6. Graduation

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6. Graduation

At present Lomé has no criteria for graduation similar to the GSP, where country sector graduation is practiced on the basis of the level of development and sector-specific specialization. The development index is based on per capita income and exports of manufactured products whereas specialization is based on competitiveness in the sector market as measured by the share of EU imports. If the beneficiary accounts for 25% of total GSP imports in a sector, it will be graduated. De minimis clauses exist at a low per capita income, reflected in a low development index, and for a country which accounts for a small share (less than 2% of GSP imports in the sector). No Caribbean country has been listed among the 37 GSP beneficiaries already identified for possible country-sector graduation.

As yet, country graduation does not operate in the EU GSP. The EU is planning to introduce country graduation criteria at the beginning of 1998. In the debate, the size factor has already come into play. In addition to the size of exports of the sector, an economy of a certain level of GDP is considered structurally developed and capable of competing even if its per capita income falls below $2,500.

Caribbean countries have made a strong case for smallness to be considered in the FTA process. In this regard they have put various criteria on the negotiating table:

• the high costs of diversification, in so far as small market size requires a large portion of output to be sold on the international market for a project to be viable and poses problems of producting and marketing economies of scale;

• the high unit cost of infrastructure because of technical indivisibilities in small societies;

• special difficulties in macro-economic management due to extreme vulnerability to the vagaries of the external environment given the high export product and market dependence and uncertainty in price and demand fluctuations;

• high adjustment costs associated with the absence of specific factors of production needed for the development of alternative production.

Free trade readiness criteria, in terms of success in policy reform and generally sound economic management, have also been used to assess Caribbean countries preparation for NAFTA/ FTAA. Table 2 shows, for some countries, their present ranking for one institution. Caution should be exercised in the use of these criteria in so far as they do not take into account boundary conditions of size and degree of structural transformation.

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Table 2
1996 Performance Scores on Readiness Indicators (5 is the highest score)

Source: Gary C. Hufbauer, Senior Fellow, The Institute for International Economists