Coffee Crisis in the Western Hemisphere

Adolfo A. Franco, Assistant Administrator USAID Bureau for Latin America and the Caribbean,
Testimony before the Subcommittee on the Western Hemisphere of the House Committee on International Relations

In the text, "billion" equals "thousand million."

Thank you, Mr. Chairman, for the opportunity to appear before the Subcommittee on the Western Hemisphere today on a vitally important issue that is dramatically and directly affecting the welfare of millions of Latin Americans. The coffee crisis, and its broader context, pose a threat to prospects for prosperity and continued stability in the Western Hemisphere. The crisis is of intense concern to the United States, and it serves as a focal point for current and planned USAID programs in Latin America.

With coffee an important export for over 50 developing countries, the effects of coffee prices dropping to the lowest levels in 30 years have been felt globally. But the coffee crisis has been most severe and felt most acutely by our friends and neighbors in this Hemisphere, where 44% of Latin America's permanent cropland is used to grow coffee. In Central America, where economies remain reliant on coffee as a primary export, and where the coffee crisis has converged with drought and other natural disasters, it is not an overstatement to refer to the coffee crisis as the economic equivalent of a hurricane. Consequently today my testimony focuses primarily on USAID's response to the coffee crisis in Central America, which is a principal element of USAID's Opportunity Alliance for Central America and Mexico, a new initiative designed to focus resources on catalyzing trade-led rural economic growth.

A worldwide oversupply of coffee is primarily responsible for the steeply depressed prices for farmers, resulting in substantial losses of income for workers in the coffee sector, numbering more than two million in Central America alone. Over the past five years, the world coffee market has undergone significant changes on the supply side, reflecting a steady increase in world production and export levels. This oversupply is due largely to production increases in Vietnam and Brazil, and is compounded by the change in consumer demand away from lower grade commercial coffees.

At the epicenter of the crisis, in Central America, it is estimated that farmers have lost more than $1.5 billion this year alone, and more than 400,000 temporary workers, and 200,000 permanent workers face layoffs by the fall of 2002. Making the situation even worse, many of the region's coffee growers are small farmers living in remote rural areas who are already poor and vulnerable. As a result, in countries like Guatemala, alarmingly high levels of acute child malnutrition are being observed. The lack of other opportunities in the coffee-growing areas means that unemployment and income loss from the coffee crisis has led to flight from the rural areas. Mass migration from countries like Nicaragua to Costa Rica, and increased illegal immigration to the U.S., are exacerbating already high levels of crime and violence in urban centers.

The coffee crisis is reducing revenue available to national governments, weakening financial sectors, and is serving as a primary fuel for overall social and economic instability across the countries of the region. The challenges stemming from the coffee crisis go beyond the coffee sector, and are more than economic. The challenges have the potential to undermine political processes and the effectiveness of newly elected governments in the region, and could ultimately lead to greater regional conflict.

While we are deeply concerned about the long-term impacts threat to stability, we should also be concerned about the immediate effects that we are seeing now, and over the past two years USAID has taken important steps to alleviate the effects of drought and the coffee crisis. In Nicaragua, USAID worked with the U.S. Department of Agriculture and U.S. Private Voluntary Organizations such as CARE, Save the Children, Catholic Relief Services, and the Adventist Development and Relief Agency to deliver $8.2 million in emergency food, medical, and health assistance in late 2001, and an additional $2.9 million in emergency food and household supplies so far in 2002. In Honduras, nearly $3.0 million in emergency food and other commodities was delivered in 2001-2002. In Guatemala, USAID's humanitarian response has included over $6 million in emergency rations, medical supplies, diarrhea and pneumonia treatments, nutrition education, and child vaccinations.

While these emergency measures are vital, the focus of my testimony today is the broader context for the coffee crisis, and how it has led to the development of USAID's Opportunity Alliance for Central America and Mexico, an initiative that recognizes not only Central America's difficulties associated with the coffee situation, but also the unprecedented and as yet unrealized opportunities for promoting greater prosperity in the region. The agreement of the Trade and Economy Ministers responsible for trade at the last World Trade Organization (WTO) Ministerial at Doha, the commitment of the Hemisphere's leaders to enter into a Free Trade Area of the Americas by 2005, and President Bush's announcement to explore a free trade agreement between the U.S. and Central America are excellent tools we can use in achieving a healthier economic environment.

The path to resolving the coffee crisis, and to fostering greater economic prosperity in Central America, and indeed, throughout the Hemisphere, will be easy or difficult depending on the extent to which these countries can become more competitive in regional and global markets and increase their levels of trade and investment.

To assist countries on this path, USAID is launching this year a new trade-led rural economic growth initiative for Central America and Mexico called the Opportunity Alliance. To begin the Opportunity Alliance as rapidly as possible, USAID has re-allocated $8.5 million in FY 2002, including $6 million to jump-start a regional quality coffee program. In FY 2003, USAID plans to allocate $30 million for the Opportunity Alliance for Central America and Mexico. Activities will focus on building trade capacity; diversifying the rural economy, and reducing the region's vulnerability to disasters and environmental degradation effecting income.

USAID's Opportunity Alliance is in direct response to the coffee crisis and the economic and social difficulties facing the rural poor. It provides broad-based solutions to those most effected -- small farmers in rural areas. It builds directly from successful USAID experiences in the field. Trade capacity activities will help prepare Central American countries to participate constructively as members in the World Trade Organization, the Free Trade Area Agreement (FTAA), and U.S.-Central America Free Trade Agreement (CAFTA) should it become a reality, and to make necessary reforms in commercial law, property rights, and contracts enforcement. This trade capacity assistance will expand a successful USAID-funded regional program that has helped Central America drop average tariff rates from 20% to 7% between 1990 and 2000, streamline customs procedures, and be in greater compliance with multilateral trade agreements, including key labor and environmental provisions.

USAID's Opportunity Alliance will also help broaden opportunity and foster sustainable improvement in livelihoods (income) of the poor through diversification of agriculture, including quality coffee, and the non-agriculture arena to reduce over-reliance on traditional crops. In this region, rural households strategically pursue diverse sources of income often including migration of family labor to urban jobs. Recognizing this pattern, USAID has developed a concept of diversifying the rural economy by viewing agricultural investments within a broader rural enterprise approach. The approach taps into Central America's potential for ecotourism, aquaculture, certified timber and other forest products, artisan crafts and rural services. USAID's programs will provide demand-driven business development and marketing services to help small-and medium-sized farmers, particularly coffee farmers, improve competitiveness as well as tap new markets. This will expand successful programs such as in Guatemala, where tens of thousands of rural residents were raised above the poverty line with USAID assistance for the Peace Accords, and in Honduras, where our work following Hurricane Mitch with nontraditional agriculture producer associations led to significant increases in export sales and new jobs.

The Opportunity Alliance also will assist countries in better managing the climatic and environmental risks in the region. Coffee trees, for example, now play a significant role in holding the soil and preserving the watershed in many areas in Central America. Massive shifts out of coffee production, even in nonproductive and noneconomic areas, could have impacts on the environment. Protecting the gains from trade-led growth (e.g., quality coffee) through USAID assistance with disaster preparedness and mitigation, and watershed management is vital to sustainable prosperity in the region. USAID also will work on protecting vulnerable coral reefs and helping Central American countries control and manage forest fires.

Given the magnitude of the economic difficulties, USAID will maximize its engagement and coordination with the U.S. private sector as well as with key international financial institutions. USAID worked closely with the Inter-American Development Bank (IDB) and the World Bank in developing a coordinated framework for responding to Central America's coffee crisis. In April of this year USAID, IDB, and the World Bank co-sponsored a stakeholders meeting in Guatemala with Central American Ministers of Agriculture and about 250 coffee producers, directors of coffee-buying and roasting companies, and consumer and environmental organizations. USAID and the banks presented a joint evaluation and set of potential recommendations. These recommendations underscore the systemic nature of the crisis while offering no "bail outs" to farmers unwilling to help themselves. Rather, the recommendations stressed the need for producers to improve competitiveness and to diversify production.

Mr. Chairman, with your permission I would like to enter into the record the USAID/IDB/World Bank discussion document outlining our joint recommendations entitled "Managing the Competitive Transition of the Coffee Sector in Central America."

USAID's new demand-driven regional coffee program is designed to assist Central American coffee producers to enhance the quality of coffee, improve business practices, promote market-based policies, form new market linkages, and secure long-term contacts. Under the regional program, the USAID program and industry alliances will play a catalytic role in helping small- and medium-sized farmer organizations identify and market higher quality and specialty coffee to U.S., European, and Asian coffee markets, as well as assist them to diversify their export base.

This regional coffee program is an initial element of the Opportunity Alliance given Central America's natural geological and climactic advantages which present opportunities for raising the region's competitiveness in producing quality coffee and tapping promising specialty markets around the world. USAID is engaging corporate allies interested in investing jointly in local projects, or signing long-term purchasing contracts with small- and medium-size coffee producers. As just a few examples of this cooperation, USAID has worked in partnership with Conservation International and Starbucks Coffee toward creating new opportunities for small-size farms in southern Mexico via technical assistance, marketing and production assistance. USAID also is supporting efforts by the Specialty Coffee Association of the Americas (SCAA) on international cup-of-excellence programs. These programs are already helping Nicaragua's small-scale producers secure unprecedented prices for coffee through internet auctions. Additionally, USAID, together with Proctor and Gamble, have begun to identify schools in Guatemala for social investment grants in coffee producing regions hit by the crisis. By working closely from the outset with industry, USAID's assistance to producers will be demand-driven and based on market potential and will encourage coffee producers that cannot be competitive to diversify out of coffee to other commodities. Diversification from coffee to other farm and non-farm sources of income will be facilitated similarly by providing business development and market access services in alliance with private industry. The interests of the region, donors, consumers, environmental groups, and industry have never been more intertwined as they are currently. USAID's coffee programs, as well as the other elements of the Opportunity Alliance, will take advantage of this convergence of interests, leverage resources, and maximize the impact of our development activities.

USAID's coffee response and broader efforts under the Opportunity Alliance are a strong signal of its commitment to our friends and neighbors in Central America and Mexico. These initiatives are highly complementary to U.S. foreign and trade policy objectives in the region, as well as regional initiatives such as Plan Puebla Panama, the joint U.S. accord with Central America (CONCAUSA), and the U.S.-Mexico Partnership for Prosperity. More importantly, by promoting greater economic opportunities, trade, investment, and market integration, USAID's Opportunity Alliance is an essential element of the U.S. Government's effort to directly address and counteract the root causes of economic migration, illegal immigration, and regional instability.

Thank you again, Mr. Chairman, for the opportunity to participate in this hearing today. I welcome questions from you and members of the Subcommittee.

Washington, D.C.
July 24, 2002