EPA Review Annex Documents - DFID

educed output for a period of time. Whilst it is difficult to grasp the magnitude of these
adjustment costs, it is easier to approximate the compensation that would need to be
disbursed by donors to compensate for these. Milner (2006) identifies the type and scale of
the assistance needed to smoothen the transition period by separating it into five broad
categories. The first category is the ‘fiscal adjustment’ cost which results from the loss in
tariff revenue. Donors should focus efforts to enhancing tax collection methods from
alternative sources. This can be done through technical assistance and capacity building
programmes. The second type of assistance would treat ‘trade facilitation and export
development’ in view of ensuring a swift re-allocation of resources towards more productive
processes. This would require aid in the form of development of export products and
enhancement of knowledge of export market opportunities. The third adjustment cost should
focus on ‘production and employment’ where both workers and firms should be
compensated in the form of unemployment benefits and training for the former, and
production line restructuring for the latter. It then follows that donors should focus on ‘skills
development and productivity enhancement’ to allow both firms and workers to reap and
channel productivity gains. The last focus area is ‘negotiation and legislation’ where donors
aid ACP countries in developing the capacity, through technical assistance, for negotiating
trade agreements and for adapting existing legislations to changing demands. Whilst an
estimate of these compensatory measures does not give us an idea of the real cost of
adjustment, it provides an interesting benchmark of the costs that would fall on ACP
countries in adapting to the new circumstances.
Milner (2006) uses previous World Bank project budgets and available indicators (such as
share of trade tax revenue in total tax revenue, or share of manufacturing in GDP) to make
rough calculations on the scale of adjustment compensation needed by each ACP country.
Overall, Milner’s results suggest that the fiscal adjustment category is the one that should
attract most attention, closely followed by employment adjustment and skills/ productivity
enhancement. In terms of geographical concentration of adjustment costs, he suggests that
ECOWAS and ESA are to require the highest volumes of aid. Overall, Milner estimates the
cost of adjustment assistance for ACP countries to be in the region of €9 billion at 2005
prices. This figure would be in addition to the current funds available to ACP countries (€22.7
billion for the years 2007-2013) 85 which would imply an increase in development funds just
below 40%.
In Table 2 the most important empirical studies carried out by region are mapped.
Comments are made on the overall results and point the reader to the tables in the annex for
a more in depth exposition of the methodologies and the results obtained from each
empirical investigation.
ECOWAS
All empirical investigations suggest that trade creation will predominate over trade diversion
in the ECOWAS region. Busse and Grossman (2004), by way of a partial equilibrium
analysis, estimate that the share of EU imports will increase by 6% whilst the share of non
preferential imports should increase by 3.5%. Under a similar partial equilibrium simulation
but at higher degrees of disaggregation, Fontagne et al (2008) estimate that the long run
impact on trading structures will increase ECOWAS exports to the EU by 4% whilst imports
from the EU are set to rise by 15%. In terms of revenue lost due to loss of duties on EU
imports, the empirical studies concur that this will potentially be a significant issue. Fontagne
et al (2008) estimate that this loss could range between 38% and 27% of total tariff
revenues. However, Busse and Grossman (2004) have a higher estimate of 53% of total
import duties. This would represent a loss of 8% of government revenue which translates
into a decline of 1% in GDP. The countries that are most likely to be negatively impacted are
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