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1. Trade

1.1. Policy Reforms
1.2. Transitional Issues
1.3. New Market Compatible Policies

1.1. Policy Reforms

Exchange rates. Most Latin American countries have consolidated their exchange rates regimes, ending preferential and multiple exchange rate systems. Countries have also moved from fixed exchange rates to managed crawling peg or floating exchange rate regimes.

As examples, Ecuador had frequent exchange rate policy changes through the 1980's, and in 1988 it converted to a crawling peg system, devalued sharply in 1992, and changed to a floating system in 1992. In Nicaragua, policy reforms began in 1990 with the Chamorro government and included consolidation of exchange rates. The 1989 economic reform policies in Paraguay included unification of exchange rates, and introduction of a managed float system. In Venezuela, the 1989 trade policy reform unified and floated the exchange rate, and discontinued foreign exchange rationing. Not all countries have shifted to market determined exchange rates. Argentina, for example, continues to maintain a fixed exchange rate in part to control domestic inflation.

Tariffs and trade barriers. Many countries have lowered trade barriers either unilaterally or as a response to conditions required by GATT or regional trade agreements. Countries have replaced quantity trade restrictions with tariffs, and tariff regimes have been simplified, with the number of applicable tariffs being reduced. Many countries have adopted a unified tariff system for most goods. Tariff levels have been reduced. Most trade prohibitions have been removed. The removal of food crops subsidies has allowed the removal of export prohibitions. State import and export monopolies have largely ended, with state and parastatal trading organizations being eliminated or privatized.

In 1990, Ecuador began to equalize import tariffs, reducing the variation from 0-338% in 1990 to 13-53% in 1991. In May of 1992, a graduated tariff system was initiated, with tariffs varying from 5-20% depending on the level of value added. ENAC ended its control of imports of basic grains in 1993. FERTISA ended its monopoly control over imports of fertilizer in 1986. Since 1990, Colombia has removed all non-tariff barriers to trade, eliminated its state monopoly over grain imports, and eliminated all export tariffs except for coffee. The maximum import tariff has been reduced from 50% to 20%, and between 1991 and 1992 the average tariff on farm goods fell from 31% to 15%, while the average tariff on farm inputs fell from 15% to 2%. In Haiti, as part of a move in 1986 to liberalize trade, export tariffs were eliminated and the average import tariff dropped from 40% to 20%. Certain food commodities in Haiti are still subject to import licenses. In Nicaragua, the 1990 policy reform reduced tariff ceilings, and eliminated non-tariff trade barriers. In Peru, policy reforms initiated by the Fujimori government in 1990 eliminated import duty exemptions, and quantity restrictions. The Peruvian tariff system was simplified to include only three rates, 5%, 15%, and 25%, with most goods taxed at 15%. In Venezuela, as part of reforms beginning 1989, quantity restrictions were removed and tariffs reduced and simplified. Maximum tariffs dropped from 135% in 1988, to 10-20% in 1993, with the number of different rates dropping from 41 to 3 during the same period. In 1989, the inputs marketing enterprise, ENCI, lost its import monopoly and was restructured. In Mexico, average tariffs with the United States fell from 27% in 1982 to 10% in 1988 when it joined GATT. With initiation of NAFTA in January 1994, average tariff fell further to 5%, and all tariffs are to be eliminated after a fifteen years transition to free trade.

Regional trade agreements and economic integration. Economic integration and trade liberalization have been promoted in the last decade by a surge of regional trade agreements. These agreements include free trade agreements (NAFTA); customs unions centered around a common external tariff (MERCOSUR, CACM, CARICOM, Andean Group); numerous bilateral trade agreements; and preferential trade agreements (CBI, CARIBCAN, Andean Trade Preference Act).

As a result of these trade agreements and unilateral trade liberalization, barriers to trade have fallen and tariff rates have declined significantly. In the region, national average tariff levels have dropped from 35-60% in the mid to late 1980's to 10-15% in the 1990's (OAS, 1995; Naím, 1994). Common external tariffs among MERCOSUR countries fell from 6-44% in the late 80's to 6-15% in the 90's, and common external tariffs for Andean Group countries fell from over 30% to 14.8% in 1995.

Intraregional trade has grown impressively in the last decade. The total export value in LA countries increased 81% between 1986-92, while trade within the region increased 135% (Naím, 1994). Intra-regional trade among Latin America's 11 largest economies expanded 50% between 1990 and 1994. The last decade has also seen large increases in trade between countries with special trade agreements including Argentina and Brazil, Colombia and Venezuela, and among the NAFTA countries. For instance, isolating the role of NAFTA from other determinants of trade shows that Mexican imports from the U.S. have grown by an additional 4.2% per year as a consequence of the trade agreement (de Janvry and Sadoulet, 1996). For agriculture, Mexican imports from the U.S. increased by 24% in 1994, when GDP per capita was rising in Mexico and the exchange rate was appreciating, when they are predicted to have been stagnant without the agreement. In 1995, under the peso crisis, imports would have fallen by 46% without the agreement instead of the observed 25% decline. NAFTA thus played an important role in helping increase trade in good years and reduce decline in bad years.

1.2. Transitional Issues

Political opposition to reform and incomplete trade liberalization. While most countries have made significant progress towards eliminating distortionary trade policies, political resistance to reform has made trade liberalization difficult and incomplete. In Colombia, farmers' organizations have successfully lobbied against trade liberalization, and there remains substantial protection to beef, coffee, and rice producers. In Chile, a deep recession in 1983 and the resulting political pressures caused uniform tariffs to climb to 35% in 1984 before falling back to 11% by 1991. Trade reforms are thus not only difficult to implement, they are also difficult to sustain, and there are strong pressures for a return to greater protection of the import competing sectors. For this reason, membership to regional trade agreements creates an essential commitment device that gives credibility that the trade reforms will not be overturned. Mexico had largely liberalized its trade with the United States unilaterally before entering NAFTA. However, joining NAFTA served as a commitment device that this trade policy would not be easily overturned by subsequent political regimes. Indeed, the commitment worked as Mexico endured the December 1994 peso crisis without raising taxes on its exports to redistribute some of the rent created by the very large real devaluation from exporters to importers, from producers of tradables to producers of non-tradables, and to reduce welfare losses for consumers of tradables. The cost of upholding trade policy commitments was, however, at a high cost on consumers, particularly of imported foods.

Agriculture is one of the sectors most commonly represented among the exceptions, exclusions, and exemptions in the regional trade agreements. Protections for agriculture include lengthy phase out periods for tariffs, and safeguards to protect against import surges. Evidence of a decline in the export share of raw agricultural commodities suggests that the extra protection agriculture receives may be having a deleterious effect on trade (Lee, 1995).

Graduated tariff systems that are still in place discriminate against agriculture because imported unprocessed products have lower tariffs than processed goods (discrimination is greater if the effective rates of protection are considered). As late as 1993, basic food commodities were banned from export in Ecuador. This policy distorted relative prices and reduced foreign exchange earnings.

Transition policies and transparent subsidies. To ease the transition towards reduced protection and free trade, countries can adopt a policy of direct income transfers. The transfers, written into the budget as explicit expenditures, have advantages over indirect subsidies in that they are more transparent and less distortionary. Explicit transfers must compete politically in the budgetary process with other sectors, and are less likely to remain as entitlements. As part of its commitment to joining NAFTA, Mexico agreed to phase out trade restrictions on maize and beans over a 15 year period. As compensation for declining prices resulting from NAFTA and the removal of guaranteed prices, Mexico initiated a direct income transfer program, PROCAMPO, based on historical land area cultivated in ten major crops rather than on quantity produced or sold. Under this program, historical growers of these crops receive a per hectare transfer for a certain number of years regardless of whether they continue to grow the formerly protected crops. This policy is efficient in that it allows growers to freely switch to new crops where Mexico is acquiring comparative advantages. It is progressive since it allows smallholders who do not market any of their harvest to receive the subsidy payments and it compensates all producers in broad agroecological regions at the same rate per hectare irrespective of historical yields. Low productivity producers, typically smallholders, are thus compensated at the same rate as high productivity producers, typically the larger commercial farmers.

Exchange rate stability and appreciation. The long run success of the agricultural sector in an open economy development strategy depends to a large degree on adequately valued and stable exchange rates. Appreciated exchange rates devalue agricultural products, most of which are tradables. Unstable exchange rates create confusion in price signals. Both appreciation and instability discourage domestic and foreign investment in the sector.

With economic recovery, most countries have experienced significant appreciations in their real exchange rates (Table 2). Appreciation of the real exchange rates caused by domestic inflation and a political inability or unwillingness to devalue the currency penalize the export sector. Mexico's management of its crawling peg system caused the exchange rate to become overvalued under the Salinas administration, contributing to a serious profitability crisis in agriculture and output stagnation. A run on the currency after the 1994 elections led to a dramatic devaluation of the currency, followed by a switch to a floating exchange rate system. While this restored price incentives for agriculture, other factors limit the ability of agriculture to respond, including large institutional gaps (particularly in marketing, research and extension, and rural finance), lack of investment in public goods complementary to private investment, extraordinarily high real interest rates as an element of restrictive monetary policy to control inflation, and a recurrent drought. In Nicaragua, reliance on a fixed, and then crawling peg exchange rate system to control inflation led to an appreciated exchange rate and non-competitive exports. In Paraguay, exchange rate overvaluation played the most important role in turning NRP and ERP below one for many of its principal crops. In Chile, strong capital inflows toward the other sectors of the economy create a Dutch Disease effect and the appreciated real exchange rate acts as a tax on agricultural exports, forcing producers of export crops to increase productivity to remain competitive on the world market. In the eight Latin American countries which he analyzed, Valdés (1996) observes that the decline in real domestic producer prices in the 1990s was principally due to exchange rate appreciation.

Altogether, these experiences show that the macroeconomic context, particularly the real exchange rate and the real interest rate, are determinant in affecting the success of the reforms in agriculture. Too often, economic liberalization in agriculture has been occurring in a macroeconomic context unfavorable to investment in agriculture, jeopardizing the outcome of the reforms and unleashing political demands for a return to protectionism or, when protection is not longer a policy instrument, to subsidies. Exceptions like Chile, where a margin of productivity gains could be captured, show that reforms can be successful under appreciated exchange rates. However, the overarching conclusion is that successful policy reforms in agriculture require, as a precondition, careful management of the macro economic context, most particularly the real exchange rate and real interest rates.

Trade diversion. In theory, regional trade agreements may divert trade from low-cost countries outside of the trade pact to high-cost pact members. However, evidence suggests that trade diversion has not been significant in the Latin American context, in large part because of low differentials between tariff rates for member and non-member countries (Lee, 1995).

1.3. New Market Compatible Policies

Export promotion. The high fixed start up costs and risks associated with certain export markets provide an economic rationale for government export promotion - especially during the initial stages of export-led growth, as countries open themselves to foreign trade. Export enhancing programs should be targeted at new products, have a limited time horizon, and be moderate in scale (ECLAC, 1994).

Economies of scale in the provision of certain services, and the public good nature of certain types of trade information provide other justifications for a government role in export promotion. Governments can provide information about foreign markets including legal requirements, procedures, and international standards. The government can certify products, assist in the promotion and marketing of products, construct shipping and packaging infrastructure, and provide export financing and insurance. Export promotion schemes have been widespread in Latin America. Chile had an effective program through Pro-Chile. Guatemala promoted exports of non-traditional crops such as broccoli and snow peas, often produced by very smallholders, through private organizations and trade associations, such as the Association of Exporters of Non-Traditional Products (GEXPRONT).

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