Latin America and the Caribbean

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In the past it has often been argued that countries in the Latin American and Caribbean region do not have agricultural policies but only, or primarily, intervene in the sector to adjust for events in the macroeconomic sphere. Whatever the validity of this argument, the subordinate role of agricultural policies has become increasingly obvious in recent years as market forces, rather than government intervention, have been allowed increasingly to determine resource allocation and price formation. This process has been common to a large majority of countries throughout the world, but has been particularly marked in several countries in the region. However, the expected benefits of the widely adopted market-oriented approach appear still to be bypassing regional agriculture. The overall economic improvement in recent years has contrasted with generally poor performances in the agricultural sector, thus fuelling the debate as to whether the pace and modalities of liberalization should be reconsidered so as to extend its benefits to disfavoured, particularly rural, areas. Furthermore, the recent turbulence in financial markets has introduced new uncertainties on the general economic and agricultural outlook for several countries in the region. These events have roused another debate on the limits of an economic policy that combines external openness with exchange rate management as an anti-inflationary anchor.

This section briefly reviews the main features of the current economic and agricultural situation in the region and traces some of the implications for agricultural policies and performances in individual countries.

Figure 8

Economic developments

The economic situation in Latin America and the Caribbean in 1994 and the first quarter of 1995 was generally characterized by moderate growth, slowing inflation and pronounced financial and current account imbalances financed by large, but declining, capital inflows.

Regional economic growth in 1994 was estimated at 3.7 percent, up from an average of 3.2 percent during 1991-93. General factors behind the accelerated growth included economic recovery in the industrial countries, continued expansion of domestic investment and further progress in stabilization and structural reform. A notable feature was the convergence of growth rates among countries in the region (perhaps reflecting the greater convergence in policies); a majority of countries achieved moderate growth rates and only a few recorded declines. The inflation rate fell to 16 percent (excluding Brazil), the lowest in many years. Brazil also achieved significant progress on the price front, with monthly inflation rates falling from almost 47 percent in June to 0.6 percent in December. Regional exports expanded by 14.3 percent in value, well above the 5 percent growth rate in 1992-93; this was the result in particular of the dynamism of intraregional trade and an increase, for the first time in five years, in non-fuel commodity prices. With imports rising even faster, however, the current account deficit increased from US$46 billion to $49.7 billion. The financing of such a deficit was rendered possible by capital inflows that, while lower than those of 1992 and 1993, still amounted to $57 billion.

The financial crisis in Mexico in December 1994 has had destabilizing financial and economic effects not only for Mexico, but also for the region as a whole. In Mexico, the devaluation and floating of the peso since December was followed by an inflationary upsurge and a tightening of fiscal and monetary policies. As a result, the country's short-term outlook is for a severe economic recession (GDP is expected to fall by about 3 percent in 1995), although the current restrictive stabilization measures are seen to be transitory in nature.

The events in Mexico had negative effects on financial markets throughout the region and worldwide. Capital inflows slowed down and stockmarkets fell, accentuating a process already under way following rising interest rates in the United States. Several countries faced heavy pressure on exchange and interest rates, while also experiencing higher debt repayment costs as a result of increasing interest rates in the creditor countries. Prospects for a strengthening of economic growth in the developed countries, and further pressure on exchange rates, suggest that such problems may accentuate in the coming years.

The situation raised again the issue of the role of foreign capital in the region's economies. The State of Food and Agriculture 1994 discussed the difficult problems of economic management that are posed by capital inflows and the undesirable side-effects of such inflows, including losses in competitiveness caused by currency overvaluation. The Mexican crisis has now raised another set of issues. For Mexico itself, it has spurred concerns on its heavy socio economic costs and the capacity of both the country and the international financial community to restore stabilization and market confidence fully in the near future. For the rest of Latin America and the Caribbean, concerns have been voiced on the possible extension of the crisis to other countries and even on a major and generalized disruption of the ongoing recovery process. Such fears do not appear to be founded, however. Unlike the situation that led to the debt crisis of the 1980s, recent flows were largely in the form of bond issues and direct investment (rather than floating-rate bank loans) and were directed towards the private, rather than the public sector. In addition, the recent record of stabilization and reform in several countries across the region appears to have created enough market confidence to make a general reversal in private flows unlikely. However, recent events underlined the potential risks of accumulating foreign liability beyond sustainable levels, and the importance of maintaining the confidence of financial markets through credible and consistent macroeconomic policies and transparency of financial markets.

Agricultural performances

The recent record of agricultural production suggests that there are continuing difficulties in overcoming the crisis of the sector that began in the early 1980s. This protracted crisis is illustrated by the fact that regional per caput agricultural production has never again reached the levels of 1981 - although the poor performances concerned mainly the non-food agricultural sector. After the relatively favourable 1987-88 biennium, when production recovered from particularly poor performances, regional agriculture entered a renewed period of sluggish growth. From 1989 to 1993, per caput agricultural production declined by 2 to 3 percent overall. Although preliminary information for 1994 points to a substantial increase in agricultural production (4.1 percent, or 2.2 percent in per caput terms), per caput production would remain slightly below the peak level of 1981. Favourable production estimates for 1994 largely reflect a significant expansion in agricultural production in Brazil (6.7 percent) and Argentina (8.5 percent), although in the latter the increase to a large extent represents a recovery from the 5.8 percent drop recorded in 1993. On the other hand, many countries recorded lacklustre or poor performances. Among the largest producers, agricultural production is estimated to have increased by as little as 1.3 percent in Mexico, while in Colombia it may have declined by 3 percent.

The record of regional agricultural trade since the beginning of the 1980s has also been generally disappointing. Much of this period was characterized by extremely depressed prices for the region's main export commodities and deteriorating agricultural terms of trade. Agricultural exports in US-dollar terms barely increased during 1980-93 in spite of an average annual increase in export volumes of 2 percent. As the increase in merchandise import prices largely outpaced that in agricultural export value, the purchasing capacity of the region's agricultural exports fell by about one-quarter during the same 1 3-year period. Trade performances improved more recently, however. Available information for 1994-95 indicates that the strengthening in commodity prices may have enabled significant increases in export revenues in many countries, despite competitive losses from currency overvaluation in several of them.

Economic developments and the implications for agriculture

The recent economic and financial events outlined above are having a major impact on domestic and international conditions for agricultural development. In Mexico, the peso devaluation significantly altered the price relationships between domestic and imported products. Higher prices of imported grain resulted in competitive gains for domestic producers, more direct purchases to local producers by the milling and livestock industries and fewer purchases of imported grain from government stocks. On the other hand, the livestock and feeding industries, which use large quantities of feedgrain imported from the United States, were losers from the devaluation. This was particularly so for livestock producers who used dollar-denominated loans under the GSM-102 credit guarantee programme for which repayments were due at the new exchange rate.

In Venezuela, another country hit by severe financial difficulties and economic recession, the strong devaluation of the bolivar and foreign currency control resulted, inter alia, in lower food imports and the suspension of the GSM102 credit guarantee programme. At the same time, farmers suffered from drastic cuts on subsidized credit and price support measures. The recession has also resulted in shifts in consumption patterns. Meat consumption fell, leading to reduced demand for feed and smaller herds and flocks; while demand shifted from bread-wheat to less expensive maize and rice products.

In Brazil, the remarkable success of the new stabilization programme in reducing inflation combined with the increase in consumer purchasing capacity (per caput GDP rose by close to 3 percent in 1994 and may rise at a similar rate in 1995) are likely to benefit significantly agriculture on the demand side. Agricultural prices were an important factor in reducing inflation, thanks to an exceptional crop year. On the supply side, however, the Brazilian subsidized credit and price support programmes were constrained by macroeconomic stabilization measures. In the external sector, the establishment of a new band for the real following recent events in international financial markets effectively resulted in a currency devaluation and competitive gains for several key export commodities. For instance, the devaluation was expected to counter the fall in domestic soybean prices; render some competitivenes to the beef industry currently affected by high prices of live cattle; and favour a further expansion of forest product exports, which are expected to reach a new record in 1995. By contrast, the wheat milling industry has expressed concern over the negative effects of higher costs of imported wheat on an already depressed flour market. Economic considerations are also affecting commodity export markets in other ways. The need to hold down prices under the stabilization plan led to consideration being given to diverting some coffee stocks to the internal market.

In Argentina, the continuation of a fixed exchange rate regime, a key element in the achievement of price stabilization, has nevertheless created major difficulties for commodity producers. Problems of competitiveness linked to the exchange rate have compounded those arising from declining real prices for key export commodities such as wheat and meat. It has been estimated that, in the three years following introduction of the convertibility plan, the prices of pampa prime land fell by 5 percent; including poorer land, the overall decline was estimated at close to 30 percent. In addition, the agricultural debt was estimated to have risen to US$5 billion, or about 40 percent of the industry's gross product. On the other hand, producers have benefited from revised credit lines by the Banco de la Nación Argentina, elimination of taxes on assets and import duties on capital goods, special loans to (pre-) finance exports, tax-free rural mortgage rates and a rural modernization programme (cambio rural).

In the context of prudent fiscal, monetary and foreign exchange policies and sustained economic growth, Colombia has pursued its economic opening policy (aperture) implemented in 1991. However, this policy, which introduced across-the-board reductions in credit and export and other subsidies and import liberalization, has been criticized by farmers' associations for having depressed agriculture. Indeed, agricultural production between 1991 and 1993 rose by only 0.8 percent per year, agricultural exports declined by 2.7 percent per year, in spite of an expansion in export volumes, and the volume of agricultural imports rose by one-third - the latter reportedly undermining domestic production. It is difficult to assess the weight of aperture in such performances (other factors, such as long periods of drought in 1992 and 1993, the relative appreciation of the currency and low international prices of coffee and other export commodities, also played a role). In any case, the problems faced by agriculture led to the introduction of support measures to improve the efficiency of the sector. A new agricultural law was introduced in late 1993 that included provisions for minimum guaranteed prices, commodity stabilization funds, compensation to growers affected by subsidized imports and subsidized credit loans for farm investment. Early policy announcements from the new administration that took office in August 1994 suggest a supportive approach towards agriculture. In particular, a programme of "absorption agreements" was announced in which processor industries, such as feed manufacturers and oilseed crushers, agree to purchase all domestically produced commodities at specified prices.

In spite of its unquestionable economic success, Chile has also faced problems in its agricultural sector. In 1993 agricultural output increased by about 5 percent (compared with 5.6 percent for the economy as a whole), but agricultural exports fell by 4.5 percent, after many years of expansion. Production rose further by 5.6 percent in 1994, but the agricultural trade surplus, which was already reduced in 1993, narrowed further, reflecting in particular mediocre fruit export performances and rising imports. Agricultural producers and exporters have faced difficulties from rising costs (particularly of labour), an appreciation of the peso vis-ŕ-vis the US dollar and competition from imports for several traditional crops. In line with its marketoriented approach the government has continued to provide only limited support to agriculture. In order to enhance exports of fruit, agro-industrial products, wine and other products, the new administration has announced an Export Promotion Fund that began operations on 1 January 1995 with an initial capital of US$10 million.

Central America

Introduction and overview

After over a decade during which the Central American region was racked by civil strife, the 1 990s brought relative peace and tranquillity, with the armed conflicts in El Salvador and Nicaragua reaching negotiated settlements and the fighting in Guatemala significantly reduced. Partly as a result of the success of the peace process, average economic growth across the five countries increased from less than 2 percent per annum from 1985 to 1990 to slightly over 3 percent for 1990 to 1994. Costa Rica, the only country of the five that was not involved in armed conflict directly or indirectly, enjoyed the fastest growth rate, at a relatively steady 5 percent per annum for the ten-year period 1984 to 1994. The economy of El Salvador also grew at almost 5 percent per year after 1990, compared with a rate of less than half that during the second half of the 1980s. Considerably less impressive were the recoveries of the other three countries; Guatemala's growth rate rose marginally from 2.9 percent in 1985-90 to 4 percent in 199194, while Nicaragua could do no better than reduce its rate of decline, from -3.5 percent per annum to -1.3 percent. In Honduras, the largest and least populated country of the isthmus, the growth rate slowed down slightly in the second period, 2.7 percent compared with the previous 3.2 percent. These growth rates occurred in the context of major steps towards trade liberalization and market deregulation, as discussed below.

After 1990 in particular, the countries implemented stabilization and structural adjustment programmes, with varying degrees of success. Costa Rica began the process in the first half of the 1 980s, Guatemala implemented some measures in the middle of the decade, but the other three countries did not initiate comprehensive adjustment programmes until the end of the 1 980s or the beginning of the 1 990s. For El Salvador and Guatemala, fiscal adjustment played a secondary role in stabilization, because these countries had relatively small budget deficits that were well below 4 percent of GDR Honduras displayed notable lack of success in reducing its fiscal deficit, which averaged about 7 percent of GDP during 1992-93, virtually the same as for 1985-86. In contrast, Nicaragua achieved spectacular success in reducing the fiscal deficit, from close to 20 percent of GDP during the period 1985 to 1988, to below 4 percent in 1989, a surplus in 1991 and, subsequently, a surplus of about 3 percent. While this reduction in the deficit was associated with the elimination of hyperinflation, it brought no respite from falling real GDP and even larger reductions in per caput income. Although Costa Rica has enjoyed the fastest growth rate in the region, its fiscal deficit proved to be a continuing problem in the 1 990s (see the section Costa Rica, p. 142).

To the extent that the stabilization measures sought to improve the current trade account, they failed. Over the ten-year period 1985 to 1994, only three trade surpluses were registered by the five countries (Costa Rica, Guatemala and Honduras in 1986) and the regional trade deficit increased continuously after 1988, averaging US$2.5 billion for 1990-94 compared with $1.1 billion for 1985-89. Along with this rapidly increasing trade surplus went a virtual stagnation in agricultural exports. For the five countries taken together, agricultural exports in current prices increased by 7 percent from 1985 to 1986, but in no subsequent year did the total regain the level of 1986. The story of agricultural exports from Central America is a tale of Costa Rica and the rest. In 1993, the agricultural exports of Costa Rica were over 60 percent higher than they had been in 1985 in value terms and 125 percent higher in volume. None of the other Central American countries achieved an increase in export value; indeed, El Salvador, Honduras and Nicaragua showed substantial declines and for Guatemala there was virtually no change.

For El Salvador and Guatemala the decline, in the former case, and stagnation, in the latter, of agricultural export earnings were the result of unfavourable prices, especially for coffee. From 1990 onwards, El Salvador's agricultural exports increased in volume by 14 percent per annum and Guatemala's by 10 percent, yet the growth rates of export earnings for the period were -1.5 and 0.5 percent, respectively. In contrast to the sluggish performance of export earnings, the value of agricultural imports to the region increased dramatically, from US$530 million in 1985 to $1.1 7 billion in 1993. Owing to a slight decline in import prices, the increase in volume was marginally higher than the increase in value. The large increase in imports to the region resulted in the ratio of agricultural import: export value rising from 1:5 in 1985 (i.e. imports were 20 percent of exports in current prices) to 2:5 in 1993. Indeed, by the early 1 990s, El Salvador and Nicaragua were only marginally net exporters of agricultural commodities, and both Guatemala and Honduras seemed to be on a declining trend. It would appear that trade liberalization measures have tended to stimulate agricultural imports more than agricultural exports. As a consequence, governments have felt pressure to apply selective import-restraint measures, discussed in the National policy reviews, p. 142.

The rise in agricultural imports relative to exports need not in itself be cause for concern on general comparative advantage and efficiency principles. In the specific case of the region, however, the observed shifts in international commodity prices associated with the decline in net agricultural exports do signal cause for concern. In 1993 the ratio of agricultural export prices to import prices for the region as a whole stood 25 percent below the level of 1985. Every country but Honduras showed a statistically significant downward trend in this ratio during the period 1985 to 1993. One of the goals of trade liberalization in Central America has been the fostering of agricultural export diversification into non-traditional products for which world market demand is more income- and price-elastic and more buoyant than it is for coffee, bananas and cotton. However, the weight of these non-traditional products in the total agricultural exports of the region remains modest.

To some extent the absolute and relative decline in agricultural export prices reflects the drop in coffee prices after the collapse of the international coffee agreement. This decline was reversed in late 1994 and into 1995 as the result of frost in Brazil and cooperative action among coffee-exporting countries. However, the recovery of coffee prices may prove to be transitory and is unlikely to stimulate diversification.

Costa Rica has achieved impressive success in agricultural diversification, with non-traditional products increasing export earnings from about US$70 million in 1985 to over $250 million in 1993. Within this category three items, ornamental plants, pineapples and cantaloup, accounted for two-thirds of the total in 1993 (up from 55 percent in 1985). Despite this impressive growth, coffee and bananas accounted for almost 70 percent of Costa Rica's agricultural exports in the 1 990s, roughly the same as for Nicaragua and considerably higher than for Guatemala.

Some degree of success in stimulating non-traditional agricultural exports was achieved in Nicaragua, especially for peanuts, beans, melons and onions. These, along with shrimp and lobster, accounted for over one-third of total exports in 1993, although the relatively high percentage was partly the result of total export earnings far below the level of the late 1 970s.

The lack of export diversification in the region is shown in its most extreme form by El Salvador, for which coffee alone represented over 70 percent of the total export earnings.

The mixed record on agricultural trade was associated with the ambiguous performance of the growth in agricultural production. While the volume of agricultural exports for the region as a whole grew faster from 1990 to 1994 than from 1985 to 1990 (4.8 percent compared with 1.8 percent), the volume of agricultural output grew more slowly in the 1 990s for every country except El Salvador (where there was no significant change). During the period 1985 to 1990 all five countries enjoyed growth of agricultural output above or close to the rate of population increase (with Nicaragua and El Salvador lowest at just above 2 percent per annum). For the 1 990s no country achieved a 3 percent annual rate of growth and only Costa Rica's rate of 2.5 percent exceeded the population increase. With regard to food production the performance was similar; the average annual growth rate for the region was 2.4 percent for 1985-90 and 1.9 percent for 1990-94. These modest growth rates of agriculture as a whole, food production and exports raise some questions about the effectiveness of liberalization in stimulating agriculture in the region, even for the "success" story of Costa Rica. Increases in world coffee prices improved the trade balances for all five countries in 1995, but this may prove to be a transitory gain (see section International and regional factors, p. 140).

Mediocre food production performances could not be compensated by rises in food imports, as indicated by the low food consumption levels in all countries except for Costa Rica. In the latter, current dietary energy supply (DES) levels are relatively high (about 2 700 kilocalories per day, compared with 2 650 kilocalories for the Latin America and Caribbean region and 2 500 kilocalories for the developing countries as a whole).

In the other four countries, however, calorie intake levels in recent years were barely of the order of 2 250 kilocalories per day. Furthermore, progress has been slow and uneven. While most countries had achieved substantial increases in DES levels until the mid-1 980s (more markedly El Salvador and Costa Rica), the general picture since then has been one of stagnation for Costa Rica and decline in El Salvador and Nicaragua. Honduras recorded only very slow increases since the early 1 970s.

International and regional factors

In the 1990s, the external economic policy of the Central American governments had three main aspects: attempting to improve the market conditions for traditional exports (coffee and bananas), rejuvenating Central American trade (especially for agricultural products) and changing policy in anticipation of accession to GATT. The governments of the region encountered serious difficulties in establishing a coherent strategy, in part caused by the different levels at which policy dialogue must be pursued for national, regional, hemispheric (i.e. North American Free Trade Agreement [NAFTA]) and world markets.

The most important Central American exports are coffee and bananas. Under the Lome Convention, the EC established import quotas for various tropical products. The quota for bananas has been of special importance to several small countries in the so-called African, Caribbean and Pacific states (ACP) group. These quotas effectively reduced access to the European banana market for most Latin American countries. Tension over the EC banana quota increased in 1992 when the European Commission announced a reduction in the tariff-free quota for Latin America and a 170 percent duty on imports in excess of the specified limit. In this context, in March 1994 the EC reached a side-agreement with four Latin American countries (Colombia, Costa Rica, Nicaragua and Venezuela) to increase quotas. However, events quickly cast doubt on the sustainability of the agreement, in part because the excluded countries, including Guatemala and Honduras, challenged it in the European Court. While the court sustained the legality of the banana quota system, the four Latin American countries party to the side-agreement began to reconsider their participation. In August 1994, representatives of Latin America's banana-producing countries met in Panama City to establish a common policy. With all the Central American countries except El Salvador (which does not produce bananas) in agreement, the group proposed restricting world supply to push up prices and making a joint submission to the World Trade Organization in protest against EC policy. In addition to the direct impact of restricting access to the European market, the quotas resulted in intensified competition and lower prices elsewhere, especially in the United States.

Notwithstanding the conflict over bananas, the Central American countries made progress on other areas of trade policy with the EC. In the late 1980s, EC policy granted reduced tariffs to Andean countries for a range of agricultural products, as part of an incentive scheme to discourage the production and trade of illegal drugs. As a result of a joint submission by the Central American governments, the European Commission in 1992 ended the discriminating levies, which affected several regional nontraditional exports (e.g. ornamental plants).

In the case of coffee, regional concern in the 1990s was more over international prices than market access. Following the collapse of the International Coffee Agreement, world prices dropped dramatically. After several years of price decline, the association of coffee-exporting countries (APEC) agreed to withhold 20 percent of stocks from the world market over the period October 1993 to April 1994. With the exception of El Salvador, the Central American governments supported and participated in the stock retention scheme. Improvement of world coffee prices in early 1994 prompted APEC members to release the retained stocks in May 1994. The cooperation among the Central American governments on coffee and bananas suggests potential for policy coordination in other fields.

Perhaps the most ambitious programme of cooperation involved the creation of a regional free-trade zone. A Central American common market was formally established in 1963, and intraregional exports as a proportion of total trade grew rapidly until regional commerce was undermined by the political instability and economic crisis of the late 1970s and 1980s. Intraregional trade during its expanding period largely bypassed agricultural products, except for processed foods. In a development that bodes well for the integration of intraregional commerce, the rejuvenation of the common market has focused on liberalizing agricultural as well as industrial trade. In March 1993, the regional governments agreed to harmonize most agricultural tariffs, with the aim of eliminating them among the five countries. This was followed by the signing of the Central American Free Trade Agreement in October of the same year. Progress on intraregional trade liberalization was greatest among the three northern countries, Honduras, Guatemala and El Salvador.

In spite of these important steps, including an agreement for freer regional trade in basic staples, the existence of alternative routes to trade promotion created tensions that weakened the move towards a coherent regional trade association. Bilateral agreements, Nicaragua with Mexico and Colombia, and Costa Rica with Mexico, cast doubt on the status of purely regional tariff harmonization. In addition, El Salvador's reduction in tariffs in advance of the agreed schedule and Costa Rica's decision to increase tariffs for revenue purposes, both in early 1995, left regional trade policy driven by unilateral rather than multilateral action. While impressive progress was made towards regional economic cooperation during 1993-94, the ways in which a regional agreement would be reconciled with possible association with NAFTA and bilateral preference schemes remained to be clarified.

Along with moves towards regional integration, the Central American governments took steps towards active participation in GATT and its successor, the World Trade Organization. The main consequence of this for the agricultural sector was a shift from quantitative import controls and other non-tariff barriers to tariffs. With a few exceptions, such as dairy products and pork, governments eliminated the major non-tariff restrictions on agricultural imports and exports. These policy changes, while addressed to all trading partners, could foster regional agricultural trade.

National policy reviews

Costa Rica. Costa Rica was the first Central American country to enter into stabilization and structural adjustment programmes in the era of the Latin American debt crisis. It does not follow, however, that by the 1 990s Costa Rica was the most liberalized economy in the region. From the late 1980s, agricultural policy combined protection and aid to targeted sectors with liberalization in other areas. For example, coffee producers received state aid through credits and other measures in response to low world market prices, as did banana growers and the livestock sector. At the same time, most non-tariff barriers affecting imports of agricultural products were converted to tariffs.

As part of a policy to foster greater self-sufficiency in basic staples, a state organization, the National Production Council (CNP), monopolized the import of grains. Yellow maize was removed from the monopoly control of CNP and, from 1992, a majority of maize imports came via the private sector. Wheat and rice imports were privatized in 1994, though further policy action would be required to make the change effective for wheat. Price controls on flour limit the incentive for private-sector imports of wheat, and these were scheduled for elimination in 1995. In order to foster domestic milling, the government maintained a substantial tariff differential between rough and milled rice. Throughout the 1 980s Costa Rica enforced price controls on a broad range of consumer products, but most controls were eliminated in the early 1 990s in compliance with World Bank conditionality for an agricultural sector adjustment loan.

More than other countries in the region, Costa Rica pursued the active promotion of non-traditional exports through subsidies to selected firms. At the same time, coffee producers objected to what they considered discriminatory taxation, because they must pay both a production and an export tax. In response, in 1994 the government proposed replacing the two levies with an income tax calculated on net revenue.

Costa Rica could claim to have had the fastest growing and most stable economy in the region over the last ten years (notwithstanding a rate of inflation in the 15 to 25 percent range). However, 1995 brought economic uncertainty as a result of tense negotiations over loan programmes with the World Bank and IMF. Early in the year, the World Bank suspended disbursement of US$100 million, making the release of structural adjustment funds dependent on an agreement between IMF and the government on deficit reduction. Achieving the IMF deficit targets, 3.5 percent of GDP by the end of 1995 and 0.5 percent by the end of 1996, could result in significant interest rate increases. The latter would significantly affect costs of production in the agricultural sector, thus reducing producer incomes and export potential.

El Salvador. During the 1980s the Government of El Salvador, like that of Nicaragua over the same period, intervened extensively in markets in an attempt to contain the effects of civil war. Major liberalization measures were introduced through stabilization and structural adjustment programmes between 1989 and 1991. The major policy changes included restrictive monetary policy, liberalization of the exchange rate, elimination of quantity controls on foreign trade, tariff reduction and an end to state marketing monopolies for sugar and coffee. Further liberalization measures in subsequent years included privatization of commercial banks and the major parastatals involved in export crops (coffee, sugar and cotton).

In a major reversal of previous policy, the government announced in early 1995 that it intended to fix the exchange rate to the US dollar, as a step towards the "dollarization" of the economy. Whether or not this mechanism succeeds in making El Salvador relatively more attractive to United States foreign investors than its neighbours, it leaves the country out of step with the flexible exchange rate regimes of the rest of Central America.

With regard to agricultural policies, it could be argued that El Salvador went further in liberalization and deregulation than any other country in the region. There is little intervention in grain markets, although a variable import levy was introduced as part of the regional agreement on tariff policy. The government also established a strategic grain reserve to enhance price stability.

Guatemala. As discussed in the section International and regional factors, p. 140, the Government of Guatemala vigorously applied itself to improving market access and prices for coffee and bananas. It is probable that the government's criticism of the side-agreement on the EC banana market influenced Costa Rica and Nicaragua to reconsider their participation. Structural adjustment measures were initiated in the mid-1 980s, although not with the dramatic liberalization impact that occurred in El Salvador or Nicaragua. The mild degree of adjustment resulted from the relatively low level of state intervention in Guatemalan markets.

Along with Costa Rica and El Salvador, the Government of Guatemala introduced changes in the marketing of grains. In addition to applying the regional variable import levy mechanism for yellow maize, rice and sorghum, the government stripped the domestic price stabilization board of important marketing functions. Liberalization of grain trade did not go smoothly; as a result of disagreements with its neighbours over the price band mechanism, Guatemala introduced temporary non-tariff restrictions on grain imports.

The liberalization of agricultural trade has not been equally matched by deregulation in domestic markets. Government bodies continue to set support prices for wheat, sugar and cottonseed, although these are implemented with the consent of producers. Proposals to eliminate domestic regulation and tariff protection for wheat went before the legislature in 1994, but no action was taken.

Honduras. Like Guatemala, Honduras entered the crisis-prone 1980s with a tradition of being a non-interventionist state. What price controls existed in law had little impact in practice. As a result, policy adjustment tended to focus on macroeconomic policy and tariff reduction. In 1990, the government began a formal, externally supported adjustment programme whose main measures were the elimination of ineffective price controls on consumer goods, reduction in the role of the state marketing institutions, reduced import duties, exchange rate liberalization and contraction of the fiscal deficit. With the purpose of stimulating output, in 1992 the government introduced an agricultural modernization law, the primary focus of which was on reducing state intervention. Since intervention was not great before the law, its impact is likely to be small.

Economic policy in the 1990s lacked a clear focus, both in general and with respect to agriculture. After maintaining a fixed exchange rate during the 1980s, the government shifted policy in the 1990s. However, the auction system begun in mid-1994 increased controls over foreign exchange as much as it liberalized them, since it required documentary evidence that private-sectorheld foreign currency derived from either the auction or other formal markets. In trade policy, Honduras reduced tariffs, as noted, but also applied non-tariff measures to block imports of poultry and maize from the United States in 1992 and 1993, and in 1993 it placed restrictions on imports of vegetable oils from other Central American countries.

These shifts in policy, including the reintroduction of consumer price controls for two months in late 1993, suggest that the government had yet to reach a consensus on a general policy framework for the agricultural sector.

Nicaragua. Like El Salvador, Nicaragua had a highly regulated economy throughout the 1980s. During the last two years of the Sandinista government major steps were taken to liberalize domestic markets which, in the context of a war economy, contributed to the subsequent hyperinflation. Once armed conflict ended and military expenditure could be reduced, the fiscal deficit dropped dramatically and relatively low inflation was achieved from 1992 onwards.

The Chomorro government continued the liberalization process with increased vigour, deregulating foreign trade, abolishing state monopolies and privatizing public enterprises. In the context of multilateral conditionality the government eliminated price supports to agricultural producers, stopped credit subsidies and dismantled the remaining controls over consumer prices. As a partial replacement of the previous price support programme, the government adopted the regional variable import levy scheme for maize, sorghum and rice. While on the one hand these measures made the Nicaraguan economy more liberalized in some ways than those of countries that had begun adjustment earlier, the trade regime included a mixture of free trade elements and ad hoc export promotion measures. These ad hoc measures in part explain the impressive growth (albeit from a very low base) of nontraditional agricultural exports in the 1990s.

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