases, and product adulteration-have drawn increased attention to food safety and agricultural health issues. Simultaneously, trends in consumer demand in industrialized countries have elevated food safety and quality over other product characteristics. Both developments, abetted by faulty risk management and poor communications, have shaken the confidence o f consumers in many industrialized countries. Inresponse, governments, private industry, and advocacy groups have taken steps to mitigate health, commercial, and political risks. Many o f these responses have involved the tightening or extension o f technical regulations and o f sanitary andphytosanitary (SPS) standards. The net result o f these circumstances i s a complex, variable, and dynamic environment for standards that constitutes a major challenge for developing countries aspiring to supplymarkets inthe UnitedStates, the EuropeanUnion, andJapan. As noted inChapter 1, some regard the challenge as a problem that threatens to block market access for developing countries and reduce the profitability o f their exports, while others see it as an opportunity to gain secure and stable access to remunerative new markets. This chapter provides an overview o f some o f the emerging trends in government regulation and private market governance, while subsequent chapters examine selected developing country responses inthis environment. This chapter begins with a brief overview o f the emergence and nature o f the international system o f standard-setting on SPS matters. It next recounts a series o f food safety and animal health events and crises that have sapped consumer confidence in industrialized countries. We then examine official and private sector responses in industrialized countries that have reshaped the rules by which existing and potential external suppliers to the industrialized countries must play. Finally, some broad implications o f these changes for developing countries are noted. 2.1 Standardsinthe Context of EvolvingTradingFrameworks Standards have been used in agricultural commerce for thousands o f years. Yet for most o f that period their main purpose was to control or monopolize commerce rather than to facilitate trade or protect life, health, and the environment. The idea o f developing national standards and using them to improve economic welfare seems to have originated on both sides o f the Atlantic at about the same time. Inthe (now) industrialized countries, regulations related to food quality and safety were introduced in the early years o f the twentieth century, while broader systems o f national standards, both for food and 13 manufactured goods, were more fully developed during the First and Second World wars. AAer World War 11, agricultural surpluses began to build in some countries due to a combination o f economic recovery and expansion, mass application o f improved technology, and govemment farm policies. Inresponse, private agricultural associations inthe UnitedStates, Europe, and elsewhere beganworking to expand global agricultural trade. Industry leaders realized that grades and standards could contribute to overseas market development-without them arms-length trading was muchmore difficult. Yet it was becoming increasingly evident that standards-related initiatives undertaken in isolation and at different times, with distinctive approaches and different nomenclature, could actually impede trade, increase commercial risk, raise transaction costs, and spawn disputes. As a result, a movement toward global harmonization began inagriculture (as in other sectors), led necessarily by international institutions with a broad mandate and public funding rather than by private organizations with a narrow set o f concems and limitedbudgets. The United Nations Food and Agriculture Organization (FAO) was founded in 1945, with responsibilities that included nutrition and associated food standards. The mandate o f the World Health Organization (WHO), created in 1948, encompassed human health as well as the establishment o f food standards. In 1960, the first FA0 Regional Conference for Europe endorsed the idea o f an international agreement on minimumfood standards. Three years later, the Codex Alimentarius Commission (CAC; hereafter referred to as Codex) was created as a joint FAO/WHO program. Its declared purposes were to protect the health o f consumers and ensure fair practices infood trade. Codex would promote coordination o f all food standards work undertaken by governmental and nongovernmental organizations, determine priorities for new standards, and initiate and guide the preparation, finalization and publishing o f regional and world-wide standards. Over the years, the Codex system has grown to comprise a collection o f guidelines, codes o f practice, and other food safety-related recommendations. Some o f these are generic, including general guidelines for applying hazard analysis and critical control point (HACCP) systems. Others deal with supply- chainmanagement measures for specific product groups (such as fresh fmit). Two other standards-setting organizations emerged to play significant roles in the SPS arena. The Office Intemational des Epizooties (OIE)I5was established in 1924, following an outbreak o f rinderpest inEurope. Its main tasks have been: (1) global dissemination o f information obtained from members on outbreaks o f diseases; (2) collection, analysis, and dissemination o f scientific information on disease control; (3) technical and institutional support to developing countries in their efforts to build capacity to control animal diseases; and (4) the setting o f standards that countries can use to protect themselves against the introduction o fdiseases or pathogens. l5InEnglish, the WorldOrganizationfor Animal Health. 14 The International Plant Protection Convention (IPPC), created as part o f an international treaty signed in 1952, aims to "secure common and effective action to prevent the spread and introduction o f pests o f plants and plant products and to promote appropriate measures for their control." The IPPC and various affiliated regional plant protection organizations have worked to promote good practices in their field, in part through the development of international standards and guidelines for pest risk analysis, plant quarantine, the establishment o f pest-free areas, the use o f irradiation as a phytosanitary measure, and so on. The original Convention has been revised or amended several times, mostrecently in 1997. The linkages between Codex, OIE, and IPPC and the evolving trade framework for agricultural and food products were formalized in the years following creation o f the WTO. Codex signed agreements with the WTO under which it would create trade standards that the WTO would use to resolve international trade disputes. The IPPC and OIE subsequently formalized their relationships with WTO. The legal basis for standards created by Codex, OIE, and IPPC was provided by the Agreement on the Application o f Sanitary and Phytosanitary Measures (the SPS Agreement) and the Agreement on Technical Barriers to Trade. These were included among the Multilateral Agreements on Trade inGoods and annexed to the 1994 Marrakech Agreement that created the WTO. The SPS Agreement permits measures that are "necessary to protect human, animal or plant life and health," yet requires regulators to: (1) base measures on a scientific risk assessment; (2) recognize that different measures can achieve equivalent safety outcomes; and (3) allow imports from distinct regions in an exporting country when presented with evidence o f the absence or low incidence of pests and diseases. In addition, the Agreement encourages (yet does not require) the adoption o f SPS measures based on international standards, guidelines, and recommendations, making explicit reference to those o f Codex, OIE, and IPPC. Countries basing their measures on those standards are automatically considered to be in compliance with the Agreement. Importantly, however, the Agreement protects the right o f a country to choose its own "appropriate level o f protection," while guiding members to "take into account the objective o fminimizingnegative trade effects." The SPS Agreement thus sets out broad ground rules for the legitimate application o f food safety and agricultural health measures, many o f which have the potential to affect international trade. Scientific justification i s called for wherever standards are deemed to not be based on established international standards. Even with ground rules, however, complications are inevitable, given the wide range o f areas for which no agreed international standards exist and the many areas in which scientific knowledge i s incomplete. Indeed, many o f the controversies that have erupted question the legitimacy or appropriateness o fmeasures taken inthe midst o f scientific uncertainty. The standards, guidelines, and recommendations developed by Codex, OIE, and IPPC reflect international scientific consensus on good risk management and appropriate hazard tolerance levels. They can be used by developing countries in establishing their legislation and management systems related to SPS matters. Further, they provide 15 important benchmarks that developing countries can use in dialogue and negotiations with trade partners when technical or administrative disputes arise. However, in the context o f developing country trade in high-value agricultural and food products to industrialized countries, the standards developed through the three sister organizations have frequently been superseded by national regulations or by specific requirements laid down by private supply-chain leaders. As the following discussion will highlight, there has been considerable change inboth regulatory and private market governance inrecent years. 2.2 FoodSafetyEventsandShakenConsumerConfidence Consumers in industrialized countries have long had concems about certain important dimensions o f food safety, especially the presence o f chemical residues and contaminants infood. Periodic outbreaks offood-borne illnesses have remindedpeople ofthe potential dangers o f undercookedmeats and spoiled foods. Beginning inthe mid-to-late 1980s and continuing through the subsequent decade, a continuous series o f food-safety events occurred-among them serious outbreaks o f food-borne illness, new scientific links between animal and human diseases, and discoveries o f tainted food and feed supplies- accompanied by an array o f scares with uncertain or unfounded scientific bases (table 2.1). Alongside broader demographic and social trends (Box 2.1), these events have changed the nature o f food markets inindustrializedcountries. 2000 Large-scale food poisoning-dairy Japan 2001 Contaminated olive oil Spain 16 BOX 2.1 DEMOGRAPHIC SOCIOECONOMIC TRENDS AND INFLUENCEFOOD PREFERENCESAND FOOD-SAFETY CONCERNS Patterns o f consumption o f high-value agricultural and food products continue to evolve in industrialized countries in conjunction with demographic and socioeconomic trends. In all industrialized countries, the share o f income spent on food has beenshrinking. At the same time, consumption o f higher-value products, especially fresh produce, fish, and poultry, has risen with disposable incomes, reflecting the fact that such products have higher income elasticities o f demand. Increasesindisposable income are also associated with greater interest in foreign travel, which tends to stimulate a desire for a greater variety o f food and greater experimentation withcooking. This favors exotic h i t s , vegetables, condiments, and processed or prepared ethnic foods. Demographic and lifestyle changes also influence food preferences. The UnitedStates and many European countries are experiencing significant changes in the ethnic composition of their populations due to migration and differences in birth rates. Lingering preferences among immigrants for foods from home, along with spillovers o f immigrants' preferences into the broader population, are altering overall consumption patterns. A t the same time, the population is aging, especially inJapan and certain European countries. Older consumers tendto prefer foods perceivedto be healthy and tend also to be concerned with standards, for example, those associated with unacceptable pesticide residues or the chance o f getting sick from microbial contamination. Lifestyle changes also matter. Fueled by two-income households and the recognition o f "time scarcity," eating out i s increasingly common inthe United States, Europe, and Japan, as is demand for precut produce, preparedmeals, and other ready-to-eat food. Source: Authors Several o f these events involved serious illness and loss o f life. But the adverse effects o f these and other events were amplified by a combination o f poor communication about risks and, in some cases, mismanagement o f crisis responses on the part o f governments and private companies. Both the mainstream and tabloid media seized on the events, often magnifying public concerns by emphasizing the potential threats to human health, the influence o f vested interests unconcerned with consumer protection, and the alleged ineptitude o f governments. Each new event further eroded the confidence o f consumers inthe safety and integrity of certain food products, in national and regional systems of regulation, and (at least in Europe) in the broader scientific community supporting the agri-food system. Many came to believe that the existing regulatory apparatus was more geared toward protecting the interests o f farmers and food distributors rather than consumers. Public disagreements among scientists in different countries about food risks further sapped consumers' confidence. While the depth andbreadth o f consumer concerns varies among industrialized countries, a decline infood-safety confidence has been a common phenomenon. Insome instances, the political and consumer backlash has been severe, undermining the careers o f several health and agricultural officials, bringing down at least one national government (in Belgium), causing financial losses and even bankruptcy for various companies, and severely undermining regional or international trade in certain products. Over time, consumers in industrialized countries have intensified their search for alternative sources o f information (usually from consumer and environmental groups) and for altemative foods, including organic products. 17 2.3 Official Responsesto Food Safety Concerns The decline in consumer food safety confidence poses both political and commercial risks, just as the wave o f food safety outbreaks and scandals has revealed weaknesses in underlying regulatory and crisis-management systems. Government action inresponse to these developments has brought about a new paradigm in food safety regulation and management (Box 2.2). Elements o f this new paradigm, and other trends in food safety management, include the following:16 Institutional independence and a sharper focus on public health. In the past, some agencies responsible for food safety also had mandates related to agricultural or industry promotion, yielding potential conflicts with the goals o f public health and consumer protection. Broad institutional shifts have taken place to create independent regulatory bodies focused on the latter two goals. InEurope, independent food safety agencies have been created in France, the United Kingdom, and several other countries. A new Food Safety Authority has been created at the level o f the European Commission, and oversight for an array o f food safety matters has been shifted to a greatly empowered Health and Consumer Protection Directorate General. Australia and New Zealand have created distinct agencies for food regulations and standard-setting, while in Japan an independent food safety advisory commission has been established. Inthe United States a federal Council on Food Safety was established to coordinate the efforts o f various agencies. Some countries have sought to coordinate regulatory arrangements with their trading partners, requiring the existence o f a competent authority to oversee the application o f various regulations (Box 2.3). Full supply-chain perspective. Regulatory authorities are increasingly adopting a farm-to- table perspective in addressing food safety hazards. Because hazards threaten the food chain at many different points, their appearance must be monitored at each point. Needed interventions, including regulations, could apply at the point o f production or capture, processing or distribution, and also in consumer households. One o f the regulatory dimensions of the fkll supply chain perspective has been growing attention to the traceability o f animals, raw materials, and products. The actual application o f officially mandated traceability arrangements has gone furthest in relation to beef cattle, with partial implementation in the European Union, Japan, Canada and parts o f Australia (Clemens and Babcock 2002) This discussionis based, inpart, uponRoberts andUnnevehr (2003) andCaswell(2003). 18 IBox2.2 THEU.K.FOOD SAFETY ACT(1990) I This Act, passedinthe wake o ffood scares relatedto Salmonella and other issues inthe mid-to-late 198Os, was a major watershed event in the UnitedKingdom, one that foreshadowed future legislation at the EU level, The Food Safety Act radically transformed quality management systems inBritain's food sector and established greater clarity in control, enforcement, and responsibilities for food safety. It made fm responsible for the safety and quality o f their food inputs, the conduct o f their suppliers, and the safety o f consumers. Both reputation and financial resources were at stake if firms failed to prove due diligence in detecting and preventing problems in the food chain. Under the Act, any supplier o f a branded product would be liable for the safety o f that product unless they could show due diligence. All fresh produce sold inunpackaged formwas consideredtobear the brandofthe retailer. These liabilityprovisions went further than those that would subsequently appear in continental Europe. As a result, they provided a strong stimulus for private, self-governing actions that subsequently took the formof: (1) a set ofgood agricultural practices (for example, the Assured Produce Scheme); and (2) a protocol o f good hygiene practice (the BRC T e c h c a l Food Standard). These, in tum, became part o f the foundation for wider food safety initiatives by the private sector inWestem Europe. Source: Loader and Hobbs (1999); HensonandCaswell(l999); Holleranand others (1999). I Increased emphasis on adoption of HACCP systems. Although HACCP systems have been used voluntarily by food processors and distributors for many years, recent regulatory measures have made them mandatory in some industries supplying certain markets. Between 1995 and 2001, several U.S. regulations made it mandatory to apply HACCP inmeat, poultry, and fish processing plants and inproduction o f fruit juices. The U.S. Food and Drug Administration (FDA) inspects a limited number o f plants for compliance, while in the fish sector importers must attest that their suppliers are implementing effective HACCP systems. Canada also requires use o f HACCP inthe fish processing sector. Various EU member states have HACCP requirements, and all suppliers o f dairy, meat, and fish products are required to have such systems, with oversight provided by national authorities and periodic inspections by EU technical experts. Increased use of scientiJic risk assessment. Scientific risk assessments-covering the identification o f risk sources and incidence as well as alternative mitigation strategies- are being more widely applied to new and familiar hazards. Such assessments are often undertaken to determine the need for new regulations. Under the SPS Agreement, assessments are required when a government proposes to adopt a measure that is not based on an agreed international standard, guideline, or recommendation (or when an international standard does not exist). Roberts (2004) notes a complementary process within Codex and the other major international standards-setting organizations, which, in the past decade, have devoted more o f their time and resources to developing common approaches to risk identification, assessment, and management (meta-standards) than to product standardsper se. l7 l7Still, this is not to imply that only scientific factors influence national food safety regulations. Political, commercial and other considerations are still, undoubtedly, important invarious circumstances. 19 IBOX 2.3 REGULATIONOF FOOD AND FEED CONTROLSINTHE EUROPEAN UNION In2003, the European Commission (EC) put forward a proposed regulation dealing with food and feed controls. The proposal was approved by the Council o f Europe inApril 2004 and will enter into force on January 1,2006. The new regulation calls for: A harmonized EU-wide approach to the design and development o f national food and feed control systems, together with a common approach to imports o f food and feed General audits to verify compliance or equivalence o f third-country legislation and control systems with EUrequirements Enforcement measures, including criminal sanctions, at the national level to address problems o f noncompliance with feed and food law, animal health and welfare rules. Technical assistance to developing countries, including training o f control officials from these countries. The Regulation provides for new general rules applicable to all food and feed production inthe European Union and abroad. Specific controls that have already been widely applied, for example on animal and fish products, will remain. The scope o f the proposed regulation is wider than existing legislation and closes several loopholes. For example: Itintroduces a common approachto imports of food ofnon-animal origin, suchas fruit andvegetables. Itintroduces a generalrequirement for accreditationofofficial laboratories andrules for the delegation o f control tasks to nongovernmentalbodies. It requires EC member states to present and report on multiyear control plans. Similar requirements will be madefor third-country suppliers. It provides for the creation of a list o f products o f non-animal origin that are known to pose serious risks to humanor animal healthand that should be subject to stricter inspectionat the point o f import. For all imported food and feed, the general principle is that the product should meet EU standards (or equivalent standards). Countries mustbe approvedfor the relevant commodity, andproducts mustoriginate inan establishment that is approved to export to the European Union. Lists will be maintained at the EU level o f countries and establishments from which imports are permitted. To be listed, a non-EU country must provide guarantees that exports to the European Union meet, or are equivalent to, the standards prescribed in the relevant EU legislation. Such guarantees will be verified through inspections by the Commission's Food and Veterinary Office. The regulation allows for more specific conditions on the importation o fparticular types o f food and feed. The new conditions may replace some or all o f the current import requirements. The new regulation will generalize, across all or most food and feed products, the systemo fpre-approval o f countries and establishments that has been appliedby the EuropeanUnion inthe fish sector for much o fthe past decade. The regulation notes the possibility o f a phased introduction o f certain requirements and possible transitional measures while management systems in third countries are being strengthened. Specific reference i s made to assistanceto be providedto developing countries. Source: Authors Intenszjied border inspections. Even with the increased attention to process requirements and oversight by competent authorities, several industrialized countries have intensified their level o f border inspections to screen for food safety and other hazards. This is especially evident in the United States. Between 2001 and 2003, there was a six-fold increase in the number of product inspections undertaken by the FDA, in part due to heightened concern about bio-terrorism.'s Intensified border inspection has also taken Between 2002 and 2003, the number o f ports where the FDA assigned inspection staff increased from 40 to 90. A large increase inthe FDA's budget for food safety enabled it to hire some 655 new field personnel. 20 place in the European Union, as evidenced by a massive increase in the number o f product notifications and alerts that have occurred for importedproducts inrecent years.Ig To a somewhat lesser extent, Japanese authorities have increased their levels o f inspection o f imported foods, especially o f fish products. Greater transparency. The risk assessments mentioned above are generally available for public inspection. Inmost countries, more elaborate consultative processes have been put inplace when proposed food-safety legislation is beingdebated. Regulatory enforcement data for certain countries, including on border rejections by inspection authorities, i s now more readily available. Official websites now provide extensive information on government programs and budgetary resources devoted to food safety. A further indication o f this greater transparency i s that industrialized countries account for the vast majority o f the notifications o fnew measuresprovided to the WTO's SPS Committee. Greater stringency and broader application of standards. Regulatory standards inseveral areas have beenmade more stringent inresponse to new scientific evidence andincreased consumer concems. The new stringency can be found both in horizontal (general food) standards as well as vertical (product-specific) standards. Regulations on pesticide use and tolerance levels for pesticide residues represent a clear example. Over the past decade, the European Union has issued a series o f directives and regulations leading to new arrangements and more stringent criteria for the (re-)registration o f ago-chemicals, a harmonized (and generally more stringent) set o f maximum residue limits (MRLs), and a more intensified program for monitoring pesticide residues. A parallel tightening o f pesticide-related regulations has occurred in the United States. At the same time, regulatory standards have been put inplace for a range o f comparatively new food safety concems and hazards-among them heavy metals, selected mycotoxins, allergens, potential BSE-related hazards associated with animal byproducts, and genetically modified organisms (GMOs).*O New concern for bio-terrorism. The possibility o f intentional contamination o f food, water, or the atmosphere with pathogens, chemicals, or radiation has long existed. Yet the level o f concern, planning, and cooperationon this topic has risenrapidly since the events o f 9/11. Most obviously inthe United States, but also with quiet intensity inthe European Union, Japan, and other countries, the heightened perception o f risk has caused significant changes in policies, regulations, and procedures relating to all merchandise trade. The U.S. Bio-terrorism Act o f 2002, inparticular, mandates new requirements for food facilities and imported food. Precaution in theface of scientzjk uncertainty. Article 5.7 o f the SPS Agreement allows WTO members to adopt provisional measures to protect human, animal, or plant health l9Part o f this increase i s due to the greater stringency o f certain standards (for example, aflatoxin innuts), yet the interceptions are largely due to enhanced capacities for inspection. 2o The emerging standards pertinent to GMOs fall within several spheres, including food safety, environmental management, and intellectualproperty rights. The trends and directions in these regulations are not discussed here because they are, as yet, o f limited importance inrelationto trade inthe higher value food products covered inour researchprogram. 21 when a potential hazard exists, yet where scientific evidence i s insufficient to draw firm conclusions. Members enacting such provisions are obliged to obtain "additional information" about the hazard. The language o f the Article is rather vague, however, and provides wide latitude for members to maintain a provisional measure for a considerable period o f time. The European Union, inparticular, has applied a precautionary principle to genetically modified foods, about which there i s significant public concern but no firm scientific consensus. A more general application o f the precautionary principle has been the very fast and severe measures taken by industrialized and developing countries inthe face o f recent outbreaks or even isolated incidents o f animal disease in traditional exporting countries.21The strong reaction to these events i s partly a response to past policy mistakes, when insufficient precaution or response measures were taken inrelation to a risky SPS event. In general, the precautionary approach i s being deployed in circumstances where there i s a possibility, perhaps remote, for dire or uncontrollable consequences for health or the environment. Common trends, differing requirements. There are some common trends in food-safety regulation inindustrializedcountries, but countries still are not adopting identical product standards or strongly aligning their process and inspection requirements. As Caswell (2003) notes, evolving regulatory systems still contain a mix o f old andnew requirements andreflect different perceptions o frisk, levels o f adopted precaution, scientific traditions, andclimatic and geographical circumstances (which themselves affect underlying risks). The growth inindustrial country notifications o f SPS measures to the WTO indicates that most new measures differ from international standards or cover areas where no intemational standard yet exists. Roberts and others (1999) note that, in 1995-99, only 22 percent o f the notifications issued by high-income countries concerned measures for which intemational standards existed. Variability o f official standards can be found inmanyproduct fields: 0 Henson and Mitullah (2004) contrast the varied standards that developing countries must meet to gain and maintain access to the U.S., European, Japanese, and Australian markets for fish and fishery products. While there are some overlapping requirements, notably the increasing emphasis on the application o f HACCP, differences remain inregulatory andtechnical requirements. 0 Mathews and others (2003) highlight the range o f product and process standards requiredby countries to minimize the risk o f salmonella inpoultry products. They note that several middle-income countries effectively discriminate against imports by having zero-tolerance standards for salmonella for imports, yet lack the surveillance and eradication systems to attain this standard indomestic supplies. 0 Dohlman (2003) and Otsuki and others (2001) discuss the significant differences among countries, not only in maximum permitted levels for aflatoxin in cereals and nuts, but also inthe sampling andtestingmethods usedto assess conformity. 2'Hundreds o f millions o f dollars of trade was affected by the discovery o f one BSE infected cow in Canadain2003 and a similar discovery inthe United States in2004. 22 0 Jaffee (2003) notes that, despite efforts to harmonize regulations for pesticide residues for fresh fruit and vegetables imported into the European Union, there remain wide variations in operative standards owing to different country approaches to surveillance and enforcement. Requirements governing the importation o f dried chili spices illustrate the reliance on different types o f standards by regulators and others (Table 2.2; based on interviews with Indianexporters). Historically, international trade in spices was governed by a system o f quality grades and cleanliness parameters. Since the early 1 9 9 0 ~health and hygiene ~ specifications have gradually beenincorporated into commercial spice supply chains and, to a lesser extent, into official regulatory systems. The vast majority o f these product and process standards were not designed specifically for spices, but derive from general food standards related to microbiological contamination, pesticides, food additives and food labeling. India's largest markets for chilies are in South and East Asia, where quality parameters remain the predominant standards. Some countries maintain regulations related to pesticide residues and aflatoxin, but they are minimally enforced, and little, if any, commercial importance i s devoted to these parameters. The United States i s the next most important external market for Indian chilies. In that market there is strong official and commercial attention to product cleanliness, labeling for allergens, and proper fumigation. Very modest attention i s given to other food safety variables for this commodity. In Australia, a secondary market for Indian chilies, the strictest attention i s given to matters of plant health. When supplying Australia, Indian exporters are requested to undertake especially intensive fumigation usingmethyl bromide. Incontrast, this fumigant is already banned for use in and to the European Union (as required under the Montreal Protocol) and is beingphased out inthe United States. The European Union is only a secondary market for Indian chilies, because o f a combination o f consumer taste preferences (notably for milder chilies) and SPS-related constraints. Inrecent years European officials have paid increasing attention to an array o f food safety issues including pesticide residues, aflatoxin, heavy metals, and, most recently, food colorants. Yet, within the European Union, there are apparently significant differences in regulatory interest and intensity o f oversight for particular issues. For example, Indian exporters report that each and every consignment o f dry or ground chilies entering Spain is subjected to testing for pesticide residues. InGermany, a sample o f such consignments (perhaps one in six) i s tested. In contrast, in the United Kingdom most pesticide residue testing i s undertaken for products at the retail level, and spices are not generally included. Past product interceptions due to the incidence o f aflatoxin occurred insome countries but not inothers. 23 TABLE PRODUCT/PROCESSREQUIREMENTS 2.2 FORINDIANDRIEDCHILIESINSELECTEDMARKETS Legal Requirement: Commercial Requirement: A Legallymandated and strictly enforced 4 Fullyrequiredfor commercial purposes B Legally mandated, spotlsample enforcement 3 Mostly required for commercial purposes C Legally mandated, minimal enforcement 2 Not required, but somewhat beneficial commercially DNot legally mandated 1Not required and unnecessary for commercial purposes Source: Jaffee (forthcoming). 24 IBOX2.4 DISCRIMINATION INTHE APPLICATION OF SPS STANDARDS? The SPS Agreement has not eradicated the differential application o f standards-indeed it is unrealistic to expect it to do so. Differentiation inthe application o f SPS measures is a necessary part o f any risk-based food safety and agricultural health control system. At the country, industry, and enterprise levels, the hazards to be monitored and the control measures implemented must be prioritized to make the best use o f limited resources. But an effective risk-management system will go beyond the prioritization to differentiate between alternative sources o f supply based on differences in production conditions, past experience, and assessments o f risk-management capabilities in the supply chain. Many countries automatically detain products imported from countries with a history o f noncompliance with food safety or agricultural health requirements. In circumstances in which regulators and others have wide discretion and where various forms of differentiation are required for cost-effective management o f food safety and agricultural health, there remains ample scope for anticompetitive mischief. Yet separating legitimate differentiation @om illegitimate discrimination is problematic. It is even more difficult to prove that a given standard is wholly protectionist in intent. For example, in two widely discussed cases where protectionism was assumed to have been an important factor (involving restrictions on exports o f Mexican avocadoes and Argentine citrus fruits to the United States), scientific justification was produced for the application o f measures to prevent the spread o fplant diseases, although less-restrictive measurescould have beenapplied (Roberts and Orden 1997). Inother cases, trading partners have had differing perspectives on the state o f scientific knowledge or the need to make allowances for uncertainty. Perhaps the most prominent case is the dispute betweenthe European Union and the United States over restrictions on exports o f beef produced with the use o f hormones (Bureau and others, 1998). Thus, questions remain about the use of food safety and agricultural health controls to discourage imports. One question is whether foreign suppliers are required to comply with higher requirements than domestic suppliers. No systematic research has been done on this subject. On the basis o f general impressions and anecdotes, it would appear that many countries, both industrialized and developing, do have a lower tolerance for certain animal and plant health risks deriving from imports than from domestic sources. Some countries have restricted supplies from areas where a plant pest or animal disease occurs, even though the pest or disease in question was prevalent domestically. Similar observations can be made for some food safety controls. For example, the United States has long argued that a broad array o f countries have a near zero tolerance for salmonella in imported poultry products, yet this pathogen i s widely present in their domestic supply chains. Several other cases o f discriminatory practices have been brought to the attention o fthe SPS Committee and addressedinbilateral or multilateral discussions. A second question relates to whether the enforcement o f food safety and agricultural health measures is more stringent for imports than for domestic supplies. Indiscussions with high-value agricultural and food product exporters in developing countries, one frequently hears the accusation that the controls they face are more rigorous than those imposed on domestic suppliers incertain industrialized countries. Frequently, however, this perception springs from the intensive oversight and monitoring provided by private entities, especially supermarkets and their buying agents, rather than from official systems o f surveillance and product monitoring. Further, in many ways the methods o f control they face are more visible in their effects, in that compliance is assessed at the border and on this basis entry may be denied. Domestic suppliers, by contrast, are regulated through inspection o f their processing facilities, with a focus on system-based controls and market surveillance. Conversely, anecdotal evidence suggests that regulatory oversight for certain products and markets is more stringent on domestic rather than imported supplies. For example, over a typical three year periodthe U.S. FDA will undertake inspections o f all domestic firms that produce low-acid canned foods, yet the same inspections are undertaken on just 3 percent o f foreign facilities exporting such products to the United States. Even after substantially increasing resources for the inspection o f food imports, the FDA still inspects only 1 to 2 percent o f the more than six million consignments o f food and cosmetic products imported each year. Source: Jaffee and Henson (2004). 25 2.4 Selected Private Responses to Consumer Concerns and Food Safety Events For economic actors in food supply chains, reduction in the risk o f product liability and loss o f reputation have generally been the `stick' driving increased involvement in food safety standards, while the `carrot' has been the quest for greater consumer responsiveness, industry competitiveness, enterprise profitability, and market sustainability. The series o f food safety events over the past two decades has sparked an array o f defensive and offensive measures byprimary producers, food manufacturers, and food distributors in industrialized countries. Some o f these have been stimulated by regulatory measures, while others have either predated official regulations or filled perceived gaps in market governance that have been o f concern to consumers. Many o f these private measures continue to evolve and to strongly affect the terms and conditions under which developing country suppliers access and compete in industrialized country markets. Important and related structural changes in food marketing systems in these countries are having similarly strong impacts on market access (Box 2.5). It is not easy to generalize about private sector standards, given their variety and differences intheir relative importance indifferent commodity fields. Nevertheless, some fairly widespread patterns can be discerned among supply-chain leaders, including food retailers, food manufacturers and major food service distributors. These include the following22: Increasing pressure on suppliers to adopt good hygiene, risk management, and quality control practices. Traditionally, food-chain leaders focused on the capacities o f their suppliers to meet their requirements in terms o f volume, continuity, and price competitiveness. Now, many require suppliers to apply an array o f process and production methods embodied in so-called good agricultural practices (GAP), good manufacturing practices (GMP), and HACCP and other systems. These are frequently specified in company codes o f practice and supply contracts. Some pressures in this direction were stimulated by regulation, as when British farmers' organizations and retailers jointly developed an integrated crop management partnership and later the Assured Produce Scheme inresponse to the liability provisions o f the U.K.Food Safety Act. Other examples predate legislation, as when McDonalds moved to require its suppliers to adopt HACCP systems many years before the USDA made this a requirement inthe beef sector. 22 For a fuller elaboration o f these trends see Willems and Roth (forthcoming), Lamb and others (forthcoming), Jonker and others (forthcoming), Garcia Martinez and Poole (forthcoming), and Jaffee and Masakure (forthcoming) 26 BOX 2.5 IMPORTANT CHANGESINTHE STRUCTUREAND CONDUCTOF FOOD MARKETING Food marketing all over the world has changed rapidly over the last 25 years, not just in industrialized countries, where trends tend to start, but also in developing countries. Among the major trends that have affected standards are the following: Consolidation offood retailing. Just 30 grocery retailers together achieved more than $1trillion intotal revenue in 2001, equal to about 10 percent o f all global food sales. Within this elite group, the top 10 retailers accounted for 57 percent o f the combined total. Concentration ratios tend to be highest in Europe. For example, the top five supermarket companies in France reportedly have a 90 percent market share, while in the Netherlands it is 64 percent and in Germany 60 percent. Although consolidation inthe UnitedStates accelerated greatly inthe late 199Os, the top five supermarket chains still hadonly about 35 percent o f the overall market in2004. Declining importance of or more specialized roles for wholesale or terminal markets inmany major marketing areas. Whereas in the past wholesale and terminal markets represented 20 percent or more o f food sales, and sometimes even more for perishables, in most industrialized countries they now account for a smaller percentage-on the order o f 10 percent. Notable exceptions include fish marketing inJapan and fresh produce marketing in France. Many wholesale markets continue to play their traditional roles or serve as a buffer for overages and outages, as an outlet for second-quality or distressed products, or as a source for small shops and restaurants. Others have taken on more specialized roles, especially inservicing the ethnic food segments insome markets. Rapid growth in thefood service industry. The food service industry has grown rapidly in the United States, where in 2002 some US$415 billion (46 percent o f total food expenditures) was spent away from home in hotels, restaurants, and institutions. In 2002, the food service sector in the EU-15 had sales o f around US$321 billion, equivalent to one-third o f all food sales at the retail level. The share of food service in total food expenditures in Japan is somewhat lower (accounting for 26 percent in 2001), in part because o f countennoves by supermarkets that now offer easy-to-prepare or already prepared foods for consumption at home. The consolidation o f food retailing has resulted in extraordmary market and purchasing power for market leaders; a strong trend toward global sourcing; the introduction o f preferred-supplier arrangements; greater emphasis on shared responsibility for the bottom line; supply chain integration and rationalization; elimination o f middlemen; lower average prices; and lower variability in prices for contract or program suppliers. The substantial growth of food service in industrialized countries has been associated with high demand for a wide range o f processed and semi-prepared foods; large-volume contracts; extreme aversion to food safety and other product risks; and, inpractice, almost no direct foreign sourcing. Measures to harmonize requirements under umbrella schemes. To many stakeholders, the emerging company codes o f practice became increasingly confixing and problematic, owing to their seemingly different standards, multiple inspections, and large oversight costs for supply-chain leaders. In response, firms have organized collective action to formulate and apply joint or industry-wide protocols embodying the core buildingblocs of GAP, GMP, and HACCP. One prominent initiative at the level o f primaryproduction has been the development of the EUREPGAP protocol for fresh h i t and vegetables, as well as more recent efforts to develop EUREPGAP protocols for flowers, coffee and aquaculture. For food packers andmanufacturers, quality and safety management systems have been developed by the BritishRetail Consortium, the Safe Quality Food Initiative, and others. The Global Food Safety Initiative has sought to benchmark several o f the food packing and manufacturing standards and launch an early waming system for food safety to parallel similar systems in the public sector. The efforts to harmonize private 27 standards have taken place at national, regional, and international levels, creating a complex and sometimes confusing picture-and set o f demands-for developing country suppliers. Increasing testing and auditing, including third-party certijkation. Food-chain leaders have been intensifying their efforts to test suppliers' produce for various hazards and contaminants and to audit the production practices and management systems o f suppliers. All formal industry protocols now involve arrangements for third-party certification, in the interest o f objectivity and transparency and to shift some compliance costs to upstream suppliers. Moreover, the demand for certified quality control and safety management i s now occurring in intermediate product industries (such as spices) that previously relied only on buyer product testing for quality conformity. Certification o f food companies for I S 0 9000, formerly quite rare, has now become increasingly common, especially for those that supply Europe. Bundling safety, environment, and social standards. An increasing number o f company codes o f practice and industry protocols extend beyond quality and safety management requirements to include environmental and social standards. This i s evident in the most recent version of the EUREPGAP protocol, which includes many requirements and recommendations inthese areas. Inthe fisheries field, food safety requirements are being increasingly supplemented by requirements for sustainability. For example, the Marine Stewardship Council and the Aquaculture Certification Council are developing certification programs focusing on environmental mitigation measures and sustainable fishing. Further, several major food manufacturers and restaurant chains have started a Sustainable Agriculture Initiative. There is also a plethora o f schemes to certify sustainable and socially acceptable practices inbeverage-crop production systems. Tendency to consolidate supply chains. The application o f category management and the development o f networks o f preferred suppliers is leading to the consolidation o f supply chains. Many supply chain leaders are building long-term relations with a select number o f suppliers that can meet their requirements for volume, continuity, price competitiveness, safety, and sustainable practices. The need for certified food-safety systems i s one o f several factors that i s contributing to supply-chain consolidation. Advances inlogistical and information technologies are also contributing factors. The proliferation of standards inthe private sector has created a complex and fast-moving environment that developing country suppliers need to understand, adjust to, and even anticipate. The complexity i s illustrated by the following example. One o f our case studies related to Kenyan exports o f fresh vegetables. Ostensibly, the European Union is moving toward a harmonized system o f regulations covering quality control, food hygiene, pesticide-related matters, and phytosanitary measures. In the private sector, groups such as EUREPGAP are striving to harmonize supplier requirements. Yet formal requirements and enforcement o f those requirements continue to vary significantly between countries and particular market segments and supply chains within countries. Exporters supplying particular segments of the British market, for example, face very different requirements (Table 2.3). The most stringent requirements are those associated 28 with supplyingthe leading supermarket chains. This is contrasted with the situation inthe ethnic food distribution segment, where basic quality and continuity criteria are important, but little or no specific attention i s given to food safety. TABLE2.3 PRODUCTAND PROCESSSTANDARDS FACING KENYAN FRESH VEGETABLE EXPORTERS INSELECTEDMARKETS LegalRequirement CommercialRequirement A Legally mandatedand strict enforcement 4 Fully requiredfor commercialpurposes B Legally mandatedand spotisampleenforcement 3 Mostly requiredfor commercialpurposes C Legally mandatedyet minimal enforcement 2 Not required.Somewhatbeneficialcommercially. DNot legally mandated 1Not requiredandunnecessaryfor commercialpurposes Source: Jaffee (2003) On the European continent and elsewhere, Kenyan (and other developing country) exporters face a diverse set o f operative standards, reflecting a combination o f factors including consumer preferences, private commercial strategies, national laws, and national enforcement themes and capabilitie~.~~Because many standards are essentially demand driven, this regulatory and private governance landscape i s fluid and subject to sudden changes. Kenyan producers expect that demands from their European (continental) clients will become more stringent in the coming years, although price- based competition (rather than standards-based differentiation) should remain paramount insomemarkets. 2.5 EmergingDynamicsinTrade-AffectingAnimal and PlantHealthStandards Animals and plants are susceptible to pests and diseases that can seriously undermine agricultural productivity. Those pests and diseases can spread within and between 23Garcia Martinez and others (2002) examine various firm-specific factors, sectoral characteristics, and regulatory and other institutional variables giving rise to varied private sector standards inEurope. 29 countries through movements o f animals, goods, and people. A variety o f containment and eradicationmeasures canbetaken to limit damage and facilitate trade. Animal health and phytosanitary measures (hereafter referred to jointly as agricultural health measures) differ from food safety standards, both intheir geographical scope and intheir underlying economic characteristics. In matters o f agricultural health, far greater onus is placed on public sector control and oversight measures than is typically the case with food safety. The overall incidence of catastrophic outbreaks o f animal disease and pest infestations has probably declined over the past two decades. Notable successes include the eradication o f foot and mouth disease (FMD) and classical swine fever inEurope, and the practical eradication of Rinderpest inAfrica. Nevertheless, major challenges remain. The OIE reports that, in2001, there were some 13,000 outbreaks o f FMD incattle and more than 2,000 outbreaks o f Newcastle disease in poultry. Increased animal and human concentrations have led to the emergence o f new or variant diseases such as SARS in East Asia and new forms o f avian flu. Competitive pressures have led to increased recycling o f waste products (such as bone meal), giving rise to the BSE crisis in the UnitedKingdom and elsewhere. In contrast with the situation for food safety, international standards for agricultural health primarily and increasingly relate to processes and systemsz4rather than to product standards. Under the OIE there is a unified and broadly recognized set o f codes and manuals containing standards, guidelines and recommendations that many countries seek to apply. For phytosanitary management, under the auspices o f the IPPC, agreement has been reached over the past decade on a broad array o f international standards and guidelines. Dependingon national capacities, these are appliedto varying degrees. Also in contrast with the situation for food safety, where consumer concerns have catalyzed regulatory change, the driving force for many new or more stringent agricultural health standards has been domestic producer groups, seeking quarantine protection against pests and diseases (and inmore than a few cases, market protection as well). However, there are some exceptions to this trend, especially in animal health, where links can exist between animal and human disease. The recent experience with Asian bird flu i s one example, where poor reporting o f the problem sharply undermined consumer confidence inpoultry products andnecessitated drastic remedies. Inrecent years, national governments have notified the WTO regarding thousands of animal or plant health measures. These measures have involved a combination o f generic approaches and restrictive or enabling measures v i s - h i s specific countries. Some o f these measures have been challenged, either on a bilateral basis or through counter- notifications to the SPS Committee (see Chapter 3). 24 In relation to animal health, the main measures affecting trade may include quarantine, import bans, vaccination, disease surveillance systems, developmentlmaintenance of disease-free status, and introduction o f traceability systems. For plant health, such measures include quarantine, pest risk analysis, surveillance, determinatiodmaintenance o f pest-free status, issuance of phytosanitary certificates, and the use of irradiation and other technologies as a phytosanitary measure. 30 Among the common trends inanimal and plant healthmeasures are the following: Prominence of pre-approval arrangements based on pest- or disease-fvee status. Increasingly, industrial countries are moving toward pre-approval o f potential intemational sources for live animals and certain meat products and plants/commodities. Approval insuch circumstances i s based on the prevailing disease status and incidence o f pests in a given source area, and associated risk assessments. Hence, only a limited number o f countries or (more recently) parts o f countries are permitted to export beef and poultry to the United States, while pest risk assessments are needed before many horticultural crops can be approved for import. The US. Animal and Plant Health Inspection Service (APHIS) has a substantial backlog o f requests from developing countries for risk assessments. For certain animal diseases (for example, FMD), the European Union has moved from requiring disease control measures to requiring disease eradication (meaning that a country must be disease free for at least a year without vaccination). This strongly limits the market access o f developing countries, which often do not have the capacity to achieve full eradication without use o f vaccination. Increasing use of bilateral programs to govern agricultural health relations. The United States, Australia, and other industrialized countries are increasingly entering into memoranda o f understanding with trading partners to define agricultural health risk mitigation measures. APHIS places personnel in many countries to oversee the pre- clearance o f product consignments, thereby reducing the need for inspections at U.S. entry points. The European Union regularly inspects the production and processing facilities o f its overseas suppliers. Such pre-inspection, together with the growing emphasis on approving pest-free areas, i s geared toward expanding the phytosanitary frontier o f the importing country. In contrast to a past pattern in which much o f the attention and technical assistance provided by bilateral agencies was in a fire-fighting mode (see Chapter 6), there i s an emerging tendency toward forward thinking and strategic planninginthe design o f such support. Increasing requirements for oversight of the entire supply chain. Pressure toward oversight o f the entire supply chain has come from growing requirements for traceability of beef within the European Union and Japan. Those requirements are likely to be extended to pork and poultry in the future. Another element is the demand for broader functionality on the part o f competent authorities. Whereas the core functions o f lead public agencies were once plant quarantine or disease control, industrialized country regulators are now demanding much broader competences from such agencies- including surveillance, local and intemational notification, contingency planning, risk assessment, export certification, oversight o f accredited laboratories, and so on. Throughout the private sector, there is a general tightening of supply-chain oversight. For example, before the recent BSE outbreak, McDonalds prohibited mechanically recovered beef in its products and the use o f meat and bone meal in livestock feed. Following the recent Avian flu outbreak, a leading Thai company has been the major force inregulating the poultry industry, moving toward closed (vertically integrated) systems acceptable under a recent OIE policy that designates disease-free status for certain areas or sub- sectors. 31 IntensiJied oversight and phasing out of certain veterinary drugs and planthop fumigants. Measures to phase out certain drugs and fumigants are driven by concerns about their potential to harm human health or the environment. The European Union i s rapidly phasing out anti-microbial veterinary drugs (used as growth promoters), with increased rejections o f products containing residues o f such drugs. Other countries have restricted imports of livestock or meat products when other veterinary drugs have been used. The use of methylbromide as a fumigant i s now banned inthe European Union and will bephased out elsewhere, as called for under the MontrealProtocol. Growing attention to animal welfare. While animal welfare measures began through voluntary and private-labeling schemes, they are beginning to find their way into official regulations. Animal welfare i s also a priority area under the current OIE Strategic Plan, with attention first givento transport and housingconditions. A broad array o fNGOshas become active in this field, and pressures are being brought to bear on meat processing and other companies to address a range o f issues. Thus, several supermarket chains in Europe have required their suppliers to adjust and document production practices affecting animal welfare. 2.6 Implicationsfor DevelopingCountries As described above, public and private standards o f food safety and agricultural health have proliferated in recent years, and the rate o f change in such standards has increased. There are significant differences inhow standards are applied and enforced, as well as in the penalties for noncompliance. Thus, despite some commonalities in approaches, standards are becoming both more profuse and more diverse. Harmonization seems to be the exception rather than the rule. These circumstances raise challenges for developing country suppliers seeking to penetrate new markets or thrive inexistingmarkets for high- value perishable agricultural and food products inindustrializedcountries. Stakeholdersface a major challenge in staying abreast of the rules and requirements pertaining to particular markets and supply chains and understanding how the game is actually played. Suppliers are faced with layers o f differing international standards, national standards, and private protocols. The more supply chains and countries that they service, the more complex the picture. Multiple sources o f information- including official and company websites, direct contacts with regulating agencies and private buyers, databases maintained by industry associations, the experiences o f one's competitors, and so on-need to be consulted to fully understand the operative rules of the game. At the same time, exporters that are able to stay informed can derive signzjkant competitive benefits. Further, the enormity o f the task o f staying abreast o f regulations and requirements can be reduced for all players through collective action, both within the private sector and through public-private partnerships. e There i s a great needfor developing country stakeholders to participate in standard- settingprocesses, even thoughfood safety and agricultural health issues have become more technically complex. Developing country representatives now enjoy greater 32 opportunities than previously to participate in the work o f Codex, OIE, and IPPC. Some large and middle-income countries are taking advantage o f those opportunities. But many critical standards are set in other arenas, and developing country representatives must raise their voice when external trading partners are deliberating regulatory changes and when private sector organizations are devising or revising their standards and conformity assessmentprocedures. It is necessaryfor developing countryproducers and agri-business entities (as well as administrators and policymakers) to consider effective safety and quality management as a core competence in competitiveness and to carefilly consider the costs and benefits o f standards compliance in their decisions about what to produce and which markets to target. Incumbent countries and suppliers have potentially significant "first mover" advantages over newcomers-in terms o f company-level facilities and management systems, as well as official and industry-level systems (such as phytosanitary controls; pre-clearance arrangements, and so on). Incumbents are also better able to deal with new requirements in an incremental manner without becoming overwhelmed. Exporters and their governments must assume a strategic orientation in determining which markets to serve, which commodity systems to give priority to, and which commercial and political relationships to cultivate. There is now a greater need for a preemptive calculus o f the risks that must be addressed, given the possibility o f an SPS crisis. There i s also a need to get ahead o f the curve. A strategic approach also implies using public resources to facilitate rather than control or block and, perhaps, to target the allocation o f resources to support potential winners within supply chains. This is both a controversial and complex arena for government activity. However, leaders can act as catalysts for wider efforts to enhance supply chain capacity and, through their learning processes, may reduce the risks for others in their efforts to upgrade. The competitive arena is becoming divided between preferred and other suppliers, with the former entering into multidimensional partnership arrangements with major retailers or their category managers, and the latter relegated to conducting their trade on a transactional basis in more volatile or less dynamic markets. Attaining and maintaining the status o f preferred supplier normally requires considerable investment-in facilities, human capital, and management systems-which is likely to represent a significant barrier to many developing country firms. Garcia Martinez and Poole (forthcoming) refer to this investment requirement as a `commercial barrier to trade'. However, the potential benefits from achieving a preferred status are significant, especially as buyers in industrialized countries shift toward longer-term relations with their suppliers. This suggests highcosts but also highbenefits. Given the diversity of standards applied within and between countries, there is scope for different speeds on the highway of standards compliance. In most instances, developing country suppliers do not face an all or nothing choice when determining the investments or other changes they must make to conform to emerging standards in 33 target markets. Markets remain where food safety and agricultural health requirements are less onerous than elsewhere and that offer market opportunities for countries with lower levels o f capacity to meet sophisticated standards. Inevitably, choices have to be made regarding which o f these markets can be targeted most profitably. In many cases, there may be large and profitable opportunities to service one's domestic market or other regional or developing country markets without having to invest immediately in quality and safety assurance systems or other specialized facilities required for access to the strictest markets. The likelihood is growing that exports may be denied entry to markets at the border- a trend fueled by a combination o f increased availability o f agency resources and heightened concem for bio-security and for protection against prominent food safety threats. Already in recent years there has been a large increase in the number o f border interceptions, both in the United States and the European Union.25The impact o f the rising propensity to intercept will depend on whether increased rejections translate into automatic detention, exporter pre-approval, or other schemes by the major importing countries. Further, effective export inspection and monitoring o f border detentions by exporting country governments and individual exporters can reduce the risks and, potentially, be a further source o f competitive advantage. The nature of the standards environment raises important issues and challenges for the World Bank in its operations related to agricultural and rural development and trade facilitation. Although current developments in food safety and agricultural health pose daunting challenges for developing countries, it will be evident from the findings presented in the next chapter that many countries have been able to upgrade their capacities when needed and have benefited as a result. The role of the Bank should be to encourage positive responses and appropriate forms o f capacity-building so as to help developing countries to tum the challenges o f new standards to their advantage. To do this, the Bank will have to monitor these developments, remain informed o f emerging challenges, and develop an improved understanding o f the link between trade-related SPS management and broader challenges o fnational capacity-building. Industrialized countries should include in their SPS regulatory assessments the prospective impact o f proposed measures on developing countries (in terms o f market access and competitiveness) and consider alternative measures, including technical assistance, to mitigate adverse effects. Intensified efforts should be made to inform policymakers and technical counterparts in developing countries about upcoming regulatory changes that may affect their exports. And, whether through memoranda o f understanding, twinning arrangements, or other programs, industrialized countries should work more closely with their developing country trading partners to achieve mutual recognition of quality assurance and SPS management systems. 25 It is difficult to ascribe the increased rejections to protectionist commercial interests. Most o f the rejections relate to products for which there i s either no direct competition domestically or where imports- from various countries-dominate domestic supplies. 34 CHAPTER3 STRATEGIESFORCOMPLIANCE WITH INTERNATIONAL AGRI-FOOD STANDARDS 3.1 Standardsas a StrategicIssue The changing and increasingly complex regulatory and commercial environment highlighted inChapter 2 poses significant challenges-and opportunities-for developing countries, especially for stakeholders involved in export-oriented agricultural and food production, processing and trade. The prior analysis suggests that both policymakers and the private sector need to adopt a strategic perspective on standards, identifying the emerging set o frequirements and opportunities, weighing the available options to address them, and effectively managing the chosen processes o f adjustment.26This notion of strategic options is unconventional in the context o f developing countries and the impacts of sanitary andphytosanitary measures on trade. The more typical assumptions i s that developing countries are `standards takers', facing all-or-nothing decisions about compliance with little or no room for accommodation. But developing countries frequently do have room for maneuver, as will be demonstrated inthis chapter. 3.2 Respondingto Standards:ImmediateandBroaderDevelopmentObjectives What objectives are private entities and policy makers pursuing when responding to the increasingly complex environment o f food safety and agricultural health standards? Put another way, what criteria can be usedto define the success or failure o f their responses? Inthe contextof export agriculture, thefollowing parametersareimportant: 0 Market access. The most obvious measure o f the success o f efforts to comply with evolving standards i s the level o f access to existing or new markets for agricultural and food products. This might include the value or volume o f trade over time compared to some benchmark. Inthe case o f existing markets, the benchmark might be the level o f exports before imposition o f the standard or, more rigorously, the estimated level o f exports that would have occurred inthe absence o f the standard. In the case o f a new market, the benchmark could be considered zero, when the market was previously closed entirely, or else success could be measured by whether the export volume, value or market share came to exceed a comparable level when there was some past history o f trade. 0 Benefits exceeding costs. To be considered successful, compliance measures should generate benefits that clearly exceed the associated costs-direct and indirect, recurring and nonrecurring. Both nonrecurring and recurring costs should be 26For the private sector, the strategies vis-a-vis standards compliance should form part of a wider commercial orientation which determines the most appropriate products, markets, and technologies to adopt. For policymakers, potential investments in standards-related physical and administrative capacity should be weighed inrelation to other public expenditure priorities. 35 compared with the expected flow o fbenefits over some defined period interms o f the economic value o f exports, spillover effects, and so on. Cost-effectiveness might be used as an alternative metric, whereby differing approaches to maintaining or achieving market access are compared against the value o f a defined unit o f exports. This cost-benefit calculus may vary among different private stakeholders andbetween these and policymakers, depending on which costs and benefits are considered relevant to their own decision making (see Chapter 4). For preemptive measures that succeed by sparing the country, industry, or firm the costs o f an SPS crisis, imputed benefits will largely be defined by opportunity costs. Long-term competitiveness. Aside from short- and medium-term impacts on market access, it i s important to recognize the effects o f compliance efforts on the long-term competitiveness o f an industry and its different participants. A strategic perspective on standards would suggest that this is the most appropriate metric to use. Thus, compliance efforts should be judged in terms o f the extent to which compliance enhances competitiveness, on a sustainable basis, in the context o f prevailing competitive forces and trends. Competitiveness may be measured by changes in absolute levels o f exports to a given target market, changes in market share, or changes inunit values relative to direct substitutes from other sources. Social inclusion/exclusion. Responses to new standards may result in changes to the structure and operating modes of supply chains (see Chapter 5), affecting the participation o f different groups. Of particular concern is the impact on vulnerable groups--such as smallholder farmers, microhmall enterprises, and farm and firm workers-- especially those that have become dependent on export-oriented supply chains and may have limited alternative income-earning opportunities. It may be an important policy objective to mitigate the adverse effects o f certain measures on vulnerable groups and enhance their capacity to remain active and competitive in a more demanding supply chain. Spillover effects. Efforts to comply with agri-food standards in external markets can have both positive and negative spillovers for domestic consumers and producers. These may include impacts on food safety, agricultural productivity, worker safety, and rural livelihoods. Although rarely considered, the existence o f such social and economic spillovers can have a significant impact on the balance o f costs and benefits associated with capacity-building andcompliance efforts. These points suggest that standards for agricultural and food products need to be considered from a wider strategic perspective encompassing many elements o f development. Compliance decisions can have wide-ranging implications not only for market access and the efficiency o f resource use, but also for the livelihood o f vulnerable social groups and for wider processes o f economic and social change. It is also evident that there may be tradeoffs among the above objectives. Certain approaches may result in a rapid resumption o f market access yet entail considerable costs and exclude many producers and firms. In making strategic decisions about 36 compliance with new standards, choices have to be made about the relative importance o f these parameters and tradeoffs between them. Where the cost o f maintaining or gaining access to a particular external market likely exceeds the potential benefits, alternative commercial strategies should be carefully considered. The temporal dimension is important as well: It is important to consider not only immediate trade flows but long- range competitiveness andprospects for social change.27 This strategic approach to standards ininternational trade is distinct from short-term "fire fighting" inresponse to immediate problems. Immediate problem-solving is inevitable in certain contexts, for example where a new food safety risk emerges that threatens market access, or when there is an outbreak o f a particular animal disease. Yet, many developing countries have no strategic framework at all for SPS management and merely seek to cope with or react to emerging events. Ideally, standards-related compliance should be incorporated into broader policymaking and capacity-building decisions related to competitiveness in international markets. Efforts to respond to standards should be proactive-they should look ahead to how requirements are likely to change inthe future and incorporateresponses inlong-term development efforts.28 3.3 Strategic Options: Exit, Voice, and Compliance Table 3.1 presents a simple conceptual framework to characterize alternative strategic response to standards. This scheme draws on the concepts of exit, loyalty, and voice developed by Hirschman (1970).29 In this case, however, we use the term compliance rather than loyalty. The pro-activity-reactivity dimension relates to the time when efforts to comply commence. This framework can be employed to assess the impact o f capacity- buildingefforts; as capacity-building can be seen as an attempt to maximize the strategic options available to both government and theprivate sector in developing countries when faced with new standards and, more particularly, the ability to employ strategies that generate gains in competitivenessand wider economic and social outcomes. 27 A common view is that the compliance process should be stretched out over time so as to facilitate restructuring and minimize or delay negative impacts on vulnerable groups. Delays in compliance, however, can be more detrimental than early compliance to the very groups that policymakers are trying to protect. Because many actors, especially the most vulnerable, may have problems moving quickly because of limited access to expertise and capital, and institutional inertia, the most appropriate strategy may be to stagger compliance with clearly defined deadlines and to develop system-wide capacity that enhances stakeholder abilities to respondto standards, as and when they arise. This perspective contrasts with the approaches o f many donors to standards and trade-related assistance, which are typified by efforts to solve problems as and when they arise (see Chapter 6). Many developing countries share that perspective, focusing on coping strategies. Fromthis perspective, decisions are limited to micro details, for example, which type o f testing apparatus to install ina laboratory. 29Hirschman's framework was used to examine economic and political behavior as responses to the decline o f firms, organizations, and states. Depending upon the context, exit could involve leaving an organization, emigrating, or ceasing to buy a company's products. Voice involves protest, lobbying for changes inrules and laws. For Hirschman, loyalty involves deepeningone's participation in and alignment with an entity's goals andprocesses. 37 Reactive Proactive I I I Exit 1 Wait for standards and give up Anticipate standards and leave particular markets Compliance Wait for standards and then comply Anticipate standards and comply ahead o f time Voice Complain when standards are applied Participate instandard creation or negotiate before standards are applied Inmany dialogues on standards, especially relating to developing countries, the implicit single strategic option is compliance. Countries (or, more accurately, suppliers) are expected to comply with the standards being implementedby government or the private sector inmajor export markets. The effort to comply can be made at the time a standard comes into force (that is, reactively), or ahead o f time (proactively), according to predictions about how standards are likely to evolve inthe future. All else being equal, a proactive approach affords greater potential to manage compliance in a manner that brings about strategic gain and minimizes detrimental economic and social spillovers. A proactive approach may afford the opportunity to choose among a variety o f different technologies and organizational/administrative means to achieve the needed outcomes. Those acting early may also achieve so-called "first mover" advantages-for example with respect to earlier sunk costs and reputation effects, as well as the greater flexibility afforded by longer periods over which compliance can be pursued. Depending on circumstances, various steps may be taken inpursuit o f compliance. As the case study examples below will illustrate, they may include the following: 0 Legal andregulatory change 0 Reform o f institutional structures and responsibilities 0 Restructuring supply chains and increasing control over primaryproduction 0 Modifications inproduction, post-harvest, processing, and treatment technologies 0 Modifications in firm- and farm-level quality assurance and safety management systems 0 Strengthening o f information and surveillance systems 0 Technical and scientific research 0 Investments inphysical infrastructure 0 Strengthening o f accreditation and certification systems. The strategic options open to developing countries are not limited to compliance. Countries or individual private sector exporters can exit, choosing not to comply with the standards being imposed ina particular market. This implies switching customers, inthe case o f a private standard-or exiting export markets altogether. The firm or farmer may choose to switch to different products for which the needed risk-management measures are less problematic or costly. Such a strategy may be employed if compliance would 38 yield a fundamental loss o f competitiveness or very negative economic and social impacts, ifresources could be better spent elsewhere, or ifthere are profitable alternative markets that have less demanding standards. Exit should not be construed as a `loser's' strategy. Shifting product lines or market orientation may be a very prudent strategy to maintain competitiveness. Developing country governments and exporters can also adopt a strategy o f voice-to attempt to change the prevailing rules or respond to new standards by negotiating or protesting. For example, WTO members may raise complaints through a cross- notification in the SPS Committee (see below) or engage in bilateral negotiations with their trading partners about the specific actions required to achieve compliance. Individual exporters may question the requirements being imposed by their customers and attempt to come to a compromise that reflects their own circumstances and their customers' Inaddition to the two dimensions of Table 3.1, there are other ways to characterize the responses o f developing countries to new standards for agricultural and food products in international markets. One is to distinguish between defensive and offensive approaches. Defensive strategies are those aimed at maintaining the status quo and minimizing the impact o f change. Those taking this approach are typically seeking to scale back the actions (and often also the investment) needed to achieve compliance. Defensive approaches are often pursuedunder conditions o f resource limitation and risk adversity. Offensive strategies involve attempts to use standards to gain competitive advantage, even where this may require additional investment beyond the minimum required to achieve compliance. A final dimension relates to the locus o f efforts to achieve compliance or exercise voice. Measures can be taken inthe public or private sectors, involving either individual entities (for example single firms, farms, or agencies), or through various forms o f collective action (Table 3.2). Where both the public and private sectors are adopting measures, the leadership or driving force behindthe process may come from either side. Individual Collective I I Public I Specific ministryor agency I Inter-ministerial task forces Government. to government memoranda o f understanding Multi-country SPS counter-notification Public-private Subsidies, co-financing Joint public-private sector task forces II Joint ventures I Private IIFirmand farminvestments I Trade and industryassociations Company codes o fpractice Grower associations Partnerships incoordinated supply chains 30In reality, it is likely that these strategic options are not entirely separable and that countries and exporters might adopt mixed strategic responses to emerging standards. Inparticular, voice i s likely to be adopted alongside compliance and even exit. Indeed, it is unlikely that voice alone would form the sole basis o f a strategic response to emerging standards. 39 Traditionally, relatively clear distinctions were made between aspects o f SPS management that lay in the domain o f the public sector (for example, regulation and laboratory testing capacity) and those that belonged to the private sector (for example, better hygiene controls inprocessing facilities). Increasingly, however, these boundaries are being challenged. For example, the potential role o f self-regulation through industry- level codes o f practice and o f commercial laboratories for product certification i s being re~ognized.~~ Further, there is recognition o f the potential efficiencies associated with collective and collaborative actions. These can include inter-ministerial task forces seeking to avoid duplication o f efforts where multiple tiers o f government are involved and trade and industry associations that build on the compliance investments o f individual enterprises. Collective action also can take place across the public and private sectors, for example, through joint task forces. More broadly, it is recognized that both the public and private sectors have a role to play in responding to new standards and that national standards capacity should be viewed from this per~pective.~~ Inthe context of this framework, the mostpositive andpotentially advantageousstrategy combines voice, proactivity, and an offensive orientation. Everything else being equal, this approach is most likely to turn the challenges associated with new standards into a competitive opportunity and to yield positive social and economic spill over^.^^ Capacity- building should strive to maximize the strategic options for developing countries and, more particularly, to enhance their ability to implement strategies that are offensive, proactive and involve negotiation. Many countries (and exporters) are not in a position to be "first movers"-anticipating emerging standards and taking early action to gain competitive advantage through compliance and differentiation. Relatively small or weaker countries, industries, or firms 3' Inrelation to food quality assurance and SPS management, relatively few fimctions can be considered pure public goods. Examples include the maintenance o f pest- and disease-free zones, border inspection and quarantine for plant and animal diseases, and epidemiological surveillance. These generally needto be carried out or coordinated by the public sector. Yet, a broader set of market failures may arise inrelation to quality, food safety, or agricultural health because o f inadequate or asymmetrically distributed information, the existence o f externalities, or the presence o f economies o f scale. To overcome these market failures, periodic or sustained public interventions may be needed. In some cases, direct public investment in facilities or services would be an appropriate response. Yet other types o f interventions-including education, information, regulation, or more direct facilitation o f private actions-may be more suitable and effective. There are many institutional models for managing quality and SPS hazards, the suitability o f which will vary among countries depending on their legal and administrative structure, and level o f commercial development, geography, prevailing education levels, and so on. 32 The lack o f effective coordination o f SPS strategy development and implementation-in government, in the private sector, and especially between government and the private sector-is a commonproblemamong developing countries, compounding the challenges associated with standards compliance and weakening the potential to exercise influentialvoice on a bilateral or international level. 33 Conversely, the most negative approach (which one can hardly call a strategy) is a combination o f exit, reactivity, and defensiveness. Indeed, there may be considerable costs associated with such an approach if it means sacrificing public and private investments made to enter the market that has been lost, as well as the social and economic consequences o f the disintegration o f supply chains oriented toward export markets. 40 may lack the requisite contacts, information, experience, or financial resources to be "first movers." But should second movers aim to mimic first-mover strategies, along the lines discussed above, or would other responsesbe more advantageous? Second movers can certainly learn from the successes and mistakes o f the first movers, adapting or modifying their practices to suit their own circumstances and offsetting the risks and costs incurred. Second movers also can ride on the coattails of others in the realm of voice, playing a supportive (but less costly) role in pertinent complaints to the WTO's SPS Committee or vis-&vis particular trading partners. Second movers need not be passive or defensive. They should still strive to be proactive in developing and implementing trade-related SPS management strategies. The resource constraints that they face make it even more imperative that clear priorities be set and collaborative actions pursued. 3.4 Evidenceon the Strategic ApproachesAdopted by DevelopingCountries The literature analyzed and the research done for this report provide some evidence o f the strategic approaches used by the private sector and governments in developing countries when faced with new standards for agricultural and food products in international markets. The evidence from preexisting literature and data mainly shows how developing countries have responded to evolving food safety and agricultural health standards at the international level-through the WTO and participation in international standard-setting organizations. Each o f these avenues will be briefly discussed. Subsequently, various experiences from our own case studies will be examined. 3.4.1 International Voice' ` The number and nature o f complaints and counter-notifications made through the SPS Committee o f the WTO i s a good indicator o f the degree to which developing countries are able to make their voice heard when new standards are proposed by trading partners. Admittedly this i s a rather reactive mode o f voice, yet our analysis i s constrained by the lack o f data on other responses, such as bilateral complaints and negotiations. Developing countries have made frequent use o f the formal review and complaint processes o f the SPS Committee since its inception in 1995 to register their concerns with respect to a significant number o f notified measures, both by industrialized and other developing countries. Table 3.3, an updated version o f information provided in Roberts (2004), summarizes the pattern of counter-notifications by regulatory goal and the country group raising the issue or being the target o f a complaint. 41 Regulatory goal of contestedmeasure Complaints against Plant Animal Human Other* Total measures of health health health Number of complaints by developed countries Developed countries 18 11 49 3 81 Developing countries 19 15 41 4 79 Multiplecountries - 2 1 - 3 Subtotal 37 28 91 7 163 Number of complaints by developing countries Developed countries 14 14 38 2 68 Developing countries 8 19 7 2 36 Multiplecountries 1 2 - - 3 Subtotal 23 35 45 4 107 Total 60 63 136 11 270 Note: Includes complaints about horizontal regulations(such as those regulatingproducts o f modem biotechnology that reference human, animal, andplant healthas objectives. Source: Roberts(2004), updatedwith results from 2003. A more detailed look at the individual complaints yields a more complex picture. Complaints by developing countries are dominated by a handful o f emerging economies. Either Argentina, Brazil, Chile, or Thailand has been involved in the great majority o f complaints by developing countries. Each has issued or supported more than a dozen complaints, with Argentina alone being involved inmore than a quarter of all developing country complaints. Only a handful o f other countries, including Uruguay, Philippines, South Africa, Ecuador, and India, have been involved in multiple cases. The pattern o f participation seems to reflect the prominence o f certain countries in the trade o f a few product categories, especially beef and horticultural products, rather than the overall structure o f developing country agricultural and food trade.34 Low-income countries are weakly represented in the pool o f counter-notifications, issuing or supporting complaints inonly five cases. While this couldpartlybe a reflection o f the structure o f their exports, which are concentrated in commodities for which food safety and agricultural health measures are o f lesser importance, it likely also reflects their limited capacity to participate in the SPS Committee. It is unlikely to be the case that their lack of formal complaints signifies that they have been very successful in resolvingtheir concerns through bilateral negotiations. '4 A large proportion o f the counter-notifications for animal health measures have highlighted inconsistencies between national and international (such as OIE) standards for FMD controls (for beef and pork) and those related to BSE (especially for meat by-products). Many o f the counter-notifications pertaining to plant health point to the absence o f proper risk assessments in relation to pests and diseases afflicting horticultural crops. For food safety, the majority o f counter-notifications point to the absence or weaknesseso f scientific evidence for the proposedmeasures. 42 Some interesting patterns can be observed from Table 3.3. First, in relation to plant and animal health, developing countries have issued almost as many complaints against their peers as against developed countries. The majority o f the former involve complaints against neighboring countries or others in the same region, suggesting weaknesses o f some regional organizations to harmonize standards or otherwise resolve standards- related disputes. Argentina has complained against 12 developing countries, including 9 inLatinAmerica, primarilyinrelationto measures to control against FMD.Second, the vast majority o f developing country counter-notifications for food safety measures are against developed countries. The European Union alone is the subject of two-thirds o f these complaint^.^^ The growing number of recorded complaints or counter-notifications by developing countries, however, provides only a crude indicator o f the extent to which they are able and willing to exhibit voice. These complaints probably represent the tip o f the iceberg, with a greater proportion of concerns and disputes being raised bilaterally. At the same time, however, it could also indicate that developing countries in general (and the least developed countries in particular) lack the capacity to complain or negotiate when new standards are applied. Further, the apparatus o f formal complaints through the WTO relates only to mandatory standards set by public agencies. As noted in Chapter 2, a growing array o f standards are being set privately, either through consensus within particular industries or by the gatekeepers o f the dominant supply chains. While many such standards are ostensibly voluntary, they are becoming the de facto standards for trade. Compliance i s required to gain or maintain access to particular buyers or market segments. Voice relating to such standards will manifest itself through private bilateral negotiationsbetween supplier and customer-unobserved by outsiders. The ultimate form of voice a developing country can exert through the WTO is to pursue a complaint through the WTO Dispute Settlement Body (DSB). Initially, a member requests a formal consultation in an attempt to rectify the problem. To date, o f the 28 requests for consultations submitted in relation to SPS measures, seven have been made by developing countries-the Philippines, India, Ecuador, Thailand, Argentina and Nicaragua. Only two o f the consultations requested by developing countries have proceeded to the establishment o f a dispute settlement panel; these involve the Philippines (against Australia) and Argentina (against the European Union). Largely, this reflects the very significant cost o f pursuing a complaint, which i s likely to extend to an appeal. Although a mechanism has been put inplace to reduce these costs (Box 3.1), the benefits from such a strategy promise to remain both limited and uncertain. Indeed, bilateral negotiationswith trading partners are likely to be more fruitful. ''There are several reasons for this. First, the process o f harmonizationhas often resulted inthe adoption o f the most stringent standards previously applied by individual member states. Second, the European Union has frequently embraced the precautionary principle when adopting standards in the context o f scientific uncertainty. Third, the complex administrative structure o f the European Community makes it difficult for countries to resolve differences with member states through bilateral discussions. 43 BOX3.1 TECHNICAL ASSISTANCEAND REDUCINGTHE COSTSOFVOICE: THEROLEOF THE ACWL The Advisory Centre on WTO Law (ACWL) is a public international organization independent o f the WTO. I t was established in 2001 to provide legal advice on WTO law and support in WTO dispute settlement proceedings. WTO member countries (or countries inthe process o fjoining) that are designated by the UnitedNations as "least developed" may use the services o f the ACWL without belonging to the center as members. Other developing countries can join as members. Member countries are classified according to their share o f world trade, with an upward correction reflecting their per capita income. This classification determines their contribution to the Endowment Fundand the rate o f fees payable for services rendered by the ACWL. a Inits short existence, the ACWL hasprovided legal advice to developing countries inmore than 30 cases. In some cases, this advice has been giveninthe context of informal dialogues or bilateral consultations. Sound legal advice, including determining whether a measure could be inconsistent with WTO rules, may provide incentives for the other party to reach a mutually satisfactory result and thus spare the developing country the time and cost of pursuing more formal dispute settlement. Thus far, the ACWL has provided advice in two SPS-related cases that went as far as a dispute settlement panel. Inboth cases, the ACWL representedthe Philippines against Australia. A private lawyer specializing intrade disputes may charge $350 to 400 per hour. ACWL's fees are on a sliding scale, with least developed countries (LDCs) paying the equivalent o f $32/hour and many other low-income countries paying $130/hour. Cases involving technical or sanitary standards are considered by the ACWL as generally being o f "high complexity," requiring application o f technical expertise and scientific evidence. The level o f advisory effort in such cases may go as high as 127 hours for bilateral consultations, or 411hours where dispute settlement panels are involved. A further 168 hours is typically involvedshould the case go to an appellate body. Hence, for an LDC, the maximum fee that the ACWL would charge for a consultation would be $4,064. Should the case be referred to a panel, the additional cost could go as high as $13,152, whereas a case that subsequently went to an appellate body could involve an additional $5,376. Thus, if the dispute went through the full cycle the total charge would be $22,592 for an LDC-a very modest cost for high-quality legal advice, provided the dispute is o f some economic importance to the country. The fee structures for other developing and transition countries are somewhat higher. Depending on the country, the maximum fees for the ACWL to advise ina bilateral consultation process would be between$16,500 and $33,000. The ACWL is a new, yet important unit that answers the needs o f many members. The organization facilitates the use o f the rules o f the WTO in the favor o f poorer members. It provides legal aid at affordable fees for poor countries, and, inso doing, increasestheir voice and legal bargaining position. a) The countries are divided as follows: Category A-Hong Kong and China. Category B-Colombia, Egypt, India, Mauritius,Oman, Pakistan,Philippines,Thailand, Turkey, Uruguay, and Venezuela. CategoryC-Dominican Republic, Ecuador,Guatemala, Honduras, Kenya, Latvia, Nicaragua, Panama,Paraguay, Peru, Jordan, andTunisia. Data are available on developing country participation in international standards-setting organizations in the area o f food safety and agricultural health, notably the Codex Alimentarius Commission (Codex), Office International des Epizooties (OIE), and the International Plant Protection Convention (IPPC). These data provide some evidence o f the degree to which developing countries are able to exhibit voice at the international level through participation in the development o f international standards. Around 80 percent o f developing countries are members of Codex and the OIE, but only 55 percent are signatories to the IPPC (Henson and others, 2001). Their participation in the main decision-making bodies o f these organizations i s generally very limited. The Codex commission meets once every two years in Rome or Geneva. In 2001, about 49 percent 44 o f developing country members participated. In the IPPC, the main decision-making body is the Interim Commission on Phytosanitary Measures (ICPM), which meets annually in Rome. In 2001, just 41 percent o f developing country contracting parties participated. The Intemational Committee o f the Om, which meets annually in Paris, typically has much higher levels o f participation by developing country members. In 2001,around 80 percent participated. Regular participation by developing countries in Codex is typically limited to a group o f large or middle-income countries including Argentina, Brazil, Chile, China, India, Malaysia, Mexico, South Africa, and Thailand. Although some other countries, such as Egypt and Kenya, have made efforts to enhance their participation, most developing countries attend meetings irregularly at best. Further, although the biannual Commission meeting is the forum in which standards are approved, standards are actually developed incommittees that generallymeet onanannualbasis. Developingcountry participationin these meetings is typically very low, suggesting that, even when developing countries participate ininternational standard-setting organizations, they do so ina reactive mode. It is evident that many developing countries face considerable constraints that limit their participation inboth the SPS Committee and intemational standard-setting organizations. That limited participation, in tum, limits their international voice. In many cases the necessary resources are not available to attend multiple meetings each year, most o f which are in industrialized countries. In the case o f the WTO, a number o f smaller countries do not have permanent missions in Geneva. Further, even when attendance at meetings is possible, many countries lack the technical know-how and experience to use these forums to address their needs. For example, they may not be able to assemble the dossier o f scientific evidence required to counter the positions o f the major industrialized countries. 3.4.2 National ComplianceStrategies Concrete and in-depth evidence o f strategic approaches adopted by developing countries to comply with standards for agricultural and food products in intemational trade i s provided by the case studies carried out in the World Bank research program, and by some previously published studies. This section examines three commodity sectors in turn, looking across the country cases to compare and contrast the strategies that have been employed. Fish andfishery products The case studies examined the fish and fishery products sectors o f India (Kerala State), Kenya, Nicaragua, Senegal, and Thailand. Although these countries differed in the products they exported (shrimp from Kerala, Nicaragua, and Thailand; fin fish from Kenya and Senegal) and inthe destination o f their exports, they do allow for comparison o f strategic approaches to compliance with evolving food safety standards, most notably related to hygiene in fish processing and controls on antibiotics in aquaculture production. Some of these countries have faced export bans and other food safety problems. All have faced demands for enhanced food safety controls throughout the 45 supply chain. The supply chains under scrutiny were generally operating below capacity; the standards used in their processing facilities differed markedly. All were facing growing competition andprice pressure that challenged their market position. The dominant approach o f the five study countries has been reactive, compliant, and defensive-both in government and the private sector (Table 3.4). Thus, hygiene and antibiotic controls have been upgraded largely in response to regulatory change in the European Union and UnitedStates, or upon demand from major customers. InKenya and Senegal, little action was taken until the European Commission sent inspectors, which in Kenya's case led to restrictions on sales to the European Union. In Kerala, the Indian government had undertaken some initial reforms o f its regulatory framework, yet these were insufficient to comply with the European Union's requirements. Inthese three cases the substantive drive to upgrade hygiene controls occurred suddenly (Box 3.2). Across all o f the countries there were examples o f exporters who adopted proactive and offensive strategies; these firms had seen the overall direction o f food safety standards and made substantive efforts to upgrade their controls to meet those standards ahead o f their competitors. While inmost cases they represented a relatively small part o fthe total industry, they clearly stuck out as leaders. At the same time, however, some processor/exporters exited the industry altogether in response to stricter controls, while others refocused their business on other markets with lower standards. Standards-related pressures were not the only reasons to exit. Other factors, including resource management and broader competitive and capacity pressures, compounded the problem o f generating the investments needed to comply with the new standards (Box 3.3). The cases o f India, Kenya, and Thailand showed some attempts to exert voice, although inareactive anddefensive modeinresponse to restrictions already imposedor threatened by the EuropeanUnion. Both the government and industrywere involved insuch efforts, which clearly were designed to `fight fires'. While ongoing negotiations may have taken place between individual exporters and their customers, none o f the exporters interviewed alluded to these, which implies that they were not a major element o f strategic responses to evolving standards. While the five case study countries differed significantly in size and income, their response to evolving food safety standards was broadly similar; most responses were compliant, reactive, and defensive. There was very limited evidence o f voice; where it was used, it was generally in crisis mode, in response to impending or prevailing restrictions. But some exporters-clearly market leaders-had seen the drive toward higher standards and made advance efforts to comply. They gained market share as a result o f their efforts. Finally, the imposition o f standards and the impacts on the structure and modus operandi o f the export supply chain reflected prevailing market conditions and economic and competitive pressures. This suggests that some o f the changes observed inthe case studies, inparticular the decisions by some firms to exit the market, were attributable inpart to other factors. 46 . Reactive Proactive Exit Some processors have ceased production since imposition o f higher hygiene standards. Compliance 0 Substantive efforts to comply with hygiene requirements Some initial attempts to reform occurred after inspection mission by European regulatory controls prior to European Commission. Commission inspections Some processors had seen drive toward higher hygiene standards and builtiupgradedtheir plants (offensive). Voice Complaints to European Commission and member states over border detentions caused by antibiotic residuesibacterial inhibitors. Kenva Exit 0 Some processors have ceased production since imposition o fhigher hygiene standards Compliance 0 Virtually all efforts to comply with hygiene requirements occurred after inspection mission by European Commission. Voice 0 Joint government-industry mission to European Commission once restrictions imposed Exit Some processors have ceased production since imposition o f higher hvgiene standards. Compliance Substantive efforts to comply with hygiene requirements Some processors had seen drive toward occurred after inspection missionbyEuropean Commission higher hygiene standards and and were induced by donor assistance. builtiupgradedtheir plants (offensive). Thailand Exit Some processors have ceasedproduction since imposition o fhigher hygiene standards. Compliance Substantive efforts to implement controls on antibiotics Some initial attempts to reform occurred after restrictions imposed by EuropeanUnion. regulatory controls prior to European 0 Most processors upgraded their hygiene standards in Commission inspections response to regulatory changes in the United States and Some processors had seen drive toward European Union, or upon demands from major customers. higher hygiene standards and Substantive upgrades o f govemment laboratories came in builtiupgradedtheir plants (offensive). response to EUrequirements. Attempts to implement good aquaculture practice before problems with antibiotic residues occurred (offensive) Voice Joint government-industry mission to European Commission once restrictions were imposed over antibiotic residues Nicaragua Exit I One processor ceased production after imposition o f higher 1 h 'ene standards, alon with other factors Compliance Substantive efforts to upgrade controls came after regulatory Some processors had seen drive toward change in United States higher hygiene standards and Most processors upgraded their hygiene standards in builthpgraded their plants accordingly response to regulatory changes in the United States, (offensive). Source: BackgroundreflectedCase Studiesdemands from ma'or customers. in 47 IBOX 3.2 REGULATORY CHANGESAND PRIVATE SECTORSTRATEGIESININDIA-FISH AND FISHERY PRODUCTS 1India has faced many challenges inmeeting hygiene requirements for fish and fishery products inits major export markets. Although the processing sector expanded rapidly inthe 1990s, local hygiene controls did not keep pace with emerging requirements abroad. Some new facilities had high standards o f hygiene, yet many existing facilities needed upgrading. Even some new plants were not compliant with EU requirements. Inspections by the European Commission inApril 1997 identified significant shortcomings. Even earlier, the Commission had voiced skepticism that the large number o f plants included on the list o f facilities approved by the Indian authorities could actually meet EU requirements. Following inspections, the European Commission banned imports o f fresh crustaceans and cephalopods and imposed border testing for frozen products. Subsequently, all exports of fish and fishery products from India to the EuropeanUnion were banned inAugust 1997. BetweenAugust andNovember o f 1997,the Indiangovernment made great efforts to reform its food safety controls and achieve compliance with EU requirements. Thus, when the European Commission undertook further inspections inNovember 1997, it considered the controls that were inplace to be equivalent to EU legislation. The ban on exports was lifted in December 1997. The Indian government improved hygiene through the imposition o f draconian measures, requiring, for example, that all preprocessing operations be integrated into processing facilities and imposing strict limits on approved output according to plants' capacities for water, ice-making, and effluent treatment. Processing facilities experiencing a border detention inthe EuropeanUnionwould automatically be subjected to closer scrutiny. Alongside such regulatory measures, the Marine Products Export Development Authority (MPEDA) has implementedprograms to support improvements inhygienic controls and other food safety practices infish processing. These include subsidy programs for upgrading processing facilities and training managers and workers through the supply chain. Many enterprises made significant investments to upgrade their processing facilities and implement stricter hygiene controls. Some plants didthis proactively, anticipating the need to operate to stricter hygiene standards and building such considerations into the design and operation o f new or upgraded facilities. Others waited until the national government required them to improve their operations. Some that were unable to fund the required investment either exited the sector or reliedon working capital, compromising their ability to source raw materials. It is widely recognizedinthe fish processing sector that, for smaller exporters, two or three rejections can doom a company. So many processors have made efforts to spread their risks by diversifying their market base between the European Union, United States, and Japan. Some have diverted sales to less challenging markets such as China, the Middle East, and Singapore. Others have attempted to diversify their business or relied on other activities. For example, a number o f the larger fish processors also operate in the hotel, travel, shipping, and construction sectors, as well as other food product sectors. Although compliance with enhanced food safety requirements has imposed a burden on fish processors, some major players in the sector have gained. Inparticular, processors that already had high standards o f hygiene or that made improvements earlier benefited from premiumprices and lower competition for raw product while the number o f EU-approved facilities was still limited. These "first movers" were able to repay their debts at an earlier stage and offset them against greater returns. Very few o f the facilities that delayed compliance are performing well; most are struggling to repay loans while operating under conditions o f lower margins and struggling to pulltogether the working capital to source raw material. Fishprocessors have acted collectively through the Seafood Exporters Association of India (SEAI). The SEAI has been instrumental ina model infrastructure project that will link preprocessing units to common water, ice, and effluent facilities. The facility includes modern laboratory facilities that will have the capacity to perform the full range o f microbial and chemical tests requiredby exporters. The SEAI has also proposed an export cluster-featuring new landing facilities, water and ice supply, and effluent treatment- inordertoimprovehygieneinthe shorelandingoffish. Source: Henson and others (forthcoming) 48 IBox3.3 CAPACITY ISSUES PROCESSINGSECTOR INKENYA'S FISH The industrial fish processing sector emerged inKenya in the early 1980s. By 1987 ten factories were operating. At that time, no facilities had been established inTanzania or Uganda, and Kenyan processors sourced fish in all three countries. Processing capacity continued to expand in the early 1990s, with the number of facilities peaking at 15 in 1995. The rapid growth o f the industrial fish processing sector was motivated by rising demand for Nile perch inexports markets, particularly the EuropeanUnion. However, after peaking inthe mid-1990s, exports beganto diminishbecause o f overfishing andpoor quality. By 1997 the sector as a whole was operating at 55 percent o f its 380 todday capacity. Three factories accounted for more than halfo f total operating capacity. Inthe 1990s, it became evident that the rapid expansion of the Nile perch fishery was not sustainable. Catches began to decline despite continual increases in fishing effort. Supply problems were initially overcome by sourcing outside Kenyan waters. There was evidence o f significant "undocumented" exports of fish from Tanzania and Uganda. Several operators established sister factories in Tanzania or Uganda, which they used as a source o f supply o f raw or semi-processed fish for their Kenyanplants. Such border movements have now beenstopped through concerted action by the three governments. The sector as a whole is characterized by low levels of added value. Most exports are inthe form o fblock frozen bulk packs o f semi-processed filets-a problem given the increasing constraints on the supply o f raw Gsh. Some processors have explored opportunities for value-added products or made attempts to diversify into other sectors-for example, bakery products, meat, and ice cream. Gross margins remain low and extremely sensitive to the landedprice o fNile perch. In 1997, the hygiene standards of fish processing plants in Kenya became an issue after a series of inspection visits by the European Commission found nonconformity with its requirements. Many plants had been converted from premises built for another reason, including the manufacturing o f nonfood products. Their suitability and general level o f repair varied greatly. Further, although most plants claimed to be aware o f regulations in the European Union and to have complied with them, there were significant differences inthe extent to which they had actually implemented the EU-required standards o fhygiene and quality management. Over the period 1998-2002, significant efforts were made to raise hygiene standards to comply with EU requirements. When the European Commission again conducted inspections inMarch 2002, i t found that most facilities met the requirements o f EU legislation, with minor exceptions. Some fish processing facilities that were unable to upgrade their fac es exited from the sector. Typically, these facilities had been operating at very low levels o f capacity and were unable to offset the additional costs o f compliance through increases inproduction volumes or value-added. The reactions o fthe fishprocessing sector inKenya to the hygiene requirements o fthe EuropeanUnioncan be characterized as reactive compliance and reactive exit. There is little or no evidence o f voice. The strategic options of all firms inthe sector were constrained by shortages inthe supply o f raw materials and limitedpossibilities for adding value. While those factories that remainhave beenable to gain from the exit o f other operators, their ability to exploit the potential benefits from more proactive strategies was constrained by the economic realities o fthe sector. Source: Henson andMitullah (2004) 49 IBOX3.4 ANTIBIOTICSINFARMED SHRIMP: RESPONSESBYTHAILAND'S GOVERNMENT AND INDUSTRY In November 2001, the Greenpeace environmental group reported that canned shrimp products from Thailand had tested positive for chloramphenicol (a banned antibiotic thought to cause leukemia inone out o f 20,000 exposed people). The report was based on analysis o f samples pulledrandomly from supermarket shelves in Austria. Product recalls from retail distribution channels followed, causing confusion among wholesalers, processors, and importers, who had received no guidance from authorities on dealing with such situations. OnMarch 14,2002, Thailand's competent authority for animal products, the Department o f Livestock Development o f the Ministry o f Agriculture and Cooperatives, was informed that trace amount o f nitrofurans (banned, carcinogenic anti-microbial drugs) had been found in chilledifiozen shrimp and prawn imports from Thailand. Under the EuropeanUnion's zero tolerance rules for banned chemicals, any product found contaminated with the banned antibiotic was subsequently destroyed. The destruction resulted inmonetary losses and eroded client confidence. All Thai shrimp products entering the European Unionwere subjected to inspections thereafier. To resolve the drug residue problems, the private and public sectors took several remedial actions. For example, inan effort to minimize the use o f chemicals and reduce the chance o f leaving residues inshrimp harvests, farmers adopted two strategies. First, they switched to a more disease-resistant shrimp strain (P. vannamei ). Second, they adopted probiotic farming, which makes use o f a microbiological formulation to clean ponds o f feed wastes and adds nutrientsto farmed shrimp. At the same time, shrimp exporters adjusted their procurement arrangements. The trend now is to use 'product-quality segmentation in supplying different markets. Large exporters normally procure products destined for the high-end markets from trusted suppliers or from their own farms. For their less critical consumers, exporters procure raw materials from new suppliers or the central market. The Thai government, too, has taken steps. It has substantially tightened controls over the import of chloramphenicol, for example. The Department o f Fisheries formed a special committee to carry out periodic inspection inshrimp producing provinces to prevent the use o f chloramphenicol and other banned chemicals. DOF representatives are now inspecting shrimp to ensure that they are free from contaminants before sale. DOF has urged shrimp farmers to adopt a code o f conduct to ensure product safety from farm to table. Extension work has been intensifiedto educate farmers on the use o f chemicals and the adverse consequences o fusingbanned chemicals. Source: Manarungsan and others (forthcoming) Horticultural Products and Spices The research work undertaken for this study included case studies related to horticultural and spice subsectors in India, Jamaica, Kenya, Morocco, and Thailand. The Kenyan and Moroccan horticultural industries are oriented to the EU market; the Jamaican horticultural industry is centered on the United States and secondarily the United Kingdom; the Thai vegetable industry i s oriented to the Japanese and European markets; and the Indian spice industry trades globally. In each case, producers and exporters have long been required to comply with quality parameters and to meet demands in terms of supply continuity, seasonality, and so on. Over the last decade, each market has faced more explicit and increasingly stringent food safety and phytosanitary requirements, coming from official regulatory agencies and private buyers. 50 Reactive Proactive regetables Exit Some farmers have switched to supplyingprocessors or the domestic market Some exporters have shifted focus from the European Union to Middle East markets Compliance Segregation o f product sources and development o f Backward integration by leading exporters into traceability systems own farm production; some forward integration Publiclprivate awareness-raisingkraining in good into overseas distribution (offensive) agricultural and pest management practices Development o f industry codes o f practice Upgrading o f staffing and systems for food safety related to product safety, environmental management inpackinghouses management, and social issues Upgrading o f govemment inspection and laboratory Expansionlmodemization o f packinghouses, testing capacities includinghigh-care facilities (offensive) New product R&D Intensification o f out-grower oversight and requirements India-! Exit Exporters withdraw from certain markets where they cannot meet or guarantee pesticide residue standards Compliance Selective contract farming and intermediary vendor Packers adopt HACCP, I S 0 9000, and other screening management systems Govemment-led programs to raise farmer awareness Pilot initiatives on organic spice production about hazards and improve post-harvest (drying) supported by govemment and NGOs (offensive) practices More exporter emphasis on custom-made, value- Investment in cleaning, processing, and product added products (offensive) sterilization equipment Investment in laboratory equipment and broader range o f tests Voice Bilateral complaints on samplinghesting procedures Coordinated effort to establish additional MRL tolerances for pesticides used for spices Thailand-' getables Compliance Department o f Agriculture promotes good agricultural Shift to integrated and coordinated procurement practices in major production areas and away from open-market sourcing Implementation o f farmer registration system (bygovemment) for traceability Several firms enter into joint venture I partnerships with intemationalbuyers Jamaica-Fruits and Vegetables Exit Withdrawal from U.S. mango market as One major firm withdraws from fresh trade and phytosanitary measure i s not cost-effective and shifts to processed exports to avoid plant-health altemative market outlets exist and pesticide-residue issues Compliance Development o f one-stop facilities for product Several firms develop own papaya farms in inspection, fumigation, and certification response to widespread disease incidence on Implementationo f pre-approval system for exporters out-grower farms o f processed foods Implementation o f pre-clearance program with US. . - I I APHIS Voice Seeking MRL tolerance standards for yams through I Source: Background Case Studies 51 Each industry has faced challenges related to pesticide use and residues, plant health protection, and, to a lesser extent, microbiological hazards. Strategies have beendeployed to better control or monitor product/raw material sourcing, improve hygienic conditions and systems for quality and safety assurance in post-harvest and packing operations, address plant heath risks, and provide acceptable product testing and certification. The dominant approach to rising standards inthe four industries studied has been to strive for compliance (Table 3.5). In contrast with the cases summarized above for fish products, several o f the horticultural and spice cases reveal a greater incidence o f proactive measures. In several cases attempts have also been made to influence the prevailing standards. Some producers and exporters have exited certain markets or supply chains rather than invest incompliance. The emerging standards have put pressure on exporter/processors to adjust their procurement arrangements or at least intensify their oversight o f those arrangements. Three approaches have been common: backward integration into farming; contractual coordination; and modified open sourcing with increased prescreening o f vendors and producers. In several cases, these have been supplemented by programs to increase farmer awareness o f food safety risks and promote good agricultural practices and post- harvest methods. InKenya, exporters traditionally procured their supplies through a combination of loose contracts with small and larger farmers and daily open-market purchases with cash. Because most sales were to overseas wholesale markets, and because freight space availability was uncertain, exporters wanted to retain flexibility. However, following shifts to seasonal contracting o f chartered air-freight services and greater reliance on sales to supermarket chains that demand reliability, product safety, andtraceability, the leading exporters were obliged to greatly increase their control over product sourcing. Beginning in the mid-l990s, many of the leading firms leased or purchased land to develop their own farms, using them to supply their core needs for major clients and to experiment with new crops. Continued supplies from smallholder out-growers were segregated and channeled to less demanding clients. Larger out-growers provided supplemental supplies. More recently, several o f the leading Kenyan firms, aided by support under the EU- financed Pesticides Initiatives Programme (PIP), have moved to expand their smallholder out-grower arrangements, with more intensive grower oversight and product traceability (sometimes through grower groups). Certain companies have developed their own codes o f practice to govern their relationships with smallholders, with detailed provisions for farmer conduct and company supervision o f land management, agronomic practices, pesticide use and disposal, hygiene and safety, and labor and environmental standards. Most smaller exporters generally lack a field presence, however, and some have come to rely on a product sourcing system run by a government agency. That.program provides some awarenesstraining for farmers and geographic (but not farm-specific) traceability. In Thailand, where large tracts of suitable land are difficult to find in many regions, exporters have adopted a strategy o f intensifying their contractual relationships with smallholder farmers, typically through fanner groups, and relying considerably less on 52 open-market purchases. In doing so, they were facilitated by the Department o f Agriculture which established a farmer registration system that has enabled both exporters and the government to trace back produce found to be noncompliant with regulations on residues o fpesticides. Less significant product procurement shifts have occurred in the Indian spice and Jamaican horticultural industries. InIndia, the bulk o f spice production is consumed and marketed domestically. Relatively little production is specifically dedicated for exports. Traditionally, processor/exporters have sourced their supplies from primaryor secondary intermediaries-traders operating in or around the main production areas. Most o f the production i s by smallholder fanners, with perhaps 15 percent o f national production occurring on medium-scale farms. Vertical integration o f production and processing i s rare. With the increased attention in some markets to pesticide residues and aflatoxin contamination, exporters have modified their procurement arrangements. More radical changes have not been warranted, however, because the most demanding clients account for a very small share o f overall sales o f the pertinent spices.36In order to retain their position in demanding markets, a few exporters have moved to contract a proportion o f their supplies from individual farmers. Others have advised their vendors o f their requirements and more carefully monitored them. Some companies have purchased mobile testing kits to take into the field to test chilies for aflatoxin before committing to purchases. Certain companies, NGOs, and agencies o f government have sought additional ways to influence production practices through training days, promotion o f integratedpest management, and, insome locales, organic productiono f spices. Despite persistent and periodic problems with pesticide residues and plant pests and diseases, Jamaica's nontraditional h i t and vegetable exporters have made few changes intheir product procurement arrangements. Most operate on a small scale with limited staff and financial resources. The products they export are also staples in the domestic market. Their buyers abroad typically service Caribbean immigrant communities and place few demands on their Jamaican suppliers with regard to food safety or good agricultural practices. Product procurement remains informal and features various intermediaries who purchase the crops for resale to local distributors and exporters. A major exception is the papaya industry. Several exporters have dedicated supermarket buyers inthe UnitedKingdom that want a particular variety and demand compliance with good agricultural practices and packinghouse hygiene standards. This reality, and past experience with widespread viral and bacterial diseases, has led to some vertical integration o f papaya operations as well as technological innovations such as ozone treatment against anthracnose. 36For example, India produces over one million tons o f dried chilies. O f this, some 900,000 tons are consumed domestically, while the bulk of exports is sent to other developing countries where food safety standards generally are not yet applied. Generally less than 8,000 tons have been exported annually to the European Union, with a (small) portion going to Spain, Italy, and Germany, where Indian exporters have encountered product rejections on food safety grounds. 53 Hence, across the studied cases, various factors have affected how firms have adjusted their arrangements for procuring products. Those factors include the specificity o f demands for control and traceability from core clients, the size o f the firm and its financial and technical resources, existing landtenure and the nature o f land markets, and the availability and capacity o f public sector resources to support supply chain coordination. IBOX3.5 VOICE INTHE INDIAN SPICE TRADE Chilies are one o f the few spices produced inIndia for which agro-chemicals are commonly used. Chilies are vulnerable to a variety of pests and diseases, which canbe controlled only with agrochemicals and crop rotations. Chemicals are sometimes used inthe production o f coriander, fennel, and other seed spices, but rarely in the production of India's other major spices. While there have been periodic concerns or campaigns to address the risks that agro-chemicals pose to farmers and agricultural workers inIndia, until the 1990s there was not much concern over pesticide residues inspices. This began to change in the early 1990s in the context o f the European Union's program to harmonize permissible maximum residue limits (MRLs) in food products. Initially, questions about spices were raised by regulators and buyers in Germany. In 1994-95, several consignments o f Indian dried chilies were rejected by Spanish authorities because pesticide residues exceeded the permissible MRLs for freswgreen chilies. Discussions with Spanish authorities to apply a "multiplication factor" for pesticide residues in dried chilies were unsuccessful, and trade with that market subsided. In the late 199Os, additional consignments o f Indian chilies and other spices were rejected inEurope and elsewhere, frequently because no established tolerance level existed for particular pesticides and spices. There exist only a handful o f Codex standards for MRLs related to agro-chemical use on spices. Individual countries have set MRLs themselves, generally for particular spices grown in small quantities intheir own countries. For example, there are some 30-40 official MRLs for spices in the United States, Germany, Spain, and Australia-the majority related to a few individual crops. Yet these countries have hundreds or even thousands o f MRLs for combinations o f fruits or vegetables and active chemical ingredients. Most o f the spice andpesticide MRLsthat do exist vary between countries. India and other spice exporting countries are therefore vulnerable should regulatory authorities and private buyers devote more attention to pesticide residues. Inresponse, India has addressedpesticide use practices inits ownindustryandsought to influence the internationalrulesofthe game. Working inconjunctionwith the American Spice Trade Association, the European and Japanese spice trade associations, and several other parties, the India Spices Board and the All India Spice Exporters Forumestablished an International Organization o f Spice Trade Associations that obtained observer status at the Codex Committee on Pesticide Residues. Given the paucity o f established MRLs for spices grown in tropical countries, it was proposedthat new MRLs be established on the basis of monitoring data made available by both importing and exporting countries-far less costly and more practical than starting from scratch and undertaking multiyear field trials. This proposal was accepted in2002 by Codex's Joint Meeting on Pesticide Residues (JMPR), which has since issuedguidelines on how the data will be collected andused. With regard to chilies, a different approach has been taken. There are already more than 20 pesticides for which MRLs have been set inEurope, North America, or elsewhere in relation to fresh peppers. India has proposedthat a dehydration factor o f 10be applied to account for the magnification o fpesticide residues in dried chilies. Inother words, while the established MRL for carbaryl is 5 mgkg infresh pepper, it would be 50 mgkg in dried chilies. A similar approach has been proposed for other vegetables that are used as spices when dried (garlic, onion). Members o f the spice industry have submitted evidence to the JMPR to support the derivation o f dehydration factors. ISource: Jaffee (forthcoming) 54 Insome ofthe case studyindustries, significant changeshavebeenmadeinpackinghouse and pvocessov operations. For example, in Kenya, most fresh produce exporters traditionally operated out o f relatively simple warehouses, consisting o f concrete floors (for sorting), aluminum roofing, and rudimentary cold storage facilities. Quality control essentially involved re-grading and repacking produce. While one or two firms had somewhat more sophisticated systems, the above description represents the norm in the industrythrough the early 1990s. Over the past decade very substantial investment has been made inthe modernization and expansion o f packinghouse facilities and associated systems for quality assurance and food safety. Much o f this investment has been made by about a dozen companies whose business strategies have increasingly targeted Britishand continental supermarkets. These companies have made major upgrades to warehouses and packinghouses. So-calledhigh- care facilities have been built, dedicated to particular segments o f the business. Major investments have gone into air-conditioning and ventilation systems, water purification systems, forced air cooling systems, and a wide variety o f equipment to attain very high standards o f hygiene within the packinghouse operations. A few companies have also invested inon-site laboratories to test products and staff health. Accompanying the above improvements have been enormous changes in quality assurance and food safety management systems by the leading export companies. Each o f these companies has hired university-trained food technologists and scientists, adopted and refined HACCP systems and put in place other formal arrangements and documentation for improved quality assurance. For those firms with high-care product lines, this dimension o f their business involves very demanding systems for product testing, environmental testing (for example, daily water tests), and staff healthtesting. There also have been changes in staff relations and conditions to cover the social aspects of retailer codes. In the past, export firms mainly employed casual labor and provided only very basic training. Firms supplying the major supermarkets, and especially those dealing in high-care products, have increasingly employed workers on more extended contracts and have provided food safety and hygiene training, as well as health counseling. The larger firms have their own food canteens, small medical staffs, and clinics. Not all companies have been willing or able to transform their operations. Kenya has always had a large number o f small-scale and part-time exporters that coexist with the dozen or so industry leaders. At times, more than a hundred firms would be registered as exporters, yet inrecent years their numbers have declined. Still, there remain some 15-20 smaller companies with annual exports o f 100-500 metric tons per year. For the most part, these firms have made only modest changes to their facilities and systems and have continued to direct their sales to British or continental wholesale mkkets and the ethnic food market.37 37Some new entrants do not own a packing house but instead rent temporary packinglstorage space near the airport at a facility managed by the Horticultural Crops Development Authority. While this space is relatively inexpensiveit does not provide hygienic operating conditions. 55 IBox3.6 PERUVIAN ASPARAGUS EXPORTS: SUCCESSTHROUGH STANDARD^ 1Realizing that it was in the best interest o f the country, the leaders o f Peru's asparagus industry and government specialists worked together to bring Peruvian agricultural standards in line with international norms. Both the industryandPeruhave greatly benefitedas a result. Over the past decade, Peruhas quickly risen to become one o f the world's largest exporters o f asparagus. This is particularly true for fresh green asparagus, and to a lesser extent for fresh white asparagus and canned asparagus. In2002, export revenue for all forms and presentations reached $187 million, representing nearly 25 percent o f the value o f Peru's agricultural exports. Peru i s able to produce quality asparagus year-round, yet in certain seasons high air and sea transportation costs prevent it from matching prices with inexpensive asparagus from Mexico. Nonetheless, the Peruvians have continued to increase exports and gain market share during their main seasonby growing asparagus o f consistently higher quality that canbe internationally certified with respect to good agricultural practices, good manufacturingpractices, and HACCP. In 1997, Spanish healthauthorities assertedthat two cases ofbotulismhadbeen causedby consumption of canned Peruvian asparagus. Despite assurances from the Peruvian government and companies, press coverage o f the botulism scare left an unfavorable impression among consumers in European markets, causing sales to slump inPeru's leading market. The incident helped motivate the industryand government to take action, by reinforcing the fact that one careless (usually artisanal) exporter could disrupt markets. Beginning in 1998, officials o f the Peruvian Commission for Export Promotion (PROMPEX) convinced the asparagus industry to implement the Codex code o f practice on food hygiene. PROMPEX specialists worked with industry leaders and production managers to ensureproper implementation. The industry soon saw improved production and processing methods, as well as better product quality and safety. In2001, national fresh asparagusnorms were published. They provided aquality andperformance baseline for the industry that allowed many firms and farms to generate the skills and experience needed to be certified under stringent international standards. Many large exporters have reached the level where they can now be certified under the even stricter EUREPGAP protocol. Looking ahead, the Peruvian asparagus industry should be well positioned to adjust to new or more stringent requirements from its trade partners, based on continued strong leadership andpublic-private cooperation. Source: T. O'Brien, IICA, communication In India, the majority of spice exporting companies traditionally undertook very basic grading, cleaning, and packing operations. For black pepper, most operations were done by hand, with the pepper being shaken through sieves, hand-washed, sun-dried, and then hand-packed in sacks. Yet after a series o f product rejections in the mid-to-late 1980s, several companies invested in mechanical cleaning, washing, drying, and packing equipment, obtaining modest price premiums for the cleaner and better graded product. Subsequent regulatory concern about microbiological contamination o f black pepper in the United States served as a catalyst for investment in sterilization facilities by the leading companies. In line with broader changes in the international spices industry, in the mid-1990s a growing number o f Indian spice companies began to adopt HACCP, I S 0 9000, and other certified food safety or quality assurance systems. By 2003, some 14 companies were certified under I S 0 9000 and 19 companies were approved under the Indian Spices Logo, a program initiated by the Spices Board to promote good hygiene and manufacturing practices within the industry. Only firms earning the logo have been eligible for cost-sharing grants provided by the Spices Board for investments in factory equipment and laboratory facilities. With the emergence inthe 1990s o f concerns in some markets about pesticide residues and aflatoxin in chilies and 56 other spices, each o f the leading Indian spice companies established and expanded its laboratory facilities, while the Spices Board continued to build up its own laboratory testing capacities to serve smaller exporters and carry out surveillance activities. BOX3.7 ADDRESSINGCITRUS CANKER INARGENTINA Citrus canker was introduced into Argentina in 1928. By the late 1970s the aggressive Asian strain o f the disease was so widespread that eradication efforts were abandoned infavor of control methods. Argentina and Florida researchers developed a copper spray program, and windbreaks were planted to reduce the spread of bacteria. Yet the low returns to growers did not encourage the use o f adequate spray programs and eventually led to the abandonment o f citrus groves. Citrus canker bacteria built up in neglected grapefruit groves. By 1990, Asian citrus canker was considered endemic in Argentina. The high cost o f maintaining export quality in grapefruit and navel oranges (plus global oversupply), influenced citrus growers to switch to varieties less susceptible to canker, such as mandarins (Satsumas) and Valencia oranges. In1997,the EuropeanUnionplacedrestrictions on citrus grown incanker endemic areas. To export fresh fruit to European Union, it must be harvested from blocks certified to be canker-free, requiring multiple inspections during and after harvests. Certification increased grove-care costs because o f additional copper sprays and use o f more windbreaks. Packing costs increased with inspection fees and regulations that prohibited the co-mingling o f certified and non-certified fruits. All certification costs are currently charged to the citrus grower. Currently, the primary market for the citrus grown in the northeast provinces is Argentina's domestic market, although Argentina has been trying to develop the Asian market. The United States has amended its regulations and now allow limited importation o f citrus from four states in the northwestern part o f Argentina. The regulations allow the importation o f grapefruit, lemons, and oranges under certain conditions and with limited distribution. Source: Canteros (2000). Muraro and others (2001) Sanitary Control Strategiesfor Livestock As part o f the World Bank's SPS-related research program, a studywas commissioned on the approaches usedby the nations o f Latin America's Southern Cone to manage the risks (and trade relations) associated with foot and mouth disease (FMD). Selective attention was also given to other experiences highlightedinthe existing literature. Inthe pages that follow, we examine criteria for determining the most appropriate sanitary control strategies and review some recent experiences inapplying various strategies. When seeking appropriate sanitary control strategies, decision-makers need to consider several criteria. First, how effective i s the strategy? Second, how much does it cost compared to alternative strategies? Third, what are the prospects for spillover effects (for example, in increased productivity) onto the domestic industry? Increased benefits for local producers o f disease control or eradication are often the dominant factor in justifying the eradication o f a certain disease.38Fourth, what i s the market potential o f the product, leaving aside the disease control factor? For example, Sub-Saharan and South Asian countries might focus more on regional markets, with easier standards for FMD 38For example, in a country with a traditional, subsistence-oriented livestock sector, FMD i s not a serious production constraint; without a strong export potential, eradication o f FMD disease is not economically justified. 57 and other diseases, because the quality o f their beef cattle population would, at best, enable access only to lower-value markets in industrialized countries. Fifth, what are the underlyingcharacteristics o fthe disease-such as the length o f the incubationperiod, the level o f the infection, and the ease o f its eradi~ation?~~Finally, what i s the specific product involved? Live animals generally are more strictly regulated than processed food. Within processed food, higher levels o f processing are generally associated with lesser restrictions. BOX 3.8 ALTERNATIVEAPPROACHES CONTROLLINGENDEMIC TO ANIMALDISEASES When a country does not have an endemic disease, the main tool is mass vaccination, reducing the incidence o f a disease to localized levels, followed by a menu o f options as used ina disease-free country experiencing an outbreak o f an OIE ListA disease. These are summarized below. Quarantine and restriction o f livestock movements at the local, regional, or national level, in accordance with the severity o f the outbreak "Stamping out," which can be restricted to the destruction o f diseased animals but normally also includes animals that could have been in contact with the infected animal population (so-called susceptible animals) Ring vaccination or immunizing the population in an area surrounding the disease outbreak, often in combination with stamping out Vaccination o f the entire population, accepting that such a strategy might preclude access to some markets for a longer period thanunderthe stamping out and limitedvaccination strategies. Applying the above criteria, countries that experience an outbreak o f an OIE List A disease or for which one or more such diseases are endemic, have the following strategic options: Exit. Withdrawal from industrialized country markets, inparticular those for sensitive products (for example, chilled meat) to concentrate on markets with less stringent requirements, such as regional markets (for example the Gulf areas and East Asia), and less sensitive products (such as canned and other processed meats). Exit will be the most logical option for a country with products o f a quality and price below the standard o f the more demanding markets, and a disease that is not easy to Some cases have been observed o f temporary exit from certain markets during a disease outbreak, while diversifying into other markets. Argentina pursued this approach in2001 and 2002 (Box 3.9). 39For example, mad cow disease (BSE) generally requires a disease free-period o f seven years for a country to carry Status Ior I1(highly unlikely or unlikely, respectively). Incontrast, disease-free status for FMD requires only one year without disease outbreaks, in cases where the country does not vaccinate animals, and two years in cases where it does vaccinate. Most countries that are FMD-free without vaccination generally limit their imports o f fresh beef to other countries that are similarly classified. Exceptions may be made for cooked and processed beef. However, FMD is a much more contagious disease than BSE and is quite difficult to eradicate because there are multiple strains and the vaccine provides a relatively short period o f immunity. 40FMD in Sub-Saharan Africa, or example, belongs in this category. I t has limited effects on animal productivity in traditional systems, is difficult to control, and, even if controlled, yields products o f low quality. 58 e Limited compliance. Seeking to eradicate the disease in parts o f the country or for specific enterprises. Recent changes in the OIE standards, under the so-called compartmentalization allow countries to request disease-free status for parts o f the country or for specific enterprises. This would be a likely option for countries and diseases for which control would have a strong spin-off benefit on local production. Sometimes, favored by natural barriers, SPS control is relatively easy ina particular region, and enterprises capable o f following strict guidelines for trapping, sampling, and treating products, as well as maintaining records, can then access lucrative foreign markets. This was the preferred strategy o f the large integrated poultry and pig producers inThailand during the Asian bird flu outbreak in2003-04. They were able to control the disease by maintaining animals in a fully hygienic, closed system. 0 Strict compliance. Seeking disease-free status for the entire country, through combinations o f vaccination, movement control, and quarantine, and stamping out o f infected and susceptible animals. This is the preferred strategy for countries with good potential in industrialized country markets and for diseases that are relatively easy to control. The Southern Cone countries are pursuingthis strategy for FMD. e Voice. This i s generally employed simultaneously with compliance efforts. In principle, the International Committee o f the OIE, with delegates from the public veterinary services o f member countries, allows developing countries to participate in decision-making on international standards. Inpractice, however, the discussions are often dominated by representatives from industrialized countries, and the private sector is poorly represented. Moreover, accessing new markets requires a particularly highlevelo fvoice at the bilateral level, as shownbyArgentina (Box 3.9). Intheory, decisions about exit, compliance, andvoice should be based on a risk analysis, including a consideration of cost andbenefit. Establishedmethodologies for such analysis have been demonstrated in several developing countries (Perry, 2003). Yet in many developing countries the capacity to undertake it i s severely lacking. Various approaches were used in an effort to eradicate FMD from the Southern Cone o f Latin America and contagious bovine pleuro-pneumonia (CBPP) from Botswana (Table 3.6). The lessons emerging from these cases are as follows: e Lack o f capacity, but often political pressure on veterinary services, can lead to delaying the declaration by veterinary authorities o f disease outbreaks-r the downplaying o f their severity. Significant commercial interests may be at stake, or authorities may be unwilling to acknowledge that prevention measures have proven inadequate. Yet the advantage o f maintaining market access through denial is often more than offset by later losses inproductivity and trust in export markets. This has been shown for Argentina, as well as the recent case o f Avian birdflu inEast Asia. 4' A compartment is described by OIE as an autonomous epidemiological entity defied on the basis o f either geography (zone) or management (enterprise) for the purpose o f intemational trade. 59 IBOX3.9 ARGENTINA: MARKET SHIFTS ANDVOICE INANEMERGENCY The beefindustry inArgentina is an economically important sector, with exports averaging about US$360 million per year in the late 1990s. Soon after the OIE certified in 2000 that Argentina was free o f FMD without vaccination, the country experienced a new outbreak that spread rapidly throughout much o f the country. When beef exports to the UnitedStates and European Union were suspended, efforts to sell into alternative markets intensified. Exports were diverted to Eastern European, Middle Eastern, and Latin American countries, generally at considerably lower prices than those fetched in OECD markets. The average annual export value in 2000-03 was just US$ 170 million. Even the new markets were not easily accessible. Argentina had to challenge the sanitary regulations o f several countries. In 2001l2002, it submitted complaints to the SPS Committee regarding the FMD-related restrictions of Bolivia, Chile, Colombia, Indonesia, Mexico, and Venezuela, and it negotiated bilaterally with several other countries. Stamping out, in particular focusing only on diseased and susceptible animals in a limited area, often i s not enough. Farmer resistance in the absence o f adequate compensation schemes and difficulties inmaintaining strict movement controls, often cause the disease to elude the restrictions and spread to other areas. This has been shown in the case o f FMD in all three Southem Cone countries. Vaccination i s then typically pursued as a last resort. Ring vaccination is often also needed to ease the pressure on destruction facilities. Trust inthe reliability o f veterinary services plays an important role inregaining entry to industrialized country markets. This is shown by the case o f Argentina's efforts to regain entry to the United States and European Union following the 2001 outbreak. Individual tracing for cattle is expensive and not foolproof. Yet all Southem Cone countries have adopted it since the outbreak o f FMD in 2000 in an effort to rebuild trust intheir national systems. Disease eradication often requires multicountry (regional) approaches, rather than national campaigns alone. For example, the recurrent outbreaks o f FMD in the three beef exporting countries o f the Southem Cone originated at the borders with Bolivia and Paraguay, where FMDi s endemic. Strong private-public partnerships are often required. With many extemalities involved, there is a solid justification for strong public sector involvement in the control or eradication o f List A diseases. However, many tasks can be more efficiently carried out by private operators under the supervision o f public institutions. Thus, Brazil has relied heavily on farmers' organizations and links with private veterinarians in controlling FMD (Dubois and Moura, 2004)' whereas Uruguay has relied more heavily on strengthening the public sector. 60 I ru 0 I 3.5 Factors Affecting the Viability of Alternative Strategies Table 3.7 draws from our case study analyses to summarize the factors that affect the viability o f alternative compliance and other standards-related strategies. These include the ability to pursue more pro-active and offensive `voice' and `compliance' approaches. Factor Exit Voice Compliance For individual exporters, enterprise size i s a key variable inthe ability to be proactive and offensive. There are significant economies o f scale incompliance, so unit costs are lower for larger enterprises. For example, the introduction o f EUREPGAF'on citrus and tomato farms in Morocco involves some "lumpy" investments (input store rooms and hygiene facilities) that are not critically dependent on farm size. The economies o f scale are likely to be less significant for firms that are highly diversified by products and markets. Large enterprises also may have greater scope to negotiate on standards-related requirements, especially with respect to major customers, and may have easier or cheaper access to capital. At the same time, however, the strategic options o f all enterprises will be influenced by levels o f managerial and technical capacity and overall organizational objectives. The reputation of the firm, the level o f value-added in its products, and the degree to which products are branded are also important factors. The size and structure o f the industry and the competitive environment in which it operates also will influence the strategic options that exporters face, in particular their ability to be proactive. Salient factors include the overall output o f the industry, levels o f integration and coordination along the supply chain, modes o f competition, levels o f operating capacity, and levels and forms o f industry cooperation. For example, even industries with a large supply base o f small and medium-sized enterprises may be able to exert voice if there i s a well-established and effective industry or trade organization. International market share and existence o f alternative sources o f supply are relevant as well, because they influence the ability of the standard-setter to go elsewhere should the 62 industry choose to not comply. The effectiveness (or absence) o f industry leadership also appears to be critical inthe process o f achieving compliance, since leading firms or farms can set an example, test newer technologies or organizational approaches, and push others to follow in order to enhance or maintain the international reputation o f the industry. Strategic options in compliance will vary among countries, reflecting economic, political and social systems and norms, institutional structures, geographical size, and so on. The efficacy o f general legal frameworks, food safety or agricultural health control systems, and general governance are important as well, both for the ability to comply and to project voice and for international receptiveness o f one's efforts. Capacity and governance can also be a major constraint on pro-activity; it is difficult for a country or exporters to be first movers if they are struggling with basic capacity issues. A country that is perceived not to have its `house inorder', perhaps because it lacks an appropriate legal and regulatory framework, clarity in institutional roles, or particular capacities in the public or private sector, i s unlikely to have much success in exercising voice, either on a multilateral or bilateral basis. Further, it may struggle to achieve compliance, even after allocating significant levels o f financial or human resources. A country that is experiencing a disease outbreak, trade ban, or other form o f crisis also cannot be expected to exercise effective voice, although exceptions exist (Box 3.9). The case studies illustrate some o f the common areas in which food safety and agricultural health control systems in developing countries are deficient (Table 3.8). These include weaknesses in legislative frameworks and noncompliance with international norms, limitations o f surveillance and inspection systems and procedures, lack o f laboratory testing capacity, and inadequate controls within the private sector. The case studies also support and emphasize the need for capacity development indeveloping countries-the focus o f SPS-related technical assistance. However, the focus here i s not just on the capacity to comply with standards in international trade, but rather the strategic options available to developing countries and, more specifically, the ability to implement proactive and offensive strategies. This suggests a wider perspective on capacity needs. As the earlier discussion suggests, the strategic approach that is actually adopted in a particular circumstance will clearly be different over time, between countries, and across issues, reflecting attitudes toward standards, levels o f risk adversity, and other factors. Indeed, in the short term many developing countries may lack the confidence to move away from their more traditional compliance-based strategies to become proactive and offensive. It i s only though positive experiences, perhaps shared among countries, that they will recognize the potential benefits o fbeing proactive and entering into negotiation. Buildingsuch confidence is itself a component o f capacity building and will come only through leaming while doing. 63 TABLE3.8 COMMONFOOD SAFETYAND AGRICULTURAL HEALTHMANAGEMENT DEFICIENCIESFOCAL IN COMMODITY s13-SECTORS Fishproducts Horticulturalproducts Animal health Inadequate legislation relating Weak regulatory systems Weak systems to monitor to hygiene controls infish relating to the import, emerging regulatory processing production, and sale o f changesrelated to animal Poorly defined administrative pesticides. disease controls on imports responsibilities for approval Lack o f capacity to inexisting or potential and inspection of processing undertake pest-risk analyses export markets facilities and certification o f Weak controls relating to Inadequate legislation and exports plant pests and diseases at undocumented procedures e Weak inspection systems for borders relating to animal health processing facilities, Low capacity to implement controls including lack o f documented Weak controls relating to procedures, insufficient quarantine measures and animal diseases at borders inspection staff, limited skills enforce pest-free areas Weak capacity to implement and weak reporting Limitedfarmer knowledge quarantine or e Weak laboratory testing o f alternative pest- controlleradication capacity for microbiological management approaches measuresinthe event o f a and chemical contaminants and appropriate use o f disease outbreak and for residues o f antibiotics pesticides Weak capacity to undertake HACCP systems not widely Limited application of disease surveillance and risk implemented infish- HACCP principles by fresh assessments processing plants and not vegetable packersiexporters Weak laboratory testing extending to fishery capture (especially SMEs) capacity related to the andproduction Limitedlack o f systems for diagnosis o f animal diseases fresh-produce traceability and monitoring programs (especially from smallholders) No incentive to divulge or publicize outbreaks of animal diseases Source: Authors In attempting to generalize about various factors that can influence the viability of different strategies, Table 3.7 glosses over some potentially significant differences in particular sectors. For example, in the horticultural cases examined, leadership (and the bulk o f investment) in compliance has generally come from the private sector. Well- managed companies and supply chains, together with reasonably effective industry organizations, can frequently compensate for weaknesses in public services. This may involve undertaking certain hnctions on behalf o f government or helping public agencies implement their functions (for example by providing vehicles to give public officials the needed mobility to do their jobs). Indeed, the horticultural product cases illustrate where particular private sector leaders have been highly proactive and offensive in response to emerging food safety or agricultural health requirements. The discussion on agricultural health offers a contrasting picture. Here, the veterinary and phytosanitary policies and standards o f importing countries have a dominant effect on market access. An outbreak o f a disease can close markets entirely. This generally requires a set of control measures that go well beyond the realm o f individual firms or farms. For example, large, vertically integrated supply chains for poultry or pork cannot do much against outbreaks o f diseases among chickens and pigs held inthe backyards o f 64 villages. Likewise, a large horticultural producer can do little to control a plant pest that is endemic to smallholder producers. Both prevention and remedial measures require a more significant role for the public sector that will often encompass both those that produce for export andthose who supply only domestic markets. Here, too, pro-activity i s important-looking ahead to potential animal health problems and developing both surveillance systems and contingency plans for action may prove essential in retaining future market access. Burying your head in the sand and keeping quiet about animal disease problems is a very defensive strategy, one unlikely to enhance competitiveness in the medium and long term. It is important to emphasize that the strategic options available to developing countries will reflect the complex interaction o fa host o ffactors. It is not possibleto draw hardand fast conclusions regarding, for example, the role o f the public and private sector, or points at which it may be possible to be proactive, offensive, or to exhibit voice. The aim has been to show that a range o f strategic options i s potentially available, and that developing countries and providers o f technical assistance should recognize and assess those options as part o f efforts to build capacity and focus on approaches that are proactive and offensive, while providing the greatest possible opportunity to exhibit ' voice. In so doing, developing countries should be able to tum the perceived threats associated with new food safety or agricultural health standards into opportunities for competitive gain. 3.6 Conclusions This chapter has examined the room for maneuver of developing countries inthe face o f an ever-changing and increasingly complex environment o f SPS and other standards. It has emphasized the need for a strategic orientation and revealed a range o f options, both conceptually and through the lens o f country and industry experiences. We have argued that the underlying objective for capacity-building inthis field needs to be recast-away from the conventional notion o f coping strategies and technocratic problem-solving aimed at simple compliance, and away from an exclusive f0cu.s on the public sector. Instead, capacity-building should be geared toward maximizing the strategic options available both to the government and to the private sector in developing countries. This puts a premium on the development o f pertinent information systems and the evolution of effective partnerships between the public and private sectors. Further, it suggests that the real focus o f such efforts should be enhancement o f their ability to employ strategies that generate gains incompetitiveness andinwider economic and social outcomes. For policymakers and technical administrators in developing countries, the case study experiences highlighted here point to the value o f fostering a forward-looking and strategic approach to managing SPS standards and international market access, taking into account current and prospective pattems o f national agri-food trade. Priorities should be based on assessments o f technical and commercial risks and opportunities, as well as the expected costs and benefits o f alternative strategies. Developing countries should aim to be as proactive as possible in achieving compliance and in influencing the ways in 65 which the international rules o f the game are applied. It i s important, however, to distinguish between agricultural health and food safety challenges. Agricultural health matters carry the possibility o f absolute barriers to market entry, whereas this i s relatively rare inrelation to food safety. Addressing trade-related agricultural health problems tends to require systemic approaches, transcending individual firms or supply chains. That being said, experience also suggests that public administrators must move beyond control and policing functions to emphasize facilitative and awareness-building inquality assurance and SPS management. Because most day-to-day measures to achieve compliance with quality or SPS standards must be undertaken within the supply chain by commercial entities and farmers, improved cooperation between the public and private sectors i s essential. Measures can be taken to encourage and facilitate collective action by firms and primary producers. In countries with limited administrative capacities, efforts should be made to delegate tasks to the private sector-with public oversight. Agri-food processors and traders in developing countries clearly need to incorporate current and expected SPS and other standards requirements (for multiple markets) into their commercial strategy decisions, including those related to markets and products, the design and adjustment o f product procurement systems, and possible investments in processing and marketing facilities. Firms should anticipate changes in official and private requirements in their major export markets and undertake proactive and preemptive measures to maintain or improve market positioning. Because independent or isolated actions may be very costly or ineffective, firms should work through industry and trade organizations to advocate for effective public sector support and to implement programs to build awareness, encourage adoption o f good practices and codes o f practice, and otherwise strengthen food quality and SPS management throughout the private sector. 66 CHAPTER4 AGRI-FOOD STANDARDS: THE COSTSAND BENEFITS OF COMPLIANCE AND NON-COMPLIANCE 4.1 Introduction The trade and other impacts o f new standards for agricultural and food products are related to the incidence and level o f `compliance costs' incurred by government and the private sector. Such costs are the focus o f concem that developing countries are disadvantaged in complying with the new standards. In some cases, the prevailing capacity may be so weak as to require very substantial investment to attain compliance; in other cases, incremental recurrent costs may undermine exporter competitiveness. In practice, however, the costs o f compliance for developing countries have rarely even been e~timated.~'This lack o f data reflects the considerable difficulties associated with undertaking such calculations. Hard data on the benefits o f compliance are also lacking because few studies have been carried out. Indeed, until recently it was not widely acknowledged that compliance actually yields benefits, especially in intemational trade performance (see, for example, Jaffee and Henson, 2004) and better controls over domestic food safety and agricultural health. Where benefits have been recognized, they have not been quantified. As a result, compliance is seen almost entirely as a cost o f maintaining market access with few, if any, offsetting benefits. This chapter undertakes a more rigorous examination o f the costs and benefits o f compliance. In so doing, it highlights the problem o f disaggregating compliance costs from a larger and ongoing change. The case studies for this research program attempted to throw light on both costs andbenefits; and how these vary between countries and firms and across types of standards. Some o f the key findings from this work are discussed here. 4.2 UnderstandingCosts of Compliance Inthe context o f trade, compliance costs are defined as the additional costs necessarily incurred by government and/or private enterprises inmeeting the requirements to comply with a given standard in a given extemal market. Inthe context o f the strategic focus adopted in this report, this refers not just to the costs associated with compliance per se, but with all strategic responses to evolving standards. There are two key elements to this definition. First, it covers the costs that are `additional' to those which would have otherwise been incurred by government and/or the private sector in the absence o f the standard. Second, it refers to those costs that are `necessarily' incurred in complying 42Inindustrialized countries, a much more extensive literature estimates the costs and benefits associated with various food safety, environmental, and other standards. See, for example, OECD (2003b) and Unnevehr (2000). 67 with the standard. It is these two key concepts that create some o f the problems associated with estimation o f compliance costs. . Inthe case of regulatory requirementsin international trade, costs are imposed on both the public andprivate sectors. Inorder to establish a `competent authority' recognizedby trading partners, government controls may need to be strengthened and institutional structures may need to be reformed. Processors may have to upgrade their procurement systems or hygiene controls in their food processes. In some cases the actions o f the public and private sectors may substitute for one another (i.e. private testing instead o f public testing); in other cases they may complement each other (i.e. improved public sampling and testing procedures alongside improved safety management systems at factory levels). The costs and benefits associated with both public and private actions need to be ascertained. An important distinction is made according to the level o f recurrence o f compliance costs (Figure 4.1). Non-recurring costs are the one-off or time-limited investments made in order to be able to achieve compliance. Typically, these include the upgrading o f laboratory infrastructure and processing facilities, establishing new procedures and the associated training of personnel, or the costs o f designingnew management systems such as the HACCP system for a food processor or a EUREPGAP compliant farm or out- grower system. Some o f these are `lumpy' investments for which there may be significant economies o f scale. Recurring costs are borne over time and include the costs o f maintaining regular surveillance and laboratory testing programs and the additional productioncosts associated with enhanced food safety controls. For some functions, non- recurring and recurring costs are substitutes for one another. For example, an individual exporter can choose between using an external laboratory to undertake routine product and input testing or establishing its own laboratory facilities that permit such tests to be undertaken at a lower unit Recurring and non-recurring costs can impede trade in a somewhat different manner and also influence the potential benefits that might flow from alternative strategic choices related to compliance. For example, `first movers' might realize significant advantages if non-recurring costs are high and they have the resources to make needed investments ahead o f their competitors. Yet, significant recurring costs can impede competitiveness by increasingunitproduction costs, especially where significant cost variations are borne by individual suppliers owing to local condition^.^^ 43The distinction between recurring and non-recurring costs suggests that account must be taken o f the stage inthe compliance process that costs are measured. Costs can be significantly under-estimated if an attempt is made to estimate costs at an early stage in the compliance process at which only non-recurring costs have been borne. Conversely, there is a tendency to overestimate costs if recurring costs decline significantly over time as exporters, for example, learn to adapt to the required controls. 44 Pertinent factors can be quite varied and include differences in climatic conditions and diseaseipest status, general infrastructure conditions, and the availability o f local technical and administrative services. 68 FIGURE COMPLIANCECOSTPROFILE 4.1 cost Non-recurring Costs I Non-recurring Costs I1 Recurring Costs I1 Time A fkrther distinction can bemade between `tangible' and `intangible' costs o f compliance (Table 4.1). Tangible costs are easy to isolate and quantify-for example, the costs o f establishing laboratory facilities and institutingroutine testing programs. Intangible costs are more difficult to identify and quantify. Indeed, inmany cases they are only indirectly related to the compliance process. These include the foregone opportunity cost o f investments, as exporters curtail new product development or when scarce resources contribute to weakened domestic food safety controls. Most attempts to assess costs o f compliance with new standards largely ignore (and may even fail to recognize) these intangible costs, despite evidence suggesting that these may be more significant than the tangible costs (Henson, 1996). Inorder to estimate costs of compliance, one needs to isolate these from more general costs created by on-going processes o f change. The latter involves evolving food safety and agricultural health controls owing to due pressure from the domestic market or longer-term attempts to enhance capacity in line with international standards. For the individual exporter, compliance efforts need to be teased out from other competitive pressures, some o f which may indirectly relate to such standards. This requires that a baseline be established that reflects the way in which food safety or agricultural health controls would be expected to evolve (and thus the non-recurring and recurring costs that would be incurred) inthe absence o f the new 45In measuring the costs of compliance, mandatory and discretionary actions must be considered. The former are required in order to comply with a specific food safety or agricultural health standard in an export market. The latter are those the public or private entities choose to adopt in the process o f compliance. Thus, for example, an exporter may choose to expand the capacity o f its processingplant at the time when it is making certain investments needed to enhance food safety controls. 69 TABLE EXAMPLES & 4.1 OF Tangible Intangible Non-recurring Upgrade o f laboratory Reduced investment innew infrastructure product development Upgrade o f processing facilities Reducedinvestment indomestic food safety controls Investments infarm-level facilities to comply with GAP requirements Recurring Costs o f collection and analysis Reducedflexibility in o f laboratory tests production processes Additional procurement costs for Reducedenforcement o f buying `certified' raw materials domestic food safety controls Additional overhead costs for implementing HACCP l o w efficient are the compliance efforts? The answer i s crucial in order to estimate the costs associated with a new food safety or agricultural health standard. An examination o f compliance costs across countries and/or individual exporters will reveal very significant differences in both non-recurring and recurring costs. Compliance can often be achieved through various technological and/or administrative ways; some parties may be more efficient than others in this regard. Also, countries and industries have different `starting points' when more stringent standards are applied. For a mature and reasonably well-developed export industry, new standards may require only incremental changes by exporters, and perhaps modest adjustments in public sector oversight. Where a supply chain i s underdeveloped, however, new standards (or better enforcement o f existing regulations) may require major upgrades at the enterprise level or the consolidation o f certain functions to realize economies o f scale. There is typically also great variation inthe efficiency with which compliance i s achieved reflecting, for example, abilities to identify and implement needed investments and operating procedures. Although these are themselves important management capacities, they also make it difficult to make generalizations about the magnitude o f compliance costs. Should general conclusions be based on some `average' o f estimated costs over countrieshirms or based on some concept o f an `efficient' countryhim? In assessing costs o f compliance, the costs o f not complying with agri-food standards must also be assessed. The most explicit and direct cost is loss o f market sales, owing either to temporary or permanent prohibitions on exports or loss o f foreign market buyers. These costs can be significant for supply chains that are highly export- dependent, and more specifically highly dependent on particular export markets. In extreme cases, suppliers may be forced out o f the market altogether. More generally, they may take actions to diversify their market base, with which costs will be associated. Intum, these market-based costs will berelatedto the choiceo fcompliance strategy. For 70 example, adopting a more defensive position, that implies longer compliance periods, may be associated with greater loss o f market sales. If such efforts are unsuccessful, for example in achieving a relaxation o f requirements, these costs will not be offset by reductions in costs o f compliance; plus there may be a more sustained hit on the reputationo f the supplier or country for quality, safety, etc. 4.3 Benefits of Compliance In addition to the costs, the benefits of compliance should also be identified and q~antified.~~To date, most commentaries fail even to recognize that benefits exist and thus they overstate the net costs o f compliance over the long term. Although this may serve a political purpose for those advocating greater flows o f technical assistance, it can also have an adverse impact on policymakers in developing countries, steering them toward more defensive and cost-minimizing strategies rather than examinations o f the entire spectrum o f strategic options (see Chapter 3). Perhaps the most significant benefit, and indeed the primary driver in compliance, is continued and better market access. At boththe country and individual firm levels (public and private goods, respectively), unhindered access to markets-for example, avoiding border detentions-is a benefit that cannot be overstated. This i s especially the case where large investments in compliance-related resources have already been made- resources for which there are limited alternative uses in the short to medium term- makingthe sunk costs high.Likewise, the benefits from enhancedmarket access, or from lower costs due to unimpeded access, can be considerable. As with costs, benefits can be recurring and nonrecurring, tangible and intangible (table 4.2). Many o f these benefits are only indirectly associated with the process o f complying with a particular standard and thus are largely intangible. Thus, intangible benefits include opportunities to reassess the efficiency o f prevailing systems o f production more widely, and to study the impact o f stricter standards on product quality more broadly. These opportunities may improve reputations and increase customer demand over the short or long term. The potential tangible benefits relate most directly to the impact that better food safety or agricultural health control systems have on costs o f production, including less waste, greater productivity, and so forth. Other important tangible benefits may be broader access to markets or particular market segments. Although the focus here i s on export- oriented supply chains, spillover benefits also occur, as in farmer productivity or 46Economists would typically focus on the net impact o f compliance with standards on social welfare, examining the impact an society as a whole-and perhaps how this is distributed among the different economic groups. The perspective here i s partial, however, as it examines particular economic benefits for the actors directly involved incompliance. 71 consumer health in the domestic market.47These act to offset recurring compliance costs such that the longer-term impacts might result in lower supply costs. These benefits can be augmented ifthe govemment and firms innovate inthe face o f new standards and thus minimize compliance costs. Such so-called regulatory-offset innovation has been shown to be significant if controversial, as in the case o f environmental regulations (Porter, 1991;Porter and van Liede, 1995. TABLE EXAMPLESRECURRINGAND 4.2 OF NON-RECURRING BENEFITSOFc IMPLIANCE Tangible Intangible Nonrecurring Crisis containment, as when the Opportunity to examineoverall existence of afunctioning traceability efficacy of controls system preventsan `alert' from becoming a crisis andcause for banning the country as a supplier Recurring Access to moreremunerative markets Enhancementofproduct quality andsupply chains Enhancedmorale of inspectionor Reduction incosts due to enhanced production staff efficiency Improvedreputation of firm and/or Reducedwastage inproduction country processes Reducedlevel ofproduct inspection anddetentionabroad Given that the costs o f compliance with new agri-food standards are typically more tangible (andthus more visible) than any benefits and that recurring benefits are typically more significant than shorter-term nonrecurring benefits, compliance is widely perceived to be costly. This produces a perceptual barrier that overstates the overall net cost and drives strategic decisions toward exit, reaction, and defense in an attempt to minimize change. Such approaches are typified by efforts to cut comers and put out fires, and to delay efforts to comply untilthe very last minute. The failure to recognize the full extent o f any benefits can also lead to the underestimationo f rates o f return on investments (including both nonrecurring costs and the net present value o f recurring costs over some defined period of time into the future). Intum, this can generate a culture of dependency andthe tendency to wait for donors to arrive with technical assistance or for the govemment to act because compliance is 47Inindustrialized countries, muchofthe analysis ofbenefits from environmental or food safety measures focuses on the domestic context, valuing the gains in animal, plant, andor consumer health. See OECD (2003a) for a review o f the methods and findings o f such work. When developing country suppliers make investments or adopt certain management systems, they reduce the plant, animal, or human health hazards faced abroad. Hence, many o f the tangible benefits from developing country compliance are realized abroad, reinforcing the public good nature o f these benefits. 72 perceived to be costly. As a general rule, however, both donors and national governments are slow to act, often waiting until a crisis develops before taking action. The result i s a reliance on reactive strategies, even where prevailing capacity may permit more offensive andproactive responses to be implemented. BOX4.1 THEBENEFITSOF VOICE: SOME EXAMPLES FROMTHE WTO'S SPS COMMITTEE As noted inChapter 3, certain developing countries have utilized the systemprovidedby the Sanitary and Phytosanitary Committee to register complaints regarding proposedapplied SPS measures by other members and to take some of these concerns to a higher level of dispute settlement. It is not possible to provide a scorecard on the results o f such attempts at voice, given that many o f the outcomes are not publicly communicated. Sometimes the matter i s resolved between the parties; sometimes not. There are also instances when the original complaint is quietly withdrawn. Still, the information available to the SPS Committee does suggest that developing countries can, probably quite frequently, obtain satisfactory results bybringing their bilateral concerns to the attention of the committee and that o f all other WTO members. Some examples ofthis include: EC Citrus Canker. Argentina requested bilateral consultations with EC experts on a proposed measure on citrus canker. Several other countries supported Argentina's concerns. The consultations resulted in a revision o fthe measure which includes the possibility for recognition o f equivalent certification systems. Chile FMD Restrictions. Argentina was concerned about draft regulations on fresh or frozen beef which appeared to be more restrictive than OIE standards inrelation to FMD controls. Argentina requested Chile to amend the draft to reflect the OIE code, or to show sufficient scientific grounds not to. Bilateral meetings led to resolution onthe matter. Australia and Sauces Containing Benzoic Acid. The Philippines voiced concern about certain import prohibitions that appeared discriminatory, enabling products from New Zealand to contain this acid yet not similar products from the Philippines. Eventually, the Australian regulations were altered and detentions o f the affectedPhilippine product ceased. Turkey and Import Procedures for Fresh Fruit. Ecuador initially requested consultations with Turkey regarding certain procedures for handling imported bananas, which were thought inconsistent with obligations under the SPS agreement. A dispute panel was eventually formed and the two parties later reportedthat a mutually agreed solution was found. Mexico and Measures Preventing Imports of Black Beans. Nicaragua requested consultations claiming that certain sanitary and phytosanitary measures taken by Mexico were inconsistent with articles o f the SPS agreement. Direct negotiations later led Nicaragua to withdraw its request for consultations as the matter hadbeenresolved. 4.4 Measuringthe Costs andBenefitsof Compliance The preceding discussion has hinted at the problems associated with attempts to identify andquantifythe costs andbenefits o f compliance with new standards for agricultural and food products in international trade. The key challenge i s to identify the actions taken (or required to be taken) in order to achieve compliance and then to quantify the cost and benefits arising from these actions. In so doing, there are potentially vevy signzficant attribution problems, which in turn relate to the concepts o f necessary costs and efficiency in compliance discussed above. Inmany cases, efforts to achieve compliance 73 with standards are undertaken within the context o f prevailing competitive challenges. Thus, the costs faced by individual enterprises may be very different according to their competitive positioning and historic efforts to improve food safety and agricultural health at the national, industry, and enterprise levels, making it difficult to attribute costs and benefits specifically to a particular standard. Having defined the actions attributed to a new standard, the next challenge is to quantify the associated costs and/or benefits. In many cases, public authorities and private enterprises are unable to distinguishclearly the precise costs associated with compliance and, even when they can, may not have records o f the precise amounts involved. This i s particularly a challenge inthe case o f recurring costs that are less discrete and are liable to change over time according to both intemal and external factors. Only as firms grow in size and their management structure becomes more sophisticated i s there a possibility that quality assurance and/or food safety systems and personnel are separated out incompany cost accounting. Eveninlarge organizations, however, this seems to remain the exception rather than the rule. There are two main approaches to the estimation o f compliance costs and benefits associated with standards: (1) deconstructive; and (2) constructive. Both approaches have their strengths and weaknesses but are each imperfect. On the one hand, most deconstructive approaches rely on an established microeconomic theoretical framework and can be used to estimate the overall economic impact o f a standard; they are weak, however, at teasing out the discrete impact o f a particular standard. Such approaches can be used to assess firm-level (and also economy-wide) costsbenefits but are not readily applicable to the public sector. Constructive approaches, on the other hand, are better able to attend to the impact o f particular standards inboth the private and public sectors; they rely, however, on reliable data about the associated costs andbenefits. Deconstructive approaches attempt to identify the net economic costbenefit of compliance-apart from other influences. Typically, these compare production costs before and after the imposition o f a standard, or use simulation methods to estimate production costs inthe absence o f a standard, through the use o f surveys or econometric techniques. For example, a number o f general surveys ask firms to isolate out the costs of compliance with the standards they face.48 Constructive approaches generally adopt an accounting-based framework that aims first to identify the actions taken by the public and/or private sectors in response to an identified standard and then attach monetary values to the associated resources. In general, such information are elicited from in depth personal interviews with the use of questionnaire^.^^ It is mostly this approach that i s employed in the case studies for the current project, as summarized inBox 4.2. 48For example, an OECD (1999) survey o f 55 firms invarious sectors in the United Kingdom, Germany, Japan, and United States suggests that the additional costs of complying with standards in international markets canbe as high as 10percent. 49For example, Cat0 and Limas dos Santos (2000) estimate the costs of compliance with EU hygiene standards inthe Bangladeshishrimp processing sector. 74 BOX4.2 HOWTO MEASURE OF COMPLIANCEINPRACTICE COSTS The current project has attempted to use a pragmatic approach to assessingthe costs of compliance with food safety and agricultural health standards that follows through the process by which public authorities and individual private sector firms undertake compliance. Thus, an in-depthquestionnaire is employed that leads public and private sector decision-makers through the various stages o f compliance:. What requirements did exports have to comply with previously or compared with domestic market requirements?. How have these requirements changed as a result o f the new standard being implemented?. What changes had to be made to prevailing food safety or agricultural health controls?. What were the costs o f implementing these changes? Inassessingthesecosts ofcompliance, abaseline mustbeclearly definedagainst whichtheneeded changes are measured. This will depend on the specific nature and history o f each exporter. The main scenarios are as follows: An established exporter faces a new or revised standard. The enterprise is asked to compare the new and old requirements. An established exporter is accessing a new external market. The enterprise is asked to compare the standard for which it must comply in the new market with that prevailing in its prior focal external market(s). Anenterprise whichis a new exporter. Itis askedto compare the standardsinits focal externalmarkets with those applied inthe domestic market. Ineach scenario, the enterprise is askedto identify the changesrequiredinorder to comply, relative to the baseline, and the associated non-recurring and recurring costs o f compliance. Individual enterprises are regarded as case studies. Using certain assumptions, the response from enterprises ineach scenario can be extrapolated to provide an estimate o f the overall costs o f compliance for exporters from a country as a whole. Problems are frequently encountered that can bias any estimates. It is important to recognize these and appreciate the likely impact on the data collected. Thus: Both national governments and the private sector may be reluctant to divulge information on limitations infood safety and agricultural health capacity and standards-related trade problems for fear of exposing their weaknesses to importing countries: Onthe contrary, there may be incentives for national governments and the private sector to exaggerate weaknesses in food safety or agricultural health capacity and standards-related trade problems inview of potential flows o f technical assistance. Where food safety or agricultural health capacity is very underdeveloped, government officials andlor exporters may be unaware or misunderstand the issues being analyzed and, inadvertently, provide misleading or even incorrect information. The perspective adopted here focuses on the investments the public sector and exporters make incomplying with standards, while ignoring how the costs o f these investments are redistributed; that is, who eventually pays? This important issue should be considered alongside the flow o f economic benefits from such compliance decisions. Thus, exporters may, for example, be able to pass their costs on to consumers, in foreign andor domestic markets, through higher prices. The government may choose to defray some o f these costs through subsidized loans or subsidies. Although this latter issue i s briefly discussed with respect to India, it was beyond the scope o f research to assess the eventual locus o f the costs within supply chains and the broader economy. 75 4.5 Evidenceon the Costs andBenefitsof Compliancefromthe Case Studies This section brings together evidence on the costs and benefits of compliance with stricter food safety and agricultural health standards from the case studies, focusing on food safety controls on fish and fishery products and horticultural products and spices, and animal healthissues. Eachis discussed inturnbelow: 4.5.1 Fish and Fishery Products The case studies in the current research, together with results from previous studies, throw some light on the magnitude o f the costs o f compliance with hygiene and other food-safety requirements set by industrialized country markets; they also reveal the ways in which these vary across source countries and individual exporters. Many fishery product exporting nations have faced the challenge o f improving their food safety controls or risk losing access to lucrative markets. As discussed in Chapter 3, different countries and exporters have adopted distinct compliance strategies and, as a result, costs have varied. At the same time, the incremental costs vary depending on the point o f departure, for example initial levels o fhygiene andfood safety controls infish processing facilities. Indeed, where the recorded costs of compliance are high, hygiene and other food safety controls may not have been upgraded in line with the growth o f exports, and action was arguably long overdue. The variation in costs o f compliance is well illustrated by the experiences of Bangladesh andNicaragua, botho fwhich export shrimp to the United States andthe EuropeanUnion (table 4.3). Inthe mid-1990s Bangladeshhad to make major investments to upgrade fish processing facilities, product testing laboratories, and other areas. This occurred aAer repeated quality and safety detentions of product entering the United States and a ban in 1997 on shrimp imports to the European Union. The total cost i s estimated to have been around US$18 million, with the subsequent annual costs o f maintaining the established food-safety controls pegged at US$2.4 million. In the case o f Nicaragua, between 1997 and 2002, the shrimp industry needed to improve its hygiene controls to comply with modified US. fish safety regulations. But because many Nicaraguan factories were relatively new and modem, only modest incremental investments were needed; these were estimated to have cost only US$560,000, with annual maintenance costs o f only US$290,000. Although the magnitude o f these costs may appear high, at least for Bangladesh, it is quite modest given the benefit o f continued access to lucrative U.S. and/or EUmarkets. Thus, the investments made by the Bangladeshi shrimp-processing sector were equal to 2.3 percent o f the total value o f shrimp exports over the period 1996-1998. The annual maintenance o f HACCP and regulatory systems involved costs equal to only 1.1percent o f exports. And significant tangible benefits were associated with these measures. Bangladesh has substantially increased its shrimp exports to (and market share in) the EU, andthe industry is movingtoward theproductionandexport o fvalue-added products (Cat0 and Subasinge, 2004). 76 TABLE COSTSOFCOMPLIANCEWITHEXPORT 4.3 FOOD-SAFETY REQUIREMENTSIN THE BANGLADESHI AND NICARAGUAN SHRIMP-PROCESSINGSECTORS (us$MILLION) Training programs Source: Cat0 and Lima dos Santos (2000) and Cat0 and others (forthcoming). Compliance with US.and EUhygiene standardsfor fish andfishery products in Kerala: The Indian fish and fishery product sector has faced significant challenges meeting emerging food safety requirements in the United States and the EU. These challenges have been particularly pronounced in Kerala where the industry i s more dependent on those markets than the rest of India and i s dominated by exports o f crustaceans and cephalopods. Historically, these problems mainly related to exports to the United States. Yet by the 1990s the EU's food safety requirements-both with respect to general hygiene controls and limits on antibiotics and both biological and chemical contaminants-emerged as the dominant challenge. In turn, the European Union has undoubtedly become the dominant driving force behind the upgrading o f food safety controls within the industry.5o Faced with restrictions on exports o f fish and fishery products to the European Union in the late 1990s, the Indian government responded rapidly with the imposition o f quite onerous requirements intended to demonstrate it was able and willing to comply. Thus, within a matter of months after a rather critical inspection report from the European Commission, India had fblly complied with EU requirements and made List Istatus. Similarly, when residues o f antibiotics and bacterial inhibitors were detected in shrimp during2002, the Indian government swiftly imposed strict controls on antibiotic use. Itis evident that these actions meant considerable costs for the processing sector, as is discussed below. The Export Inspection Council (EIC), the recognized competent authority inIndia for the regulation of fish exports to the EuropeanUnion, has implemented a rigorous inspection 50The challenges faced by the fishery product sector reflect the failure to upgrade legislative and other elements o f the food safety system across India in line with developments in major export markets. Ironically, the very rigorous food safety controls implemented for agricultural and food exports by the Indian government through the 1980swere allowed to wane as a result o f liberalization inthe early 1990s. While t h ~ sexisting institutional framework may have enabled the Indian government eventually to bring about changes infood safety controls quite rapidly, it did not prevent exports to the EuropeanUnion being banned on the grounds o f microbiological contamination. 77 and laboratory testing regime to monitor EU-approved plants. This i s done through five regional Export Inspection Authorities (EIAs); in the case o f Kerala, this is the EIA Cochin. It is estimated that the cost per plant is around $6,444 per annum, with the bulk o f this associated with the fortnightly testing o f product samples. This implies a total annual cost o f monitoring EU-approved plants inKerala o f around $341,000 in2003-04, and a cost for all of India o f around $876,000. As a proportiono f the value of exports to the European Union, however, this is only around 0.3 percent. The laboratory facilities operated by EIA Cochin were relatively small untilthe upgrades made to comply with EUrequirements in the mid-to late 1990s. An investment o f some US$ 65,000 has been made. However, this laboratory has severe space constraints, and land has been acquired for a new facility that will be built in the next one to two years. The laboratory operated by the Marine Products Export Development Authority (MPEDA) in Cochin has recently installed new HPLC-MS/MS equipment in order to perform laboratory analysis o f antibiotics residues, at a cost o f around $280,000.51 MPEDA has implemented various programs to support improvements in hygienic controls and other food safety practices inthe fishprocessing sector. It operates a subsidy scheme to assist companies to establish quality control laboratories, integrate pre- processing facilities, and undertake other renovations. The subsidies are at the rate o f 45 to 50 percent, with a cap placed on the amount per company. The amounts disbursed under this program and the numbers o f processing units supported over the period 1996- 97 to 2001-02 are summarizedintable 4.4.52 To comply with the EU's hygiene standards, India made major investments in processing-facility infrastructure (e.g., flooring, walls, lighting, etc.) and control systems o f fish-processing facilities, including the implementation o f HACCP. The changes required varied significantly among individual factories. In extreme cases, plants had to be extended or the entire layout was changed, for example, to ensure a unidirectional flow o f material in order to prevent cross-contamination between raw and processed materials. Manyplants also installed ice-making and laboratory facilities, upgraded water treatment systems and increased chill room capacity. Across virtually all plants, other, less expensive changes had to be made including the installation o f air curtains and/or air conditioning, foot baths, new wash basins, and thermographs and the purchase o f new utensils, staff uniforms, metal tables, etc. 51The ultimate aim is to have nine well-equipped laboratories nationwide, some of which may be operated by other agencies under a Memorandum of Understanding with MPEDA. In addition, there are three private laboratories inCochin that play an important role inbolstering analytical capacity inthe State. 52 MPEDA also provides and supports a number of training programs, both in general quality control procedures and HACCP. Over the period 1996-97 to 2001-02, 29,110 fishers, 20,363 pre-processing workers and 15,745 processing workers receivedbasic quality control andhygiene training. 78 TABLE MPEDA SUPPORTFORFACTORY 4.4 UPGRADES ININDIA'S FISHPROCESSING INDUSTRY, 1996-97 TO 2001-02 Year Support for QC laboratories In-house preprocessing facilities Units cost Units cost Total 98 103,874 132 2,459,921 Among the plants surveyed by Henson and others (forthcoming), the nonrecurrent costs of compliance ranged from US$51,400 to US$514,300, with a weighted mean of US$265,492 (by volume of production). As a proportion o f company turnover in 1997- 1998, these costs ranged from 2.5 percent to 22.5 percent, with a weighted mean o f 7.6 percent.53In 2001 there were 51 EU-approved facilities in Kerala, suggesting an overall nonrecurrent cost across the sector o f US$13,540,092. This represents around 1.7 percent o f the value o f exports from Cochin over the three years (1994-95 to 1996-97) prior to the initial implementation o f these investments. It should be noted that these rather high numbers, to a large extent, reflect the very specific characteristics o f the fish- processing sector in Kerala-namely, the historic use o f independent pre-processing facilities (see below). From interviews with fish processing companies it is apparent that the installation o f integrated preprocessing facilities was the most significant costs o f compliance. Processing plants also had to implement significant changes to their operational procedures. The majority had not implemented HACCP, and this was required to establish the necessary control procedures and documentation systems. Further, cleaning, maintenance, and pest control procedures had to be enhanced. Inmany cases, extensive worker training programs had to be undertaken. The cost o f implementing these new procedures has been considerable, including laboratory analysis, record-keeping, ongoing staff training, maintenance o f worker medical records, and so forth. To undertake these tasks, new technical and supervisory staff had to be employed. Monitoring fees paid to the EIA have also increased significantly. Further, the costs o f preprocessing have been intemalized within the processing plant; these are significantly greater than purchasing preprocessed raw material from independent facilities. Across the surveyed companies, the resultant increase in production costs ranged fkom 5 percent to 15 percent, with a weighted mean of 11.7 percent. From the in-depth interviews with fish processors, again 53This does not include the value o f lost production for plants that had to close during renovations. Many plants had to curtail productionat some point inthe process o fupgrading hygiene standards. Incases where major construction work was required, the curtailment extended across several months. 79 it is apparent that the majority o f these costs are associated with the EIC's requirement to have integratedpreprocessing. Figure 4.2 illustrates the diversity o f experiences among a selection o f nine SMEs within the sector-that is, firms whose annual turnover ranges from $1.0 to 3.0 million. Some o f these firms only had to make incremental changes to obtain compliance, while others had to make large investments relative to their annual turnover. The data also suggest a correlation between investment and recurrent costs. Those firms which had to make comparatively large investments also report relatively large increases in their unit production costs attributable to food safety management measures.54This finding lends support to the earlier argument about the relatively high costs-and effects on competitiveness-associated with reactive and defensive responses to the changing standards environment. FIGURE INDIANFISHPROCESSINGSMES:NON-RECURRENT 4.2 AND RECURRENT COSTSINRELATIONTO COMPANYTURNOVER AND UNIT PRODUCTIONCOSTS 16 14 12 10 8 6 4 2 0 0 5 10 15 20 25 Cost of compliance as % of turnover (non-recurrent) Source: Hensonand others (forthcoming) To date, the level o f investment made to comply with the European Union's hygiene standards for fishery products in Kerala has been considerable, amounting to US$13.5 million. Although this has undoubtedly imposed hardships on many processors, in particular those that were already operating at low levels o f capacity, overall it only represents 1.7 percent o f the value o f exports over the three years prior to the imposition of new controls by the Indian government. Further, for those processors that have managed to comply, the benefits o f continued market access are considerable. Indeed, the fact that Indian exporters have not faced the restrictions imposed on their Chinese and 54Several factors could account for this, including the depreciation costs on new equipment, the relative lack o f familiarity with this equipment, and overall weaknesses in business management. For whatever combination o f reasons, precisely those f i i which incurred relatively high non-recurrent compliance costs are also the firms struggling to compete on a cost basis with others. 80 Thai competitors through 2002 and 2003 may have been a source o f competitive advantage related to the European Union's stricter food safety standards. BOX 4.3 SHRIMP PREPROCESSORSAND SHIFTSINPROCUREMENTARRANGEMENTS A key element o f the supply chain for fish and fishery products in Kerala is the preprocessing sector. Traditionally, independent preprocessors sourced raw material from fishboats, which they thencleaned and peeled before selling it to processing plants operated by the exporters. These plants froze and packaged products for export ina cooked or uncooked state. Inso doing, they played an essential role inthe sourcing o f raw materials and inmanaging the costs o f preprocessing operations, which are a significant part o f the total cost o fprocessing and which is heavily labor intensive. The European Commission voiced serious concerns about the hygiene controls for pre-processing. Indeed, the Indian government recognized the considerable control problems associated with separate preprocessing and processing operations. Thus, in 1997-98 the EIC prohibited the use o f independent pre- processors in the case o f EU-approved facilities. Non-EU-approved processing plants were, however, permitted to continue using independent preprocessors on an interimbasis. Thus, EU-approved processing facilities installed their own preprocessing capacity, while independent preprocessors made their own investments to upgrade their fac es to meet these higher hygiene standards. Fishprocessors now purchase directly from landing sites through independent agents, paid on commission. Many employ supervisors at landing sites to check quality and prices. However, the final acceptance or rejection o f raw materials occurs at the factory. In some cases the factory transports the fish; inothers this i s the agent's responsibility. Regardless, most processors provide ice produced intheir own facility. To the extent possible, many processors attempt to buy from selected fishing boats. However, attempts to have direct contractual links with fishermen have generally failed. While the costs of these improvements have been significant, a number o f processors have highlighted the benefits. Many have recorded lower microbial counts in their end products, contributing not only to food safety but also to lower levels o f spoilage. Some recognize that they now have greater control o f the entire production process and expect to be able to enhance efficiency in the medium term. With their expanded chill room capacity, processors are able to store raw materials for longer periods, enabling them to take advantage o fperiodic gluts insupply. Upgradingof Hygiene Standards in the Nile Perch Sector of Kenya Over the period 1998-2002 significant efforts were made to improve hygiene standards within Kenya's industrial fish-processing sector in order to comply with EU requirements. This followed a series o f negative inspection visits by the European Commission and the imposition o f restrictions on exports o f Nile perch to the EU, not only from Kenya but also from Tanzania and Uganda. When the Commission again undertook inspections inMarch 2002, it found that approved facilities generally met the requirements o f EU legislation conceming structure, maintenance and hygiene, and Kenya was added to the list o f `approved' countries. Nonrecurring costs of compliance borne by individual companies differed widely, reflecting the varying standards o f hygiene that prevailed within the sector in 1998 (Table 4.5). Thus, one plant made an investment o f US$128,000, while others had only minimal costs. In general, costs were greatest where factories had undergone major structural change in order to improve the general facility and implement effective pest control. These facilities had lower pre-existing standards o f hygiene. Further, they were generally housed inolder buildings, often converted from some alternative previous use, and/or had severe space constraints. 81 The total cost o f compliance for the fish-processing sector is estimated at US$557,000. This implies an average cost per plant o f just under US$40,000. Although this is not a large amount given exports valued at US$33.5 million, considering that six plantsare not operational, a significant part o f the sector has clearly derived no payoff from this investment. Further, there i s no clear relationship between size o f fish processing operation andnon-recurring costs o f compliance; some o f the smaller processors incurred costs o f the same order o f magnitude as the larger ones. Recurring costs of operating to improved standards o f hygiene varied from 5 to 25 percent, with a mode o f 15 percent. Such variation i s difficult to explain. Differences in scale o f operation are likely to influence these costs; the literature on the economics o f HACCP suggests significant economies o f scale (Unnevehr 2000). Also, there are differences inthe efficiency by which different companies have adjusted to new systems o f production and control. However, respondents also differed in their ability to identify changes inproduction costs depending on their accounting procedures and the degree to which written records were maintained o f processing operations. Where recurring costs o f compliance were identified, these related to additional staff costs-for example, employing an HACCP coordinator and quality-control supervisors, additional laboratory testing, reductions in the rate o f production to facilitate effective temperature recording, and greater packaging costs. BOX4.4 IMPACT OF FOOD SAFETY STANDARDS ON SHRIMP PRODUCTION COSTS IN THAILAND The Thai government has made considerable effort to promote `good aquaculture practice' in shrimp production inorder for the country to meet external market food safety requirements. Interestingly, our case studysuggests that farmers may actually experience a decline inproductioncosts as a result o fbeing forced to adopt stricter food safety controls. The Thai Department ofFisheries has enforced a Code o f Conduct for aquaculture productionthat strictly controls use o fantibiotics, encouragespractices that prevent the buildup o f feed wastes, and promotes the use o f non-chemical alternatives, such as herbal preparations and probiotic formulations. The cost o f shrimp production using antibiotics is estimated at US$1.75kg. Use o f chemical alternatives, increased this cost by around 6 percent to US$1.85/Kg. However, costs o f production with probiotic supplements were actually lower than the conventional system (with antibiotic use) by 33 percent at US$1.17kg. Iffarmers also switched to the disease-resistant Vannamei variety o f shrimp, production costs were over 38 percent lower. This suggests that, bybeing induced to adopt probiotics, aquaculture producers achieved a net benefit beyond any changes intrade volumes or market reputation. This option has higher yields, higher survival rates, greater ease o f cultivation, shorter production times, and lower feed costs. The Vannamei shrimp also provides more meat than Black Tiger shrimp andgrows to a more homogenous size, which makes grading easier. There are some disadvantages, however. First, because the larger Black Tiger shrimp commands higher prices, this will generally offset the higher yield from Vannamei, with little net changes infarmer incomes. Second, Vannamei shrimp are raised in more intensive farms which means that more larvae are required per unit area. Finally, Vannamei shrimp face greater competition ininternational markets-there are more than 30 supplier countries for white shrimp comparedto only 10 for Black Tiger shrimp. Source:Manarungsan and others, forthcoming. 82 TABLE NON-RECURRINGRECURRING 4.5 AND COSTS OF COMPLIANCEFORKENYA'S INDUSTRIALFISHPROCESSORS Companies Ithrough N were not operational in early 2003. Source: Hensonand Mitullah (2004). 4.5.2 Horticulture and Spices Examining compliance costs and benefits in horticulture and spices is frequently a more challenging exercise than inrelation to fish or livestock industries. In contrast with these latter cases, where public regulators often govern market access and where distinctive events (for example, a disease outbreak or temporary product ban) present a before and after context, many o f the compliance challenges inhorticulture and spices have evolved over time and have thus led suppliers to make steady yet incremental changes in their supply chains, testing arrangements, and so on. Some o f these changes are motivated by SPS compliance; others by multiple objectives. As a result, analytical attribution problems are commonly encountered. While a number o f crisis situations have occurred and are noted in the existing literature, they do not represent the norm in these product fields. In addition, a large part of the compliance challenge for horticultural and spice growers and exporters i s inrelation to the specifications o f individual or groups o fprivate buyers. Hence, in horticulture and spices, compliance tends to be in relation to a moving and variable target and is normally embedded in wider organizational and technological changes geared toward improving competitiveness. This reality makes it especially difficult to generalize about compliance costs or benefits. As such, the analysis here 83 provides a somewhat more extended discussion o f compliance costs and benefits in two of our case studies, while providing supplemental insights from several other cases. India Spices: Making a Down Payment on the Future As noted in Chapter 3, the Indian spice industry has faced, in some of its key external markets, increased scrutiny by buyers and regulators with regard to product quality and microbiological or chemical contamination. Although some changes were made in the industryearlier, the bulk o f investment inquality assurance and food safety facilities and systems has occurred over the past decade.55The $14.5 million invested in standards compliance between 1995/96 and 2002/03 represents approximately 1percent o f the total value o f Indianbulk and semi-processed spice exports duringthis period.56 The largest investments have been in various types o f cleaning and sterilization equipment and in associated quality assurance management systems. Inthe Cochin area alone, more than a dozen companies invested in ethylene oxide sterilization facilities costing between $100,000 and $300,000. A portion o f these costs was covered by the Spices Board as part of an ongoing program to encourage investments in technology upgrading.Many companies also invested inmechanical spice grading, washing, drying, and packaging equipment, again with some subsidy under the Indian government program. In conjunction with these investments, most o f the medium-sized and larger companies developed and implemented one or more certified quality-management systems, including HACCP, I S 0 9000, and others. Development, implementation, and certification costs ranged from $2,000 to $10,000, Nearly one hundred spice companies now have their own labs, although many of these are rather basic, able to test only for physical and chemical properties. Smaller companies have tended to use the lab testing services o f the Spices Board, the capacity o f which has been enhanced over the years. Most o f the leading companies have expanded their lab capabilities, drawing on a 50 percent grant from the Spices Board for this purpose. Equippinga fully functioning private lab to test for pesticideresidues and aflatoxin costs companies from $50,000 to $125,000. While previously they may have had one person manningtheir labs, now most havethree to five technician^.^^ Considerable attention has been given to improving farmer postharvest methods through training andsubsidized provision o f dryingmats andcement drying floors. In 1997-2002, the Spices Board trained 163,000 farmers and provided improved drying mats to some 68,000 farmers. The total budgetary allocations o f the Board's Post Harvest Development Scheme were $800,000 over the period. 55This does not include investments made inthe spice oilloleoresin segment o fthe industry. s6Total spice exports minus those of spice oils and oleoresins amounted to $1.433 billion over this period. Most o f the investment was incapital equipment. 57 The variable costs associated with an expanded battery o f lab tests have also been significant. For example, one company estimates the costs associated with testing dry chilies for pesticide residues and aflatoxin to be equivalent to 2.8 percent o f the product's FOB value. 84 TABLE INDIANINVESTMENTSINSPICE QUALITY/FOOD 4.6 SAFETY CAPACITY, M1~-1990~2003 (ESTIMATED, MILLIONS) TO us$ I I I I Investment Private sector Public sector Post-harvest materials, infrastructure, training, etc. 3.00 1.oo Cleaning, processing, and sterilization equipment; 6.00 1.oo management systems Laboratory equipment, personnel, andmaterial costs 2.25 1.25 Subtotal 11.25 3.25 Total 14.50 What have been the benefits o f farmer, company, and government investments in quality assurance and food safety? Many o f the benefits have been subtle and are not reflected in the aggregate level of India's spice exports, in large part because o f the enonnous influence o f broader supply and demand conditions andprice fluctuations ininternational markets. Companies that had upgraded their quality control systems in the early to mid- 1990s obtained price premiums on their black pepper sales, even as world prices skyrocketed inthe late 1990s. Although these prices have since fallen sharply, and fewer international buyers have been willing to pay a premium for the cleaner Indianproduct, some exporters have found relatively attractive sales inthe domestic market.58 Exporters report that it costs them some 25-30 percent more to procure (safer) chilies under contract, consideringthe price premiums that they mustpay to cover yield risk and their own costs for field staff, vehicles, and record-keeping associated with such programs. Their more general efforts to control the procurement o f certain crops through more intensive vendor screening, monitoring, and record-keeping also involve more staff time. Many o f the overseas buyers o f Indianchilies are not yet prepared to pay extra for this more rigorous oversight o f the crop. However, some buyers will pay such a premium, as will a limited yet growing number o f domestic food manufacturers and others. These measures, taken to manage risks, constitute a sort o f reputational insurance policy.59 Direct monetary payoffs are not the full picture, however. Several managers indicated that the implementation o f one or more quality or safety management systems had provided them with peace o f mind, enabling them to sleep better at night. It apparently also increased the confidence o f their buyers, especially those in the food manufacturing industry, and the confidence o f inspectors; firms with certified management systems reported having reduced frequencies o f consignment inspection, associated inspection fees, and other transaction costs. 58Where it i s estimated that 25 percent o f demand i s for a higher quality, cleaned product. 59One would expect some economies o f scale and institutional learning to be associated with such productionipostharvest oversight, reducing incremental unit costs as this approach becomes widespread. Having more direct exporter contact with farmers may also contribute to improved field and postharvest productivity. 85 Enhanced laboratory testing capacity has certainly been a contributing factor to a reduced incidence o f Indian product rejection abroad, due to microbiological or product contamination factors, although some level o f rejection continues, especially for consignments from smaller exporters. Improved testing capacity has enabled firms to meet the more exacting specifications o f particular buyers. In some instances it has enabled the industryto challenge certain qualityhafety claims or concerns on the part o f particular trading partners. While regulatory attention to pesticide residues, aflatoxin, and other forms of product contamination has thus far been stronger in Europe than elsewhere, there i s an expectation that both regulatory and private oversight on such matters will increase for other markets. The Indian industry i s increasingly confident that it will beprepared for suchdevelopments. Inthe near term, the economic retumfrom bothprivate andpublic investments inquality assurance and food safety facilities and systems has probably been quite modest because o f prevailing conditions in international markets and the modest level o f premium awarded to cleaner and safer spices in the Indian domestic market. However, those investments provide an excellent platform for the future development o f the industry. At least among leading firms, there is a growing trend away from bulk spice sales and toward custom-made, value-added, semi-processed products. Indeed, the year 2002/2003 was the first inwhich India's exports o f value-added spice products exceeded those for its whole spices. This trend will continue. Many o f the investments in improved product cleaning, processing, and testing are o f vital importance in servicing the value-added segments o f the international spices market-and o f absolute necessity if certain companies are to realize plans to sell consumer-pack and branded products. Thus, much o f the payoff from public and private investments inquality and safety assurance systems will be accrued inthe near future. Kenyan Horticulture: High Costs and High Gains at the Topof the Market As noted in Chapter 3, the leading firms in the Kenyan fresh produce industry have essentially sought to `ride the tail' o f British supermarkets, investing inproducts, internal systems, and supply chains to service the premium-quality end o f the market, including the growing demand for salads and other semi-prepared vegetable products. It i s these firms, and their farmer suppliers, that have bome the brunt o f compliance costs-and reaped the bulk o f the benefits. Others inthe industry, especially an array o f smaller-scale exporters, have made only modest adjustments intheir operations over the years and have continued to sell into countries and particular market segments (for example, the British ethnic vegetable market) that are substantially less demanding in their SPS-related product and process standards. Some smaller companies have aspired to upgrade their operations to meet supermarket requirements but have lacked the financial resources to do so (see the example inChapter 5). The tail-riding strategy, which appears to have been costly yet rewarding for the firms involved, i s essential for the industry as a whole, in view o f its inability to compete directly on a cost basis with international suppliers who face substantially lower freight costs. Several indications can be provided o f the investments and the recurrent expenditures associated with the `riding the tail' strategy. These have included the 86 construction o f high-care processing facilities, investment in private laboratories, and development o f full supply-chain traceability. It would be an exaggeration to call these standards `compliance costs', however, because they combine both the normal costs o f developing and running a modern fresh-produce export operation and a subset o f expenditures made specifically to conform to private or official standards. ' Two categories o f companies should be considered. One i s the `premium supplier'-a regular supplier to supermarkets and other up-market distributors. Most sales are o f pre- packed and source-traced produce, with improved packaging and product combinations. A second category is the `value-added prepared food operator', who combines the characteristics o f the premium supplier with the addition o f a so-called high-care line o f ready preparedh i t or vegetable products. Inthe Kenyancontext, the system of raw material sourcing has generally combined the development and operation o f one or more farms to ensure supply control andtraceability and the development of tight oversight andprocurement systems for small and larger out- growers. For larger companies, the acquisition and development o f a 100 hectare horticulture farm costs in the range o f $1.0 to $1.35 million, including the costs o f buildings, irrigation equipment, fencing, and other facilities. Professionalmanagement o f the farm, involving an experienced general manager, farm manager, a handful o f senior supervisors, and several accounts staff, could cost close to $100,000 per year. To effectively manage a smallholder out-grower system, the company would need a team o f field supervisors and assistants, some vehicles, basic collection stations, and many clerks to handle paperwork. One large company, with nearly 200 smallholder out-growers, spends about $175,000 per year to manage its system. Put another way, the transaction costs o f smallholder oversight and traceability, not including the actual prices paid to farmers, are equivalent to about 6 percent o f the FOB value o f the green beans that the company procures from out-growers. At the packinghouse level, leading companies have upgraded and expanded their facilities, putting in improved lighting and water sanitation systems, advanced cold treatment and storage systems, facilities for worker hygiene and HACCP, and advanced quality management systems. A small version o f this operation, handling 500 to 1,500 tons per year, could entail investments o f up to $1.5 million. A larger version, handling 2,500 tons or more per year, could involve investments exceeding $4.0 million. The investment in a `high-care' area, involving sophisticated temperature controls and air venting systems, could cost an additional $0.1 to $1.O million, depending on its size and whether or not an entirely new building had to be constructed. Managing such an operation requires a highly trained and experienced technical team. One large company estimates that it spends $300,000 per year (equal to 3 percent o f its turnover) on its quality assurance and food safety operations, including personnel, materials and the health testing o f staff. Yet the benefits from these investments and o f general compliance with the requirements o f upscale supermarkets also seem to have been significant for individual Kenyan companies and for the industry as a whole. Table 4.7 contrasts the net profit margins 87 achieved by leading companies for various product lines. Items toward the bottom o f the table have required more supply chain control and packinghouse upgrades. Product Typical net profit (percent) Finebeans, loose incarton 0-2 Okra, loose incarton 2-4 Mangetout in300 gmbag 4-6 Extra fine beans, topltail in200 gmtray 4-6 Garden peas, poddedin200 gm bag 6-8 Runner beans, sliced in335 gmbag 10-12 Stir fry mix, high-care, 300 gm tray 12-14 Higher margins are not the only benefit to have accrued to those who rode the tail o f Britishsupermarkets. Other benefits perceived by the exporters include the following: 0 Demand i s more consistent throughout the year, with little or no seasonality. This helps innegotiatingwith airfreight carriers. A supply program is agreed at the beginning o f the year, enabling the exporter to program own-farm andout-grower production. The supermarket clients provide detailed information on changing developments and requirements inthe market. 0 Specifications for quality, hygiene, and other matters tend to include very detailed guidelines to exporters, including examples o f good practice. 0 A supermarket connection is an excellent marketing tool. The exporter can drop the name o f its supermarket clients when talking to prospective customers. The payoff on proactive investment i s illustrated in Figure 4.3. Over the past decade, a period in which EU imports from nonmember countries have been more or less flat, Kenya has been able to increase the value o f its fresh vegetable exports significantly, in large part by shifting the product composition o f its trade, meeting the highest standards inEUmarkets, andachieving a shift upwardinthe unitvalue ofits exports. 88 FIGURE GROWTH KENYANEXPORTSFRESH 4.3 IN OF VEGETABLES, 1991-2003 50 150 45 125 g Q 40 100 E ro" ;I35 75 0 0 2 30 50 Ft3 m 25 25 20 0 1991 1992 1993 1994 1995 1996 1997 1998 19992000200120022003 111Volume +Value Source: Jaffee (2003) IBOX4.5 COMPLIANCE WITH EUREPGAP: INSIGHTS FROMMOROCCOPERU AND The EUREPGAP Protocol for Fresh Fruit and Vegetables contains 145 required elements and 65 recommendations, all geared toward encouraging the application of good agricultural practices, reducing chemical applications, protecting the environment, and enhancing worker safety and welfare. A growing number o f British, Dutch, Swiss, and Scandinavian supermarkets are requiringtheir suppliers to be certified for compliance with the EUREPGAP protocol. They may be ceitified on an individual or group basis, or by having the industry's own quality and safety management system deemed equivalent to that o f EUREPGAP. For some suppliers this hasbeena challenging and costly requirement, because their facilities and productiodmanagement practices were far below certain EUREPGAP norms. For others, relatively modest changes have beenneeded. In Morocco, several medium-sized and large tomato growers and exporters were required to make substantial investments in facilities and equipment to meet the EUREPGAP requirements (Aloui and Kenny, 2004). Many had lacked storage rooms for pesticides and fertilizers and appropriate changing and washing facilities for farm workers. One farm operating with ten hectares under plastic greenhouses and a workforce o f 60 people had to invest some $50,000 in buildings, facilities, and equipment to become compliant. Taking into account proper depreciation o f these investments over time, the firm estimates that measurestaken for EUREPGAP compliance account for some 12 percent o f its farm productioncosts and4 percent o f the FOB value o f its tomato exports. InPeru, Galdos (2004) fiids that a very large proportionofgrowers o fasparagus, citrus fruit, andavocados are implementing EUREPGAP requirements or are already certified as having done so. The primary motivations or expected outcomes o f these farmers are improving customer trust, improving farm management efficiency, and generally improved competitiveness. The most commonly reported constraints in adopting the protocol related to the initial investment costs, absence of waste disposal capacities and services (for example, safe disposal o f agro-chemical containers), and complications in training farm workers. Source: Galdos (2004); Aloui and Kenny (forthcoming) Costs of Noncompliance: An Illustrationfrom U.S. Importers Compliance (and noncompliance) costs are incurred not only by developing country suppliersbut also by their overseas trading partners. When a consignment o f fiesh fmits or vegetables is detained by regulatory authorities because o f food safety or pest-related problems, importers incur costs (Table 4.8), even if the consignment i s eventually 89 released for onward distribution. The direct costs, including lost value o f the product, can be very high, especially for small shipments. Inthe snow pea example in table 4.8, the direct costs for inspections, laboratory testing, fumigation, and temporary cold storage amount to more than one-third o fthe CIF value o fthe consignment. The indirect costs o f the event o f noncompliance may range from small to enormous, depending on the nature o f the problem, the identity o f the supplier, and the extent to which the supply interruption affects downstream customer relations. At least inrelation to the U.S. market, an interruption involving a microbiological risk i s a much more serious event than one involving pesticide residues. In the former case, the FDA may recall prior consignments from the country or supplier, which could have a major impact on consumer demand for that product and cause sustained damage to the reputation ofthe exporting country, the supplier, and the importer. Where product detention (or rejection) results inthe importer losing an important client the indirect noncompliance costs for the firm involvedcanbe very great. TABLE ILLUSTRATIVECOSTSOFFRUITANDVEGETABLESHIPMENTS 4.8 TO THE UNITED STATESTHAT ARE DETAINED BUT LATER RELEASED (us%) Element Cantaloupe Mango Red Asparagus Snow peas raspberries Container type 40-ft reefer sea 40-ft reefer 40 x 48 inch 88 x 125 inch 88 x 125 inch container sea container pallet inreefer P1P air pallet P1P air pallet truck Boxes 840 40-lb 4356 10-lb 144 flats. each 256 11-lb 300 10-lb cartons cardboard with 12'6-oz Styrofoam cardboard boxes clamshells pyramid boxes boxes Lab services 300 300 300 300 300 Fumigation 120 0 0 120 120 Cold storage 210 871 87 154 180 Sortinglrepacking Variable Variable Variable Variable Variable 4.5.3 Meat Products and Animal Health Controls As with food safety standards, the cost o f compliance with sanitary standards can be disaggregated into both nonrecurring and recurring, and tangible and nontangible elements. As most zoosanitary standards deal with the eradication o f disease, by 90 definition an activity with a finite time horizon, the bulk o f tangible costs are nonrecurring. Table 4.9 provides an overview o f the most common costs incurred in meeting zoosanitary standards. Table 4.10 then provides several estimates o f tangible costs that have been incurredby countries inefforts to control animal diseases and obtain or maintain access to major international markets. Comparing different control strategies inthe case o f a disease outbreak requires a risk assessment approach (including cost and benefit estimates) to identify the most appropriate strategic options.6o Tangible Intangible INonrecurring - Stamping outiculling o f animals Reduced investment indomestic Vaccines and their delivery sanitary control and other areas o f production improvement (breeding, Quarantine installations (fencing) and nutrition, marketing) related laboratory equipment, investment in traceability Recurring Surveillance and early disease alert system Underutilization o fprocessing and Running costs o f traceability systems marketing facilities and related unemployment Overall, the vaccination approach, consisting o f the purchase o f vaccine and its administration, combined with movement controls, is clearly the most efficient, with a cost o f US$ 0.75 per animal per vaccination. Onthe other hand, multiplevaccinations are requiredfor most diseases, and disease-free status with vaccination, inthe case o f FMD, does not provide access to many markets. Stamping out, ifperformed immediately after a disease outbreak, can be very cost- effective. However, this strategy i s often affected by late or underreporting, by inadequate or difficult movement control-such as for wildlife-and by other quarantine weaknesses, effects that usually raise the cost o f this approach. For example, the 2001 outbreak o f FMDinthe UnitedKingdom, diagnosed with some delay and controlled only through stamping out, caused the destruction o f about 4.5 million animals. However, in the subsequent outbreak in the Netherlands, which was identified more quickly and controlled through a combination o f stamping out and ring vaccination, only 260,000 animals had to be destroyed. Continuous mass vaccination to prevent disease outbreak is a less risky strategy, but for large animal populations, such as in the large countries or regions, and for diseases with multiple pathogen strains, it can be costly and still exclude access to manyindustrialized country markets. 6o One issue in the choice o f control strategy is the cost-creep of compliance-the continuing need for investments as standards continue to evolve. The cost o f compliance experienced by the beef export sector o f Botswana illustrates this point. Botswana benefits from a beef import quota at a preferential price inthe EuropeanUnion. That quota may have justified the original investments to free the country from FMD in the early 1980s and subsequently. Yet, the EU's continual tightening o f slaughterhouse standards and recent traceability requirements challenge the wisdom o fthe original decision to focus on the EUmarket. 91 In the context of trade in meat and animal products, the direct and indirect costs of noncompliance may approach or even exceed those directly associated with disease control measures. The most substantial noncompliance costs are typically the declines in trade that attend the loss o f access to remunerative markets, and the related need to maintain animals for a longer period or redirect production to less remunerative markets. For example, while the direct costs o fUruguay's FMDdisease control measures in2001- 02 were estimated at about $31 million, the value o f the country's beef exports temporarily declinedby more than $150 million, from $369 to $217 million. TABLE 1 ILLUSTRATIONSOFTAN [BLECOSTSOFDISEASECO rROLMEASURES 4.1 Country Intervention costs Remarks Argentina Mass vaccination o f cattle Vaccinations cost US$lSO- population following failure 2.00 per animal for three o f stamping out vaccinations. Indemnitvfor culled animals US$250 per head o f cattle Botswana Indemnityfor slaughtered US$lOOmillion for 320,000 Does not include cost animals animals o f increased cattle/ wildlife fences Philippines Mass vaccination to eradicate A total o fUS$14 million or endemic disease about US$0.50 per animal Strengthening surveillance US$l millionper year or system US$0.50 per animayyear Uruguay Mass vaccination intwo One vaccination, US$0.65 per Does not include cost provinces animal o f increased Indemnityfor culled animals US$200 per animal (all species monitoring included) Emergency systems US$l millionper year or US$O.lO per animaVyear Zimbabwe Mass vaccination inbuffer Vaccination costs US$1.25 per Additional cost o f zone every six months animal US$l8 million for Strengthening surveillance US$7.6 millionper year or wildlife fencing system US$0.75 per animauyear Note: The data on Argentina, Philippines, Uruguay and Zimbabwe all relate tcoot and mouth disease (FMD).The data onBotswanarelate to contagious bovine pleuro-pneumonia (CBPP). Likewise, it i s estimated that, following the 2001 outbreak o f FMD, the British beef industry lost nearly $200 million inexports. The government spent nearly $1.7 billion in compensation for animals destroyed. Agricultural producers experienced a loss o f $260 million associated with having to hold animals for a longer period, plus a loss o f $75 million associated with the sale o f animals at discounted prices.61The U.K. tourism Thompson and others, 2002. 92 industryis estimated to have lost some $7 billion as a result o f the decline inthe number o f visitors as a direct result o f the outbreak.62 Other costs o f noncompliance are borne by associated or even non-associated industries. For example, the income o f the Argentine meat packing industry was estimated to have declined by some $40 millionper month duringthe course of the major FMDoutbreak in 2000-01. Even the limited outbreak o f FMD in the Netherlands that affected only 26 farms andwas contained within one monthi s estimated to have cost $350 million, largely due to its impact onrelated sectors (Rweyemamu andAstudillo, 2002). TheHigh Costs of Disease Control: An Illustrationfrom Argentina After a major outbreak o f FMD in 1990-91, concerted control efforts kept Argentina FMD-free throughout the 1990s. In 1997, the OIE declared Argentina to be FMD-free with vaccination, opening up exports of fresh beef to several previously closed markets, including the United States. By 1999, Argentina stopped vaccinating its cattle herd and was certified by the OIE in early 2000 as FMD-free without vaccination, promising opportunities for high-value niche-market sales in Japan and Korea. Subsequent events, however, dashed those hopes (Rich, forthcoming). InJuly 2000, a small outbreak ofFMDwas recorded inthe province ofFormosanear the Argentina-Paraguay border. A week later, another outbreak occurred in the province of Entre Rios, more than 500 km from the previous site. The disease progressed steadily, peaking inlate September before slowing by November. Initially, stamping out measures and movement controls were taken. Apparently, the disease was never fully contained in the initial period, and the full severity o f its spread was not publicly acknowledgedby the government. InDecember 2000, the disease again gained momentum; by M a y 2001 more than 150,000 animals per week were beingexposed to the virus. The policy o f stamping out and movement controls was ineffective in controlling the disease. InApril 2001, the Argentine government began a multi-step program to eradicate the disease. This involved regionalizing the country into five areas. Patagonia was declared to be FMD-free without vaccination, whereas the other four regions were required to vaccinate all cattle stocks. The mass vaccination program was successful in slowing the disease, which by the end o f 2001 had essentially run its course; the last outbreak was in January 2002. By the end o f the outbreak, nearly 2.8 million animals (roughly 5-6 percent o f the national cattle population) had been exposed to the virus. More than 150,000 had become infected, and 875 had died. Approximately 1percent o f all cattle farms were affected. The direct costs to combat the disease were substantial. The first three rounds o f the vaccination program cost $65 million in 2001 and $18 million in 2002, all borne by the government. In addition, one source reported that downstream meat packing industries 62The loss o f meat exports resulting from a single case o f BSEinCanada is estimated at CA$1 billion, with the loss o f live cattle sales (both feeders and breeding stock) estimated at a further CA$700 million, Thailand's poultry exports are expected to decline from US$1.2 billion in2003 to $480 millionin2004 as a result o f the outbreak o f Avian flu. 93 that produced for export were losing an estimated $40 million per month from idle production. The government assisted the meat packing industry through temporary provision o ftax rebates for 20 export-oriented packers. The costs o fveterinary services to contain the outbreak are unknown, although likely sizable. Total indirect costs of the outbreak on other sectors o fthe economy are also unknown. Bylaw, indemnity payments were requiredto bepaidto producers whose animals were slaughtered. The effects o f FMD on livestock markets in Argentina were pronounced, particularly in export markets. Most major export markets for chilled or frozen meat from Argentina, except for Brazil, Hong Kong and African markets, remained closed for most of 2001. The European Union delayed its decision to reopen its market to Argentine beef until November 2001. In the case o f fresh beef, the closure o f the U.S. market resulted in a reallocation o f exports to lower-value markets. Markets such as Canada, Chile, and the United States, which were importing Argentine beef in 1998-2000, had been replaced in 2002 by markets such as Bulgaria and Egypt. In 2003, Argentina was allowed to export precooked, individually quick-frozen meat to the UnitedStates, providing a means to add value to exports o fprocessed meat products. Production effects from the FMDoutbreak, by contrast, were negligible, giventhat only a small fraction of animals were slaughtered or affected by the disease. At the same time, however, there were severe short-term impacts in downstream industries, particularly meat packing. Indomestic markets, prices for live animals fell throughout 2001. The real price o f steers, for instance, fell from 78 cents per kg in January 2001 to 64 cents per kg in December 2001. However, by the end of 2002, domestic prices had rebounded to levels that were double those o f December 2001, aided inpart by the devaluation o f the Argentine peso. Numerous steps have been taken in disease control programs since the FMD outbreak. Vaccination has been mandated as the control regime for all animals inArgentina, except in Patagonia. In response to demands from certain export markets, particularly the European Union, a traceability program was implemented to improve animal identification and tracking. Despite these efforts, FMD re-emerged in Argentina inmid- 2003, with isolated outbreaks occurring in the northwest o f the country near the border with Bolivia. While this outbreak was isolated and contained by stamping out the affected livestock (mainly pigs), the OIE suspended Argentina's designation as FMD-free with vaccination for all regions north o f the 42nd parallel in September 2003. Areas to the south o f this demarcation are still recognized as FMD-free without vaccination. High- value markets such as the Canada, Japan, Korea, and the UnitedStates remain closed for fresh beef. As will be discussed in chapter 5, one of the beneficiaries o f Argentina's ongoingproblems has been Brazil, whose beefexports have expanded substantially. 4.6 Conclusions This chapter has explored the costs o f responding to food safety and agricultural health standards in international trade. While many forms o f technological and organizational change involve shifts inthe levels and structures o f operating costs, those associated with 94 changing agri-food standards have proven to be controversial because o f perceptions that the required measures are unnecessary or unjustified, or that they yield little or no benefit to those countries and suppliers that make changes. The results o f our case studies (supplemented by other research) leadto the following conclusions: 0 There are certainly examples o f scientifically unjustified standards (and thus `unnecessary' compliance costs), yet this can not be considered the norm. Nearly all o f the case studies examined involved legitimate issues o f food safety or agricultural health that requiredbetter management. 0 While less well understood or quantified, there are a broad array o f tangible and intangible benefits that accrue to countries and suppliers that improve their food safety and agricultural health management systems, especially those that do so in a proactive mannerthat yields competitive gains. 0 Compliance costs may be significant in absolute terms, but they are often small relative to the value o f exports, highlightingthe importance o f continued market access. Although overall compliance costs (relative to total exports) may not be especially large at the national or industry level, particular firms or supply chains may well face substantial costs. This is especially likely for commodities and exporters for which trading margins are low due to competitive conditions, high operating costs, and other factors. 0 It is difficult to generalize about compliance costs. There are many strategic responses to emerging standards and varied technological and administrative ways to achieve the needed food safety or agricultural health results. Different approaches entail different cost structures. Our analysis also highlights the importance o f the starting point for compliance. Countries and firms with higher levels o f capacity will face lower compliance costs, perhaps because they were proactive inthe past inanticipating standards. Further, they are likely to be able to achieve compliance in a shorter period o f time, yielding first mover advantages. This finding emphasizes the cumulative nature o f capacity-building inthis field. 0 For these and other reasons, the relative significance o f compliance costs varies enormously between different countries, and between industries and firms in the same country. Important variables include the prevailing organizational and geographical structure o f the supply chain, the availability o f administrative and technical capacities, the level o f intra-industry andpublic-private cooperation, and the strength o f existing technical service industries, among other factors. Each o f these can be influenced by policy measures andinvestments. 0 Improved food safety and agricultural health is both a national and international public good. Hence, inthe context o f developing country exports, when suppliers and governments adopt measures to better manage a food or agricultural health risk, foreign consumers and producers benefit. Such benefits normally would not be included in calculations o f the economic return on SPS management investment within a developing country. The costs and benefits associated with compliance (or broader strategic responses) to evolving food safety and agricultural health standards raise some important issues for development agencies and their capacity-building programs. In cases where costs and 95 benefits are both high, it may be appropriate for agencies to provide technical and financial assistance aimed at achieving compliance, within an overall strategic response to evolving standards. The same response may not be appropriate, however, where costs are high and benefits low. In such cases, agencies might better direct their efforts to enabling clients to refocus exports to altemative markets or products. That said, the distributional consequences o f compliance decisions must be taken into account-those consequences are the subject o f the next chapter. 96 CHAPTER 5 THE DISTRIBUTIONAL EFFECTSOF INTERNATIONAL AGRI-FOOD STANDARDS 5.1 Introduction Any changes in standards for agricultural and food products in international trade inevitably have distributional impacts that reflect the nature o f these standards themselves and the strategies employed to achieve compliance. In many cases, these impacts are poorly understood and, indeed, are not even recognized. However, even a cursory assessment of the changes that take place consequent upon compliance with food safety or agricultural health standards illustrates the complex ways in which the costs and benefits are distributedbetween supply chainparticipants and within the wider economy. Although most o f the cases presented herein were not designed to study distributional impacts per se, they nevertheless highlight the many ways inwhich the costs andbenefits o f compliance have affected different economic agents. The analysis presented inChapter 3 suggests that recognition o f such distributional impacts should be considered, first, while selecting the proper strategic approach to achieve compliance and, second, in assessingthe results o f such efforts. Further research on distributional impacts i s urgently needed; it is hoped that the cursory findings presented below will help to stimulate interest inthis area. 5.2 DistributionalImpactsof Standards The introduction o f new and/or stricter standards for agricultural and food products in international trade can result in a wide range o f primary and secondary distributional effects: At the international level, via their effect on the relative competitiveness o f different countries, given their existing SPS management capacities, climatic/geographical factors, and other factors which influence their ability to comply. Countries that are able to comply at lower cost and/or manage compliance in a manner which yields other productivity gains will gain market share at the expense o f others. To the extent that there are economies o f scale in compliance, larger countries or larger industries would be expected to gain at the expense o f smaller ones. At the industry or primary production levels, the new standards affect the relative competitiveness o f different types o f enterprises and farming operations. Where there are economies o f scale in compliance, enhanced standards can have a detrimental impact on smaller firms and/or producers (see Crain and Johnson 2001 inthe context o f environmental standards). But multiple factors may also be involved including the level o f preparednesdexperience o f such players, the breadth o f their activities and dependence upon particular markets, the available support infrastructure, and so forth. Within individual supply chains, distributional impacts are seen, first, inthe allocation o f compliance-related costs, benefits, and performance risks among supply chain participants and, second, in the likelihood that downstream buyers will choose to 97 consolidate their supply base in order to minimize transaction costs (see Dolan and Humphrey, 2000) The distribution o f costs, benefits and risks will partly derive from where the specific problems lie and the nature o f the regulatory requirements. However, positions of relative power within the supply chain are also important in this distribution. Through broader spillover effects in the domestic economy. For example, domestic consumers may be affected by measures taken for the export market, through the availability, quality/safety, and price o f the same products or those which complement or compete with these for resources. Rural residents may be affected by the environmental impacts o f proscribed export farming practices. Compliance with standards may impact the broader demand for technical and administrative services. Specific illustrations o f each o f these types o f distribution effects will be provided in subsequent sections o f this Chapter. In practice, identifying and (to an even greater extent) quantifying the distributional impacts o f standards i s problematic. In many cases these impacts are subtle and wide- ranging, extending both through and outside o f the supply chain directly affected by a particular standard. Further, disentangling the impact o f changes in standards from other prevailing changes in the structure o f supply chains i s often difficult, making it hard to attribute any observed changes to compliance with standards alone. The economic impacts o f standards tend to reflect and even exaggerate a country's underlying strengths and weaknesses. There is also a temporal dimension. There may be several rounds o f distributional effects as economic agents modify their strategies and particular approaches to standards and as these filter through various product and factor markets. Inpractice, the major losers and (to a lesser extent) gainers from new standards are most visible. This has two effects. Firstly, there can be a tendency towards a rather biased perspective on standards that i s focused on those who lose, even where there is a net benefit across society as a whole and potentially major pay-offs interms of economic and social development in the medium or long-term. Such a perspective also downplays the importance o f those who gain, even though these may be significant in number. Secondly, it tends to focus attention on major losers/gainers that are easily identifiable, even though the impacts o f standards can be dissipated across many groups in society. This is o f particular concern where small impacts that largely affect vulnerable groups in society are ignored. 5.3 InternationalDistributionEffects Concerns about the international distributional effects o f rising standards center on the possibility that lower income countries, facing more severe capacity constraints, will experience a decline in their competitiveness and thus be (further) marginalized in the trade in higher value agri-food products. Some literature examines the particular circumstances facing countries in certain regions (Le. Africa; South Asia) and contends that such countries will be especially affected by new or more strict standards (Otsuki et al. 2001; Jha 2002). The overall evidence on this is rather mixed, with examples o f both 98 low and middle-income countries experiencing significant trade problems and examples ofbothtypes o f countries beingsuccessful inusingstandards for competitive gain. Horticulture, Spices,and Nuts Inrelation to horticulture, a limitednumber of middle-income countries have long held major shares of particular markets for tropical products or `counter-seasonal' produce. Suitable agro-ecological conditions were combined with investments in production (especially irrigation) and marketing (especially freight logistics) infrastructure to establish and maintain these competitive positions. Very few lower income countries held prominent positions in these markets prior to the 1990s, and the more recent escalation and proliferation o f standards. Besides for certain isolated `crisis ' situations (Box 5.1) there is little evidence to suggest that newhore stringent standards, as a distinctfactor, have had a major impact on the overall level of fresh horticultural exports by low income countries. In fact, exports o f fresh and processed h i t s and vegetables from low-income countries experienced an increase from $1.12 billion in 1990-91 to $1.95 billion in 2000-01. Thus, their share o f world exports in these products increased from 2.0 percent to 2.7 percent (Diop and Jaffee, 2005). The Kenyan experience highlighted here illustrates the possibility for a well-organized industry in a low income country to effectively utilize standards for competitive gain. Many o f the SPS-related conflicts on horticultural matters have been between industrialized countries (i.e. US vs. Japan) or betweenmiddle-income andindustrialized countries (Box 5.2). Inthe spices trade, there is also little evidence that rising standards is marginalizing low income countries as a group. The somewhat increased attention to food safety and plant health issues inthe spices trade since the early-to-mid-90s does not seem to have had any appreciable impact on the overall distribution o f trade among developing countries. The same eight countries that accounted for 75-80 percent o f developing country exports in 1995 accounted for a similar share in 2002. The shifts inrelative shares had more to do with international price movements for particular spices and increased supply capacity in certain countries (Le. Vietnam and China) than were the result o f standards-related effects (Jaffee forthcoming). India is one o f the dominant players ininternational trade in value- added spice products, including oils and oleoresins. It i s now seeking to increase its presence inthe finishedconsumer products market. Inrelation to driedfruit and nuts, Otsuki et al. (2001) draw attention to the potential adverse effects on the exports o f Africa arising from the harmonization o f EU standards for aflatoxin at a more stringent level than recognized under CODEX. Employing a gravity model, the authors project that African exports to the EUo f these products will be hundreds o f millions o f dollars lower than if the EU had adopted the less stringent CODEX standard. The actual experience since the EU standards came into full force (in April 2002) has been much different than projected. While product rejections due to aflatoxin have indeed increased substantially, the primary countries affected have been Turkey, Brazil, and Iran. The African (including North African) share o f the EUmarket for dried h i t has actually increased as Tunisia and Algeria-both with exceptionally dry climates-experience very low incidence o f aflatoxin. A limited number o f African (especially South African) consignments of groundnuts have been rejected inrecent years 99 due to aflatoxin, yet in the majority of cases the recorded levels o f the toxin have been quite high and would have failed to meet even the CODEX standard. For most African groundnut producers, there have been multiple factors inhibiting their international competitiveness inthe confectionery nut market (see Jaffee and Henson 2004). BOX 5.1 CYCLOSPORA AND THE MIGRATIONRASPBERRY EXPORT OF CAPACITY FROM GUATEMALAMEXICO TO In the late 1980s, several firms began exporting raspberries from Guatemala to the US at times when domestic supplies were limited. By 1996, 85 growers were exporting raspberries valued at $3 million. However, at this time the U S Centers for Disease Control and Prevention (CDC) and Health Canada received reports o f some 1,465 cases o f food-borne illness associated with the parasite Cyclospora. After some time, raspberries from Guatemala were identified as the most likely source o f the contamination. While the US FDA sent a teamto Guatemala to investigate, there was much scientific uncertainly and great difficulty identifying the likely source o f the contamination. The association representing Guatemalan growers (GBC) remained unconvinced that its raspberries were the source o f the problem. It attempted to put inplace a limited programto screen out potentially high-risk farms, yet this program had no effective enforcement mechanism. After another large outbreak o f Cycospora-related illnesses inthe springo f 1997, the GBC voluntarily agreed to stop exports o f raspberries to the US. Despite the fact that the Guatemalan government created a food safety commission with certain enforcement powers inlate 1997, the FDA was unconvinced and essentially imposed an importban on Guatemalan raspberries. Over the subsequent two years many organizations inthe U S and Canada worked with the Guatemalans to solve the problem. A `Model Plan o f Excellence' (MPE), requiring the application o f certain food safety practices by growers, involving mandatory inspection by government and a systemfor product traceability back to the individual grower was put inplace in 1999. Subsequently, the U S again permitted imports o f Guatemalan raspberries. In 2000, however, there were two hrther Cyclospora outbreaks which were traced back to a single Guatemalan farm, which was subsequently removed fkom the MPE program. There have been no such outbreaks since. Facing consumer concerns about the safety o f Guatemalan raspberries, several U S supermarkets sought alternative sources o f supply. Recognizing the enormous challenge in rehabilitating the reputation o f Guatemalan raspberries, a number o f leading f i inthe industry shifted their operations to Mexico. By 2001, there were only four growers o f raspberries remaining inGuatemala, with annual exports o f less than $200,000. Yet, Mexico's exports o fraspberries grew from $2.9 million in 1998 to $8.9 millionin2002. Although the Guatemalan raspberry industrynever recovered, other elements o f the fresh produce industry did build upon the institutional capacity-building which took place under the MPE. For example, the IntegratedProgram for Agricultural and Environmental Protection (PIPAA) has been working closely with local blackberry growers, a leading local supermarket chain and others to enhance food safety management systems. The PIPAA is also collaborating with APHIS to expand market access for Guatemalan exports o f papayas, greenhouse tomatoes, greenhousepeppers, and avocadoes. This case illustrates a number o fkey issues. First, delays inaddressing SPS problems may adversely affect an industry's exports and reputation. Second, an effective traceability system allows trade restrictions to be overcome by particular players, rather than needing to enhance standards in an entire industry. Third, strong grower organizations can improve an industry's ability to respond to SPS challenges. Fourth, small countries and niche products are probably far more vulnerable to loss o f markets and reputation inthe face o f food safety problems than would be the case with larger countries and more mainstream or generic products. Both international buyers and consumers are likely to be more tolerant andpatient with core and long-standing suppliers that have established a national image inwhich they have confidence. Sources: Calvin (2003); Calvin et al. (2003) 100 r Box5.2 INTERNATIONAL (ANDNATIONAL) DISTRIBUTION BENEFITSFROM OF MEXICAN EXPORTS AVOCADO THEUNITED STATES OF TO There has been a longstanding and high profile dispute related to US phytosanitary controls on imports of avocados from Mexico. In 1914, U S officials identified avocado seed weevil in Mexican avocados and instituted an import ban. This import banremained inplace through the 1980s despite repeated attempts by the Mexicans to gain market access and on-going dialogue between the Mexican authorities and the U S Animal and Plant Healthinspection Service (APHIS). Inthe 1980s, Mexico expanded its avocado production and improved its production processes. It again sought entry into the U S market. In July 1993, APHIS agreed that Hass avocados grown in the State of Michoacan could be imported into Alaska under certain conditions. Trade began and a year later a request was made to gain access to markets in the U S northeast. An extended consultation process followed, with growers from California and Florida voicing their concems about potential adverse effects on the domestic industry should improper quarantine occur. In early 1997, APHIS published a ruling which allowed Mexican Hass avocados to enter 19 states and the District o f Columbia. Imports were permitted from certain growing areas in the state o f Michoacan under specified conditions, providing a multiple layer of safeguards at farm, post-harvest, product inspection, and market levels. All stages o f the overall system are overseen and supervised by APHIS. Since the lifting o f the restrictions. Mexican exports o f avocados to the United States have increased significantly, risingfrom only 367 tons in 1991 to nearly 15,000 tons in 2000. Following a request from the Mexican government, in Novembei 2001, APHIS issued a new rule, extending the number o f states to which avocados can be exported to 31 and extendingthe permittedentry periodto six months from October 15 to April 15. While at a macroeconomic level, there have clearly been significant benefits for Mexico and, more specifically Michoacan, questions have beenraised about the impact on local producers. Inorder to secure access to the US market, Mexican legislation has established a systemo f phytosanitary control that applier to commercial sales to both intemational and national markets. Even unregistered orchards are routine11 inspected to check on production practices and monitor harvesting methods. Although the govemmeni claims that such controls will also be o f benefit to producers supplying national markets, t h ~ sis not ye1 evident. Stanford (2002) suggests that the benefits o f the long-standing and costly politicalprocess througk which access to US markets was gained has beenlargely co-opted by an `elite' o fmajor avocado growers. Fish and Livestock Products Food safety standards are an important factor influencing the level and direction o f intemational trade infish and fishery products, and in particular the performance of developing countries. Global trade in fish and fishery products was US$55.2 billion in 2000. Major exporters include Thailand (US$4.4 billion) and China (US$3.7 billion). Collectively, developing countries account for around 50 percent of world exports, compared with only around 35 percent inthe mid-1970s. At the same time, industrialized countries account for around 80 percent o f global imports o f fish and fishery products. Thus, a dominant trade flow is from developing to industrialized countries. This suggests that, while food safety standards are rising, these have not prevented developing countries from capturing an increasing share o f global fish exports, albeit this may have occurred at a slower rate than would otherwise have beenthe case. Internationally, requirements related to hygiene in fish processing and controls on antibiotics, for example, have favored countries able and willing to make the investments necessary to comply. A good example relates to hygiene requirements for fish and fishery 101 products in the EU. Only countries for which the European Commission has approved local requirements as being at least equivalent to those in the EU and for which specific import requirements have been established are subject to reduced physical inspection at the border. These are publishedin Part Io f the list of approved countries. Countries for which these procedures have not been completedbut where assurances have been given that requirements are at least equivalent to those in the EU are permitted to export on an interimbasis, yet with a higher level ofborder inspections. These are publishedinPart I1 o fthe list o f approved countries. A number o f countries, including well-established exporters o f fish and fisheryproducts, have struggled to comply with the EU's requirements. Thus, while the number of countries achieving Part Istatus increased from 27 in April 1997 to 83 in December 2003, 26 remain in Part I1and face the possibility o f being excluded from EUmarkets unless they achieve compliance by the end of 2005. Still, more than halfof the Part I countries are low or lower middle-income. As of December 2003, nineteen African countries were on List 1, exceeding the numbersfor Asia and Latin America (both with sixteen countries). With relation to livestock, the difficulties faced by several South American countries in controlling foot and mouth disease (FMD) have contributed to shifts in competitive positions in the world market for beef One `beneficiary' o f Argentina's on-going problems (and declining trade) has been Brazil. Brazilian production and exports o f beef have exploded inrecent years, spurredby technical improvements inproduction andvery effective market promotion efforts. Despite having its own outbreaks o f FMD in 2001, the effects on production and exports were minimal as the problem was isolated to a few locations. In 2002, Brazil launched a major investment to register and trace all cattle born in or imported into the country. This should be completed by 2007, with an estimated total cost of $400 million. Otherwise, the country has taken major steps to harmonize its sanitary arrangements with those o f major trading partners. Between 1998 and 2002, Brazilian exports of fresh beef increased from $277 million to $776 million, and its combined exports o f fresh andprocessed beef exceeded $1billion in2002. (Rich, forthcoming) The pattern of low-income countries in livestock trade essentially reflects an inability to meet a broad array o f food safety and agricultural health requirements, both pertaining to livestock disease and hygiene controls. Indeed, most low-income countries are restricted to trade in live animals (on the hoof) rather than livestock products, for which attention need not be given to hygienic slaughter in an abattoir, meat inspection and refrigerated transport. Examples include intra-regional trade in West Africa and supplies from East Africa to the countries o f the Persian Gulf. However, even ifanimal disease and hygiene capacity could be enhanced, these countries would need to compete with well-established livestock product exporters, for example Argentina and Australia, which are more reliable producers withfewer animal health problems and more standardized production (Upton 2001). 102 On a more general level, an analysis o f US.and EUborder product rejections related to SPS matters (Jaffee and Henson 2004) does not indicate that low-income countries have been especially affected. The contrary i s actually the case. In2002, a limitednumber o f developing and industrialized countries accounted for the bulk o f rejections. Among developing countries, most o f the rejections were from countries which have been large/dominant suppliers o f `sensitive' products for many years (for example Brazil, / Thailand, Mexico and Turkey), or newly emerging large exporters o f such products (for example China, Vietnam and India). Inthat year, five countries, namely China, Thailand, Turkey, Brazil and Vietnam, accounted for nearly 60 percent o f EU rejections o f agricultural and food product from outside o f Europe. These are some o f the countries which are simultaneously increasing their EUmarket share for such products, suggesting that border rejections are more o f an irritant than a major problem for larger exporters. Incontrast, in2002 the EUonly rejected 26 consignments from low-income sub-Saharan African countries, with most countries experiencing only one or two such rejections. This reflects the fact that most o f these countries are mainly exporting less `sensitive' products in terms o f food safety or agricultural health risks, or have been recognized as being fully harmonized with EUrequirements for more `sensitive' products (for example fish and fishery products) and thus subject to lower levels o fborder inspection. 5.4 Industryand Supply ChainEffects A number of previous studies serve to highlight the distributional impacts o f standards within established export supply chains (see for example, Dolan and Humphry 2000; McCulloch and Ota 2002). These tentatively explore the impact on the horizontal and vertical structure o f industries including patterns o f participation by smallholder farmers and various types o f employees. This section extends this analysis, both in horticulture, which is the focus o f much o f this literature, and into other industries. Evidencefrom Horticulture Inrelation to horticulture there is concem that more stringent SPS (and other) standards will adversely affect the continued participation o f small enterprises and smallholder farmers in export supply chains. SMEs are seen to be disadvantaged given the knowledge-intensity and/or economies o f scale associated with certain standards-related functions. Requirements for the application o f GAP and for produce traceability might be expected to substantially raise the transaction costs o f exporter relations to dispersed, smallholder farmers and thus harmthe latter's relative competitiveness. The Kenyan experience well illustrates the complexities involved in untangling the distinctive impact o f standards on patterns o f participation and welfare. Since its establishment in the late 1950s and early 1960s, Kenya's fresh produce trade has long been dominated by a few companies. By the mid-l980s, the leading six companies accounted for two-thirds o f the trade. TakingKenya's fresh fruit and vegetable trade as a whole, the level o f concentration has not changed from a decade ago. The leading six companies accounted for 75 percent o f the volume o f exports in 1991 and 71 percent o f the total in 2001. Most of the leading companies today were also among the leaders two 103 decades previously, although the scale and sophistication o f their operations have substantially changed. Also substantially changed i s the number o f smaller exporters. Through the 1980s, at any one time there were typically more than one hundred licensed exporters, the majority o f which were very small andpart-time `brief case' operators. Many o f these smaller traders sent periodic consignments to friends or relatives in Europe or the Middle East. Today, there are only about two dozen such companies. Failure rates for such firms have always been high, yet in recent years there has been relatively little new entry into the trade. Standards have been a contributing yet seconday factor. More important has been the squeeze in profitability for somefirms in theface of intensiped competition in the market, limited consumer income growth, risingfreight costs andperiodic adverse movements in relative exchangerates. All of thesefactors have rendered it dgficult to continue toprofit from the sale of bulkproduce via wholesale markets. The leading firms in the Kenyan horticultural export trade have re-oriented their businesses to servicing up-market supermarket chains. About a dozen firms, with varied ownership patterns, are restructuring their operations to service these clients, with a handfulproviding the leadership. Some smaller firms have been caught in the middle, unable to grow and profit in the more traditional lines o f business, yet also unable to make the leap into a larger and more sophisticated operation to service the supermarkets. Limited management capacity has been the constraint for some, yet others have been primarily constrained by lack o f financial resources (see Box 5.3). IBOX 5.3 UPGRADINGFORBRC: THECHALLENGEFORA SMALLERKENYANEXPORTER Most o fthe companies that have recently obtained British RetailConsortium (BRC) certification have been selling to UK supermarkets for a number o f years. They have made relatively large investments in upgrading their pack-house facilities over time, to accompany their overall business expansion. However, there are other firms that presently operate on a small scale, yet recognize that long-term viability may depend upon their ability to service the UK or other supermarkets with value-added product. They are unsure whether they can maintain, let alone grow a business based upon low margin sales o f loose produce to clients whose prime concern i s competitive pricing. One such firm is examining the prospects o f transitioning toward supplying pre-packed vegetables, necessitating that it put inplace the management systems and facilities to conform with BRC standards. This firmpresently has annual produce sales o f 600 tons, implying a turnover o f perhaps $1.4 million and retainedprofit inthe range o f $40,000 to $60,000. Itrecently undertook a feasibility study that determined that the firm would needto investjust under $150,000 inpack-house modifications and equipment to reach the necessary standard. Such investment would involve: (1) the installation o f temperature control equipment in the packing area ($40,000); (2) the partitioning o f cold rooms to accommodate pre-cooling, cold storage o f un-graded produce and storage o f graded produce, all entailing new equipment ($38,000); (3) the installation o f produce washing and drying equipment ($35,000); and (4) the lining o f the packing area and cold rooms and ceilings with panels coated with food grade materials ($19,000). Several other measures would also be required, including the development o f an appropriate documentation system. The fmwould also need to hire the necessary food technology staff, develop a HACCP system, and develop an effective system o f traceability for its produce. This will cost some additional tens o fthousands o fdollars. ISoulace: Jaffee (2003) 104 Regarding the participation o f small-holders, it was noted in Chapter 3 that one o f the strategies taken by some o f the leading exporters inthe mid to late-1990s was to acquire or lease their own farms in order to obtain better control over at least part o f their supplies. This backward integration was partly stimulated by food safety and/or traceability concerns combined with other factors, including the need for better volume control now that more sales were conducted under fixed seasonal contracts rather than under consignment arrangements with importer/wholesalers, and the ambition to experiment with new products, some o f which could not be properly grown by smallholders under Kenyan conditions.63 Earlier research (Jaffee 1990) estimated that in the mid-l980s, upwards o f 14,500 smallholders were participating inthe fresh produce export system, o f which about 7,000 grew various vegetables and 7,500 various h i t for export. At that time, small-holders were believed to account for 45 percent o f the volume o f export vegetables, and about 65 percent o f the volume o f export fruit, with combined share o f 50 percent. Research undertaken in2002 (Jaffee 2003) estimated that the smallholder share o f vegetable export volume had declined to 27 percent, while their share o f fruit exports had increased to some 85 percent. While the number o f small-holders growing vegetables for fresh exports has likelydeclined from a decade ago, those producing avocadoes and other h i t s for exports has increased, probably by a larger amount. 64 Yet, this is an evolving situation. Firms that were relatively `late' in shifting toward a supermarket focus are at an earlier stage o f backward integration, while the firms which had backwardly integrated earlier were finding that certain vegetables could be more cheaply or better produced by small-holders, or that there was too much productiodsupply risk associated with concentrated production and they are in a process o f re-engaging with smallholders and intensifying out-grower systems. H o w this plays out into the hture will depend upon the trajectory o f growth intrade indifferent products and the ability o f exporters, working in conjunction with the Kenyan government and various donor-supported programs, to promote the applicationo f GAP among their small- holder suppliers and cost-effectively achieve certification o f these out-grower arrangements and produce traceability. Whether or not (smallholder) certification can truly be an effective and sustainable alternative to vertical integration in highly demanding horticultural supply chains is an unanswered question and awaits more experience and testing o f different approaches. Still, in considering poverty reduction issues one needs to place the small-holder participation challenge in a proper context. Some 75 percent o f rural Kenyanhouseholds produce fruits and vegetables for consumption and sale. This i s equivalent to about two 63For example, runner beans were introduced in the mid-90s and have been a major source o f growth, Given the daylight pattems in Kenya, this crop has required artificial lighting to ensure its proper flowering. Garden peas were also introduced. These are extremely temperature sensitive and need to enter and remainin a cold chain very soon after harvest. This logistical factor led exporters to grow this crop on their own farms rather than seek out-growers. 64 Growers o f mangoes and avocadoes have been largely unaffected by the changing standards environment. Kenyan mangoes are primarily exported to the Middle East and usedto make juice. Kenyan avocadoes are primarily sold on consignment inwholesale markets. 105 million households. Twenty percent o f these (i.e. about 400,000 households) account for the bulk (i.e. 80 percent) o f horticultural sales (Muendo et al. 2004). More than 90 percent o f Kenya's vegetable production i s consumed in the domestic market. There i s certainly more at stake, from a poverty reduction perspective, inthe improved efficiency o f domestic (and/or regional) fresh produce markets than from the impact which European standards have, or could have, on a few thousand small-holders who produce vegetables for the export market. McCulloch and Ota (2002) illustrate that small-holder horticultural growers, for export and domestic sales, do have higher overall and farm-based incomes than non-horticultural growers. Still, the number o f small-holder farmers involved in export horticultural production pales in significance compare to the numbers o f people employed more widely in the sector, including on medium or larger farms, in pack-houses and in associated industries such as packaging, freight forwarding and input supply.65Thus, while the more recent growth o fthe industryhas not beenon the basis o f expanded small- holder supplies, this does not necessarily detract from the poverty-reducing role o f the industry. Larger company-owned and larger out-grower operations are not highly mechanized, the primary exception being land preparation. Although somewhat seasonal, large numbers o fjobs have been created on those farms, including for landless or near landless women for whom few other income-earningopportunities exist. Just as important, the shift from unprepared to semi-prepared produce exports has substantially increased the demand for labor inthe pack-houses o f the leading companies. Humphreyet al. (2004) suggest that semi-prepared products involvebetween2.5 and five times more labor per unit weight than was the case for the unprepared, loose produce. Drawing upon a model o f labor demand, they simulated two alternative scenarios. In one, the present patterns o f product export growth were used while assuming that the share o f smallholder production in that trade would increase (from 20 to 30 percent in their model). Inthe other scenario, the share o f smallholder supplies was held steady, yet it was assumed that future growth intrade in semi-prepared would accelerate faster than its recent trend. The additional labor demand in the latter scenario is many times that o f the former, even using the most favorable assumptions for the small-holder case. More evidence is needed from other countries to weigh in on these issues regarding standards, smallholder linkages, and broader employment effects. Evidencefrom Spices India has some 1700 registered spice exporters and more than 300 registered processors o f spices and condiments. However, most o f these firms are very small or irregular participants inthe export trade. The largest 100companies account for over 80 percent o f spice exports, with only the top ten companies being responsible for about half the total trade. Most spice exporters are Indian-owned and are typically family-based companies that have been in this business for several generations, both in the domestic market and through sales abroad. Over the past decade, several major international companies have entered the industry throughjoint ventures. Humphrey et a1 (2004) estimate that just under 100,000 people are employed inthe sector, yet this does not include those employed inassociated industries. 106 The overall trend is toward a growing concentration o f India's spice exports. A significant contributing factor has been the changingproduct composition o f India's spice trade. The contraction o f its trade in raw black pepper (in which hundreds of smaller firms were active for export) has occurred in parallel with an expanded trade in value- added manufactured products, for which only a handful of very sophisticated firms account for the bulk o f sales.66 However, one cannot attribute this increased concentration to the effects of increasingly stringent SPS standards by certain international buyers or importing countries. Rising standards did not drive the many black pepper traders out o f export markets. Rather, they could not compete with Vietnamese supplies on price or simply have found Indian domestic prices more attractive than international prices. Although the quality and cleanliness standards o f Vietnamese black pepper i s frequently lower than that o f India, lower prices have increasingly driven international sourcing patterns. The application o f more rigorous grading, cleaning and sterilization o f spices, and a greater array o f tests to which products are subjected, have collectively altered the cost structure for some o f India's spice export products. In the case of chili powder, for example, the average FOB value for this product was slightly higher in2003 than inthe mid-l990s, yet the raw material composition o f the final cost declined both proportionally (from 79 percent to 67 percent) and absolutely (from $899 to $804), suggesting that farmers and intermediary traders have borne a signijkant part of the incremental costs incurred in cleaning,processing, and testing activity. The biggest cost increase has occurred for grinding/processing operations, nearly doubling from $91 to $168 per ton. The gross margins for exporters o f this product remained essentially the same, at about five percent, suggestingthat exporters have not made much o f a retum on their investments in cleaning, processing, and testing equipment. At the same time, however, this investment may have enabled them to service new clients and may have preventedhigher levels o fproduct interceptions/rejections abroad. Evidencefrom Fisheries The Kenyanand Keralan case studies illustrate the distributional impacts associated with attempts to comply with stricter hygiene standards for fishery products. These have altered the vertical distribution o f costs and benefits as well as induced changes in the horizontal structure and modus operandi o f the supply chains. The changes have occurred amid wider challenges stemming from over-capacity in the processing sector and both seasonal and structural shortages o f raw material. At the same time, Kerala's position in its major export markets was being challenged by new and fiercer competition, notably from China, Thailand and Vietnam. Below we distill the findings from the Kenyan andKeralan cases. The structure o f the Lake Victoria Nile perch sector changed dramatically through the 1980s and 1990s, to become predominantly export-oriented with an industrial processing ~~ ~ 66 The Spices Board o f India indicates the export share of the ten leading companies i s 83% for black pepper and 87% for spice oilsloleoresins. Incontrast, the trade in chilies and turmeric is more fragmented with the ten leading companies having export shares of33% and 35%, respectively. 107 sector supplied by an expanded capture fishery that had remained for the most part artisanal. The imposition o f stricter hygiene standards by the EU and the extended periods o f trade restrictions induced the Kenyan government to implement more rigorous regulatory oversight and the processing sector to up-grade its facilities. The average level o f investment required by each processing plant was not large inrelation to the value o f exports, but many had been operating at very low levels o f capacity such that their profitability was also low. A number o f exporters have exited the sector and their facilities have been purchased by a few o f the increasingly dominant players. This, in turn, is fueling the consolidation across the processing sector, previously spurred by prevailing competitive conditions. The implementation of stricter standards o f hygiene and HACCP-basedprocess controls inthis sector has also had a significant impact on the wider operations o f industrial fish processing facilities. Two examples are changes in labor practices and the disposal o f waste materials. Historically, most processors have employed predominantly casual labor, particularly in more recent years when the supply o f raw fish from Lake Victoria has become more sporadic and processing does not occur every day. However, in response to the needfor fish handlers to undergo regular medical checks and be trained in basic hygiene practices, some have increased use of permanent andor contracted labor. Temporary labor now tends to be used predominantly for tasks that do not involve contact with the fish--for example general cleaning operations. Given that fish fillets are only 35 to 40 percent o f the raw fish by weight, the volume o f waste materials produced by industrial processing operations i s considerable. The more rigorous standards of hygiene under which facilities now operated require that this material is disposed o f both quickly and reliably to avoid any risk o f cross-contamination o f the raw fish. Many processors have traditionally supplied these materials to artisanal fish processing operations situated inclose proximity to their factory. However, these are not able to absorb the supply o f frames and other materials the entire year round. Processors are therefore increasingly dealing with traders that collect inbulk and supply industrial fishmeal plants. Structural changes have also taken place inthe Keralan fish processing industry, in large part due to the challenges o f meeting EU hygiene standards. Many processors were operating at levels significantly below their installed capacity and have struggled to fund the required up-grades to their facilities. A number subsequently exited the sector, while others are still struggling to survive. Increasingly, the sector i s being dominated by a relatively small number of larger processors that operate multiple plants. Even more profound have been the structural changes within the pre-processing segment o f the industry. Attempts to upgrade standards o f hygiene in pre-processing date back to the 1970s. While some fish processing plants integrated pre-processing into their own facilities, independent pre-processing remainedthe norm untilthe midto late 1990swhen strict controls were imposed on the sector, effectively preventing the use o f independent pre-processors in the case o f exports to the EU and, more recently, other countries as well. As a result o f these measures, the structure o f the independent pre-processing sector has changed dramatically. While the number o f pre-processing facilities declined 57 per 108 cent over the period 1997-98 to 2003-04, installed capacity actually increased 42 percent from 2,700 tons per day to 3,860 tons per day. Thus, the main impact o f the regulation o f the sector was to force the closure o f old and established pre-processing facilities, while new or up-graded (and typically larger) facilities took their place. Alongside the structural change in the sector, labor practices have also shifted. Traditionally, workers were employed on a piece-rate or temporary basis; peeling was sub-contracted out to home peelers. Firms are now increasing their reliance on casual and part-time workers, most o f whom are women that live inthe vicinity o f the facility. These are chosen on a daily basis from amongst a pool o f workers that have undergone the required medical checks and have a health card. Home peeling has been all but stamped-out. Duringidle times, workers will either remain inthe changing /rest rooms at the facility or return home. It i s evident that overall levels o f employment have declined, whilst certain vulnerable groups have been excluded altogether--for example, poor Muslim women who are culturally barred from taking work outside of the home. Inboththe Kenyan and Keralan cases, the wild capture fishery segment hadbeen largely unchanged by the imposition o f stricter hygiene standards. Indeed, one o f the major remaining challenges i s the upgrading o f handling practices post-capture and the installation o f more hygienic facilities at landing sites. To this extent, the imposition o f stricter hygiene standards has had only limited impacts on fishers at the current time. However, inboth cases fundamental changes are planned. InKenya, only 10 out o f 297 landing beaches have been designated for improvement and will be approved for export. InKerala, planshave been formulated for new landing facilities that will be exclusively for export and linked with processingplants. The implications for fisherfolk that are not able to access these new sites are likely to beprofound. 5.5 BroaderSpillover Impactson the DomesticEconomy Indeveloping countries, the poor can be impactedby trade-related SPS measures as (1) consumers, (2) farmers, (3) workers/employees, and (4) micro/small entrepreneurs. Impacts can be channeled through the markets for products, labor, and other factors o f production (Le. land, water) and can be positive or negative; substantial or quite minor. The degree or extent o f impact depends upon an array o f initial conditions as well as the particular strategies and policies which are adopted to address the challenge and opportunities o f international agri-food standards. The potentially broad range o f domestic spillover effects from SPS-related trade barriers is well illustrated by the case o f Ethiopia, which has faced a banon livestock animal exports to the PersianGulfcountries. Ethiopia's Somali region is a vast and under-developed lowland area with ethnic and economic links with neighboring Somalia, where livestock production is central to the economy. The mainly pastoral population depends heavily on livestock exports to Somalia for their livelihoods. Most o f these exports are re-exported to Saudi Arabia and other Gulf States. The bulk of this trade occurs informally and is not recorded in official trade statistics. 109 This trade continued for many years, until an outbreak o f Rift Valley fever (RVF) inthe Hom o f Africa prompted Saudi Arabian authorities to issue two consecutive bans, in 1998 and 2000, on live animals and meat from Ethiopia. The ban had a major impact on this economy. Livestock exports hadtransformed the Ethiopian Somali pastoralist society from near subsistence to being more market-oriented. This shift brought cash earnings and enabled access to food and other consumption goods from abroad. Indeed, economic links with other Ethiopian regions are negligible compared with the illegal exports of live animals andimports of consumption goods from the Arab countries. To measure the cost and distributional impact o f this ban, a Social Accounting Matrix ( S A M ) patterned on the Somali region economy was used with a CGE model, simulating a reduction o f live animal exports from the region equivalent to a 16-month ban, Complementing the CGE analysis was a survey-based analysis o f the links among agents inthe livestock productiordmarketingchain-- pastoralists andagro-pastoralists, exporters, transporters, retailers and households. Information on patterns related to production, transhumance, market activity, food security, social life and the environmental were collected through a focused survey of stakeholders. Among the prominent results o f this analysis are the following: Inthe short-run(four monthsaftertheban), thebancausedasharpreductioninlivestock prices, directly affecting households and the activities most dependent on livestock sales. Hence, small pastoralists and traders experienced comparatively very sharp declines in their incomes and overall welfare. Larger pastoralists could increase home consumption oftheir own production andor sales o f livestock to compensate for their income loss. Inthe medium-run (twelve months), producers hadbegun to reallocate resources among their different income-producing activities, reducingthe supply o f livestock andtransport services and increasing the supply o f milk and grains. This shift produced a partial price recovery for livestock and transport and pushed grain and milk prices down, negatively impacting on sedentary farmers and ago-pastoralists, who had been less affected by the ban in the short-run. Inthis way, pastoralists and traders, in effect, shifted part o f the costs to other agents through markets andprices. To i%rther \compensate for income losses, pastoralists developed various strategies, including taking animals to better grazing areas and traveling to different local markets in their zone as well as across the Somalia border insearch o f higher prices. To cope with the joint stresses o f the ban and a sustained drought, pastoralists also began to cultivate grain and cash crops. Some traders have relinquished business activities, while others have diversified their trading. A number have shifted to non-livestock goods (for example contraband and chat, an addictive stimulant), or traded other species o f animals; most rely more on local livestock trade (for example to restaurants). Since animal prices were low, this might have allowed the restaurant business to reduce costs, buffering to some degree the loss o fbusiness. Other agents also suffered from the ban. Most brokers lost income because there were fewer transactions in livestock markets. Market administrators reported that the ban had 110 decreased government's revenue fi-om tax collection. Grain retailers had a reduction in business due to the lower incomes o f the other sectors, the drought and the subsequent supply o f food aid. Clothes retailers reported that they experienced sizable income losses because their customers lost purchasingpower. Hence, the banon livestock exports appears to have had significant and widespread ripple effects on the economy o f Ethiopia's Somali Region. Some o f the adverse effects were felt within the livestock supply chain, while others extended into the broader economy. For example, o f the total estimated decline in regional income, some 10 percent o f the loss was attributed to `poor' producers, 23 percent to `middle-income' producers, 18 percent to `better o f f producers', with the remaining 49 percent involving income losses bythose engaged ingeneral trade, retail or other services. 5.4 SIMULATIONOF EXPORT CERTIFICATION SCHEME A program involving the certification of exported live animals from a potential RVF non-free zone in Ethiopia was evaluated using cost-benefit analysis. The "benefit", as defined inthe analysis, were the costs resulting from the imposition o f the ban that would have been avoided if the program was in place. Ethiopia was assumed to have RVF non-free status and, according to OIE regulations, animal exports are allowed only with a certification scheme, with or without vaccination. Inthe non-vaccination scheme, the animals are kept ina collection ground for 30 days. Ofthe animals to be exported, 1to 5 percent are tested. After this period, the animals are quarantined for another 30 days prior to shipment, and a second round of sampling and testing is done. For the vaccination scheme, the animals spend 30 days in the collection ground where they are vaccinated. The animals then are quarantined for another 30 days. No testing is needed. Both alternatives require the same basic investments and costs, except for the cost o f testing inthe non-vaccination case, andthe cost o f vaccine for the vaccination case. The results o f the benefit-cost analysis suggest that the implementation o f an animal health program inthe Somali region is feasible and would benefit producers. The resulting costs and the risks o f the program are manageable. Different alternatives to finance the program (for example through an export tax, sales tax or increasedprivate transactionlmarketing costs) were analyzed to evaluate the effects onthe competitiveness, welfare and income o f Somali producers. Looking at the distribution o f benefits and costs o f the alternative policies, the most significant negative effects for poor households came from an increase inmarketing costs or from the imposition o f an export tax, via loss o f export competitiveness. The sales tax scenario resulted in welfare gains for the poor. Better-off and middle-income producers were more adversely affected than poor producers in all three policy scenarios. The analysis suggests that increasing taxes on livestock sales offers the best prospect to implement a health certification plan in the Somali region. This option has the least negative impact on exports and welfare; while having greater benefits for the poor through transfers from better-off producers. The sales tax policy would benefit pastoralists and traders and affect sedentary farmers and agro- pastoralists negatively, although the total amount o fthe loss is expected to be small. The results show that poor producers and the trading and service sectors are not expected to lose from the implementation o f the health program. Middle-income and better-off livestock producers are expected to lose on average, but these losses are only a small fraction o f their total income. Further, it i s very likely that these losseswould be compensated bybenefits from growth not considered inthe analysis. Measuring the cost o f the ban i s the first step to determine if there i s justification to comply with the costs o f developing an animal health programthat would allow a regular export flow between the Somali region and the Gulf countries. If this is the case, there could be opportunities to "formalize" this informal economy, contributing to its integration into the rest o f the economy. I t could also provide opportunities for the Government o f Ethiopia to play a central role inthe development and the stabilization o f an insecure region, while sharing the benefits o f growing exports o f live animals and livestock products. ISource: Pratt and others (forthcoming') 111 5.6 Conclusions Internationalcompliance with new food safety and agricultural health standards can bring costs and structural changes which, in tun, can give rise to significant redistribution o f welfare across countries, along supply chains affected by standards, as well as within societies as a whole. These distributional effects can come through direct changes in product, labor, and land markets and through various secondary effects (inpublic health, for example, or in local environmental conditions). The available evidence on this issue in developing countries remains fragmentary, and, there are significant methodological challenges to properly attributing distributional effects to standards per se. Yet, several tentative conclusions can nevertheless be drawn from the current research and other complimentary analyses. For example: Developing countries as a group are not suffering from a tightening o f SPS standards. Yet, differential approaches to the challenge as well as some countries' technical or administrative problems with compliance are affecting the relative competitiveness in international high-value food markets. In general, incremental advantage tends to be skewed to larger, incumbent suppliers, who can realize economies o f scale, have better access to information and benefit from well-established reputations with, for example, overseas inspectors. Still, effective action can make a difference. There are examples o f well-organized industries (in addition to well managed firms and supply chains) in low-income countries that have maintained or increased their competitiveness and market share following the imposition o f more stringent standards. While standards compliance (or non-compliance) can bring about changes that harm the livelihoods o f the poor, advantages may accrue to those able to participate in evolving supply chains. This can certainly apply to smallholders, especially those operating in suitable locations with adequate infrastructure and in the context o f effective producer organizations and long-term relationships with buyers. Smallholder farmers can frequently adopt the necessary technical measures and investments to comply with emerging standards. A key challenge i s thus to reduce, through collective action, the transaction costs associated with monitoring and certifying compliance. Public policy and investment can make a difference in the pattem o f `winners' and `losers'. The distribution o f compliance costs will reflect strategic decisions on the part o f both the public and private sectors regarding compliance. For example, the government can reduce the detrimental impacts on supply chains by investing in public sector capacity (for example testing laboratories), andor by providing financial and technical support to the compliance efforts o f the private sector. Such initiatives can be focused on assisting certain vulnerable groups, such as smallholder farmers, to remain viable participants in export supply chains or tailored to facilitate their switch to altemative market orientations andor sources o f livelihood. The public sector can recover some or all o f these costs through user fees. More generally, policy-makers need to be aware o f the manner in which the costs and benefits o f standards 112 compliance are distributed and consider compensating actions that can be taken to protect vulnerable groups. 0 The rising demand for product quality and safety appears to be giving rise to increased off-farm employment opportunities, especially in product cleaning, handling, processing, and packing and in a broad array o f process controls. The terms and conditions o f this employment inthe formal supply chains, although not optimal, are almost certainly better than inthe informal sector, inpart owing to the imposition o f higher social standards by foreign buyers. Thus, when assessing distributional effects it i s important to consider changes inthe demand andremuneration o f labor in farming, processing, andadministrative activities. 0 Compliance with SPS standards i s only one o f many factors affecting competitiveness and only one o f many variables impacting the incomes, employment opportunities, and overall welfare o f the poor in developing countries. Standards have had distributional and equity effects; these need to be better understood. Yet there is little reason to believe that these effects are somehow unique to standards or more profound than those created bybroader market or policy shifts. The distributional impacts associated with strategic responses to standards also raise a number o fchallenges for the WorldBank. Onthe one hand, itneeds to focus its attention on backing the `winners', countries and exporters that stand to gain from compliance, especially where major investments are involved. On the other, it must support efforts to offset the impact on those who may potentially lose, most notably poor and vulnerable producers, and smaller trader/processors. At the same time, it should encourage the implementation o f strategic approaches to standards that provide an acceptable trade-off between the competitive gains to be had from compliance and any negative distributional impacts on the disadvantaged groups. In turn, this requires that the distributional implications o f capacity-building and related activities are both recognized and assessed when applying a strategic lens to standards-related issues. 113 CHAPTER 6 TRADE-RELATED SPS CAPACITY BUILDING: TAKING STOCKAND DRAWINGLESSONS FROMRECENT DONOR-ASSISTEDPROJECTS A main message from the foregoing discussion has been that while developing countries have limited influence over the setting o fmany internationally-recognizedstandards, they do have room for maneuver in designing policies and strategies to ensure compliance with these requirements in a bid to maintain international market access and enhance competitiveness. In formulating and implementing these policies and strategies, developing countries are seeking additional external assistance as called for under the SPS Agreement. Over the past decade many development agencies have therefore initiated projects or programs to strengthen developing country capacities to implement SPS measures. That capacity-building has ranged from short-term technical assistance and training to more elaborate programs and projects to strengthen marketing and export infrastructure, both in terms o f physical assets (for example cold stores and laboratories) and knowledge and management systems. This chapter highlights some emerging patterns inthis assistance67and draws some tentative lessons based upon a desk review o f selected projects andproblems. 68 6.1 Scope and Scale of Assistance The most comprehensive database on capacity building inrelation to SPS measures has been compiled by the WTO. That database covers projects implemented between 2001 and 2003, including information on the type and level o f assistance, participating donor, recipient, and time period o f pertinent projects. While the database i s incomplete in its coverage and provides only limited detail on most o f the listed projects, it does contain sufficient information to develop a broad perspective on emerging donor assistance in this area, especially where this is supplemented by more detailed information about projects/programs obtained directly from the leading donor agencies.69To draw some broad observations, the reported projects launched in 2002, and involving more than a one-time event, were examined. Various agencies and project managers were contacted to develop estimates o f project funding that were not reported in the database. This was especially the case for World Bankprojects and those o f Aus Aid. 67 The SPS Committee has produced a taxonomy that is being employed to monitor the technical assistance being provided by WTO Members. However, this essentially represents a `record' o f assistance rather than an attempt to coordinate responses to requests for technical assistance from developing countries. Thus far, there has been no attempt to compare and contrast the assistance that has been provided in terms o f its efficacy, efficiency, and sustainability inaddressing the needs of developing countries. A review was done o f some 31 current or recently completed projects supported by one or more o f the following agencies: the World Bank, the Inter-American Development Bank, the FAO, UNIDO, USAIDNSDA, the European Union, and Aus Aid. See Sewadeh and Ferrer (2004). 69 However, one needs to crowd out the great deal o f `noise' which exists o n the WTO database given that it includes literally hundreds o f very small one-time events (i.e. seminars, brief consultancies, study tours). As of early 2004, there were nearly 500 `projects' listed inthe database, only a small proportion o f which have involved sustained and substantial capacity-building support. 114 Overall Scope The overall level o f fundingcommitment of the projects inour 2002 sample was US$ 53 million, with the US and EU being the largest individual donors. However, this figure underestimates the total assistance in this area, as capacity-building support efforts by some donors, including the World Bank, were not included in the database and apparently not all projects o f other donors were covered. Moreover, SPS capacity- building is often subsumed within cross-cutting trade capacity-building efforts, without specific cost allocation. In 2002, there were no new World Bank projects that became effective that had clearly discernible trade-related SPS capacity components, yet an array o f existing projects involved an estimated combined disbursement o f $5.25 million for SPS capacity-building in that year. A major Australian program involved some $15 million in expenditures over the 2002-2003 period. Taking these factors into consideration and assuming further under-reporting o f small andmedium-sized assistance programs, a conservative estimate o f recent annual donor/industrialized country government agency expenditures on SPS capacity-building programs in low and middle- income countries would be inthe order o f $75 to 80 millionper year. Timing/Catalystfor Intewention Most donor resources for SPS capacity support have been driven by tension or emergency-in the context o f actual trade disruptions or disputes, a threat o f such an event, or the perception that certain countries or market participants (for example small- scale farmers) will encounter major problems in trying to comply with new standards. Frequently, SPS capacity needs `get on the radar screen' only in the midst o f a crisis, such as when repeated shipments of product have been detained or refused entry by a major trading partner or when audit/inspection teams from the importing countries find unsatisfactory conditions and practices in a growing export sector. Sometimes, the trigger point i s not an actual crisis, but a growing recognition o f future risk given the experiences o f other countries selling similar products into similar markets. For donor agencies, it i s apparently easier to justify investments inthis field when there are evident risks o f trade disruptions or disputes. The demand for assistance almost always increases when there exists a `clear andpresent danger'. Geographical Focus A large proportion o f the assistance in this field by bilateral donors is driven by `self interest' or domestic considerations such as ensuring that food imports are safe and preventing the spread o f actionable plant pests or animal diseases from their main trading partners in the developing world. Hence, throughout the years, various United States agencies (including USAID, USDA, and FDA) have been most extensively involved in programs inCentral America, the Caribbean, and elsewhere inLatin America.70.The bulk o f EU assistance has been targeted at ACP countries and Eastern Europe. Australian assistance has been primarily targeted to the developing country members o f the Asia Pacific Economic Cooperation zone (MEC). AusAid's assistance has primarily focused 70There are on-going efforts to develop a U S government assistance strategy for SPS capacity-building in sub-Saharan Africa, partly in response to concerns that African countries have been unable to boost their agricultural exports to the US, despite preferential market access under the African Growth and Opportunity Act, partly because o f SPS-related constraints. 115 on building capacities in plant health and quarantine requirements given Australia's particular concerns in these areas. Projects supported by multilateral agencies are generally driven more by the requests o f the recipient countries inwhatever region. The vast majority o f projects supported by the multilateral agencies are focused on specific countries, while the programs o f the bilateral agencies involve a combination o f individual and multi-countryhegional projects. With much of the support in this field driven by a combination o f self interest and emergencies, there i s little application o f economic analysis, either involving ex ante assessment o f the potential costs and benefits associated with alternative approaches, or expost review o fthe impact and cost effectiveness o f adopted measures. Sustainability o f project outcomes i s also often neglected. In most projects that were reviewed, the participating partners seemed focused on `putting out fires', devoting far less attention to ensuringthat the capacities and functions addressed duringthe project were sustainable beyond the life o f the project. And, in most o f these projects, the primary measure o f project success was whether the intervention helped the recipient country overcome or evade a trade-related crisis inthe short run. Progvammatic Context A large majority o f projects in this field are stand-alone interventions related to SPS capacities, albeit typically involving more than one type o f component. Thus, interventions are targeted at resolving particular types o f constraints in the SPS-related area. The World Bank's approach has generally differed. With only a few exceptions (for example some animal health and disease control projects in Latin America), most assistance in recent years has been through qualityhafety sub-components o f larger projects dealing with agricultural services, export promotion, smallholder commercialization, or industry-specific development. Several recent projects supported by USAID or the EUhave also featured a broader set o f interventions to promote trade and/or agricultural commer~ialization.~~There are some apparent trade-offs here. Devoting specific attention to SPS constraints and capacity needs prevents these issues fkom taking on a secondary status within more complex projects. However, the competitiveness challenges o f developing country industries are rarely related to SPS matters alone and, as long as other constraints remain unattended, simply fixing the SPS constraint will not provide a sustainable impact. Project Size There i s significant variation in the resource commitments to SPS capacity building among the range o f projects listed and also observed inour project review. For technical agencies such as the FA0 and UNDO, the typical size o f an intervention is inthe range o f $400,000 to $600,000, mostly spent on training and consultancy. The larger thematic programs are mainly funded by the European Union, including its 28 million Euro Pesticides Initiative Program and its 45 million Euro program to strengthening fishery products health conditions in ACP/OCT countries. These provide support to multiple 71 For example, several projects supported by the EU have addressed broader capacity-building needs related to standards and conformity assessment, cutting across SPS issues, quality control, and matters covered under the WTO TBT Agreement. 116 countries, with the level o f support to any individual country rangingfrom a few hundred thousand to a few million Euros. There i s an enormously wide range o f resource commitments to this field within the World Bank's project portfolio. While in most projects, the SPS sub-components involve commitments o f between a few hundred thousand and a few million dollars (out o f total project sizes ranging from $5 to 15 million, including other components), one coastal resource management project in China involves some $19.5 million in food safety-related investments over an eight year time period (within a broader project involving a loan o f $100 million). There are three new projects-in the Philippines, Romania, and Kazakhstan-that will each involve World Bank loan commitments exceeding $10 million for food safety and agricultural health components. Projects with relatively large resource commitments typically involve investment inmarketing, research, and/or testing infrastructure and equipment. Sectoral Focus While some projects are geared toward building horizontal capacities and reforming broad food safety or animal/plant health regulations, many (including most o f the larger projects in this field) have provided support for capacity enhancement in specific industries. The most common are the fishery, livestock, and horticultural export sub- sectors. Given the greater incidence o f SPS-related trade constraints, disputes, and emergencies inthese commodity fields, this seems appropriate. Limited CollaborationAmong Agencies This review suggests that in this relatively young field there has been rather limited cooperation between bilateral and multilateral agencies and between "technical" donor agencies--such as FAO, WHO andUNIDO-- and "financing" donor agencies such as the World Bank. With the exception o f the USAID and the Animal and Plant Health Inspection Service (APHIS) o f USDA, there are few projects where technical and financing donor agencies provided joint support in SPS capacity-building. The lack o f collaborationbetween bilateral and multilateral agencies may be explained by the need o f some o f the bilateral agencies to have trade partner regulations and/or institutional arrangements that specifically meet their own product/process standards. It is more difficult to account for the seemingly limited collaboration between the various multilateral agencies, especially when considering their potentially complimentary roles in the capacity-building process. It is such a consideration that has led to the establishment o f the Standards and Trade Development Facility (STDF).72 6.2 Targeting the Public Sector, Private Sector, or Both? Traditionally, SPS Management has been perceived as a predominantly public sector responsibility. Indeed, there are important regulatory, surveillance and management functions that are necessarily carried out by government agencies. For example, some importing countries require a designated public sector `competent authority' to carry out certain enforcement functions. However, the private sector has a fundamentally important 72The STDF brings together the WTO, FAO, WHO, OIE, and the World Bank into a partnership for information-sharingand support for capacity-buildingindevelopingcountries. 117 role to play in the development and sustainability o f food safety and agricultural health management capacity. This can complement, or may even substitute for the development o f public sector capacity. An example i s investment in laboratory testing facilities. Ina number o f developing countries with insufficient public sector capacity to meet requirements in export markets, the private sector has established its own laboratories, many o f which are internationally accredited, either within individual enterprises or an industryorganization. Many technical assistance projects in this field have directed their attention at either public sector agencies or private entities. This stems from the specific mandates o f particular donor agencies, the particular requirements o f certain overseas trading partners, or the need to be very pragmatic inorder to get quick results inthe face o f an impending trade disruption. Yet, more effective and sustainable interventions have involved assistance for both public and private sector functions and, importantly, careful attention to linkages betweenpublic and private efforts. It would appear that the collaboration and tensions between the public and private sector strengthen the processes o f prioritizing and sustaining resource allocations, hold different parties accountable for their actions, and more generally yield the results required by overseas trading partners -on an on-going basis. Donor experience suggests that capacity-building efforts should generally aim to strengthen the capacities o f both the public and private sectors. SPS management involves an array o f functions with public good properties, especially in the fields o f animal and plant health-yet there are other functions amenable to private sector solutions, whether on an individual or collective basis. The degree o f substitutability between public and private sector performance o f SPS functions depends not only upon their techno-economic characteristics, but also other factors including country and industry size, the broad level o f development, the level and distribution o f administrative/managerial capacities in the public and private sectors, the vertical and competitive structure o fparticular industries, and the volume o ftrade. Inrelationto capacity buildinginthe public sector, two major challenges arecommonly faced. One i s the overlap in responsibilities and limited coherence between various regulatory agencies and departments. This may involve the spread of limited human and financial resources across numerous agencies, multiple and conflicting interactions with the private sector, and problems with trading partners. Many countries are exploring options to coordinate better or even to consolidate various functions through formal or less formal umbrella agencies or committees. A second major challenge in the public sector i s the sustainability o f functions, whether owing to high rates o f staff turnover, periodic or sustained budget constraints, or inadequate arrangements for service cost rec~very.'~ l3 Provision o f infrastructure to the public sector should be carefully designedto ensure that the equipment i s matched by technical capacities o f the staff or that the staff can be trained to use the new facilities and equipment without undue dependence, over the long term, on consultants and other forms o f technical assistance. 118 Recent project experience with capacity-building in the private sector shows the importance o f economies o f scale or scope. Producer or industryassociations canbe very effective in catalyzing change within an industry, developing and enforcing various `codes o f practice', coordinatinghmplementing findfarm technical assistance programs, and interfacing with both local regulatory authorities and representatives o f overseas commercial or regulatory bodies. Much can be leamed from such experiences. In selecting partners from the private sector, donors have generally aimed to channel support to the "best, brightest, and financially fit" firms or producers or to those firms that provide the critical share o f exports in specific industries. Focusing on such partners seems to be a cost-effective approach, yet almost certainly exacerbates trends toward increased consolidation o ftrade inhighvalue, yet SPS `highrisk', products. Furthermore, priority industries are often most threatened by the least capable players, who, from ignorance or negligence, can do great damage to export prospects or industryreputation. The effectiveness o f training or other technical assistance i s partly, and perhaps very substantially, related to the management capabilities o f the participating individuals/firms and, to a certain extent, the access o f these firms to adequate financial resources to make necessary adjustments in their production operations or technologies. It is difficult for projects to apply a bottom up approach during capacity-building. Hence implementing agencies may need to reach smallholders through the government or downstream players, and reach SMEs through industry associations. Another finding from recent experience is that SPS-related problems should not be addressed inisolation from other factors that affect industryor producer competitiveness. SPS interventions cannot possibly help firms that are otherwise unable to compete inthe market because o f poor product quality or availability, high costs o f production or transportation, etc. It follows that it may not be cost effective to provide SPS management support at the very early stages of an industry's development Thus, prospective donors should channel their resources toward assisting industries that have already demonstrated their capacity to compete inregional or international markets and to effectively address other common constraints (for example freight logistics). 6.3 Reflections The overall level o f trade-related SPS capacity-building assistance is extremely modest given the significance o f the challenges (and opportunities) facing developing countries. For example, Jaffee and Henson (2004) estimate that in 2000-01 some $1.75 billion o f developing country exports were affected by import border rejections or retentions. With increased resources going to food safety and agricultural health inspectorates inindustrial countries and some developing countries, and with increasingly stringent private standards, the risk o f future trade interruptions due to SPS matters could certainly increase. While the current pattern o f assistance appears to be appropriately focused on the `high risk'/'highgain' sub-sectors, it is inefficient that the bulko finterventions are triggered by `crises' or (imminent) trade disruptions and involve reactive and remedial responses. This 119 is a costly and unsustainable form o f assistance, both for the donors and the recipient country as the latter may incur significant losses in trade and damaging effects on reputation prior to benefiting from technical assistance. The support provided may, therefore, be geared toward damage control and restoration o fpast trade rather than being part o f a strategic approach to SPS management and investment. Inthe context o f a crisis and/or trade disruption, the range o f options and the acceptable time frame for institutional and technological change may be dramatically reduced, perhaps leading to higher cost, less sustainable, and/or more inequitable solutions. Rather than a defensive, `fire-fighting' approach, it is preferable to adopt preventative and progressive capacity building. Here, a more strategic approach would be taken, considering SPS capacity needs within the wider challenge o f agri-food system modernization; anticipating near and longer term requirements from (and opportunities within) external markets; anticipating the likely changes in the domestic market; and prioritizing capacity-building needs in `high risk' or other sub-sectors based on both technical and economic considerations. Yet without a `clear and present danger' there may be resistance to regulatory/institutional reform and to incurring costs associated with technological and/or organizational change. Hence, awareness and consensus-building may be important starting points, with particular attention given to cross-country experiences in gains/losses associated with compliance/non-compliance with emerging standards. Effective SPS management should be considered an increasingly important component o f industrial/commodity supply chain competitiveness and become a mainstreamed element o f strategies to strengthen such competiti~eness.~~ Finally, it i s evident that the strategic perspective presented here i s at odds with the focus o f SPS-related capacity building efforts to date and, more specifically, the focus o f technical assistance providers and/or donors. As has been made clear above, the predominant focus is on the development o f technical capacity aimed at achieving compliance. There i s little or no recognition o f the need for developing countries to be able to make strategic decisions with respect to their response to emerging standards, which might include challenging their legitimacy and/or negotiating changes. Yet, a primary focus o f capacity-building should be on enabling developing countries to look forward and predict the food safety and agricultural health standards with which they are likely to be required to comply in the future and to respond proactively. Overall, this suggests that SPS-related technical assistance should aim at maximizing the strategic choices of developing countries, and exporters therein, with respect to standards. l4One o f the core challenges inthis regardi s effectively assessing and prioritizing capacity-building needs. Anapproachto this is outlinedinChapter 7. 120 CHAPTER7 IMPLICATIONS OFAGRI-FOOD STANDARDSFORTHE WORLD BANK Previous chapters have described the dynamics o f agri-food systems-including the emerging trends in official and private standards-and examined the opportunities and challenges these provide for trade and rural economic growth in developing countries. Case study and other evidence have been employed to highlight successful and not-so successful responses to these trends. Building on these analyses, this chapter provides recommendations on how donors and international funding agencies, such as the World Bank, car1 help developing countries best strengthen their systems for food safety and agricultural health management and in so doing enhance their international competitiveness. The chapter first provides the rationale for the increased involvement o f development agencies in this field. It then briefly notes the World Bank's comparative strengths and weaknesses in undertaking an expanded role. The chapter then enunciates the broad principles that should guide the involvement o f the Bank and its partners. It concludes with recommendations on the main entry points for the World Bank. 7.1Rationalefor BankandOther DevelopmentAgency Involvement Global food markets currently constitute a dynamic commercial and regulatory environment; in this environment, low- and middle-income countries face greater challenges both in gaining and maintaining market access and in sustaining competitiveness. New and more stringent agri-food standards contribute to this environment. Although developing countries and enterprises have limited influence over what standards are set, they do have room for maneuver in designing policies and strategies to ensure compliance with them. Also, these countries and individual suppliers may have the latitude to negotiate, with buyers and bilateral trade partners, how these requirements are enforced. The main rationale for World Bank involvement relates to the host o f market failures faced by producers, processors, and consumers in the realm o f food safety and agricultural health. To overcome these market failures, periodic or sustained public interventions may be needed. As noted earlier, many aspects of capacity buildingin this field involve the generation o f public goods and therefore fall clearly within the World Bank's mandate. For example: e Trade in certain animals, plants and food products can contribute to the transmission or movement o f diseases, pests, contaminants, and microorganisms between countries, with the potential for causing illness, loss o f life, and consequently, large economic losses. Hence, at the international level, improving systems to detect, control, and eradicate such hazards will benefit not only domestic producers and consumers but also those o f neighboring countries and 121 trading partners, developed and developing countries alike. Thus, there are potentially large externalities associated with the management, and mismanagement, o f sanitary andphytosanitary At the national level or within particular supply chains, there is wide scope for market failure in relation to food safety and agricultural health. The failure o f certain farmers to effectively manage animal and plant diseases may lead to the spread o f such diseases into other locations. Conversely, there may be positive externalities associated with exporter efforts to comply with external market standards. Such efforts-say related to the control o f animal diseases-may result inwider productivity gains for localproducers and inhealthbenefits for domestic consumers. These spillovers can thus contribute to poverty reduction (over and above the direct benefits accruing to farmers, workers, and others who participate inexport-oriented supply chains). There is a strong moral hazard aspect infood safety control, inareas such as maximumresidue limits o f pesticides, or pathogen levels in food o f animal origin, as these cannot be easily detected by the general public. Interventions in SPS management systems can therefore contribute to growth, poverty reduction, and the pursuit o f national and international public goods. Further, despite the progress made by many developing countries in beginning to address the challenges posed by rising standards, the playing field will almost certainly become more challenging in the years ahead, given trends in consumer attitudes and preferences, the changing composition o f international food and agricultural trade, and continued advances inscience andtechnology. In formulating and implementing food safety and agricultural health standards, many developing countries are seeking external assistance, as called for under the SPS Agreement. Untilquite recently, the provision o f technical assistance and other capacity- buildingmeasures inthis area through World Bank-supported projects was quite modest. However, client demand for support appears to be increasing substantially. Table 7.1 provides information on ten projects involving trade-related SPS management components that are either being implemented or in advanced stages o f preparation. In more than a dozen other countries plans are under way either to assist in SPS strategy formulation or to design project subcomponents inthis field. 75Indeed, the benefits o f controlling a pest in a developing country may be greater, in financial terms, for the highly productive agriculture in a neighboring or trade partner developed world, than for the lower productivityagricultural sector inthat developing country. 122 Project Start of Expected Size of Agricultural Industry project closingof project loan safety focus for project ($ millions) components agri-safety funded by support World Bank ($ millions) China Sustainable Coastal Resource 1998 2006 100.00 19.50 Fisheries Development Uruguay Foot and Mouth Disease 2001 2005 18.50 6.30 Livestock Emergency Recovery Niger Agro-Pastoral Export 2001 2005 10.35 0.60 Livestock Promotion Among lower- and middle-income countries (although to a lesser extent in the latter), there are an array o f common food-safety and/or agricultural health-management weaknesses. These include the following: Lack o fwidespread appreciationinthe public andprivate sectors o f the importance o f agri-food standards to trade and the strategic options available to them. Insufficient awareness o f international food standards and limited application o fbasic risk management practices, including HACCP and `good' agricultural or manufacturingpractices at various points inthe supply chain. Lack o f technical capacity and resources to develop standards and to update SPS legislation. Relatively poor enforcement capacity as regulatory agencies are under-funded, under- staffed, and lack appropriate infrastructure. Insufficient public-private dialogue on standards development, implementation, enforcement, and export market strategy, and Limited capacity to control plant and animal pests and diseases, as well as monitor and report their incidence. These and other shortcomings can be addressed through technical assistance and related capacity investments. There are several reasons to expect increased demand for such assistance. First, more countries are seeking to diversify their agri-food exports, 123 especially in high-value food products such as fish, meat, and horticultural products that are much more vulnerable to SPS-related problems than traditional food and agricultural exports. Second, the industrialized world i s strengthening its systems for agri-food inspection, a move also being made, to a lesser extent, by middle-income countries; this development raises the risk o f future trade interruptions. Third, the range and depth o f private agri-food standards will have increasing effects on the market access and competitiveness of developing countries. Fourth, South-South trade in SPS-sensitive products is growing at a rapid rate, yet food safety and agricultural health challenges are being encountered in this trade. Considering these trends, together with the multiple potential linkages between standards, growth, andpoverty reduction, and theprominence ofpublic goods infood safety and agricultural health, there is a very strong argumentfor increasing both the analytical and operational role of the WorldBank in thisfield. 7.2 The ComparativeAdvantage of the World Bank Trade-related SPS management is a relatively complex and fast-moving field, requiring a range o f expertise and varied instruments for providing assistance. The World Bankhas a number o f notable strengths and opportunities to contribute to the enhancement o f developing country capacities inthis area. It also has some limitations, although these can be overcome by exploiting synergies with various development partners. Table 7.2 summarizes the Bank's comparative advantages, weaknesses, and the opportunities they present to participate further inthis field. Strengths Weaknesses Opportunities Strong convening power and Very limitedtechnical staffing Leverage resources and experience infacilitating with experience infood safety or partners to facilitate multi- I stakeholder dialogue agricultural health Istakeholder effort Strong analytical skills IIRelatively slow mobilizationo f IScope to outsource technical resources analysis and design Broad experience inapplying Relatively high cost inproject Scope to buildstandards costhenefit analysis formulation subcomponents into an array o f ongoinglplanned ESSD and PSDprojects Field presence inmost client Limited(non-IFC) experience in Scope to utilize WBI and countries collaboration withthe private GDLNfor training and sector inthe agri-food sector networking Capacity to work at the macro Limitedcapacity for piloting Scope to incorporate level and across sectors (trade, interventions standards-related analysis in agriculture, environment) planned IntegratedFramework and other trade studies Capacity to combine policy Limitedpossibilities for fknding Mobilize donor funding for advise with investments external TA as many clients prefer grants, e.g., through STDF grant financing for TA Hence, at present, the Bank's relative strength is its understanding o f the big picture and its ability to analyze pertinent issues; it can also underpin its analytical work with the 124 required investments. Its relative weaknesses lie in implementation, in part due to its limited technical capacity in this area and the difficulties it has in working with the private sector, Partnerships with technical agencies (e.g., the FAO), the OECD's bilateral agencies, and the private sector would address these weaknesses and are therefore an essential feature for the future program. The need for technical assistance grants may be obtained through special funds, such as the Standards and Trade Development Facility (STDF), provided by donor agencies. 7.3 GuidingPrinciplesfor BankInvolvement The nature o f the SPS management challenge, and the recent experiences o f country and donor agencies in adopting strategies and building capacity in this field, lead to the following broadprinciples to guide the World Bank and its partners: First, SPS management challenges must be addressed within the context of agricultural supply-chain (or export) competitiveness. Although it has some distinct technical dimensions, this i s not a stand-alone field o f action. Resolving specific SPS matters while other crucial dimensions o f competitiveness-such as the investment climate, logistics, etc.-go unattended, will likely produce little trade growth. Nevertheless, resources are scarce and the potential benefits o f investing in SPS management capacities and systems should be weighed against alternative uses o f those resources to enhance competitivene~s.'~ Second and related, the World Bank should encourage its clients to adopt a proactive (preventive) approach to this Jield instead of falling back on ffire-fighting ' or defensive coping strategies. As noted in Chapter 3, a proactive approach opens up more technical and administrative options and frequently enables governments to take on a variety o f facilitative roles rather than engage primarily in control and enforcement measures. In adopting a proactive stance, countries are likely to give priority to high risldhigh gain subsectors where SPS-related challenges/opportunities are most significant. For many countries, this i s likely to relate to the supply chains o f fishery, animal, horticultural, or spice/nut/condiment products. The World Bank should be especially responsive to the assistance needs o f high-risk countries, particularly lower-income countries whose existing trade and future growth prospects consist largely o f the high risldhigh gain product lines. Third and also related, the WorldBank and its partners should employ and encourage its clients and development partners to employ more economic analyses in helping to determine the constraints on and priorities for action in thisJield. This is an operational field traditionally dominated by technical analysis o f hazards and solutions, with little use of ex ante or ex post costhenefit or cost-effectiveness analyses. But technically feasible solutions are not always desirable. Some partial or second-best solutions (such as sharing l6Yet WTO members do have certain obligations as stipulated under the SPS Agreement. Revisions may be needed in national legislation, standards, and inspection systems to meet these obligations and enable other WTO members to supply them with food and agricultural products. 125 capacities on a regional basis) may be more cost-effective than so-called best technical solutions. Various approaches or technologies can typically be employed to address particular SPS challenges. Economics should provide a strong voice when governments consider the options and prioritize investments more generally. Hence, there i s a need to combine risk analysis o f the technical hazards with economic cost-benefit analysis. Fourth, the Bank should encourage its clients to consider a hierarchy of functions when determining priorities and the sequence of investments. As elaborated below, the foundation stone for a well-functioning SPS management system i s broad awareness among stakeholders about (1) the relevance and importance o f food safety and agricultural health to competitiveness and (2) the available strategic options to address such concems. In tum, rather basic GAP, GMP, supply-chain coordination and other management practices need to be applied at farm and enterprise levels. More sophisticated and costly technical functions and trade diplomatic skills are important but only to the extent that they add value to a solid foundation. Related to this is the need to cover the whole supply chain from the producer to the consumer and identify both weaknesses and strengths o f every player in the chain, including the government and the regulatory framework and the private sector. SPS-related risks are often not limited to one stage o f production or processing. Interventions geared only to improving final product testing are of little value if the basic building blocks for quality and food safety control have not been effectively introduced earlier inthe supplychain. Fifth, SPS management capacity should be strengthened in both the public and private sectors, with emphasis on their effective interaction. Traditionally, SPS management was perceived as largely a public sector responsibility and assistance programs focused accordingly. More recently, some donors have been frustrated intheir efforts with public agencies and have sought to help private entities address particular problems. This either/or approach i s generally not effective or sustainable. There are critical SPS management functions for both the public and private sectors and various areas where cooperation andjoint provision are essential to ensure competitiveness. Sixth, assistance in this field should explicitly recognize potential structural and distributional impacts and make specijic provisions to address the particular challenges/opportunities of small stakeholders and other vulnerable groups. Solving SPS constraints and helping to maintain international market access should not be the sole purposes o f development assistance. The direct or indirect impacts on poor stakeholders needto be considered inthe design o f these measures and special efforts made to ensure that these groups may benefit (or are at least not undulyharmed) by them. Seventh, greater attention needs to be given to the sustainability of selected approaches and investments. Sustainability has not been a primary concern inmost instances o f SPS `fire-fighting'. The result is a landscape o f "white elephant" laboratories and inspection systems that lack sufficient recurrent budgetary resources to effectively perfonn. Sustainability relates to both the human capital and financial resources to maintain facilities and informatiodmanagement systems. Emphasis should be put on creating stocks of knowledge, pools o f experts and trainers, capacity sharing arrangements, and 126 cost recovery systems in the development o f programs. Given the weak public sector capacities and incentives affecting many o f the poorest countries, attention might well focus on how the private sector could carry out important SPS management functions, with oversight from government. The World Bank and its partners could use the above seven principles and employ screening devices when examining proposals submitted by potential clients and other development agencies for investments in SPS capacity-building. Following these broad principles in no way implies that `one size fits all' in this field. While the above principles could well constitute good practice inthe orientation the World Bank and other donor/technical agencies bring to this topic, the specific mix and mode o f interventions will frequently vary among countries and industries. 7.4 EntryPointsfor the World Bank The Bank can appropriately pursue three main sets o f roles in this field-namely, (i) advocacy, analysis and training; (ii)priority-setting and development o f country strategiedaction plans; and (iii) investment lendingand regulatory reform. 7.4.1Advocacy, Analysis and Training Stronger advocacy roles at several levels are needed, inwhich the World Bank can take a lead. 0 At the global level, the Bank can advocate andparticipate instronger partnerships that offer technical assistance and capacity-building among multilateral agencies, between industrial and developing countries, and between the public and private sectors; 0 Among industrial countries, there i s a continuing need for the greater harmony o f standards and requirements to ensure that their SPS measures do not unduly restrict trade, especially for suppliers from developing countries. Industrial countries should be encouraged to include developing country impact assessments withintheir own ex ante analyses o fproposed SPS regulatory measures. 0 At the regional level, the World Bank and its partners can encourage greater standards harmonization and capacity-building, while urging developing countries to use standards to facilitate rather than block regional trade; and 0 At the country level, continued advocacy o f the guiding principles described above i s needed, as well as dissemination o f good practices in policy and technical aspects o f SPS management. This advocacy program should be underpinned by a limited program o f empirical research, with continuous dissemination o f the findings to policy-makers, development practitioners, and others. Key issues identified in this study that require additional analysis, include: 127 0 The effects o f SPS measures on South-South trade, whether within or outside o f regional groupings; 0 The distributional impacts o f standards-between countries and within and between different supply chains, firms, and farming entities; 0 The further quantification o f tangible and intangible benefits from (and overall returns on investment from) enhanced SPS management capacities; 0 The scope, limitations, and suitable conditions under which coordinated and certified small farmer production can be a reliable and cost effective alternative to vertical integration and use o f larger commercial farm suppliers within supply chains applying rigorous food safety and other standards, and 0 The actual incidence and modalities o f standards enforcement by developed countries andtheir impacts on market access by developing countries. 7.4.2Priority-Setting and Development of County Strategies/Action Plans Priority-setting inSPS management canbe a complex task, as many developing countries have multiple deficiencies in their legalhegulatory systems, weak capacities in an array o f SPS management areas, and unclear or overlapping responsibilities among public agencies and between these and the private sector. SPS management involves an agglomeration o f basic and more sophisticated technical and administrative functions (Box 7.1), seemingly requiring a broad range o f skills, physical infrastructure, institutional structures andprocedures, and financial resources. ' BOX 7.1 SOMEBASICFOOD SAFETY AND AGRICULTURAL HEALTH MANAGEMENT FUNCTIONS Apply GAP, GMP, HACCP, and QMat farm and enterprise levels Develop appropriate legislation and standards Register/control feed, agro-chemicals, veterinary drugs, etc. Conduct basic research, diagnosis, and analysis 0 Accredit laboratorieslveterinarianslother thirdparty entities for official duties 0 Developlapply quarantine procedures, including for emergency situations 0 Carry out epidemiological surveillance and informationmanagement 0 Inspectllicense food establishments 0 Develop/maintain pest or disease-free areas 0 Test products for residues, contaminants and microbiologicalcontent 0 Verifyicertify biological materials (seeds; embryos, semen) 0 Verifylcertify imported/exported products relatedto established risks 0 EstablisWmaintain identity o fproducts (for example traceability) 0 Report possible hazards to treatyhading partners 0 Notify WTO/trading partners onnew SPS measures 0 Participate ininternational standard-setting processes 128 One way to simplify this task is to cluster these functions into a pyramid-shaped hierarchy o f functions (Figure 7.1). Functions/actions toward the base o f the pyramid represent the foundation stones, while those toward the top add value and sophistication to the entire system o f SPS management and gain in importance as the industry matures and encounters increasingly complex technical, administrative, and even political challenges. FIGURE7.1HIERARCHYTRADE-RELATEDMANAGEMENT OF SPS FUNCTIONS / Technically Demanding Risk Management Functions / Institutional Structures and Role Clarity \\ Suitable and Applied Regulation Application of basic `good practices' for Hygiene and Safety i Awareness and Recognition \ The bedrock o f the system is broad awareness among participating stakeholders about the relevance and importance o f food safety and agricultural health to the competitiveness o f their country/industry/supply chaidfirm and recognition o f their own role inthis system. Where this awareness is especially weak, any regulatory enforcement system will almost certainly be overwhelmed. Awareness o f major SPS challenges and opportunities is needed at several levels. It i s needed among senior agricultural and trade officials inorder to assign appropriate priorities for public programs and expenditures. Awareness is needed among the owners and managers o f agricultural processing and trading companies, and the industry organizations that represent them. These people make investment, personnel, and other decisions-and engage in self-policing activities- 129 which strongly determine the willingness and capacity o f firms to meet emerging standards. Awareness i s also critical-and perhaps most difficult to build-among the large numbers o f farmers and farm and industry workers who produce and handle food and agricultural raw materials on a day-to-day basis. Another core set o f buildingblocks that proceed fi-om broad awareness i s the application o f basic risk-management good practices at the farm and enterprise levels-namely, GAP, GMP, HACCP, and various quality-management systems. This mostly involves training staff and family members in basic hygiene, in the proper use and storage o f potentially hazardous substances, and in basic record-keeping about production practices and cycles, etc. With broad awareness and common application o f good practices, many potential SPS risks can be effectively managed. Yet other risks cannot be fully managed on such a decentralized basis. They are more systemic in nature and require broader oversight or collective action, requiring basic research, surveillance systems, and quarantine and emergency management systems. Even if individual farms and enterprises apply good practices, they may not be able to control all hazards-thus the need for scientific testing and verification systems. Many of these higher-order functions require particular technical skills, certain equipment, well-defined procedures, and recurrent funding. Some need to be mandated by law in order to ensure that they are done and done properly. A proper regulatory framework and transparent institutional structures i s therefore placed in the middle o fthe pyramid. At the top o f the pyramid is something called SPS Diplomacy, which includes the intemational obligations o f individual WTO members but also relates to a strong engagement in the technical and political realm o f intemational standard setting (both official and private), negotiations with bilateral trade partners and with regional integration partners on matters dealing with harmonization, equivalence, joint programs, special considerations, etc. This is a difficult and serious art, which relatively few developing countries have thus far mastered. This specific hierarchy of functions controverts not only the experience of the World Bank and other donors but also the dominant responses of countries with regard to capacity building This is illustrated by the priorities frequently identiJied in questionnaires submitted by countries to the World Trade. Organization's SPS Committee. Much of thefocus of developing country-donor interaction has been at the top parts of the pyramid, covering laboratoy facilities and equipment, technical assistance and equipment for surveillance systems, and training in negotiating skills. Although these capacities undoubtedly need strengthening in many countries, the effective use of such capacities depends enormously on the strength of thefoundational and mid-level functions, the clarity of institutional roles, and the effectiveness and suitability of legislation. ?$%ere the foundation is weak, the return on investment in laboratories and participation in international standards-setting meetings of CODEX, IPPC, and OIE is substantially reduced. 130 Cost implications differ accordingto the level inthe hierarchy: 0 Elements at the bottom half o f the pyramid require decentralized efforts that can reach potentially large numbers o f fanners, employees, businesses, etc. The costs associated with implementing these functions are generally not especially high (although sometimes they might require certain infrastructure), yet the challenge here is reachingpotentially dispersed stakeholders ina cost-effective way. 0 Elements in the top half o f the pyramid typically involve interactions with participants/stakeholders in national ministries (agriculture, commerce, and health) and in the federalhtate capital cities. These items tend to be more expensive, and some entail rather "lumpy" investments in hardware, for which cost-benefit considerations are generally needed. Where client demand i s solely or largely for assistance at the upper ends o f the pyramid, potential funding agencies should either be satisfied that the existing foundation stones are strong or are being successfully strengthened through parallel programs. In most cases, the optimal design o f a project will involve interventions at multiple points in the pyramid. While complex, proper priority-setting i s absolutely essential, and a necessary element in the proactive (preventative) approach, which this report advocates. The output o f any priority-setting process can vary: 0 In countries with a strong trade focus and relatively strong institutions dealing with SPS management, the product could be a National SPS Management Strategy and Action Plan, providing a comprehensive picture o f the strengths and weaknesses o f national food safety and agricultural health systems and laying out a subset of priority measures-policy andregulatory reforms, investments, and so on-to be undertaken, over the short (one year) to medium (three years) terms. 0 In the less well developed economies, where institutional capacity is weaker or more fragmented, a more modest output in the form o f an Industry or Supply Chain Standards Strategy or a Standards Compliance Action Plan would normally suffice. This Action Plan could center on one or several high riskhigh gain export-oriented sub-sectors. 0 Hybrid outputs could also be envisaged. These would combine one or more industry action plans with an analysis o f priority actions in specific cross-cutting technical or administrative fields (i.e. WTO accession requirements, accreditation and certification systems, plant health risk management). The role o f the Bank andpartner agencies inthe priority-setting process should be that of facilitator, as the country/industry stakeholders should own the strategies or action plans. External facilitators can help in evaluating current capacity strengths, weaknesses, opportunities, and threats and help stimulate critical dialogue regarding the roles and 131 interactions between the public and private sectors. By applying the above-noted guiding principles, the World Bank andpartner agencies can help improve the quality o f priority- settingprocesses. 7.4.3 Lending and Regulatory Reform Financial support can be provided for various kinds o f capacity-building activities, often included in broader lending activities for boosting competitiveness, promoting agricultural diversification, and so forth. Examples on the public side are the provision o f infrastructure, the development of an effective accreditation system, and the strengthening o f specialized services and testing facilities. The rationale for such investments would be provided in a priority action plan. On the private side, support can be provided for enterprise and supply chain infrastructure, the strengthening o f associations, and training and awareness-raising with regard to GAP, GMP, HACCP, and quality management. There might also be joint public-private investments in cold chain infrastructure, the development of trackindtracing systems, the strengthening o f certification capacities, etc. Other types o f support may be justified to serve a demonstration function. For example, support for the involvement o f smallholder farmers in coordinated supply chains may help to identify institutional and technical means to reduce the transaction costs incurred by the private sector (for example, related to product traceability) and thus induce additional companies to maintain smallholders as a core part o f their product or raw materialprocurement systems. Emergency situations do emerge in this field, including outbreaks o f plant pests and animal diseases, or instances o f microbiological contamination in traded food products. These can result in large losses, in financial terms as well as in human, animal, or plant health. The World Bank's project development and decision-making system generally limit the provision o f immediate assistance in the face o f emergencies, although there have been examples when existing project funds have been reallocated to address animal disease outbreaks promptly (for example, with the occurrence o f African Swine Fever in Ghana) or provide timely assistance to help countries respond to drought or animal diseases (e.g., in Morocco and several southem African countries; Vietnam's avian flu emergency). These emergency responses are most effective when good surveillance systems andcontingency plans are inplace-ahead o ftime. Recognizing that emergencies do periodically occur in this field and noting the Bank's own strengths and limitations, the most suitable roles for the Bank inthis regard would be to work with other partners in planning and implementing emergency contingency systems in client countries (including pest and disease surveillance and product traceability systems, establishment o f emergency peddisease quarantine systems, emergency insurance systems, etc.), and post-emergency rehabilitation programs that might involve compensation schemes to farmers, the rebuildingheplanting o f herddcrop coverage, andother investments needed to rebuild qualityhafety management systems. 132 As seen above, marketfailures in SPS managementjustiJjlpublic interventions. But even wherepublic goods are involved, these do not necessarily imply that governments need to undertake thefunction or service. Public capacitiesfor implementation may be very weak and this may be tied up with broader constraints within the civil service, which are not amenable to quick resolution. I t may be more attractive to contract private providers of the service, or, using partial grants, to encourage the private supply of this service. Examples include private certijkation with public oversight and tests carried out by private laboratories withpublic accreditation. Public interventions could therefore take a variety o f forms inthis field: 0 Legislation and regulation, and its enforcement, a core public responsibility; 0 Education and information sharing; 0 Investment in physical infrastructure, either uniquely or in conjunction with the private sector; 0 Direct provision o f functions, with or without private co-funding or technical input; 0 Mandating or encouraging private functional performance, with or without public co- fundingor technical support; and 0 Stimulating private investment through subsidy, matching grants, tax advantages, etc. These considerations can serve to guide the Bank's lending in SPS management. With regard to regulatory reform, adjustments inthe SPS arena can be pursued as part o f wider reforms in trade facilitation (customs and logistics, for example) or the broader investment climate. The technical support should be done in partnership with other donors and technical agencies, especially the FA0 and the three international standard- settingagencies, CODEX, OIE, and IPPC. The Standards and Trade Development Facility shouldprovide a vehicle for collaboration insupporting regulatory reforms as well as for broader capacity buildingfor developing countries. This donor-supported initiative brings together the Bank, the World Trade Organization, the World Health Organization, the FA0 and the standard-setting agencies, to enhance information-sharing on standards and related technical assistance activities, to further support country assessments o f SPS capacity constraints andneeds, and to finance selected capacity buildingprograms at national or regional levels. 133 REFERENCES Aksoy, A., and J. Beghin, eds. (2005). Global Agricultural Trade and Developing Countries. Trade andDevelopment Series. Washington, D.C.: World Bank. Bervejillo, J., and K. Rich (2003). 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"Animal Health Services: Finding the Balance between Public and Private Delivery." World Bank Research Obsewer 9 (1): 71-96. Unnevehr, L. (2000). "Food Safety Issues and FreshFood Product Exports from LDCs." Agricultural Economics 23 (2000): 231-240. ,ed.(2000). TheEconomics of HACCP CostsandBenefits. St. Paul,Minn.Eagen Press. and N. Hirschom (2000). Food Safety Issues in the Developing World. World Bank Technical PaperNo. 469. World Bank,Washington, D.C. andH.Jensen (2001). "Industry Compliance Costs: What Would They Look Like in a Risk-Based Integrated Food System?'' Working Paper 01-WP 278. Center for Agricultural andRuralDevelopment. Ames: Iowa State University. (2003). "Food Safety in Food Security and Food Trade: Overview." In Food Safety in Food Security and Food Trade. Edited by L. Unnevehr. Washington, D.C.: Intemational FoodPolicy ResearchInstitute. Upton M.(2001). "Trade in Livestock and Livestock Products: Intemational Regulations andRolefor Economic Development." Rome: FoodandAgricultural Organization. Wilson J. and V. Abiola. (2003). "Standards and Global Trade: A Voice for Africa". World Bank Trade andDevelopment Series. Washington, DC. 140 ANNEX RESEARCHPROGRAMCASESTUDIES Aloui, O., and L. Kenny. "Case Study on Cost of Compliance to SPS Standards for Moroccan Exports." Canale, F. "The Phytosanitary Capacity ofDeveloping Countries." Cato, J., S. Otwell, and A. Saborio Coze. "Nicaragua's Shrimp Subsector: Developing a Production Capacity and Export Market during Rapidly Changing Worldwide Safety and Quality Regulations." Henson, S., and W. Mitullah (2004). "Kenyan Exports o f Nile Perch: Impact of Food Safety Standards on an Export Oriented Supply Chain." World Bank Policy Research Working Paper # 3349. Washington, D.C. and S. Jaffee. "Jamaica's Trade inEthnic Foods and Other Niche Products: The Impact o fFood Safety andPlant Health Standards". Henson, S., M. Saqib, and D. Rajasenan. "Impact o f Sanitary Measures on Exports of FisheryProducts FromIndia: The Case ofKerala." Jaffee, S. (2003). "From Challenge to Opportunity: Transforming Kenya's Fresh Vegetable Trade inthe Context of Emerging Food Safety and other StandardsinEurope." World Bank, ARD Discussion PaperNo. 2. Washington, D.C. "Delivering and Taking the Heat: Indian Spices and Evolving Product and ProcessStandards." Jonker, T., H. Ito, and H. Fujishima. "Food Safety and Quality Standards in Japan: Compliance of Suppliers from Developing Countries." Lamb, J., J.Velez, and R. Barclay. "The Challenge o f Compliance with SPS and Other Standards Associated with the Export of Shrimp and SelectedFresh Produce Itemsto the UnitedStates Market." Manarungsan, S., J. Naewbanij, and T. Rerngiakrabhet. "Costs o f Compliance to SPS Standards: Thailand Case Studies of Shrimp, Fresh Asparagus, and Frozen Green Soybeans." Mbaye, A. A. "Sanitary andPhytonsanitaryRequirements andDevelopingCountry Agri- food Exports: An Assessment o fthe Senegalese Groundnut Sub-Sector." Niang, P. N."Study of the Costs of Compliance with Export Standards inthe Senegalese Fisheries Industry." 141 Pratt, A.N., P. Bonnet, M. Jabbar, S. Ehui, and C. de Haan. "Benefits and Costs o f Compliance of Sanitary Regulations in Livestock Markets: the case o f Rift Valley Fever in Ethiopia". Prepared and being published by the International Livestock Research Institute (ILRI) for the World Bank. Washington, D.C. Rich, K. "Animal Diseases and the Cost o f Compliance with Intemational Standards and Export Markets: The Experience o f Foot-and-Mouth Disease in the Southem Cone." Department o f Agriculture and Consumer Economics. Urbana: Universityo f Illinois, Willems, S., E. Roth and J. van Roekel. "Changing European Public and Private Food Safety and Quality Requirements: Challenges for Developing Country FreshProduce and FishExporters". The World Bank, RuralDevelopment Department. Washington, D.C. 142