The agricultural sector

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Beyond country-specific and climatic factors, agricultural performances in 1993 have been strongly affected by the overall macroeconomic environment. The productive and export capacities of regional agriculture have been negatively affected by the continuation of stabilization measures, which has reduced governments' capacity for supportive intervention; the overvaluation of currencies, involving losses in competitiveness; and the persisting problems of depressed internal and international demand for agricultural products, compounded by unabated protectionism in the main export markets of the region,

As a consequence, in 1993 the index of agricultural production for the region as a whole showed a contraction of almost 1 percent relative to the previous year. This shortfall followed several years of mediocre or poor performances for many countries in the region. Regional agricultural production only rose by an average 1.2 percent yearly during 1990-93, about half the already depressed average growth rate of the previous decade.

The agricultural export sector of the region showed fit similarly lacklustre trends, in marked contrast with the relatively dynamic export performances of other sectors since the early 1990s.

Some improvement in the international policy framework surrounding agricultural trade is expected in the coming years, in particular as a follow-up to the conclusions of the Uruguay Round of GATT negotiations. The recent strengthening of agricultural prices for some of the main export products of the region are an encouraging signal in this context. Prices of coffee, sugar, wheat and soybeans have remained well below the averages of the 1970s and most of the 1980s, however. Also, despite a commitment by many countries to reduce levels of support in agriculture and improve market access, the region will continue to face strong competition for its commodity exports as well as the risk of new forms of protectionism such as sanitary and phytosanitary measures.

Sectoral policies. Along with the rest of the economy, regional policies have progressively emphasized the role of market forces in agriculture as the main mechanisms for resource allocation. This process has imposed the difficult task of redefining the role of the public sector, including in agriculture. As shown by the region's recent experience, radical changes in strategy involve the risk of failing from one extreme to another - in this case, from an excessive presence in productive and market mechanisms to an excessive absence of the public sector.

These issues gain relevance in the context of the generally poor performances of regional agriculture in recent years. Among the various factors behind such trends, what has been the role of the new policy strategies? More specifically, do agriculturists overall, or at least large numbers of them, risk being the great losers of free-market reform? Although this much debated question can only be answered in the longer term, the issue has immediate implications for policy-makers. Without adequate government support, large segments of agriculture, a historically neglected sector in the region, risk losing economic viability for the transition period required until market forces place them on a more efficient and self-reliant long-term footing. Support should focus on improving farm productivity and accelerating the process of modernization. This can be achieved by providing farmers with better infrastructure, extension and training, technical and financial assistance.

An increasing awareness of these problems and needs prompted several countries in the region to strengthen the role of sectoral policies in 1993. This was particularly so with regard to institutional policies and instruments of agricultural support.

One important area of institutional reform, with wide implications for agriculture, was the creation of ministries of the environment in Bolivia, Colombia, El Salvador and Nicaragua. This development is particularly significant not only as a sign of growing recognition of the importance of environmental problems in the region but because it also defines a new and important line of policy action for these governments in the context of the redefinition of the public sector's role. It can also be seen as an indication of the improved economic and political environment for policy-making, to the extent that governments are able to channel significant human and financial resources towards longer-term objectives.

Another area of important institutional developments is the process of regional and subregional integration, which is reviewed in the section Trade arrangements in Latin America and the Caribbean, p. 156.

As regards internal policies related to agricultural support, a number of significant developments took place, particularly in Colombia, Mexico and Argentina. In 1993 the Government of Colombia issued a package of measures designed to promote agricultural development in the coming years. These included: the General Law of Agricultural and Fisheries Development, a ten-year plan of land improvement and reclamation, the establishment of a national system of technological transfer; and the creation of a cooperative institution for agricultural research and the establishment of Colombia International, an institution for export promotion. The new General Law defines a number of norms and regulations for agricultural support. These include the elimination of duties at the source for agricultural services, incentives to capital formation in rural areas and the creation of stabilization funds for agricultural prices, crop insurance's and peasant family subsidies.

Other measures of agricultural support included changes in the system of prices to protect agro-industrial enterprises, minimum import prices to counter the effects of subsidized exports and changes in import licences for certain products that have an impact on livestock production. At the same time, the price stabilization fund for cotton was redesigned with a view to improving its operational efficiency and a special agreement was made with Venezuela for regulating bilateral rice trade. Finally, a tax refund certificate was established for productive activities related to agriculture and fisheries.

A significant new development in the process of policy reforms carried out by the Mexican Government since the late 1980s was the PROCAMPO programme. Introduced in 1993, the programme is expected to align domestic prices of programme commodities to world prices by April 1995. PROCAMPO aims at gradually replacing price supports with direct income payments. Direct support is to be provided to producers who have cultivated the main grains and oilseeds in the last three years. Farmers will be free to switch to more profitable crops in the future. Subsistence farmers, rather than commercial producers, are targeted to receive the direct income support. Under the new programme, the government will make direct payments to farmers based on the number of hectares planted to maize, beans, wheat, rice, cotton, soybeans, safflower, barley, sorghum and coffee. Payments per hectare will be kept constant in real terms for ten years and will be phased out from year 11 to year 15. It is expected that maize land will be converted to wheat, cotton, fruit and vegetable cultivation. Subsistence farmers, who generally had not benefited from the guaranteed price support system, will directly benefit from PROCAMPO. Thus, the programme is expected to mitigate the effect of farm labour migration from rural to urban areas. The budget allocated in 1994 for financing PROCAMPO represents an increase of more than 80 percent relative to producer support in 1993.

Within the framework of the programme "Argentina en crecimiento (Argentina in expansion) 1993-1995", a large number of agricultural support policies were announced by the Argentine Government in 1993. In order to improve profitability and promote investment in agriculture, taxes on assets and import duties on capital goods were eliminated; a credit programme was introduced, with official and private bank participation, for refinancing agricultural debt at interest rates close to those in international markets; enlarged facilities were provided for agricultural export prefinancing; a new agricultural credit facility, amounting to $200 million, was created for the 19931995 period; the Argentine National Bank introduced new lines of supervised credit for the reconversion of agricultural production units to sheep, fruit, vegetables, agro-industrial products and agrotourism. This new policy package also included measures to improve agro-industrial competitiveness, improve agricultural extension and reduce climatic risks. A programme of technical assistance was also introduced to help production reconversion and diversification of about 30000 small and medium-sized agricultural enterprises.

Trade arrangements in Latin America and the Caribbean

The commitment of many countries to a more open trade regime is evidenced by the recent revitalization of old and new trade arrangements in the region. Inspired in particular by the Enterprise for Americas Initiative (EAI) and the North American Free Trade Agreement (NAFTA), many countries negotiated expanding markets through reciprocal privileged access with neighbouring countries, thereby revitalizing old trade arrangements throughout the region.

Regional cooperation schemes are not new in Latin America and the Caribbean. Many of the groups to promote economic integration and freer trade (see Box 7) were formed in the 1960s (the Andean Pact and the Central America Common Market [CACM]), 1970s (the Caribbean Community and Common Market [CARICOM]), and 1980s (the Latin America Integration Association [ALADI]. NAFTA, which took effect in January 1994, is the latest and by far the largest trading bloc in the region (see Selected issues, p. 74). In addition, many other bilateral agreements have been signed. Nevertheless, until recently limited progress had been made in these schemes because of both short-term constraints associated with the economic crisis and factors of a more structural nature (limited complementarity, inadequate transport and marketing facilities, rigid economic structures and high levels of government intervention).

Since the beginning of the 1990s, the older groups have renewed their arrangements by securing further integration towards a free trade agreement (FTA) or a customs union. For example, the Andean Pact reduced its external tariffs by more than 40 percent, while two of its members, Colombia and Venezuela, also established the Andean region's first binational customs union in January 1992. As a result, Colombia's exports to Venezuela increased by 30 percent in 1993 while Venezuela's exports to Colombia increased by 20 percent. These older groups are now moving faster towards a common market or an FTA with submembers either within or outside the group. New trading arrangements are the Southern Common Market (MERCOSUR), the Chile-Mexico FTA and the Group of Three (G3) - Mexico, Colombia and Venezuela - which are yet to sign the trade accord. Many trading blocs in the region are customs unions or common markets such as the CACM or MERCOSUR (see Box 7).

MERCOSUR, created in 1991, is the largest trading bloc in Latin America and is second only to NAFTA, with a GDP of $485 billion in 1992 and total population of 196 million. Intratrade within MERCOSUR has significantly increased in recent years, especially trade in grains and animal products for which member countries have a comparative advantage. For example, over one-quarter of Argentina's total trade in 1994 is expected to be with the MERCOSUR countries and three-quarters of that figure should be with Brazil. A major obstacle to progress under the scheme and to the achievement of scheduled targets is the discrepancy between Brazil and other member countries with regard to inflation levels and exchange rate policies. As regards agriculture, Brazil has been practising a more active policy support than its partners in the scheme, although Argentina, as seen above, has also strongly activated its policy intervention in favour of agriculture in recent months.

Following are some recent developments in these regional integration schemes.

In addition, a series of bilateral and multilateral cooperation and free trade pacts have been implemented or are being negotiated. For example, Chile has signed a bilateral agreement with Mexico, Bolivia and Venezuela; Mexico has also signed an FTA with Costa Rica which will go into effect on 1 January 1995; and Bolivia has signed a bilateral agreement with Argentina. On July 1994, 25 countries signed an agreement for the establishment of an Association of Caribbean States, with the objective of creating a new economic zone that would include Colombia, Cuba, Mexico, Venezuela and Central American and Caribbean island states.

BOX 7: Selected trading blocs in Latin America and the Caribbean

  GDP (1992): $151 billion
GNP per caput (1992): $1408
Population (1990): 92 million
Established 26 May 1969, effective 16 October 1969
Objectives Encourage harmonious development through economic integration
Members Bolivia, Colombia, Ecuador, Peru and Venezuela Associate member: Panama
Current status The Andean Pact's external tariffs are 13.6%, down from 41 % in 1989.
In 1992, Bolivia, Colombia, Ecuador and Venezuela set up duty-free trade. Peru has reached an FTA separately with Bolivia and Venezuela. Venezuela and Colombia eliminated all tariff and non-tariff barriers in January 1992
  Population (1990): 6 million
Established 4 July 1973, effective 1 August 1973
Objectives To promote economic integration and development, especially among the less developed countries
Members Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines and Trinidad and Tobago
Associate members: British Virgin Islands, Turks and Caicos Islands
Observer: Mexico
Current status CARICOM is working towards a single market in 1994. External tariffs are expected to be reduced from 45 to 20% by 1998. CARICOM and Venezuela have signed a preferential trade agreement
  GDP: $33.3 billion
GDP per caput: $1 143
Population: 30 million
Established 13 December 1960, effective 3 June 1961
Objectives Promote establishment of a Central American common market
Members Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua
Current status In 1992, Honduras, Guatemala and El Salvador signed an FTA to eliminate all tariffs. Regional tariff rates range from 5 to 20%, with a 15% common external tariff. In February 1993, the region also established the Central American Integration System (SICA) which functions as a Central American parliament, replacing the Organization of Central American States. The CACM signed an FTA with Venezuela and Colombia in 1993. Mexico also signed an FTA with the CACM in 1992, which will be fully effective by 1996
  GDP (1992): 1987 $86 billion
GNP per caput (1990): $1 880
Population (1990): 102 million
Established February 1992
Objectives Promote free trade
Members Chile and Mexico
Current status The FTA between the two countries will be fully operational by 1 January 1996
  GDP (1992): $6.2 trillion
GNP per caput (1992): $16833
Population: 370 million
Established 1 January 1994
Objectives Promote freer regional trade
Members Canada, Mexico and the United States
Current status Implementation of NAFTA began 1 January 1994
  GNP per caput (1990): $1681
Population: 384 million
Established 12 August 1980, effective 18 March 1981
Objectives Promote freer regional trade
Members Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela
Current status ALADl's slow progress towards integration has led some of its members to pursue bilateral and subregional integration
  GDP (1992): $485 billion
GNP per caput (1992): $2 473
Population: 196 million
Established 26 March 1991
Objectives Promote regional economic cooperation
Members Argentina, Brazil, Paraguay and Uruguay
Current status MERCOSUR members plan to eliminate most trade and investment barriers by he end of 1994. Tariffs are being cut by more than half to each a 20% ceiling. The common external tariff will enter into force on 1 January 1995

Source: ELAC/UN; World Bank; and C. Valdés et al. 1993. Overview of US agricultural trade with the Western Hemisphere. In Western Hemisphere Situation and Outlook Report. RS-93-2. Washington, DC, ERS/USDA.


The economy

Since the 1980s, the Brazilian economy has undergone a number of stabilization and adjustment programmes. These included the traditional balance-of-payments stabilization package adopted in 1982, the heterodox Cruzado Plan experience in 1986, the heterodox-cum-orthodox Bresser Plan of 1987, the short-lived Summer Plan in 1988 and finally the Collor Plan in 1990. During this period both inflation rates and GDP growth fluctuated widely and, since 1987, hyperinflation has been a persistent threat.

Agriculture was strongly affected by an adverse economic environment, characterized by deep recession during much of the 1980s as well as by institutional and political instability and strenuous efforts to restore equilibrium in domestic and external macroeconomic balances. Thus, agricultural growth slowed from an average annual rate of 3.4 percent during the 1970s to 2.4 percent during 1981-90. Per caput food production barely increased during the latter period but food imports increased sharply. Agricultural exports stagnated, in marked contrast with the buoyant performance of earlier periods. However, in the context of the major economic difficulties faced by Brazil during the past decade, the overall performance of agriculture was considered remarkable by most analysts. The dynamism of the sector is confirmed by the strong recovery that was achieved during 1991-1994.

Stabilization and adjustment programmes since the 1980s

From 1980 to 1994 there were numerous attempts at stabilization and structural reform. The main concern of macroeconomic policy was to address the increasing and, after 1982, unsustainable - deficit in external accounts through the standard stabilization programmes advocated by the IMF.

As the current accounts were brought to balance, the Brazilian economy entered into its deepest recession ever, accompanied by inflation rates which rose from 100 percent per annum in 1981/82 to 230 percent in 1983/84.

After 1985, having traversed the most critical phase of external balancing, economic policy focused more on controlling inflation through a series of heterodox stabilization programmes. The main policy experience during this period was the Cruzado Plan, enforced in February 1986 at a time when monthly inflation reached 28 percent. Along with a monetary reform, all prices, wages and the exchange rate were frozen. The formal mechanisms of price indexation were eliminated. In an attempt to foster economic recovery, credit restrictions were eased and abundant and cheap resources channelled to agriculture in particular. However, underscoring the inconsistency of combining price freezes with expansionist monetary and fiscal policies, inflation accelerated to 26 percent in June 1987.

The Bresser Plan followed; it combined heterodox measures (wage and price freezes) with devaluation and restrictive monetary policy. Confidence in the Plan was soon eroded because the government was unable to reach a satisfactory debt-alleviation agreement with foreign creditors, unable to reduce the public deficit and unable to implement fiscal reform.

In 1989, the government introduced yet another stabilization plan - the Summer Plan - based on a wage-price freeze with a fixed nominal exchange rate anchor and tight monetary policy. However, the stabilizing effects of the Summer Plan lasted only one month. The government, having lost control over public spending, relied entirely on highly profitable short-term public bonds to finance its deficit and prevent hyperinflation.

In March 1990, the more radical Collor Plan introduced an unprecedented liquidity squeeze through a general freeze of bank assets, shortly followed by a price freeze. Simultaneously, a structural reform programme was launched which included the privatization of public sector enterprises, administrative reform, trade liberalization and domestic deregulation. Replacing the crawling peg rate of exchange with a floating exchange rate, strongly affected by central bank operations, was particularly important.

In spite of the liquidity squeeze, which virtually paralysed the economy, prices increased and, by the end of 1990, monthly inflation had reached 20 percent. In January 1991, a new phase of the Plan - Collor II- was introduced. It included a new round of price freezing, de-indexation measures and renewed restrictive monetary policy, but it was soon abandoned in favour of a market-oriented approach. Stronger tax reform and privatization measures were enforced to address the foremost cause of inflation - the public sector deficit. Other anti-inflationary measures included trade liberalization and even more restrictive monetary policies.

The new government that took over in August 1992 accentuated the market-oriented approach. In February 1994, a new adjustment programme - the Real Plan - was announced, with the notable feature that no price freeze was contemplated, unlike previous plans. The Real Plan was implemented in successive phases: balancing the public budget through fiscal reform; creating a unit reference value (URV) for wages, contracts and prices; and, finally, introducing a new currency (the real) which entered into force on 1 July 1994. Although not legally pegged to the US dollar, since its introduction the URV has in fact followed the variations of the dollar.

It is too early to assess the effectiveness and viability of the Plan, but current expectations are on the whole optimistic. The Plan should help consolidate the macroeconomic improvements achieved in recent months. Although the government was unable to gain approval for the entire fiscal reform, the fiscal deficit is expected to be brought down to zero in 1994. At the same time public debt was reduced to an equivalent 10 percent of GDP, foreign exchange reserves rose to a record $40 billion and the external debt was renegotiated on relatively favourable terms and reduced to 15 percent of GDP. Despite high inflation, Brazil once again attracted international capital. In general, the opening of the economy is expected to help overcome supply bottlenecks and contribute to price stability. Finally, the expected record grain harvest in 1993/94 should help normalize the food supply.

National currency appreciation (an estimated 15 to 20 percent since the early 1990s) is undermining recent gains in export competitiveness, achieved through improved productivity and trade liberalization. Despite this, there is still ample margin for improvement through further productivity gains and tax reductions.

The Plan's impact on agriculture is expected to be positive to the extent that sluggish domestic demand - a major limiting factor to sustained growth of the sector - would be sustained by the fall in inflation. Moreover, market liberalization and the reduction of inflation are expected to create a better environment for agricultural investment and more efficient resource allocation.

Role and performance of agriculture

Although agriculture accounts for only 10 percent of GDP, it is a key sector of the Brazilian economy. In addition to its traditional role as a source of income, employment and foreign exchange, agriculture also has important upstream and downstream linkages with industry; it has served as a safety valve for social pressures during crisis periods and has played a positive anti-cyclical role since the 1950s. About 27 percent of the labour force is employed in the agricultural sector and nearly 30 percent of the population still lives in rural areas.

The economic crisis of the early 1980s affected agricultural products in different ways. Animal product output rose by 6.3 percent but crop output fell by 5.1 percent during 1981-83. Domestic market production declined or stagnated but production of cotton, cocoa, coffee, orange juice and sugar cane expanded significantly. This shift towards tradables primarily reflected price incentives arising from real currency devaluation during the first half of the 1980s.

The years 1984 to 1989 were a period of stronger agricultural expansion, reflecting government support, some economic recovery and improved international market conditions for certain Brazilian products. The growth of export products continued, albeit at a slower rate, partly because of currency appreciation. By contrast, staple food production accelerated, particularly rice, maize and potatoes. Wheat production expanded most rapidly during this period (12.6 percent per annum).

This overall favourable growth halted abruptly in 19901991. Agricultural output fell by 3.7 percent in 1990 (with crops declining as much as 10 percent) and did not recover in 1991. Bad weather played a role but the 1990 shortfall also reflected economic deterioration in the second half of 1989 and the negative impact of the Collor Plan, adopted in March 1990. Rice, bean, maize, cotton and sugar cane production recovered in 1991. However, this was largely offset by a sharp fall in soybean production (from 19.8 million tonnes in 1990 to 14.9 million tonnes in 1991), caused by credit restrictions and pessimistic market expectations.

BOX 8: Emergency agrarian reform programme

The concentration of landownership continues to be a fundamental problem in Brazilian agriculture. About 50 percent of all farms are small and occupy 2.2 percent of agricultural land; the upper 5 percent of the total are large farms which occupy 69.2 percent of the total land. Such uneven land distribution, together with macroeconomic and sectoral policies that discriminated against family production, resulted in a bipolar modern and traditional agriculture.

Successive governments introduced programmes of agrarian reform. Between 1979 and 1993, about 325000 families received land from state and federal authorities. Between 1985 and 1991, the federal government alone created 524 settlements in an area covering 4.7 million ha and benefiting 94000 families.

A recent study, carried out jointly by FAO and the Brazilian Ministry of Agriculture, Supplies and Land Reform, presents a relatively positive assessment of the agrarian reform efforts in Brazil since 1985. In particular, it concludes that 90 percent of those who benefited from reform saw a marked improvement in their welfare and income situation. Their average family income, equivalent to 3.7 times the minimum wage, is close to the national average of 3.82 times the minimum wage.

Despite these achievements, social pressure from the landless poor has mounted in recent years. About 20000 landless families are camped precariously alongside highways and illegal land occupation has increased considerably.

These problems prompted the government to introduce in March 1993 an Emergency Agrarian Reform Programme with ambitious objectives: through a Special Agrarian Reform Credit Programme, to provide financial support to about 100000 small producers who had received land since 1986; and to settle 120000 families on 5 million ha within 1993 and 1994.

Unlike previous plans aimed at reforming large farm agrarian units, this emergency programme reinforces family ownership. Following this approach, policy action is to be implemented in areas facing particular problems of poverty or social tension by utilizing state-owned or unoccupied land. Despite major financial and institutional problems, the objectives defined for 1993 have been achieved and 20000 families have been settled.

After the short 1990-1991 crisis, agriculture resumed growth, animal production rose by 5.3 percent and crop output by 6.5 percent in 1992. Maize output increased by 29 percent, to a record 30.5 million tonnes and soybean production recovered somewhat. improved international market conditions and renewed government support achieved high levels of agricultural production in 1993 despite dramatic reductions in output of cotton and wheat which were negatively affected by the liberalization of trade and a policy shift that accorded less priority to agricultural self-sufficiency. Preliminary official estimates indicate an all-time record for the 1993/194 grain harvest.

Agricultural exports have fluctuated but overall there has been a virtual stagnation, resulting in a marked decline in the sector's share of total exports (from 45 percent in 1980 to 39 percent in 1985 and 28 percent in 1993). Nevertheless, Brazil's agricultural exports ($10.4 billion in 1993) still account for more than 5 percent of the world's total.

Export stagnation was due in part to government policies that discriminated against exports of unprocessed agricultural products. Yet international markets and prices were generally depressed, particularly for tropical products, of which Brazil is traditionally a major producer. Depressed prices defeated efforts to increase export earnings by expanding the volume of agricultural exports. Nevertheless, the sector showed flexibility in adjusting production patterns to market conditions. In particular, the 1980s saw a significant expansion in exports of nontraditional and agroprocessed products, which largely compensated for the decline in traditional exports.

Agricultural products were traditionally a minor import item until 1988, when food imports increased steeply (reaching a peak $3.1 billion in 1991 but failing to $2.1 billion in 1993). This reflected a shift in the domestic production mix, from domestic food staples towards tradables, and the liberalization of trade, particularly of wheat for which natural and climatic constraints impose a large degree of external dependence.

Even favourable agricultural sector performances have not resulted in commensurate gains at the farm level. Agricultural prices and farmers' incomes have lagged behind general inflation and compared unfavourably with prices and incomes of other sectors. Nominal farm prices deflated by the consumer price index indicate a real price decline, particularly after 1986. Overall, real agricultural prices in the early 1990s had fallen to half their level of ten years earlier. More recently, real prices showed some recovery but their sustainability will depend mainly on the success of the Real Plan. Also, there was a clear inverse relationship between inflation rates and the terms of trade of agriculture and industry after 1986.

A study comparing the evolution of agricultural and industrial prices since 1970 revealed that: i) wholesale agricultural prices were falling and industrial prices were increasing; ii) producer prices had fallen for both domestic and exportable agricultural goods; iii) agricultural prices were more unstable than industrial prices at both wholesale and producer levels; and iv) agricultural price instability had been accentuated at both levels during the second half of the 1980s, indicating increased uncertainty and risk. Another recent study concluded that gross income from Brazil's 20 main crops declined steadily from the second half of the 1980s, except for 1988 and 1991.

All these studies concur that the negative impact of depressed and unstable market conditions, the adverse macroeconomic environment and the effect of stabilization measures more than cancelled out productivity gains and benefits from lower real prices of fertilizers, agrochemicals and fuels.

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