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II. Economic and Agricultural Performance and the Changing Policy Environment

1. Economic Performance and Policy Environment
2. Agricultural Performance

Latin American agriculture has been exposed to large macroeconomic and sectoral policy shocks. Before we analyze these policies in detail, it is important to assess whether the combination of shocks and reforms has resulted in a stagnant or growing agricultural sector and in stagnant or growing labor productivity in agriculture. Recent analyses of agricultural policy reforms have concluded that reforming agriculture is extremely difficult and that it has rarely been successful, with Chile, Ghana, and New Zealand among the few success stories (Gardner, 1996). Failure for the reforms to result in an improved performance of agriculture has been blamed on (i) unfavorable macroeconomic contexts, particularly overvalued currencies and excessively high real interest rates, and (ii) political difficulties of sustaining the reforms, leading to a return to protectionism.

This section provides an overview of macroeconomic and agricultural sector performance for the Latin American and Caribbean region between 1970 and 1994. Our analysis divides the two and a half decades since 1970 into three distinct epochs distinguished, for each country, by macroeconomic performance, and broadly associated with distinct policy regimes:

· Early growth, starting in 1970, and lasting for as long as per capita GDPs are rising. It is a period characterized by ISI policies, debt accumulation, and ultimately unsustainable fiscal and trade policies.

· Recession, characterized by falling per capita GDPs, and the initiation of stabilization and structural adjustment policies.

· Late growth, characterized by economic recovery in per capita GDP growth, with relaxation of stabilization policies (including fiscal austerity and competitive exchange rates) and a deepening of neoliberal policy reforms.

The analysis also focuses on discerning the features of strong economic performance in the late growth period. The countries used in the study were grouped into 2 categories:

· Rapid late growth: countries with annual GDP per capita growth rates in the late growth period that were greater than the sample average growth rate (2.75%/year.)

· Slow late growth: countries with GDP growth rates in the late growth period that were lower than the sample average growth rate.

The analysis looks for correspondences between economic performance and the macro-economic policy environment (real exchange rates, inflation, government expenditures) and indicators of agricultural sector performance (agricultural value added per capita, agricultural labor productivity, and rural population density). The country-level data are presented in separate tables in the appendix; the aggregate group data are presented in the summary table.

1. Economic Performance and Policy Environment

Table 1 lists the gross domestic product per capita growth rates of 20 Latin America and Caribbean countries from 1970 to 1994.1 Of the 20 countries, 5 did not fit into the 3-period trichotomy used for our analysis: Brazil2, Haiti, and Nicaragua did not have a late growth period; Jamaica never suffered a significant recession; and Chile was excluded because it had only a very short (though severe) recessionary period 1981-83, and because its macro-economic policies did not conform to the general three-period classification as it began adopting neoliberal policies early in the early growth period. Figure 1 graphically illustrates the GDP per capita growth rate and the associated periods for each country.

1 Data was only available to 1993 for the 6 countries indicated in the table.

2 Interestingly, although Brazil has failed to enter a strong recovery, it rapid early growth performance was such that its performance over all three periods (1.61%) is among the best in Latin America.

The early growth period terminated for 12 of the 15 countries between 1979 and 1981, corresponding with the debt crisis, a world wide recession, and the onset of structural adjustment policies. GDP growth began again for 12 of the 15 countries between 1985 and 1990. Most rapid growth countries have had a sufficiently strong recovery to achieve positive growth rates since the onset of the recession, that is for periods 2 and 3. The slow growth countries still have not recovered, on average, their pre-recession GDP per capita levels. Despite significant inter-period differences in performance, both groups performed on average almost exactly identically over the whole 24 year period.

Another perspective on past economic performance is derived from an examination of policy-sensitive economic indicators such as the real exchange rate, inflation, and government expenditures. We use the same country and period groupings derived from the GDP per capita growth rates to observe correspondences between economic performance, growth epochs, and policy instruments.

Table 2 indicates the average annual growth rates of the real exchange rates for the three periods for each country and both groups. The real exchange rates of both groups of countries depreciated during the recession period. In contrast during the late period, the average real exchange rate appreciated in the rapid growth countries while it continued to depreciate in the slow growth countries. This result is, however, somewhat deceptive in part because it reflects the policies of the statistical outliers (Peru, Argentina, and Honduras). In fact, in six of the eight slow growth countries, the real exchange rate appreciated, indicating that almost all countries in the region (except Honduras) reversed the exchange rate depreciations that had occurred in the recessionary period. The impact of the real exchange rate on imports and exports is shown in figure 2.

Table 3 lists the annual inflation rate for the same periods and groupings. Inflation was higher during the recessionary period than it was in either the early growth or recovery periods. Average inflation for all three groups was relatively low in the late growth period, appearing to indicate that countries have maintained into the final period the fiscal and monetary policies necessary to control inflation. While there is a correlation over time between growth and inflation, there does not appear to be a correlation between performance in any one period and inflation.

The estimated annual growth rate of government expenditures is listed in table 4. The rapid growth countries appear to have pursued significantly tighter fiscal policies during the recessionary period than did the slow growth countries. Government expenditures rebounded vigorously during the recovery period, especially for the rapid growth countries.

In sum, the late growth period can be characterized by appreciating exchange rates, moderate inflation, and rebounding government expenditures. The policy instruments/economic indicators examined here both affect and reflect economic performance, making it difficult to draw causal relationships between the policies and the performance. High GDP growth rates and low inflation permit a benign expansion of fiscal expenditures. On the other hand, the recent appreciation of exchange rates is more ominous as it portends future devaluations and with inflationary implications, as revealed in the case of Mexico.3 In terms of the agricultural sector, we would expect much of the positive impact that may have resulted from the increases in government expenditures that were directed to the sector to be counterbalanced by the exchange rate appreciations. In the following section, we use the same country and time groupings to see how agriculture fared in the last two and a half decades.

3 The December 1994 Mexican devaluation post-dates the data.

2. Agricultural Performance

Table 5 gives the estimated growth rates of agricultural value added per capita. Agricultural value added is contrasted with GDP for each country in figure 1. For all 3 periods and both groups, the rate of expansion and contraction of agricultural value added per capita was less than for GDP per capita. That is, the agricultural sector expanded more slowly than the economy during the early and late growth periods and contracted less during the recession period. Agricultural performance in the rapid growth countries is notable both for the rapid rate of decline during the recession and its rapid rate of growth in the recent period.

Agricultural value added per capita, while a useful indicator of sectoral performance, should be considered in the context of other agricultural performance indicators. If countries experienced significant rural-urban migration and/or restructuring of the economy (away from agriculture), value added per capita may fall despite a healthy economy and a healthy agricultural sector. To account for economic restructuring, we consider labor productivity in the agricultural sector as a second measure of agricultural performance.

Table 6 shows labor productivity measured by the growth rate of agricultural value added per capita of rural population. The growth in labor productivity was in all cases greater than the per capita agricultural growth rates - growing faster on average at a rate of 2% per year. So while total output for the sector could barely keep up with the growth in population, labor productivity in the sector was increasing, implying economic restructuring, rural out-migration, and higher average rural incomes. Agricultural labor productivity growth rates were comparable to the macroeconomic growth rates (table 1) in the growth periods, but were higher than the macroeconomic growth rates during the recession period. In other words, the average output of labor in agriculture grew during the recession while the average output per worker in the whole economy fell.

Relating growth in agricultural value added to GDP growth in Figure 2 shows that the two are consistently related with an elasticity of the order of 0.6 through all three periods. Hence, a 10% growth rate in GDP is associated to a 6% growth rate in agricultural value added. Thus, agriculture has a slower growth than the overall economy when the economy expands and a slower rate of decline when there is a recession. This is the well known phenomenon of the hysteresis of agriculture in the economic cycle. Only with slow growth in the recovery period did the growth of agriculture exceed that of GDP, with an elasticity of 1.9. What does this say about the performance of agriculture in the context of economic reforms? Two observations. One is that the general context of economic growth is indeed fundamental to agricultural growth. Success of the agricultural reforms has thus been tied to success in restoring overall economic dynamics. However, rapid growth has been associated with rapidly appreciating real exchange rates (an annual rate of -6.8 under rapid growth compared to 0.6 under slow growth. See Table 2), and this contributes to dampen the growth transmission effect on agriculture compared to slower growth. There are some clear growth failures for agriculture in slow growth countries, specifically Mexico, Venezuela, and Bolivia. Otherwise, however, successful macroeconomic reforms and the associated reforms in agriculture have been able to restore a modest level of agricultural growth, certainly higher than the growth which agriculture was achieving in these same countries under import substitution industrialization and debt accumulation. The second observation is thus that the reforms have not been without effect, even though performance is still modest. We thus do not find support for the pessimistic assessment of the impact of policy reforms on agriculture espoused by Gardner.

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