Sectoral policies in the context of macroeconomic adjustment
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Until the debt crisis in the early 1980s, Brazil's macroeconomic policies primarily emphasized industry-led rapid growth. Subsequently, policy-makers were forced to shift priorities in favour of macroeconomic stabilization. Debt-related financial constraints and a deteriorating domestic and international economic environment combined to change overall and sectoral policies' objectives and instruments. Sectoral policies, which during the 1970s had promoted agricultural modernization by using seemingly unlimited financial transfers, became subordinate to macroeconomic objectives and constraints.
In the new context, agricultural policies also became less development-oriented and more ad hoc in response to short-term stabilization or sectoral concerns. Prior to 1987, there was a high degree of government intervention in agricultural markets, through both sector-specific and trade policy instruments. Despite reduced resources and other constraints linked to the restrictive fiscal and monetary environment, agricultural policies attempted to balance sectoral objectives - such as increasing food production with macroeconomic objectives, particularly the generation of export earnings-and price stabilization. Stabilization objectives and the ad hoc nature of interventions created inefficiencies and distortions. Nevertheless, until the 1987/88 harvest season, support policies did help farmers overcome the effects of unfavourable macroeconomic and market conditions.
During 1988-1991, attempts were made to deregulate and liberalize, first the domestic agricultural markets and, after 1990, foreign trade. Some market intervention mechanisms were deactivated (for coffee, wheat, cocoa and sugar cane) and, although minimum price mechanisms continued to exist, they were ineffective.
The unfavourable macroeconomic environment, together with liberalization measures aimed at short-term stabilization, depressed agricultural output which consequently stagnated during 1990-1991. After 1991, the government continued with the liberalization strategy adopted in 1990 but also partially reactivated sectoral policy instruments to cope with the agricultural crisis and its negative effects on the stabilization effort.
Rural credit. Before the crisis of the early 1980s, the government highly subsidized rural credit, the main instrument used to promote agricultural modernization and strengthen the processing, agricultural input and equipment industries. Since then, rural credit supply fell dramatically, from $26.8 billion in 1979 to $6.1 billion in 1991 and around $8 billion in both 1992 and 1993. Official lending continues to account for the bulk of agricultural loans (more than 82 percent in 1992).
Not only was rural credit supply sharply reduced but also lending conditions and regulations became more restrictive and were adjusted almost yearly throughout the period 1980-1993. Within the limits allowed by budgetary constraints, credit policies still attempted to compensate farmers for the negative impacts of macroeconomic policies and to direct production decisions in the light of short-term market requirements.
Reducing rural credit subsidies has been a policy goal since the early 1980s. In 1981, rural credit interest rates were only partially indexed to compensate for inflation but, when inflation accelerated, real interest rates became progressively negative. Except for short periods, this has not happened since 1984 when rural credit became fully indexed to general inflation. Although interest rates for rural credit have been progressively raised, they have remained significantly below commercial bank rates.
From 1984 to 1987, preferential real interest rates ranged between 3 and 7 percent, depending on the crop, region and farm size. Small staple producers enjoyed better conditions than large producers and usually had 100 percent of production costs funded under the National Rural Credit System (SNCR). After the Summer Plan in January 1988, real interest rates were raised to 12 percent per year and further to a historical maximum 18 percent per year in 1990/91, at the time of the major liquidity squeeze imposed by the Collor Plan. Two consecutive years of sectoral recession and poor prospects for the 1991/92 season caused the government to announce an emergency "agricultural package" in October 1991. Among measures to stimulate recovery, real interest rates were reduced to 12 and 9 percent for large and small producers, respectively. These rates were still in force for the 1993/94 crop season.
Although the government introduced measures to prevent it, the excessive concentration of credit in large farms continued; they were main beneficiaries of SNCR funding at preferential rates of interest. In 1990, 27 percent of SNCR resources went to small producers, 18.7 percent to medium-sized farmers and 33.6 percent to large farmers.
A study covering the period 1987-1992 suggests that, for seven out of ten crops considered, producer prices lagged behind general inflation rates but increased faster than rural credit costs." This interesting result should be read with caution because monetary correction is automatic and daily but producer prices are linked to market fluctuations. In fact, the financial costs of borrowing can be far greater than the revenues from crop sales because inflation and agricultural prices are not directly linked.
In 1993, 12 percent of farmer borrowers were in arrears compared with an average 2.5 percent in 1981-88. The steep increase seems to indicate an emerging acute financial problem which could severely hamper agricultural growth in the coming years. Between 1986 and 1988, debt forgiveness cost the Banco do Brazil approximately $455 million. Despite this, a recent Banco do Brazil report indicates that 51000 producers are in arrears amounting to $615 million; 10 percent of 1993 arrears have already been written off by the Bank in 1994. Those in arrears are: large producers, 85 percent; very small producers, 1 percent; and small producers, 8 percent. The report minimizes the role of credit diversion to other uses in the increase of arrears and blames instead the unstable macroeconomic context; competitive losses, particularly in wheat and cotton production; depressed agricultural prices; and a reduction of domestic consumption.
Since 1986, the government has been searching for new non-inflationary sources of funding and encouraging greater private sector participation in agricultural financing. Particularly successful was the savings account "Caderneta Verde" which accounted for nearly half of total rural lending in 1993. However, this was not enough to offset the overall decrease in rural credit. Since 1990, producers have been benefiting from the Constitutional Regional Development Fund (Fundo Constitucional), which provides long-term investment loans at preferential rates, and from the inclusion of agriculture in the FINAME programme, run by the Economic and Social Development Bank (BNDES).
To reduce uncertainty arising from high inflation, Brazilian farmers pressured the government to adopt the "product equivalence" concept which had been established but never implemented in the 1990 farm bill. The concept means that the lending agency bases the loan value on the product value. if, for instance, a bean producer borrows funds equivalent to 100 bags of beans, the repayment will be the current value of 100 bags, plus interest. This system protects farmers but requires government subsidization for the difference between the product's market value and the loan's real financial cost. This difference can be high in years of abundant crops and falling prices. Nevertheless, for 1993/94 the government has agreed to introduce product equivalence loans for six crops (cotton, cassava, rice, beans, maize and wheat) up to a limit of approximately $200000. The sector has responded enthusiastically, particularly since the outlook is for a record grain harvest. The follow-up to this interesting experiment deserves monitoring.
Credit, investment and agricultural performance. Agricultural investment was affected negatively by changes in the volume and terms of rural credit. However, the extent of the decline in agricultural investment and the ultimate effects on agricultural growth are difficult to assess. Available data indicate falling tractor and other equipment purchases, a slow-down in land reclamation on the dynamic central-western frontier, reduced fertilizer consumption and lower investment in soil upgrading and conservation. Nevertheless, contrary to analysts' forecasts, the drop in subsidized credit and investment during the 1980s did not seem to depress agricultural performance. There are several possible explanations for this. Prior to the squeeze, considerable subsidized rural credit had been diverted to non-agricultural purposes; therefore, perhaps the drop in credit affected agriculture less severely than available data suggest. Another possible explanation is that, in view of the reduced access to credit and the risks of contracting indexed loans in periods of high and volatile inflation, many large and medium-sized producers increased self-financing, thus upholding investment and growth.
Minimum price programme. Since the early 1980s, minimum prices have gradually replaced rural credit as the main instrument for stimulating sectoral growth and steering production towards priority crops, particularly basic foodstuffs. Minimum prices have proved to be a powerful influence on crop levels and composition.
Until the early 1980s, the minimum price programme (MPP) was an ineffective influence on producers' decisions because minimum prices were usually considerably lower than market prices. Minimum prices were normally fixed before the planting season, taking into account the government's expectations of future inflation. However, actual inflation always exceeded expectations and there was great uncertainty about the real value of minimum prices during the harvest season.
In 1981, the government replaced the fixed minimum price with an inflation- indexed base price. For the crop seasons 1983/84 and 1984/85, minimum prices were raised to compensate for reduced official rural credit and for losses incurred from real devaluation. Farmers responded positively by expanding crop output (by 8.5 and 13.1 percent in 1984 and 1985, respectively) and changing the production mix. In fact, the recovery from the 1981-1983 crisis was initially led by crops that had been stimulated by the MPP, such as rice, maize, cotton, beans and soybeans.
To a certain extent, objective technical criteria influenced the determining of minimum prices, as they were generally expected to cover variable costs of production. in practice, price definition was primarily a political exercise because farm needs tended to be subordinated to Treasury concerns. This caused wide fluctuations in minimum prices during the decade, although two broad tendencies did emerge: a general increase from 1981 to 1986 and a sharp decline after 1987. Minimum prices of all products fell to a record low in 1990/91.
Following the 1990-1991 crop shortfall, the government decided to reactivate the MPP on a selective basis by targeting fewer crops (rice, maize and beans) and small and medium-sized producers. In 1993, the MPP was extended to other crops and all producers. Since 1992, the government has fixed more attractive minimum support prices for basic foodstuffs but it has been very slow to purchase products at those support levels. This has created friction between the government and the farmers' association, one of the strongest pressure groups in the country.
The importance of the MPP can be broadly assessed from the extent of producers' utilization of the two MPP instruments: Federal Government Loans (EGF) and Federal Government Acquisition (AGF). During 1980-87, nearly 80 percent of cotton production was either purchased by the government at a guaranteed minimum price or stocked under an EGF. For rice, approximately 50 percent of production in 1985-88 was covered by the MPP. In some years, maize, soybeans and beans were also extensively covered.
During 1981-88, under the MPP, grain production increased rapidly in the central-western (10.8 percent) and northern (7.3 percent) frontiers and a significant proportion of output benefited from the MPP which fixed guaranteed minimum prices without adjusting for the distance from farm to market and related transportation costs.
Overall, the MPP played a significant positive role in agricultural markets until the 1987/88 crop - when the system lost effectiveness and credibility. With all their shortcomings, inflation-indexed guaranteed minimum prices did grant producers some protection against price risks. They also provided basic signals for resource allocation, which the market was unable to provide in the highly unstable economic environment of the 1980s.
Government intervention in marketing
Traditionally, the Brazilian Government has been extensively involved in all activities related to the purchasing, transportation, distribution and external trade of agricultural products but the shortcomings of such intervention became increasingly evident during the critical decade of the 1980s. Particularly after 1986, instead of providing market and price guarantees, government policies became an additional source of uncertainty, which affected not only the more direct targets of policy action - producers and consumers but also the whole marketing chain.
Private grain stockholding was also constrained by the unfavourable economic and market environment. Depressed markets, high and unpredictable inflation, restrictive monetary policy, marketing credit shortages and the high profitability of public bonds and other short-term financial assets all contributed to shrinking the grain stockholding market. Under these conditions, the government became the main grain purchaser, particularly in the frontier zones.
As a result, the government accumulated large stocks of grain, used mainly to control food prices. However, public sector stock management was inefficient and hardly conducive to market equilibrium. The financial burden of stockholding was increased by transportation costs from the frontier zones and sales at subsidized prices. In fact, in 1985-88 market intervention accounted for an average 80 percent of total government expenditure in agriculture. There were also important wastes because of storage problems as well as poor public sector handling and controlling capacity. Since 1987, when the government could no longer honour its procurement commitments at the minimum price and sustain the MPP, it began withdrawing from agricultural markets.
In an attempt to discipline and liberalize agricultural markets, foster private sector participation in grain stockholding and reduce expenditures, in 1988 the government defined and introduced the "rules of intervention". Under these, government procurement only took place when agricultural market prices exceeded intervention (ceiling) prices for IS consecutive days. Moreover, procured commodities could only be sold in the market at break-even prices that covered storage costs. Initially, these liberalization rules were limited to selected products (rice, maize, cotton, soybeans and beans), but they were later extended to beef and wheat.
The 1991 farm bill continued to emphasize the government's role in ensuring food security and price stability but, clearly, its main thrust was freeing agricultural markets from government intervention.
Market deregulation measures included dismantling, in 1991, the government's 30-year monopoly of wheat imports as well as the liberalization of the milling industry which was formerly dominated by a few millers through a government-managed quota system. The Sugar and Alcohol Institute and the Brazilian Coffee Institute were also dismantled. Although the government continued to control sugar trade and alcohol production, the coffee industry was totally deregulated.
Foreign exchange policies and agricultural markets
Foreign exchange and trade policies played a contradictory role in determining real agricultural prices and levels and patterns of agricultural production.
During most of the 1980s, Brazil operated a policy of periodic "mini-devaluations", combined with a number of formal real devaluations of the currency. These policies caused pronounced fluctuations in the real rate of exchange but, until the mid-1980s, by and large maintained purchasing power parity vis-à-vis the currencies of industrial countries. However, the real exchange rate appreciated markedly after 1985. Although this tendency has subsided in recent years, most estimates still pointed to a 15 to 20 percent overvaluation of the currency in 1993.
The currency depreciation during the first half of the 1980s produced conflicting results. Real devaluations reduced the negative impact of declining agricultural export prices and mini-devaluations reduced monetary instability. But domestic market producers, who were already hurt by stagnating demand, paid more for the imported component of their production requisites. At the same time, import substitution opportunities for domestic producers were to a large extent nullified by ad hoc government food import decisions and price interventions.
The sharp appreciation in the rate of exchange after 1985 had opposing effects. It diminished the competitiveness of tradable crops so that, even though output growth remained generally robust for these crops, the export sector suffered for many years. This problem became particularly acute in 1990 and 1991, when the inflation-indexed exchange rate was replaced by a managed, floating foreign exchange market. During this period, producers of tradables were exposed to the risks of unpredictable exchange rates without much possibility, at least initially, of hedging against them. This contributed to a major extent to the catastrophic agricultural production shortfall in 1990-1991.
Since 1992, central bank interventions in foreign exchange markets have been successfully attempting to set monetary goals compatible with real exchange rate stability.
Trade policies. Traditionally, Brazil's trade policies have emphasized supporting local industry, including agroprocessing; ensuring an adequate supply of food and agricultural products to the domestic market; and increasing and diversifying exports. To this end, the government has operated a wide range of instruments, including trade bans and restrictions, tariff barriers, export and import licensing and export subsidies. Such policies were vigorously implemented until the early 1980s and, although their net effect is difficult to ascertain, most assessments indicate that they were detrimental to agriculture.
During the 1980s, trade policies were redefined in the light of pressing short-term stabilization concerns. For agriculture, this shift meant even more sectoral neglect and it was often a source of confusing market signals and inconsistent policy action. Thus, food imports were allowed at times when the domestic market was unable to absorb even domestic supply; and export incentives or restrictions were sometimes imposed, ignoring the interests or needs of farmers, industries and consumers.
In 1987, the government began gradually liberalizing agricultural exports. Nevertheless, it was not until 1990 that a major trade reform was introduced. The main thrust of the reform was to move away from quantitative restrictions and to establish a tariff system that, while being compatible with GATT and MERCOSUR agreements, could also be used as a means for productive restructuring and controlling inflationary pressures. The reform virtually eliminated administrative and quantitative trade restrictions, simplified administrative trade procedures and eliminated export taxes. Tariffs were significantly reduced, from an average 51 percent in 1988 to 25.3 percent in 1991. The liberalization process has been accelerated in recent years: by early 1994, maximum rates on agricultural imports were 10 percent, except for milk and milk powder (20 percent) and rice (15 percent). Import tariffs on agricultural inputs were also sharply reduced, ranging from 0 (most fertilizer components) to 20 percent (farm equipment and tractors) in 1993. Tariffs on agricultural imports from MERCOSUR partners range from 0 to 5 percent. Overall, nominal rates of protection in 1992 varied from -47 percent (maize) to 8.5 percent (cotton).
It is too early to assess the net effects of liberalization on agriculture. On the one hand, at least in 1990 and 1991 it is likely that food imports accentuated the problems agriculture was facing, particularly since the Collor Plan. On the other hand, farmers benefited from tariff reductions for agricultural inputs and equipment, which allowed the sector to increase its productivity and partly compensated for the negative effects of the overvaluation.
Financial markets, inflation and agriculture
In an economic and financial environment dominated by risk and uncertainty, open market operations constituted an effective system to convert assets into liquidity almost instantaneously. Through an increasingly refined use of this mechanism, money holders were able to achieve a large degree of financial safety and profitability.
The development of open market operations had pervasive implications for agriculture through the linkages with inflation, financial markets and agricultural prices and incomes. These interfaces are too complex to be covered here in detail, but some of the main issues are highlighted.
In the short term, producer prices have been strongly affected by changes in demand for stockholding, itself strongly affected by the inflationary environment.
During periods of high inflation and uncertainty the attractiveness of holding indexed, profitable and highly liquid financial assets increases. Thus, many producers opted to sell part of their crop at low prices immediately after harvest, expecting to compensate for the foregone gains by investing the proceeds of their sales in the financial market. Private stockholders and processing industries also reduced demand for stockholding.
Financial markets were even more attractive considering the "imperfect indexation" of agricultural prices. Although industrial prices adjusted almost continuously to both past and expected inflation, agricultural producer prices have tended to be unstable and lag behind other prices, particularly during harvest seasons.
It is only logical that producers with surpluses have opted for a promising financial market rather than to face very unstable and uncertain markets for their crops. To some extent, the farmers' propensity to "sell off" their crops right after harvest and rush to the government bond market was induced by their precarious financial condition which prevented them from holding stocks. While this practice might have protected some farmers, it also depressed agricultural prices during postharvest periods when most farmers sell the bulk of their -crops. These opposing effects exemplify the simultaneous crisis and prosperity seen in different segments of Brazilian agriculture during the past decade.
BOX 9: Social problems in Brazil
Although per caput GDP levels (around $2500 in the early 1990s) place Brazil among the upper middle-income economies, the country's distribution of wealth, productive resources and access to social services is extremely unbalanced. About 45 million people, or nearly one-third of the population, are estimated to be below absolute poverty levels (i.e. per caput family income is one-fourth or less of the minimum legal salary).
Absolute poverty, formerly a predominant rural problem, increasingly affected cities during the critical decade of the 1980s; by 1988, approximately half of the destitute were estimated to live in urban areas.
Such a high incidence of poverty has multiple consequences. About 67 percent of the population consumes less than the minimum average 2400 calories per day recommended by FAO and WHO. Child mortality - 64 per 1000 births - is the third highest in Latin America and the Caribbean, after those of Honduras and Bolivia.
An estimated 12 percent of urban and 44 percent of rural populations do not have adequate access to drinking-water. About 10 percent of the entire population is estimated to suffer from physical and/or mental forms of permanent or temporary disability.
Only about 59 percent of young people between the ages of ten and 17 are full-time students; 12 percent are employed part-time and 18 percent are full-time workers (working more than 40 hours weekly). Approximately 500000 girls (under the age of 19) are prostitutes.
Working conditions, especially in the countryside, are harsh for many labourers. In 1980 the working time for 35 percent of rural workers was at least 49 hours weekly, while the average wage for 60 percent of those working 40 or more hours was below the minimum wage. Furthermore, over 80 percent of rural workers did not have a work contract or social security coverage.
A striking sign of Brazil's socio-geographic distortions is the 11-year difference in average life expectancy between populations in the northeast, historically a depressed region, and those of the more economically dynamic southern region.
For Brazil the 1980s have been a period of extraordinary economic turbulence and a strenuous search for an appropriate policy mix leading to both successes and failures. Overall, the growth rate has been disappointing and the inflation rate catastrophic. The crisis, and measures to cope with it, have affected all sectors and economic activities. Despite this, agriculture has shown a remarkable capacity to resurface in the most adverse circumstances. This has been partly due to the structural and inertial qualities of agriculture, which render it less vulnerable to economic, market and policy shocks than other sectors; but it has also been due to circumstances specific to Brazilian agriculture - its immense territory and rich resource base.
There are also other equally important factors, among which policy. For most of the period - broadly speaking, until 1987 - government sectoral support programmes, despite their shortcomings and inconsistencies, provided an effective shelter for those farmers who had access to them. After 1987, the withdrawal of government support in a context of financial restrictiveness and loss of policy credibility resulted in a deterioration of agricultural conditions which culminated in the short 1990-1991 crisis. However, agriculture subsequently recovered, assisted by the recovery of domestic and export markets; reduced risks; owing to price controls and government market intervention; and more clearly defined and credible "rules of the game". Renewed government support also helped..
Another factor is agricultural self-financing. Despite high inflation and inimical economic conditions during the 1980s, farmers' reduced reliance on loans and their ability to self-finance their investment and maintain reasonably dynamic rates of sectoral growth are striking signs of the strength and potential of Brazilian agriculture. Nevertheless, self-financing would not have been possible in the absence of minimum guarantees offered by sectoral support programmes, particularly minimum prices, and the financial opportunities offered by government bond markets.
While agriculture has responded well to government support and changing market opportunities, its development has also shown limitations. First, not all farmers have been able to benefit from government support or market and financial opportunities. In the same vein, the benefits of agricultural growth have been uneven across types of crop and regions and categories of producers, and major efforts remain to be made to overcome the structural imbalances that still characterize the rural sector. All evidence indicates that, during the past decade, Brazil's already notoriously inequitable pattern of productive assets and income distribution has become even more pronounced.
The trend towards declining food self-sufficiency can be considered anomalous, in view of Brazil's rich endowments for agriculture and the precarious nutritional status of large segments of its population.
Although it can be argued that emphasis on export agriculture can also help finance food imports, possibly in a more cost-efficient way, it is doubtful whether such reasoning can be applied to a country with Brazil's current and potential comparative advantages for food production" and whether low-income food consumers will benefit from this process in the long term.
The responsiveness of producers to policy and market incentives, even during the particularly difficult decade of the 1980s, and the recovery in agricultural production; after 1990-1991 augur well. The gradual resurfacing from the economic crisis and the emerging liberal policy environment should create unprecedented opportunities for future growth in agriculture. In the new market-oriented framework, sectoral support policies are expected to emphasize the provision, particularly to small farmers, of basic conditions for overall sectoral development, such as infrastructure, technology, rural extension and education, rather than short-term direct support.
Near east and north Africa
Economic and agricultural performance in 1993
The Near East and North Africa region is entering a demanding period of economic adjustment, in the face of lower oil prices, widening budget deficits, balance-of-payments difficulties and unsettled political issues. The economies of many of the region's countries have been buffeted by a sharp and prolonged decline in petroleum prices, their principal source of foreign exchange. Reduced petroleum earnings forced many of the region's petroleum exporters to cut back spending and study new ways of raising revenues. Some countries have also had to tackle increasingly daunting debt-service obligations. Different remedies are being applied, including debt rescheduling and export diversification. In the case of Saudi Arabia, some pressure has been lifted by stretching out payments schedules. The Islamic Republic of Iran has persuaded creditors to reschedule debts and Algeria is moving towards a. multilateral rescheduling.
Some countries made substantial economic progress but faced increasingly unmanageable inflation rates and growing deficits in their balance of trade and often in their current accounts,. Among these were Turkey, Iran and Algeria.
Hopes were raised by the signing of the long-awaited peace agreement between Israel and its Palestinian neighbours. The Syrian Arab Republic, Jordan and Lebanon moved ahead in attempting to reconcile their historical differences with Israel.
The region was marked by civil unrest which bit into foreign exchange earnings and the tourist industry, particularly in Egypt, In Algeria, violence caused the exodus of many foreigners and slowed investment in an already dismal economic climate.
Agriculture fared well in most countries, in 1993, the exception of Morocco and Algeria, which suffered damaging droughts. The region's index of agricultural production rose to 155 in 1992 (1979-81 = 100), with per caput production rising to 113. Growth in output has generally enabled regional food production to keep pace with population growth, except for weather-induced fluctuations: Most countries weather achieved substantial gains in food production; the index stood at 153, with per caput food production at 112 0 979-81 = 100). Per caput caloric intake in the region rose by 3.8 percent between 1981 and 1990 to an estimated 2 928 calories.
Figure 8: NEAR EAST AND NORTH AFRICA; Source: FAO
Morocco, one of the region's largest agricultural producers, suffered its second consecutive major drought in 1993, necessitating substantial and higher than normal grain imports. Algeria's cereal output was 1.9 million tonnes which reflected the severity of a drought in the western region and necessitated imports of 5.2 million tonnes, a 24 percent increase over 1992. In Egypt, changing price signals and the lifting of planting controls resulted in a substantial shift in crop mix since 1986. As a result of the adoption of high-yielding varieties (HYV) over the past decade, wheat yields have risen by nearly 50 percent, wheat area by nearly 80 percent and output by 172 percent.
Iraq's food situation continues to deteriorate from levels prevailing before the Persian Gulf conflict. Revenue losses resulting from the UN embargo on Iraqi oil exports have caused a steep reduction in agricultural imports, leading to a precipitous decline in the output of livestock products and little gain for overall crop production. This caused a sharp increase in food costs, reducing the average daily per caput caloric intake from 3 250 in 1990 to about one-third less in 1993.
In Iran, the agricultural sector's performance over the last five years (ending in 1993) was more stable than the rest of the economy. Following a decline of 2.5 percent in 1988/89 because of drought, the sector's output rose by an average of 5.3 percent in the four-year period ending in 1992/93. In Saudi Arabia, the spectacular growth in the agricultural sector has been a result of a vigorous price support policy and other incentives as well as the adoption of modern cultivation techniques. However, a shift is occurring in the grains sector because the government is reducing the extraordinarily high price supports and subsidies which nevertheless remain far above global wheat and barley prices.
In Afghanistan, shortages of agricultural inputs, damage to irrigation networks and insecurity - the results of a lingering civil war - continue to limit agricultural production throughout the country. Total cereals output in 1993 was estimated to be 2.5 million tonnes, somewhat higher than in 1992 but still below normal. The indices of both agricultural and food production have continued their downward spiral, falling to below 80 (1979-81 = 100) in 1993. Staple food prices remain high relative to earnings. The miserable food situation, resulting from successive below normal cereal harvests and the return of hundreds of thousands of refugees, was further exacerbated in 1993/94 by poor winter conditions.
In the Sudan, the civil war and the weather dictate the performance of the agricultural sector which accounts for one-third of the GDP. In the late 1980s, the Sudanese economy was characterized by very low growth, high government expenditures, triple-digit inflation and a widening trade deficit. In 1991, the government implemented a three-year recovery programme, which aimed at deregulating price and profit controls, privatizing government parastatals, lifting fuel and food subsidies, liberalizing the trade environment and stabilizing the exchange rate. Although the economy has shown signs of recovery since the implementation of these reforms, many problems remain, including large trade imbalances and budget deficits.
In Lebanon, past conflicts have taken a heavy toll on the country's infrastructure, financial markets, labour and capital. Like other sectors, agriculture has suffered heavily, including from neglect of tree crops, livestock losses and the destruction of storage facilities. However, recent years have seen a remarkable recovery and growth of the sector. Little information is available on Lebanon's irrigation facilities which used to cover one-quarter of the country's cultivated area.
Although not verified, it is believed that much farmland was abandoned in southern Lebanon by people fleeing the continuous fighting in that region.
Agricultural value added constitutes an estimated 8 to 10 percent of the country's GDP, while food and agricultural exports, which include forestry products, provide about 10 percent of merchandise export earnings. In recent years, the sharply depreciating Lebanese pound enabled the agricultural export subsector to withstand rising domestic transport costs and external competition (from Turkey). Although sales to the Persian Gulf state markets were severely curtailed by the Persian Gulf crisis, more recently they have recovered somewhat.
The region remains a huge importer of agricultural products - with agricultural imports estimated to have been worth $25.2 billion in 1992, 9 percent above the previous year and comparable to the levels recorded before the Persian Gulf conflict. The region's leading suppliers continue to be the EC, with a share of approximately one-third, and the United States, with approximately 12 percent. Other important suppliers include Australia, Canada, Argentina, Thailand and Turkey. The leading importers in the region are Saudi Arabia, Egypt, Algeria, Iran, the United Arab Emirates and Turkey. Turkey, Egypt, Saudi Arabia, Morocco and Israel are important exporters of agricultural products such as cotton, horticultural products and tobacco.
Wheat self-sufficiency has increased slightly as a result of strong production gains relative to consumption. In 1992, Near East wheat production was 91 percent of consumption, compared with 80 percent in 1980. For North Africa, production was 39 percent of consumption in 1992 compared with 36 percent in 1980. Regional self-sufficiency levels are a composite of varying performances (if individual countries. For example, Saudi Arabia has become a major exporter in recent years, exporting about one-half of its crop. Turkey became a substantial wheat trader in the late 1980s and Iran has made strong headway in increasing wheat output. However, for most of the region's countries, imports account for an increasing share of wheat consumption.
Policy reforms and issues
Despite the disruptions caused by the Persian Gulf crisis, economic reform remains high on the agenda of most countries. The region as a whole continued its march towards policy reforms and liberalization, with reduced government intervention and increased private sector investment. However, structural adjustment programmes were slowed by domestic political problems. Iran and Lebanon continued their rehabilitation of economic infrastructure. Egypt continues its structural adjustment programme, public enterprise reform and privatization.
The reform process has been more difficult in Yemen and Algeria, largely because of changes in government leadership and continuing social tensions in Algeria and the confrontation between northern and southern Yemen.
Most countries within the region introduced some privatization of marketing and trade as part of a broad policy shift towards market liberalization and reform. Yet, wheat-producer support policies are being maintained in most countries. All countries have subsidized consumer purchases of wheat flour and bread, which has helped transform the region into a mature wheat market where per caput consumption is among the highest in the world. Since 1980, per caput consumption has stabilized, and growth in total use correlates with population growth.
In some countries, including Morocco, Egypt and Tunisia, recent policy reforms included reducing or eliminating consumer subsidies for staple foods, including some breads. Algeria continues to subsidize bread and wheat flour but controlled prices are being increased for other food items, implying reduced subsidies.
The region shares a number of social problems, including unemployment. It has a large pool of skilled, relatively cheap labour and a dynamic and entrepreneurial trading sector with great expansion potential. However, unemployment remains a chronic issue, averaging around 15 percent in Egypt, Iran, Morocco and Tunisia; 20 percent in Algeria and Jordan; and 25 percent in Lebanon and Yemen. In many countries, this situation is exacerbated by the imbalances between population and economic growth. In agriculture, unemployment and underemployment are somewhat more difficult to measure. The capital-intensive nature of a large share of investment and increased mechanization on the land continues to free up already underutilized labour at a time when domestic employment generation has slowed (petroleum earnings are declining). Also, Western countries, which in the past absorbed some of the excess labour, are undergoing economic slow-downs and have sharply reduced expatriate employment.
Control over water resources has long been regarded by nations as a vital security interest. This is especially true in the Near East and North Africa because periodic droughts and rapidly growing populations have compounded the problems of water scarcity. In the past, the major emphasis was on assuring an adequate and reliable supply of water. It has only been in recent years, as problems of salinity and pollution have increasingly threatened the quality of water supplies, that governments have begun to focus on the potentially harmful environmental effects of development projects and unregulated private water use.
Two water-related issues are of an immediate threat to the sustainability of agriculture in the region. The first is environmental - the deterioration of irrigation water quality and the second is the diversion of irrigation water for urban use. Solutions will require both political and scientific cooperation among the region's nations. These issues affect each country and will be critical determinants of viable agriculture and urban life in the near future. While water issues have been most often couched in terms of regional conflicts, the necessity of developing a regional water strategy may, in fact, drive nations towards regional peace.
Most governments in the region have called for greater attention to water issues, including sewage disposal, salinity, water source pollution and inefficient, wasteful water delivery systems. In many cases, municipal water supply has priority over other uses. Water that had been used for agriculture is now being diverted to urban use. This is the case in Damascus and Aleppo in the Syrian Arab Republic and Amman in Jordan. Other urban areas are relying on desalinated sea water transported over long distances.
In 1993/94, high temperatures and a critical shortage of rain reduced the Near Eastern grain harvest. In Turkey, for example, unusually dry autumn conditions prevented wheat and barley germination in many areas. Grain output forecasts are significantly lower than in 1992/93; similar circumstances apply in neighbouring countries such as the Syrian Arab Republic, Iran and Iraq. This dry spell underscores the vulnerability of the region's economies to weather. In North Africa, growing conditions have been favourable for winter grain crops in Morocco and Algeria, forecasting good grain crops for the 1994/95 season. increased crops will mean reduced grain imports, following record levels in Morocco in both 1992 and 1993 and near record levels in Algeria.
Agriculture's role in the economy
Historically, the agricultural sector has been Turkey's largest employer and a major contributor to the country's GDP, exports and industrial growth. However, as the country has developed, agriculture has declined in importance relative to the rapidly growing industry and services sectors. Agriculture's share of GDP declined from 35 percent in 1970 to 22 percent in 1980 and to 15 percent in 1992. Agricultural employment declined from 75 percent of the population in 1950 to an estimated 40 percent in 1992. This reflects rural-urban migration and an increase in foreign employment. Crops represent 55 percent of the agricultural sector, livestock represents 34 percent and the rest comprises forestry and aquaculture.
Turkey is the largest producer and exporter of agricultural products in the Near East and North Africa region. Exports of agricultural commodities, including tobacco, pulses, vegetable oils, dried fruit, hazelnuts and other nuts, forest products, wheat and cotton, were valued at $3.4 billion in 1992 and accounted for 23 percent of Turkey's total export earnings. The country has a vast agricultural resource base with significant potential to expand output, particularly through increased crop yields. However, agricultural production is constrained by factors such as weather variations exacerbated by low irrigation rates; ineffective technical support services; inadequate access to agricultural credit; inefficient agricultural marketing systems; inadequate input use; and fragmented landholdings.
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