Economic decline: the critical role of agriculture

Contents - Previous - Next

Although there is no one single reason that could by itself explain Ghana's rapid economic decline, it is safe to say that at the root of the problem were the severe economic disequilibria caused by the insistence on a fixed exchange rate regime and the lack of proper macroeconomic policies to support it.

Agriculture in general and the cocoa sector in particular played critical roles in the economic crisis. Although the growth of the cocoa sector was essential for foreign exchange receipts and fiscal revenue collection, macroeconomic policies discriminated against cocoa, both directly and indirectly: i) by direct taxation of the cocoa industry in terms of high shares of the cocoa price being used to cover the expenses of an inefficient and highly expensive parastatal bureaucracy; ii) by indirect taxation of real domestic prices as a result of the overvaluation of the currency, high domestic inflation and the relative protection accorded nonagricultural sectors.

In a well-known study, direct and indirect taxation of cocoa in 1975-79 and 1980-84 were calculated and compared. The results show that, for the 1975-79 period, there was a 26 percent direct subsidization (negative taxation) of cocoa producers because of the low world cocoa prices and the system of payments as described above. During the same period, indirect taxation of cocoa was 66 percent. The net result was a total taxation (or negative protection) of cocoa amounting to 40 percent. The situation worsened during the 1980-84 period during which, although direct subsidization increased to 34 percent, indirect taxation increased to 89 percent for a net tax of 55 percent. The situation was very different with imported food products: the data for rice show that, while it was subject to a negative indirect protection of 66 percent in 1975-79, rising to 89 percent in 1980-84, it enjoyed direct protection of 79 and 118 percent, respectively. The combined effect was a positive overall protection for the two periods of 13 and 29 percent, respectively. Those results are in broad agreement with the overall government policy on tradable food commodities, as described previously.

The excessive cocoa taxation policies exacerbated the impact of declines in world prices of this commodity and reduced production by an average of 6.1 percent per year in 1970-83. A comparison with Côte d'Ivoire demonstrates that the loss in cocoa output was not just a result of changes in the world price. While Ghana's world market share changed from 26.3 percent in 1970 to 14.5 percent in 1983, Côte d'Ivoire increased its share from 11.6 percent in 1970 to 25.8 percent in 1983.

The disincentive effects of policies on cocoa production created a vicious cycle for the Ghanaian economy. Declines in production and exports meant declining fiscal revenues and foreign exchange receipts, a situation that was dealt with by imposing more controls and increasing inflationary deficit financing, which increased inflation and dampened production incentives. The emphasis on increasing controls to stave off the crisis caused Ghana to become one of the world's most distorted economies during 1970-1980.

Post-1983 policies

Macroeconomic reforms. When the Provisional National Defence Council took over in December 1981, Ghana was on the brink of economic collapse after initial attempts to deal with the crisis through tighter controls on foreign exchange, stricter border surveillance and an anti-corruption campaign. The government first adjusted the exchange rate in April 1983 by establishing a system of export bonuses and import taxes that amounted to a 900 percent devaluation of the exchange rate.

In 1983, in response to the deepening economic crisis, the government launched the economic recovery programme (ERP), covering the period 1983-1986. This was followed by the first phase of the structural adjustment programme (SAP I), covering the period 1987-1988, and by the second phase (SAP II), from 1989 to 1990. In 1983 the ERP was accompanied by nominal devaluations, first to keep the real exchange rate at its April 1983 value and later to create further real devaluations. Two major institutional reforms practically eliminated the overvaluation of the cedi: establishing the exchange rate auction in September 1986 and the launching of the interbank market in April 1992.

Fiscal policies succeeded in broadening the tax base and increasing tax revenue from 4.6 percent of GDP in 1983 to 11.2 percent in 1986 without a major increase in tax rates. Non-tax revenue also increased as a share of total revenue, mainly as a result of the grants which increased from 0.6 percent of total revenue in 1983 to 5.9 percent in 1992. Higher fiscal revenues permitted increased spending on civil service salaries, infrastructure rehabilitation and social services and programmes without increasing the deficit. Thus, total fiscal deficit as a percentage of GDP, which stood at 2.7 percent in 1983, became a surplus 1.5 percent in 1992. The structure of spending also changed: the share of capital spending in total central government expenditures increased from 7.9 to 20.1 percent while current expenditures fell from 89.3 to 76.7 percent.

The conduct of monetary policy in Ghana is complicated by large official capital inflows. The need to replenish the foreign exchange reserves of the central bank as well as the need to use foreign aid to finance the domestic expenditure and fiscal revenue gap have been major sources of monetary growth. Thus, growth of the broad money supply increased at an average annual rate of more than 40 percent in 1984-1988. Since 1989, domestic credit policy has been used to offset the growth of foreign assets, so money supply growth decelerated between 1989 and 1991 although it exploded in 1992, an election year. The cause was an 80 percent wage increase for civil service staff, which set the stage for private sector wages to increase by 500 percent. The inflation rate has been decelerating, Wing from about 40 percent in 1987 to 10 percent in 1992. On the trade side, most quotas and import restrictions have been removed and tariffs for a wide array of goods have been reduced.

Agricultural sector reforms. Agricultural sector reforms started relatively late in the SAP. Exchange reforms succeeded in raising producer prices despite failing world prices. Thus, real cocoa prices increased continuously between 1983/84 and 1987/88, despite. the collapse of world cocoa prices in 1965. As the devaluation effects bottomed out, real producer prices declined sharply in 1989/90 (14.5 percent) and continued declining at a rate of about 5 percent per year between 1989/90 and 1991/92. Farmers benefited from a premium paid to them after harvest (albeit often with a delay). This price compensation ranged from 0.9 percent of the producer price in 1986/87 to 15.2 percent in 1989/90.

There have been gradual reforms in the cocoa marketing system, including the restructuring of the CMB - renamed the Ghana Cocoa Board (COCOBOD) - and a reduction of its activities. Thus, the Board has shed some of its plantations, its majority ownership of a pesticide factory and the responsibility of maintaining feeder roads. More than 40000 workers were laid off in 1985 (some of them ghost workers) and an additional 12000 were retrenched in 1987. In 1992, competition was introduced in the internal marketing of cocoa. Two new buyers were allowed to buy cocoa from producers alongside the Produce Buying Company, a subsidiary of COCOBOD. Since 1987, the reforms have reduced COCOBOD's operating costs by one-third. Full liberalization has been stalled by, inter alia, the fear that the credit market is not capable of handling a large private cocoa trading sector.

The Ghana Cotton Company's monopoly on cotton buying and ginning has been abolished. The government withdrew from fixing producer prices for cotton and lifted the restrictions on cotton exports.

With respect to food crops, the guaranteed minimum price for maize and rice was abolished owing to the ineffectiveness of the scheme and the high costs associated with it. The Ghana Food Distribution Corporation controlled only 10 percent of the market while the rest was controlled by private traders. The government transferred some of its rice mills to the Divestiture Implementation Committee and operates others on a fee basis.

Ghana has also abolished subsidies and price controls on fertilizers and is encouraging private importation, wholesaling and distribution. A phased marketing privatization was launched over a three-year period ending in 1990. In January 1989, the Ghana Seed Company was dissolved to enable the reorganization of the entire seed industry. Imports of agricultural inputs are duty-free.

Policy reforms. assessing the effects and charting the future. The effects of policy reforms in Ghana have been impressive. Overall growth in real GDP increased from an annual average of 1.5 percent in 1970-83 to about 4.7 percent in 1983-91 and 4 percent in 1992. Assuming population growth of 2.6 percent, there has been a real per caput growth rate of more than 1.9 percent per year. The fact that the rate of growth remained continuously positive in per caput terms since 1984 (with the exception of 1990) is also impressive.

Agricultural GDP, which had declined by about 1 percent annually between 1970 and 1983, increased by 1.9 percent between 1984 and 1991, and fell again by 0.6 percent in 1992. Thus, overall per caput growth in agricultural GDP has been negative throughout the post-adjustment period, except for short-term recoveries such as that following the severe drought of 1983.

In response to devaluation and increased domestic price incentives, cocoa production is slowly recovering from the record low level of 1983/84. This partly reflects the diversion of cocoa from the parallel to the official markets. FAO data show that a 6.1 percent average annual decline in production between 1970 and 1983 has been turned into an annual increase of 6.75 percent between 1984 and 1992. However, cocoa production has not reached the high levels registered in the 1960s to the mid-1970s.

The production of non-traditional export commodities (pineapples, cola nuts, cotton seed, yams, fish and lobsters) has also picked up as a result of the higher incentives provided by the devaluation. Export earnings from nontraditional export crops increased by 66 percent between 1966 and 1990.

The privatization and liberalization of agricultural inputs has had mixed results. In the case of fertilizers, consumption has been down from its peak levels of the late 1970s and early 1980s, when the subsidy sometimes reached 80 percent of the fertilizer price. The relative absence of private sector interest in marketing and distribution is due, inter alia, to inconsistencies in the fertilizer privatization process. Namely, government control on fertilizer distribution margins and an indirect subsidy to the Farmer Service Companies have discouraged the participation of private dealers. Problems associated with credit availability are also inhibiting activity by the private sector in the marketing of inputs. Declining fertilizer imports cause increases in the per-unit price because of the consequent loss of cost savings associated with bulk orders.

In this context, it is worthwhile mentioning the activity of Global 2000, a non-governmental organization (NGO) whose activities have contributed significant productivity gains for the participating -1 farmers. Global 2000 provides extension and payment in kind (for example, maize in return for fertilizer) to farmers participating in the scheme. Many of Global 2000's resources (staff, capital and physical flows) are provided by the government. Despite the positive results achieved so far, the scheme may be inhibiting efforts to increase private participation in the distribution process.

From adjustment to growth: constraints, prospects and the role of agriculture

Ghana is one of the few countries in sub-Saharan Africa where issues concerning the transition from stabilization to a sustainable growth path are now being raised. Despite the courageous steps that it has taken towards policy reform and despite its impressive overall growth performance, it is still one of the poorest countries in the world, with a per caput income of $390. It has been estimated that, even if the past decades's high growth rates were to continue, the average Ghanaian would rise above the poverty line 50 years from now. The World Bank estimates that, under the best of circumstances, it will take ten years before Ghana finds itself on the "threshold" of rapid growth.

Future economic role of agriculture. The performance of Ghana's different economic sectors after 1983 leaves some questions to be answered. Given the reversal of the indirect taxation of agriculture, one would expect prima facie the sector to show a strong recovery, given the more favourable domestic environment. This has not happened so far. While industry and services grew on average by about 7.5 percent per year between 1983 and 1990, agriculture only increased by 2.5 percent during the same period.

The explanation for the growth of industry and services rests largely with: i) the availability of substantial unused capacity in factories and mines because of the state of the economy which was near to collapsing before 1983; and ii) heavy government activity in the areas of electrification and road and other infrastructural construction, which accounts for the bulk of non-agricultural investment. The explanation for the lack of a strong response from the agricultural sector lies in: 0 the continuous declines in world cocoa prices which eventually reversed the effects of devaluation; ii) the accumulated effects of unfavourable domestic real returns for cocoa producers on tree planting and replanting; iii) the limited price benefits of liberalization on food crops; and iv) structural constraints that dominate the agricultural sector and inhibit its response to price signals.

In any case, overall growth in Ghana will continue to be largely dependent on agricultural growth for many years to come. This is so in view of the importance of the sector to employment and export revenue as well as its strong input and output links with other sectors (demand for agricultural products, demand for transport services, links with agro-industry). The high proportion of the poor who live in rural areas and depend on agricultural activities make it unlikely that any broad-based poverty-reducing development strategy can be successful without the growth of the agricultural sector.

It is unlikely that the current pattern of sectoral growth led by manufacturing and services is sustainable. Continuous growth of manufacturing and services will require significant increases in capital investments by the private sector as well as improvements in human capital resources and infrastructure, which take time to build up. investment as a percentage of output stood at around 19 percent of GDP in 1993, a rather low percentage since it is estimated that a 13 percent share is required for replacement investment.

Furthermore, the current pattern of agricultural growth is unsustainable: recovery has been based largely on increases in cultivated area rather than yield responses. Despite some improvements in productivity, which have followed policy reforms, Ghanaian Government estimates show that food crop yields are still as low as 40 percent of potential. Likewise, in the cocoa sector yields are low compared with other world competitors. For instance, while Ghana's 300 kg per hectare average yield compares favourably with those of Nigeria and Cameroon (200 and 260 kg per hectare, respectively), they are far from those of Côte d'Ivoire Malaysia and Indonesia (600, 800 and 1100 kg per hectare).

The availability of land resources is not a critical constraint in the short term, but their abundance may be exaggerated. Despite Ghana's undulating topography, 70 percent of the territory is subject to sheet and gully erosion. In the longer term, extensive farming may not be possible without jeopardizing the sustainability of the resource base (forests and wetlands). Population pressure causes increased settlement of fragile lands, thus exacerbating the serious sheet and gully erosion of the soils. Therefore, the extensive frontier, although not reached yet, may be rapidly declining.

Ghana's accelerated growth strategy aims at maximizing value added in agriculture rather than gross volume increases. Expanding yields rather than the area under cultivation will reduce the volume of investment required for supporting infrastructure, minimize marketing and distribution problems associated with extending the production area and be environmentally friendly.

This discussion leads to two major conclusions: i) the growth of agriculture is necessary if Ghana is to achieve a poverty-reducing development path; ii) agricultural growth should mainly be productivity-based.

Policies for increasing agricultural productivity. Stimulating agricultural productivity in an environment of failing real world and domestic agricultural prices is a major challenge facing policy-makers in Ghana. Given the market-oriented direction that Ghana is following with respect to economic management, trade and prices, policy solutions to low productivity are being sought in largely non-distortive interventions rather than policies directly affecting the prices of outputs and inputs. Such policies try to alleviate the structural problems and bottlenecks facing Ghanaian agriculture.

Increasing the use of modern inputs is the key to increasing soil fertility and productivity in Ghana. Yet there is a decline in the use of fertilizer and agricultural chemicals to which several factors have contributed:

i) An increase in the relative price of fertilizer vis-à-vis that of agricultural commodities following devaluation and the abolition of the subsidy. in order to overcome this constraint, policies are concentrated on improving the performance of the marketing system, reducing marketing margins and improving relative prices for the producer.

ii) Reluctance by traditional farmers to expose themselves to the risks of using new technologies with uncertain returns.

iii) A lack of access to credit by small farmers.

iv) A lack of appropriate technologies and inputs (especially seeds).

Constraints ii) and iii) are interrelated. Namely, the lack of a well-functioning rural credit system reduces the risk-taking capacity of farmers who have to rely either on their own savings or on informal credit. The problem is accentuated by the investment uncertainty associated with Ghana's land tenure system which is dominated by traditional tenure arrangements. The legacy of suspicion and harassment of the private sector associated with past policies in Ghana has deprived the country of a class of large traders who could extend credit to small farmers. Constraint iv) is associated with a long-neglected research and extension system which is now undergoing a complete reorganization.

Technology for increasing labour productivity is also necessary. There are already labour shortages in critical periods of the production cycle (land preparation, harvesting) and this is expected to worsen as competition for labour increases from other sectors. At the root of the low level of farm productivity is the very low-level technology, especially tools and implements (even the use of animal traction is rare). Research and extension are critical for developing and disseminating technical packages based on simple technologies and improved cultural practices geared towards small producers who constitute the majority of the rural population and produce the bulk of the nation's food. The Medium-Term Agricultural Development Programme plans a drastic reform of agricultural support services, including unification of the fragmented research and extension services.

If agriculture is to benefit from the demand generated by a growing economy, linkages with other sectors must be strengthened. Thus, the creation of conditions for the smooth functioning of markets is considered essential. From the policy point of view, this means enhancing the physical infrastructure of rural and urban markets including improvements in telecommunications and storage facilities. The public sector will play a key role with a view to leasing or selling the services to the private sector.

Farmers and sellers face an acute lack of adequate storage facilities. Estimated storage lows for all food crops (including cereals, roots, tubers and plantain) are between 15 and 30 percent. Proper storage facilities could reduce losses by 30 to 50 percent. This means that much of the harvest must be sold immediately weakening the flexibility and bargaining power of sellers and eventually discouraging surplus production. The role of the public sector in planning and constructing storage facilities, with a view to leasing or selling them to the private sector, is essential. To encourage medium-level storage as a part of its Food Security Strategy, Ghana has asked bilateral donors to finance small to medium-sized storage facilities for the private sector. This, along with other measures aimed at a smoother market functioning, will create the conditions for Increased arbitrage and the smoothing out of extreme interseasonal and interregional price fluctuations.

In Ghana high transport costs incurred by the poor state of rural roads is considered the single most important factor preventing the integration of small farmers in the market economy. During the crisis years in Ghana, a lack of foreign exchange and fiscal revenues limited the ability of the country to buy spare parts and keep up regular road maintenance. The problem of costly transportation is particularly acute for non-tradable food crop, since such costs represent a large part of their value. The deterioration of roads and the incapacitation of 70 percent of the truck fleet through a lack of spare parts and tires has resulted in 70 percent of the farmers head-loading crops to markets.

The feeder road density in Ghana averages 89 m per km² for a total of 21300 km. Of those, 12900 km are considered to be in poor or very poor condition while only about 3200 km are motorable year-round. Head-loading produce to markets causes long delays in delivery, increases wastage and poses serious health risks. It also inhibits the smooth functioning of the rural labour markets. The Ghanaian Government has established the National Feeder Road Development Programme (NFRDP 1992-2000), under which 2500 km of selected feeder roads will be fully rehabilitated and another 3500 km will be regravelled. Cocoa roads will also be rehabilitated to facilitate the linking of cocoa production areas to ports.

A major source of vulnerability of the agricultural sector derives from the fact that 87 percent of agricultural production is sent without processing for final sales and consumption. The development of agro-industry will permit the carryover of food products between seasons, thus increasing the shelf-life of perishable commodities. Studies have shown that agroprocessing and other value added activities contribute to the revitalization of the rural non-farm sector through a number of input, output and labour market linkages. The government has tried to stimulate investment in agroprocessing by increasing incentives through the waiver of import duties on equipment. Such policies have led to the diversion of equipment to other uses. The use of the corporate tax structure may be more effective for such a purpose.

Poverty alleviation. Box 5 shows the dimensions of the rural poverty problem in Ghana and outlines some of the policies that the Ghanaian Government is implementing with the aim of poverty alleviation. Although the majority of the poor are rural poor, one-third of them live in the urban areas. The government has identified the urban unemployed and those with meagre earnings, especially in the 18- to 25-year-old bracket, as a target group in its poverty alleviation scheme. In contrast to the rural poor, policy reforms have negatively affected the urban poor and have created a new class of poor through the retrenchment of workers from the civil service, state-owned enterprises and inefficient enterprises that closed as a result of market liberalization. In the urban context, and for the unemployed who have not returned to rural areas, the government has introduced a programme of initiatives to help distressed industries. The First Finance Corporation was established to provide venture capital and expertise in restructuring in management, production marketing and finance.

Conclusions

Ghanaians have made a choice as to what the main directions of their economic system should be: a market-based, private sector-driven economy with pragmatic government policies and the concentration of state activity in the areas of education, Infrastructure, market development and poverty alleviation. While consolidating the gains from policy reform is a fundamental task for the short term, it is equally important that the benefits of growth be shared widely among population groups. The achievement of these objectives is critical if economic development is to be sustained. Continued support from donors will go a long way in helping the Ghanaian Government cope with the structural problems that have to be resolved if the economy is to be put on a sustainable growth path.

BOX 5: Reform and rural poverty in Ghana


To understand the impacts of the policy reforms on the poor in Ghana, one has to have a good idea as to i) who and how many the poor are; ii) where they live; iii) their sources of income; and iv) their consumption patterns. If the poor are defined to include those who live in households with a per caput expenditure below two-thirds of the mean (one-third for the extremely poor), according to an analysis of household data in the Ghana Living Standards Survey (GLSS), about 80 percent of the poor live in the rural areas. Thus, poverty is primarily a rural phenomenon. For Ghana as a whole, 35 percent of the population fall below the poverty line while, for the rural areas, 43 percent are considered poor. Further analysis has demonstrated that, amid wide regional variations, the rural poor are "poorer" than their urban counterparts. For instance, the savannah region of the country, with a population share of 12 percent, has 18 percent of the country's poor and 35 percent of the extremely poor. The heads of most poor households are self-employed, poorly educated and own no cocoa land.

Poor and non-poor alike spend a large share of their budgets on food (69 and 66 percent, respectively) but the poor depend on home-produced food for 33 percent of their total food consumption, compared with 22 percent for the non-poor. Thus, the poor depend on the market for a large proportion of their food consumption.

About 88 percent of the total income of the poor comes from self-employment (65 percent from agricultural income and 23 percent from non-farm self-employment). Almost two-thirds of the income derived from agricultural activities constitutes consumption of home-produced commodities, while about one-third constitutes (net) income from sales of commodities. Cocoa and cereals have equal shares in the total crop revenue (about 20 percent each). The data also show that the poor do not dominate the production or consumption of any single commodity vis-à-vis the non-poor. On the other hand, sorghum and millet seem to be the principle elements of diets in regions where malnutrition is the highest and are also the main income sources in those regions (the Upper and Eastern regions and the entire savannah agro-ecological zone).

The data on poverty presented above indicate that macroeconomic policies favouring the agricultural sector in terms of better incentives for cocoa production tend to help the poor and extremely poor who live in the cocoa-producing zones directly (i.e. as producers and as labourers), while their impact on other regions can be positive through labour migration linkages.

As a high proportion of the income of the poor is derived from self-consumption, it is correspondingly isolated from market shocks. On the other hand, the amount of income derived from market sales of commodities is not negligible, implying that market conditions and prices do matter to the rural poor. The smooth functioning of prices and markets also matter for net consumers of purchased food. The data indicate that real prices of food consumed by the poor have probably followed a declining trend since 1984. The decline in real food prices occurred despite the increase in average per caput incomes and increasing demand, thus reflecting increases in food production. The prevalence of parallel markets in Ghana, especially at the peak of the economic crisis, means that the poor had to pay market prices for food. Thus, the removal of price controls may not have caused a deterioration in the ability of the poor to buy food.

As the rural poor derive 88 percent of their income from self-employment, they are unlikely to have been affected by the retrenchment of the state and the reductions in the civil service. Although devaluation tends to increase the cost of living through its effects on import prices, one has to take into account that imports had all but collapsed before the devaluations took place. The role of the parallel markets and the fact that controlled items found their way into those markets means that the biggest effect of devaluation has been on those earning high rents from the previous system. A significant effect of the combined devaluation/liberalization policies on the poor was through increases in the price of kerosene on which the poor largely depend.

Data show that public expenditures on health increased from an average 0.8 percent of GDP in 1981-86 to 1.3 percent of GDP in 1987-90. For the same periods, education expenditures increased from 2.2 to 3.4 percent of GDP. The large external flows into the country following reform have permitted the government to spend more on social services. Although the analysis above suggests no deterioration in the position of the rural poor as a result of policy reforms, the eventual benefits may not have been large enough to permit a drastic change in the overall poverty situation in its several manifestations (malnutrition, poor health, etc.). Overall growth has not been strong enough to make a serious dent in poverty.

Despite the fact that health expenditures have increased in the post-reform period, nutrition and the level and quality of health services provided in Ghana are still extremely low. A 1990 report by the United Nations Children's Fund (UNICEF), showed that 30 percent of all Ghanaian children are malnourished to some degree, 28 percent of the 12- to 23-month-olds were considered wasted and 31 percent of 24- to 59-month-olds were considered stunted.

Even under the most optimistic growth assumptions, it will take several years before Ghana will able to make a substantial step forwards in poverty alleviation. Thus, although growth is probably the ultimate sustainable answer to the poverty problem, parallel direct interventions are needed to broaden the benefits of such growth to the poorest segments of the population and improve their living and education standards.

The fact that the majority of the poor live in the rural areas emphasizes the need for agricultural growth as a necessary step towards poverty alleviation. Increases in agricultural productivity will greatly improve the position of the poor in the rural areas in terms of higher farm earnings and lower food costs. on the other hand, the fact that the poor do not seem to dominate any one commodity group means that price-based measures (as production or non-targeted consumption subsidies) to help the poor will be associated with high leakages. The building of rural infrastructure, in addition to its beneficial effects on productivity and overall development, can in the short term be an income-generating activity that will contribute to the revival of the rural communities. income-generation through employment is an important element in the government's new anti-poverty policy. In this context, the government is promoting projects such as the construction of labour-intensive feeder roads, hand-dug wells and low-cost sanitation, priority public works and non-formal education as part of the mainstream development programme.


Asia and the Pacific

Regional overview

Over the last 25 years, Asian and Pacific developing countries grew at an average annual rate of 6.5 percent compared with the average 4.5 percent for all developing countries. This strong performance continued in 1993, and the Asian Development Bank (AsDB) estimates the average growth for the region to be 7.4 percent for 1993 and 7 percent for 1994. The high-growth economies include China, Malaysia, Thailand and Viet Nam, but almost all countries performed well except Pakistan and the Philippines. In general, countries throughout the region stabilized their economies, reducing fiscal deficits, improving their balance of payments and containing inflation rates.

Major factors contributing to this overall growth performance include market-oriented policies aimed at enlarging private sector participation, enhancing competitiveness in the economic system, attracting foreign investment and participating to a greater extent in world trade. There is a greater convergence of policies followed by Asian countries than ever before.

The overall figures, however, do not tell the full story. There have been significant intracountry and interregional differences in economic growth, daunting poverty problems still persist in many countries and the quest for rapid growth is placing increased pressure on environmental resources while threatening long-term sustainability.

Although the share of agriculture in the region's GDP has declined from around 30 percent in the mid-1980s to 22 percent in recent years, agriculture remains the driving economic force and major employer in many countries. Moreover, the Asian region is the world's fastest-growing import market for agricultural commodities. The region's share of global agricultural imports has increased from 17 percent in the early 1980s to nearly 25 percent today; agricultural imports are increasing by around 6 percent per year, accounting for the bulk of the increase in global imports.

Table 4 provides an overview of recent agricultural GDP performance and the AsDB's estimates for growth rates in 1994. Following are some individual country experiences.

Figure 6: ASIA AND THE PACIFIC; Source: FAO

TABLE 4: Growth rates in agricultural GDP

Country 1991 1992 1993 19941
Bangladesh 1.6 2.2 1.9 2.6
Cambodia 4.7 1.9 3.2 -
China 2.4 4.0 4.0 3.7
India -1.4 4.6 2.3 2.5
Indonesia 1.4 6.5 1.5 4.5
Laos -1.7 7.9 0.0 -
Malaysia 0.0 4.3 3.0 1.2
Mongolia -5.1 -3.9 -7.0 4.0
Myanmar -2.4 13.6 7.5 -
Nepal 2.8 -1.2 -1.2 5.0
Pakistan 5.0 9.7 -3.9 4 0
Philippines 1.4 -0.1 1.5 2.0
Sri Lanka 1.9 -1.5 5.1 3.5
Thailand 5.0 4.0 2.6 2.5
Viet Nam 2.2 6.0 3.3 6.5

1 Projections.
Source: AsDB, Asian Development Outlook 1994. Manila.

Public and private sector roles under policy reforms

The positive results of market-oriented policies among the early reformers has encouraged several other countries to follow similar paths of economic and institutional reforms. The basic strategy is to reduce public sector dominance, liberalize markets and emphasize private sector participation. For example, since July 1991, India has made considerable progress in liberalizing the investment, trade and foreign exchange regimes. While agricultural subsidies for water, electricity and fertilizers still exist and trade policy remains biased against the sector, the government's direct involvement in agricultural activities is being reduced gradually.

In recent years, former command economies (Cambodia, Laos, Mongolia, Viet Nam and six central Asian former Soviet republics) either initiated or made substantial progress towards a more market-oriented economic system. The policy reorientation aims to improve overall sectoral efficiency and performance while preserving the natural resource base and keeping macroeconomic, fiscal and external imbalances within manageable limits. A concurrent concern is to minimize or offset the negative effects on the poor.

Among the command economies, however, the pace of reform, the difficulties encountered and the record of success in surmounting them are quite diverse. For instance, Viet Nam is continuing structural reforms and the economy is performing well; the agriculture sector is responding to improvements in land tenure security, liberalization of input and output prices and an increase in farm credit. In Laos, on the other hand, the privatization plan appears to have slowed down. Only 5 percent of state enterprises have been privatized so far, although the government plans to privatize all such enterprises by 1996.

In Mongolia and the central Asian republics, high rates of inflation and unemployment, failing output levels and constraints to the financing of social safety nets over the last three years have resulted in a gradual erosion of living standards and considerable increases in poverty. These problems are being addressed by reverting to price controls on selected basic goods and services such as food, public transport and housing rent or, where possible, cash compensation to the affected population. Even in China, steps have been taken to control prices of some basic commodities and services in recognition that measures to curb money supply growth and credit restrictions are not enough to curtail the double-digit inflation rate (currently exceeding 20 percent in the cities).

The varied experience with structural adjustment programmes in the market-oriented and transitional economies demonstrates that the design of policy reforms should take into account the country-specific comparative advantage of the private and public sectors for economic functions and support services. In particular, such experience underscores the public sector's role in addressing market failures to enhance private sector efficiency, improve competitiveness and quality of service, and fulfil long-term social welfare objectives, including environmental protection. Moreover, it has also indicated that a conducive institutional framework for a market system must be created prior to, or concurrently with, policy reforms. Without the appropriate institutions, the expected supply response would not occur and the process would consequently lead to high inflation and impoverishment of the population.


Contents - Previous - Next