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LATIN AMERICA AND THE CARIBBEAN

REGIONAL OVERVIEW

Recent economic and financial trends indicate an overall marked improvement in Latin America and the Caribbean’s economic situation and prospects. At an estimated 3.5 percent in 1996, economic growth rebounded significantly from the depressed 1.3 growth the previous year, and is expected to accelerate to 4.4 percent in 1997 and further to more than 5 percent in 1998. However, performances varied across countries and subregions. The largest economies – Argentina, Brazil, Colombia and Mexico – expanded at rates of 3 to 4.5 percent, although in Argentina and Mexico such rates only represented a partial recovery from the decline in economic activity the previous year.42 Among Andean countries, the Bolivian economy continued to expand at sustained rates of around 4 percent, while growth in Ecuador and Peru was only about 2 percent, a marked downturn in relation to previous years in the latter country. Chile’s economy remained buoyant, expanding by more than 6 percent for the fifth time in the past six years and by an average 7 percent over the period 1991-96. Growth slowed down in most countries in Central America, while still remaining at fairly healthy rates of 3 to 3.5 percent in Costa Rica, El Salvador and Honduras.

Within the Caribbean area, performances appeared to have improved overall, despite wide variations across countries. The Dominican Republic and Cuba achieved growth rates of more than 7 percent, resulting chiefly from dynamic performances of the communications, construction and agricultural sectors in the former, and of sugar and tourism in the latter. The economies of Barbados, Guyana and Santa Lucia also expanded at very fast rates, while Haiti returned to positive growth after three years of catastrophic recession, but Jamaica continued to stagnate.

Figure 11A

Figure 11B

The region continued to achieve encouraging progress towards price stability. Average regional inflation fell to 25.5 percent in 1996 and was expected to fall to 19.3 percent in 1997 and further in 1998. Most remarkable was the performance of Brazil, where consumer prices only rose by about 10 percent in 1996, down from 22 percent in 1995 and hyperinflationary levels in earlier years. Capital inflows, including a large FDI component, increased significantly, as investor confidence was boosted by the continuity in economic policy since the Mexican crisis. Indeed, capital inflows rose to an estimated $50 billion in 1996, more than offsetting the current account deficit (which represented 2 percent of GDP) and thus enabling a considerable increase in foreign exchange reserves. The rapid recovery since the crisis stemmed from strong investment and export growth, rendered possible by the stronger initial position of the region’s economies following economic reform. Within this generally favourable picture, a number of latent problems and uncertainties persist. The revival of economic activity has not translated as yet into any reduction in unemployment which, on the contrary, continued to rise throughout the first three quarters of 1996, after having also increased considerably in 1995. The strengthening of the exchange rate in many countries of the region43 has helped to check inflation but has also inhibited export growth. The continuing difficulties in balancing government budgets in several countries may be accentuated by the tendency of governments to overspend during favourable periods. The international trade climate also presents negative aspects and uncertainties for the region. In particular, the terms of trade of non-oil exporters deteriorated markedly as the net result of declining prices of basic commodities, higher oil prices and lower inflation rates in industrialized countries.

The agricultural sector

The agricultural sector of the region continued to expand at a relatively robust rate in 1996, following two years of above-average growth. Total regional food and agricultural production rose by an estimated 3.2 percent in 1996, less strongly than in 1994 and 1995 (4.9 and 4.4 percent, respectively) but still significantly above longer-term trends (about 1.9 percent annually during 1981-1990 and 1.4 percent during 1990-1994). Despite significant variations across countries and commodities, the general picture is one of widespread recovery of the agricultural sector, observable in both food and non-food agricultural products.

The relatively strong performances of regional agricultural production for three consecutive years, after a long period of mediocre growth, have raised expectations for the possible emergence of a more favourable trend. However, such a short time span of recovery does not allow any conclusive assessment of the importance of transient market and climatic factors vis-à-vis progress of a more structural nature, associated in particular with economic and agricultural reform. Such an assessment is also difficult in view of the wide variations in performance and policy factors affecting such performances. Behind the relatively strong growth in 1996 were bountiful harvests in Mexico and Argentina, relatively good ones in Brazil, a marked slowdown in production growth in Chile and shortfalls in Colombia and a number of smaller producer countries. Among the main commodities, cereals and sugar cane showed vigorous growth and coffee staged a strong recovery, while cocoa bean production fell for the second consecutive year and that of roots and tubers also declined. Finally, while the process of liberalization is widespread across countries, there are significant differences in the pace and depth of this process as well as in the mechanisms of support to agricultural and rural development, as reviewed in the following section.

Developments in agricultural policies

Food security has been a recurrent theme in the policy formulation and implementation of Latin American and Caribbean countries. The recent past has seen the introduction and strengthening of numerous concrete initiatives addressing various dimensions of the problem. These range from measures focusing on specific aspects – such as the efforts in El Salvador to bring large idle areas in the eastern region back to grain production – to integrated food security programmes such as those found in Venezuela and Honduras, where national food councils have been created. In line with the general policy framework provided by the World Food Summit Plan of Action, these councils are in charge of formulating national food security plans which define strategies, objectives and programmes for the public sector organizations concerned, with the participation of national NGOs. In addition, a bill on agricultural development and food security, covering all sectors of society, has been elaborated in Venezuela by a presidential commission with FAO expert advice. This legal instrument is to be submitted for approval to the Congress of the Republic in order to be converted into law.

National food security was also addressed through a variety of policy measures put into place to stimulate food and agricultural production. Despite the general move towards market liberalization, many countries have continued to implement price support programmes in favour of crops considered to be of importance for food security. Milk, rice and sugar benefit from the highest levels of protection, particularly in the Andean countries, while wheat, maize and soybeans are also widely protected in these and other countries in the region. The degree of such intervention, however, varies considerably. While countries such as Colombia, Venezuela and Ecuador have maintained a relatively active sectoral policy, Bolivia and Peru take a more liberal approach and Argentina no longer intervenes in any direct agricultural support programme, except in the case of tobacco producers who benefit from a special fund collected through taxes on cigarettes. In Mexico, support is provided through the rural alliance programme Alianza para el Campo, which encompasses action carried out under PROCAMPO and PRODUCE (programmes of direct and productive support for the rural areas) as well as other support service programmes. Alianza para el Campo was introduced in the context of a decentralization drive that allows better cooperation between the federal and state governments and the private sector to create income opportunities in rural areas and reduce income disparities. The Colombian Government has continued to implement agricultural support programmes in the form of minimum guaranteed prices for white maize, paddy rice, dried beans, soybeans and sesame seed. The objective remains, however, to align domestic prices gradually with international prices so that farmers’ decisions are based on market realities.

Similar concerns are found in other countries where the objectives of agricultural support and liberalization require, in many cases, difficult policy choices. The Costa Rican Government has been facing pressure to slow down the pace of reform or provide more compensatory assistance to those negatively affected by liberalization. Several associations and groups of producers have been campaigning for the promotion of basic foodstuffs production, including rice, beans and white maize, in response to the country’s growing dependence on food imports and the high prices for several of these products. In the Dominican Republic, price support programmes have been reduced reflecting the overall liberalization drive, budget constraints and management problems and indebtedness on the part of the price stabilization authorities. Direct support to the small farm sector has also been reduced and confined to emergency programmes in case of severe price declines. Small farmers also benefit from a limited distribution of seeds and some access to mechanized equipment.

In Brazil, a new round of deregulation for the crop year 1996/97 included the phasing out of minimum prices, henceforth restricted to small farmers. The government is devising legislation to allow the privatization of government-owned storage facilities. The abandonment of commodity purchasing and selling under price support is expected to result in considerable savings for the Treasury as well as the elimination of the complex problems and disputes that surfaced when dealing with warehouse and transport operators. The reform of agricultural finance has involved the elimination of cheap credit and farmers will now have to base their production decisions more on market expectations.

The progressive reduction of direct support interventions has shifted the focus of policy-makers towards alternative ways of favouring agriculture that emphasize modernization and competitiveness. Argentina has been able to gain competitiveness in international markets following the virtual elimination of export taxes and major improvements in rail service and port facilities. Current policies in Chile aim at modernizing traditional sectors that have shown lagging performances (grain, oilseeds, beef, sugar beet) and expanding and diversifying export products and markets. This is to be achieved through a set of programmes that were announced by the President of the Republic in May 1996, and that include improving rural infrastructures, emphasizing research and technology transfer, the further refining of marketing systems, lowering duties on farm inputs and modernizing credit and financing systems in favour of small farmers. The promotion of high-value products with great market opportunity remains a key element in the country’s strategies. According to estimates quoted by the Minister of Agriculture, Chile’s agricultural and forest product exports could double in 15 years to $12 billion. In Paraguay, there is serious concern for the crucial cotton industry, which faces problems of low productivity, falling competitiveness in world markets and vulnerability to shocks and depressed conditions in international markets. As a measure to promote productivity, the government has introduced a programme to modernize production, with the stated goal of mechanizing 10 000 ha per year. Major difficulties have been encountered in trying to meet this target, however, given the poor topology of large areas cultivated with cotton. In El Salvador, significant increases in the budget for research and technology dissemination through the National Agricultural Technology Centre (CENTA) are expected to provide long-term impetus to food and agricultural development. In Cuba, efforts are being made to improve management systems and efficiency in the Basic Units of Cooperative Production that are replacing state farms.

A major limiting factor to modernization of the sector has been, however, the lack of adequate financing for agricultural investment, accentuated in many cases by the withdrawal of the public sector from agricultural credit operations. This is the case in Colombia, where private investment continues to be hindered by high interest rates, farmers’ indebtedness and difficulties for many farmers in gaining access to commercial bank credit. Similarly, while interests on commercial credit in the Dominican Republic declined in 1996 in relation to the previous year, they remained unaffordable for most farmers. In Brazil, private credit at high interest rates has represented a considerable financial problem for the large number of highly indebted farmers as well as those dependent on production loans. As a measure to alleviate these problems at the farm household level, a national credit scheme to strengthen family farming (PRONAF) was instituted in May 1996. In Honduras, the National Complementary Guarantee Fund was established in 1996 to guarantee financing for agricultural production and marketing activities. About 70 percent of the guarantees will be geared towards basic grain production. In Cuba, a shortage of finance continued to be a major constraint affecting agriculture as well as other economic activities, although some agrifood sectors, such as the depressed dairy industry, have recently attracted badly needed FDI.

Credit shortages have affected farmers even in Argentina and Uruguay, despite favourable market conditions for the main traded products of these countries and widespread optimism over their agricultural outlook. In Uruguay, the record level of farmers’ requests for loans from the Banco de la República in 1996 is an indicator of farmers’ optimism regarding the country’s agricultural prospects and their willingness to invest in a broad range of agricultural activities. In the case of Argentina, record crops of cereals in 1996 and unprecedented earnings enabled many farmers to expand their use of inputs and modern machinery, improve infrastructure and restructure debt. However, many medium and small farmers and producers of crops other than cereals and oilseeds continued to face serious indebtedness. Although no comprehensive scheme of debt refinancing is being contemplated, the Argentine Government is examining the problem of farm indebtedness on a case by case basis. The situation in Peru, discussed in the following section, illustrates a problem faced by many other countries, that of inadequate financing for agriculture and poor access to credit, particularly for small farmers, in the new context of liberalized capital markets.

As regards the external sector, policies have continued to emphasize trade openness, although a degree of protection continues to be granted to crucial agricultural activities, and trade restrictions are still applied in various forms. As a means to reduce external account imbalances, the Brazilian Government has slowed down import licences and eliminated the export tax on raw and semi-processed agricultural products. In Colombia, interventions continue to be applied through price bands, or variable duties, and import licensing. A sharp reduction in the production of many crops in 1996, contributing to an estimated 1 percent decline in overall agricultural production, was largely attributed to competition from imports and declining profitability of crop production which caused the diversion of land use towards alternative activities. In the Dominican Republic, despite some relaxation in the trade regime, restrictions continue to be imposed in the form of import certificates and high tariffs to protect a number of commodities, such as maize, sugar, poultry, potatoes, swine and rice, considered critical to the country’s economy.

El Salvador has continued its liberalization policies: the harmonization of tariffs with other countries within the Central American Common Market (to a range of 5 to 20 percent) and the elimination of all import and export permits have been important steps in this direction. Current plans are for a gradual reduction of tariffs to a range of 1 to 6 percent by 1999. A flat 20 percent tariff has been imposed on all basic grains except maize, for which a seasonal tariff mechanism is applied to safeguard domestic producers. In order to counter the decline in coffee prices and the formation of excess volumes of coffee in the market, producers of this commodity introduced a plan to install sales on a quarterly basis, and quarterly exports are being regulated by a Coffee Council. Moves are under way to privatize the remaining government-controlled sugar mills which operate less efficiently than private ones. Government action has strongly emphasized the development of non-traditional agricultural exports such as fresh fruits, flowers, organic coffee and sesame seeds, particularly through cooperative work between the private sector and the Foundation of Salvadoran Economic Development (FUSADES).

In Ecuador, WTO membership is expected to enable greater access for agro-industrial products and thus boost the agricultural sector overall. Lower tariffs on imported inputs and machinery are also likely to lower costs and promote competitiveness.

Following the signature by Central American countries of a Tariff and Customs Regime Agreement in December 1995, a number of duty reductions for selected capital and raw materials were implemented in the course of 1996. The agreement authorized the reduction of tariffs for capital and raw material products, at the discretion of the countries concerned, from 5 to 1 percent as of 1 January 1996. For intermediate and finished goods, the reduction may be from 20 to 15 percent. The agreement is part of a liberalization process accelerated by the strong reduction of tariffs which El Salvador implemented unilaterally in 1994 and which raised the issue of the extent to which other Central American countries should follow suit.

As of 1 January 1995, with some exceptions, customs duties among Argentina, Brazil, Paraguay and Uruguay, the member countries of the Southern Common Market (MERCOSUR) were eliminated, and a common tariff for most products was implemented. The exceptions to the agreed tariffs are expected to disappear by 2006. Following negotiations that were successfully concluded in the course of 1996, Chile (1 October 1996) and Bolivia (1 January 1997) became Associate Members of MERCOSUR. Negotiations are also under way with other Andean Pact countries to develop a duty-free trade relationship. For Chile, association with MERCOSUR means assured access to a market of 200 million consumers, and hence major opportunities for market diversification and export expansion. While the modern agro-industrial sector is likely to benefit considerably from this association, some sensitive traditional production sectors will need to adjust to trade competition with Argentina. Such adjustment is to be facilitated by the extended periods, 10 to 18 years, that were allowed for duty reduction as well as by the new programmes of investment in rural infrastructure.

Under Chile’s price band system, intended as a mechanism for price stabilization, tariffs on wheat, sugar and vegetable oils had been raised in 1995 in line with the decline in prices of these products below predefined levels. With the subsequent strengthening in prices, however, no tariffs were applied to these products in 1996.

In Uruguay, dairy and livestock products have expanded significantly in recent years owing to strong demand in the United States and other developed countries and preferential access to Brazilian markets in the context of MERCOSUR. Argentina’s agricultural exports have also benefited from trade intensification in the context of MERCOSUR.

Another important issue addressed by regional policy-makers has been that of environmental conservation, including the preservation of biodiversity and reforestation. Recent initiatives in this area include a long-term forestry action plan, introduced in Honduras in 1996 and comprising strategic programmes in ten different areas of the country. About 1 million ha of forest area are affected by the management plan. The Forestation and Reforestation Incentives Law provides for fiscal and other incentives for such activities.

With annual exports in the order of $2 billion, the forestry sector in Chile is the country’s third largest source of foreign exchange. Plantations of fast-growing species cover 1.95 million ha and natural forests an estimated 12 million ha. The annual rate of reforestation (more than 100 000 ha) largely exceeds that of forest exploitation (about 50 000 ha). About 85 percent of cuts for industrial purposes (estimated to be 25 million m3 annually) are made in plantations, and the conversion of natural forest into plantation area has only affected 132 000 ha over the past 30 years. The national norms for forest exploitation have been increasingly severe. Under a provision recently incorporated in national legislation, any intervention for industrial purposes that affects forest resources will be subject to a specific environmental impact study.

In Mexico, soil erosion (about 80 percent of farmland is sensitive to soil erosion), depletion of water resources and biodiversity losses are serious problems that are largely associated with agricultural activities. These problems have given rise to discussions concerning the establishment of a comprehensive scheme that ensures agro-environmental sustainability. At present, only isolated regulations exists in this direction, such as the registration of pesticide toxicity.

PERU

General characteristics

Peru is divided topographically into three regions: an arid coastal plain, the Andean highlands and the eastern lowlands consisting of subtropical forest. This means that almost any crop can be cultivated in the country. Around 3.4 million ha are estimated to be arable and permanent crop land, of which almost 40 percent is irrigated. The area actually sown has fluctuated in recent years around 1.5 million ha, falling to a low of 1.1 million ha in 1992, a year of particularly severe drought. Agriculture contributes about 13 percent of GDP. Nearly 40 percent of the economically active population is employed in agriculture.

Peru’s 1993 census gave a mid-year population of just over 22.5 million inhabitants, including an estimated 532 000 not contacted by census officials and an estimated 60 000 forest-dwelling Indians. The population growth rate averaged 1.8 percent between 1990 and 1995.

Seventy percent of the Peruvian population now resides in urban areas, up from 65 percent ten years ago. A large percentage of Peruvians were forced to abandon their homes in the rural areas owing to the serious threat of guerrilla movements and the low standard of health care and educational facilities that are usually lacking in the rural communities. This trend towards urbanization is expected to continue, but at a reduced rate, since more peaceful conditions prevail and the overcrowded shanty towns are now less attractive to potential migrants.

The proportion of the population living in poverty (defined as those living on $65 per month or less and unable to cover basic food, clothing, housing and transport requirements) dropped from 54 percent in 1990 to 50 percent in 1994 and again to 49 percent by mid-1995. This was primarily due to rapid economic growth and the government’s social development projects. However, progress in reducing poverty is likely to have stalled owing to slow economic growth in 1996.

There have been some advances in health care over the past few decades. Life expectancy at birth, for example, rose from 47 years in 1960 to 69 years in 1995 (71.1 years for women and 66.2 years for men). Improvements in health care have reduced the infant mortality rate from 109 per 1 000 in 1972 to 48 per 1 000 by the end of 1996. Nutrition levels, however, remain low for large segments of population. In 1995, one-fifth of all Peruvians (4.7 million) were unable to meet basic nutritional needs. Child malnutrition, measured by height and weight statistics, remains a serious problem, especially in the remote rural districts.

Public education standards are among the worst in Latin America. This is especially seen in the rural areas where terrorism and a lack of discipline among poorly paid teachers have cut teaching hours drastically. According to the 1993 census, 7.8 percent of the population (1.78 million) were illiterate, of which 1.3 million were women. The overall illiteracy rate was 29.8 percent in rural areas, compared with 6.7 percent in urban areas. Now that the Peruvian economy has opened up and companies have been forced to compete in the international marketplace, improving education – particularly primary education – has become a priority. In 1995, the budget allocation for education was 3.9 percent of GDP, up from 2.1 percent in 1990.

Economic developments and policies

The Government of Peru is confronting the difficult task of consolidating economic stabilization and recovery after the disastrous experience of the 1980s, a period marked by deep economic recession, civil unrest and terrorist activity. This period was also one of poor agricultural supply performances which, added to the declining food import and consumers’ purchasing capacity, resulted in a marked deterioration in the country’s food security situation. Although the economic and food security conditions have improved significantly in recent years, full recovery to pre-crisis levels remains to be achieved. Indeed, the strong economic growth of recent years must be considered against the background of a 29 percent fall in per caput GDP during the 1980s (ECLAC estimate).

The immediate causes of the economic crisis of the 1980s were a series of unusually adverse events in the early part of the decade. A steep decline in world prices of the country’s main export commodities and rising interest rates for its burgeoning foreign debt coincided with a devastating El Niño in 1982-198344 and a rise in guerrilla movements that required the diversion of ever-increasing resources towards military and reconstruction operations. Although the government aimed at market liberalization, its reform programme was frustrated by the need to place priority on short-term objectives of economic stabilization and the control of violence and civil unrest. Popular resentment over austerity measures led to the defeat of the governing party in the 1985 presidential elections.

With the rise to power of the American Popular Revolutionary Alliance (APRA) in 1985, a radical policy shift took place. The government adopted a heterodox approach to macroeconomic management in which income redistribution and social equity considerations played a major role. Economic policy was based on the premise that inflation was primarily a "cost push" problem, as ample margins existed for boosting demand-led growth by expanding expenditure capacity, particularly among the poor. It was also considered that the costs of adjustment – not the least the huge debt-servicing obligations – were not only socially unacceptable but were the primary obstacles to sustained recovery. Thus, fiscal and monetary policies became markedly expansive and wages initially rose significantly in real terms. In the agricultural sector, considered a priority area, abundant credit in addition to remunerative farm prices was made available under extremely favourable conditions. In order to contain production costs and ensure an adequate supply response, a stable exchange rate was maintained while a number of input prices were controlled. The financial costs of such a programme were to be covered by a unilateral decision to devote no more than 10 percent of the export earnings for servicing the foreign debt of $14 billion – a decision that shocked the international financial community, making Peru ineligible for future loans and credits – and by drawing from what were, at the time, relatively large international reserves.

These policies were initially successful to the extent that GDP growth rose from 2.3 percent in 1985 to 9.2 percent in 1986 and 8.5 percent in 1987 while the inflation rate fell from 158 percent in 1985 to 63 percent in 1986. The agricultural sector also benefited from a gain in domestic terms of trade, since controlled prices rose by 25 percent while non-controlled prices (mainly those of agricultural products) rose to nearly 100 percent.

However, as the utilization of productive areas reached full capacity, the unsustainability of such demand-led growth policies became evident. GDP fell by 8.3 percent in 1988 and by a further 11.7 percent in 1989, more than offsetting the gains of the previous two years. Prices entered an accelerating spiral that turned progressively hyperinflationary: consumer prices rose by 114 percent in 1987, 2 775 percent in 1988 and more than 5 300 percent annually during the last six months of the APRA administration. The public sector deficit more than doubled from 3 percent of GDP in 1985 to about 8 percent in 1987-89; international reserves were depleted and fiscal expenditure was increasingly financed by primary monetary emission. As low-income groups and wage earners were hardest hit by recession and hyperinflation, the process ended up negating the very distributional equity objectives of the government. The end of the APRA term was marked by political confrontations (even within the ruling party itself), a series of crippling general strikes and a widespread call for "change".

The new administration that entered into force in the 1990s introduced another radical policy shift towards stabilization and market-oriented reform. The reform programme entailed the privatization of state-owned companies, drastic reductions in public sector employment, the elimination of price controls and state subsidies and financial and monetary restraint. While these measures initially exacerbated inflation and economic recession, some months later positive results began to emerge. After having fallen by nearly 5.4 percent in 1990, GDP rose by about 3 percent in 1991, fell again in 1992 but expanded vigorously by, respectively, 6, 13 and 7 percent in the following three years, thus producing the highest growth rates in the region. A marked slowdown to 2.8 percent was recorded in 1996, reflecting measures to contain the current account deficit, maintain the fiscal equilibrium and cool an overheating economy. The government forecasts 4 to 5 percent annual growth for the rest of the decade, which would be a less spectacular but more sustained performance than in 1993-95.

Particularly dramatic results have been achieved in price stabilization. Consumer price growth fell from the 40 percent monthly rates of the early 1990s to yearly rates of about 15 percent in 1994 and about 10 to 12 percent in 1995 and 1996. The official target for 1997 is 9 percent.

As regards external accounts, trade liberalization resulted in a strong upsurge in imports of capital and consumption goods which, together with depressed prices of Peru’s commodity exports, caused a strong deterioration in the trade balances in 1990-93. Although the commodity boom of 1994-95 enabled a significant expansion in exports, both the trade and current account deficits continued to widen. On the other hand, stabilization and better prospects for recovery prompted a return of investors’ confidence and consequently induced a turnaround in net capital inflows, which went from a negative $6.14 billion in 1991 to a positive $1.92 billion in 1994.

Peru’s external debt was estimated to be $22.6 billion in 1994 (about 50 percent of GDP), of which $17.9 billion was long-term public and publicly guaranteed debt. Short-term debt amounted to $3.5 billion. After having defaulted in its external debt servicing from 1985 to 1990, Peru resumed payments to official creditors in 1991. Debt servicing represented around one-fourth of exports in both 1991 and 1992, 60 percent in 1993 and 20 percent in 1994. A number of rescheduling agreements have been negotiated in recent years, bringing welcome relief.

In particular, an important agreement in December 1996 along the lines of the Brady Plan was expected to reschedule debt in highly favourable terms, settle all remaining debt disputes and allow Peru to gain access to world commercial credit markets. Nevertheless, debt repayment obligations are still a major financial burden.

The dismantling of guerrilla and terrorist organizations in recent years has been an important factor contributing to economic stabilization and recovery – the recent retention of hostages at the Japanese Embassy in Lima being a dramatic but isolated, episode of organized terrorism. The outlook remains fraught with uncertainties, however. Social hardship associated with reform has so far been tolerated as the unavoidable cost of overcoming economic disorder and setting the basis for recovery. Nevertheless, the economic slowdown in 1996 and prospects for moderate medium-term growth are raising concern about the country’s capacity to reduce unemployment and poverty to the extent and speed needed for maintaining political and social stability.

Agricultural sector performances and policies prior to 1990

Despite the importance of agriculture as a contributor to economic growth and employment, the long-term performances of the sector have been generally poor. Agricultural GDP increased at an average annual rate of 2.1 percent in 1950-89, well below the growth rates of manufactures (3.8 percent), mining (3.8 percent), services (3.5 percent) and population (2.6 percent). Food production barely kept pace with population growth, and some periods, particularly 1971-80, brought pronounced declines in per caput food production. Inadequate domestic supplies required growing recourse to food imports, which increased in volume by about 4, 9 and 3 percent annually during the 1960s, 1970s and 1980s, respectively – the lower growth rate in the latter period reflected somewhat better production performances and foreign exchange constraints. Overall, however, food imports were unable to prevent a deterioration in the population’s food consumption levels. Indeed, per caput food intake fell from 2 317 kcal per day in 1969-71 to around 2 200 in 1979-81 and less than 2 000 in 1990-92. Consequently, the proportion of undernourished people increased from 20 to 49 percent of the population between 1969-71 and 1990-92 (FAO estimate).

While the poor agricultural performances prior to 1990 reflected many developmental and natural resource constraints as well as external shocks and influences, the policy factor played a major role. The pronounced interventionism that characterized government policies until the early 1990s often had a marked anti-agricultural bias which was only partially compensated by direct farm support. This neglect of the sector explains, to a large extent, the high degree of productive inefficiency and poverty still prevailing in rural areas.

The distortions affecting the sector were accentuated during the second half of the 1980s, a period of particularly strong public sector involvement in markets, prices and credit. Current attempts to redress the anti-agricultural bias implicit in previous development models and to place agriculture in an undistorted economic and market environment must be assessed against such a historic background.45

The 1985-1990 period

Government action from 1985 to 1990 had actively sought to stimulate farm incomes, investment and productivity through various price, credit and other support mechanisms. Price support, the fundamental instrument for promoting production, was provided through the agricultural and food security programme, the Programa de Reactivación Agropecuaria y Seguridad Alimentaria (PRESA). The main elements of PRESA were: the purchase of staples (maize, potatoes, wheat, barley, quinua, beans and peas) at guaranteed prices in targeted regions;46 the creation of strategic stocks of potatoes, maize and other Andean products subject to wide price fluctuations; monopoly importation of wheat, maize, sorghum, dairy products and vegetable oils by a national marketing enterprise; the elimination of food import subsidies and the introduction in 1986 of a 15 percent additional tariff on imports of these products. Price control was exerted on a number of basic foodstuffs.

The high costs of market regulation were to be "internalized", i.e. covered by revenues obtained from importing food at preferential exchange rates and the tariffs charged to such imports. However, as such forms of revenue proved insufficient, intervention was required on the part of the Treasury.

An essential means for reducing production costs was the strong subsidization of imported fertilizers and pesticides. Between 1986 and 1987 the implicit subsidy to fertilizer imports through preferential exchange rates doubled in real terms, coming to represent an estimated 0.7 percent of the agricultural GDP. In addition, the direct subsidy to urea and other fertilizers was estimated to be 0.6 percent of the agricultural GDP.

Considerable amounts of agricultural credit were made available at interest rates below inflation rates, implying again heavy and growing subsidization.47 The main source of credit was the Agrarian Bank, with the private banking sector playing a minor role. Loans by the Agrarian Bank between 1985 and 1990 amounted to a total of $2 950 million, about 27 percent above the levels of the previous five years. At their peak in 1987, loans by the Agrarian Bank totalled $1 576, out of a total agricultural credit of $1 824 million. About 2.4 million people were employed in agriculture during the period 1985-1990. As a result, each of them received on average $250 per year and as much as $760 in 1987 – the latter figure being above the average farm wage. The distribution of these loans, however, was far from even. Most went to medium-sized and large farms located in the coastal region which were richer in resources and technology and better integrated in domestic and international markets. Small producers had virtually no access to credit, except the onerous loans they could get from informal sources. A major impediment to creditworthiness was the inability of farmers to use land as collateral for loans, owing to regulations under the Agrarian Reform Law of 1969. Indeed, a survey found that only 16 percent of rural households were able to obtain some form of credit, and the formal sector was the source of such credit in only 50 percent of cases.48 Furthermore, large amounts of credit were utilized outside agriculture, and frequent cases of non-payment and cancellation of debt obligations required ever-increasing transfers from the Central Reserve Bank.

In summary, it appears that the Agrarian Bank was largely unsuccessful in its attempts to promote agricultural production cost-efficiently and self-sustainably, and it may in fact have contributed significantly to accentuating disparity in rural incomes.

The market, price and credit policies had varied degrees of success but, on the whole, do not appear to have contributed much to improving conditions in the farm sector. A comparison between prices received by producers and import prices, including transport costs, between 1985 and 1990 suggests that a considerable negative subsidy (tax) was in fact paid by producers of the main agricultural products. In other words, direct price support was unable to compensate farmers for the gains they would have achieved from unprotected markets.

Domestic agricultural terms of trade (price relationship between overall wholesale and farm prices) showed significant variations by product, region and period. The general trend was, however, a marked improvement until 1987-88, followed by an even more marked deterioration so that, by the early 1990s, agricultural terms of trade were below the levels of 1985. Real farm incomes (farm product value deflated by wholesale prices) reveal a similar pattern: strong gains were recorded between end-1985 and end-1987 and, again, the subsequent fall brought income levels down below those of 1985.

Agricultural performances and policies since 1990

Following a period of sluggish growth (1 percent annually during 1981-90) agricultural GDP rose by an accumulated 20.7 percent between 1990 and 1995 (4.8 percent annual average). After a sharp contraction in 1991-93, when bad weather49 added to the first impact of stabilization and structural reform, a vigorous rebound in agricultural production took place in 1994-96. Improved weather was a major reason for this recovery, but other market and policy factors also played a role. The most significant production increases were recorded for exportables, chiefly coffee and cotton, which benefited from better market conditions and prices. However, the production of non-traded food staples (maize, potatoes, sheep) also showed a robust growth. Agricultural trade also gained dynamism in recent years, on the side of both exports and imports.

It is difficult to assess the extent to which the favourable performances of the past three years constituted a cyclical recovery caused by weather and transient market factors, or the beginning of a new trend made possible by the new economic environment and policy framework. The present administration has repeatedly emphasized the need to extend free market principles to agriculture on the grounds that, in the long term, free markets and improved marketing infrastructure and services, together with a propitious environment for private investment, will do more for agriculture than direct credit, price and market support.

The reforms undertaken to liberalize input and product markets have included the reduction and harmonization of duties, the relaxation of price controls on inputs and food and agricultural products and the end of state marketing monopolies. Thus, the national input marketing board, Empresa Nacional de Comercialización de Insumos (ENCI), is in the course of privatization and the food marketing board, Empresa de Comercialización de Alimentos (ECASA), has been abolished altogether.

The government considers, nonetheless, that agriculture requires more active protection from international competition than any other sector, given the fragility of domestic farming after decades of neglect and unfair competition from highly subsidized sectors in many exporter countries. The main instrument of border protection is a system, introduced in 1991, of flexible import duties (sobretasas) on rice, wheat and flour, sugar, yellow hard maize and whole and skim milk powder. In April 1997 tariffs were increased from 15 to 25 percent on most imported food items and, at the same time, tariffs on agricultural machinery, equipment, genetic material and other inputs were reduced from 15 to 12 percent. While not explicitly designed to protect domestic markets, a number of sanitary and phytosanitary regulations also have the effect of restricting imports.

Contrasting with the maintenance of external protection, interventions in domestic markets have been virtually eliminated. Only occasional purchases of rice and potatoes are made in years of overproduction (as in 1993/94) under the national food assistance programme, Programa Nacional de Ayuda a la Alimentación (PRONAA). The objectives of PRONAA are of a primarily social nature, as the agency provides short-term relief to producers in periods of exceptionally poor price conditions, while also making indigenous foods available to very poor consumers. While PRONAA’s purchases are sometimes made at well above market prices, the volume of such purchases, and hence their overall impact on markets and prices, is very limited.

With the end of credit subsidization, a new system for agricultural financing has been established, comprising the Development Financial Corporation, a commercial bank that addresses the financial requirements of the modern agricultural sector, and the Cajas Rurales de Ahorro y Crédito (Rural Saving and Credit Funds), which provide credit to small farmers and rural workers. In addition, a transitory system of agrarian development funds, organized at regional government levels, provides credit to organized peasant farmer groups. Finally, the poorest peasant farmers in marginal areas benefit from rotating funds, which provide loans in the form of seeds, fertilizers, pesticides and production equipment.

An important development, with major implications for agricultural financing, has been the Law on Investment Promotion in the Agrarian Sector. This law marked the end of the restrictions to private landownership and enabled landowners to sell, loan or transfer their land. It is expected that the ability of landowners to use their land as collateral for loans will remove one major obstacle to investment in agriculture. However, while the process of formalizing land titles has significantly accelerated in recent years, much remains to be done.50 Another significant institutional development has been the issuance of the Water Law which no longer relates the use of water to land area and introduces provisions governing payment for water used by farmers.


BOX 9

THE FISHERIES SECTOR IN PERU

Despite having lost ground relative to other sectors over the past two decades, fisheries remains an important economic sector in Peru, with its contribution to GDP fluctuating around 1 percent in recent years, down from about 1.9 percent in 1970. In 1994 the sector contributed about 19 percent ($856.4 million) of total export earnings, with fishmeal ranking as Peru’s second most important export earner behind copper. The fisheries sector provides direct employment to an estimated 50 000 to 60 000 people, three-quarters of whom work in the fish capture sector and one-quarter in the processing sector.

The Peruvian stretch of the Pacific Ocean is one of the world’s richest fishing grounds. With an estimated catch of 12 million tonnes in 1994 and 8.9 million tonnes in 1995, Peru’s fisheries production is the second largest in the world, after China. The fishmeal processing and canning industry became a large foreign exchange earner in the 1960s and then experienced a sharp decline from 1970 to 1973. Sluggish performances ensued until the mid-1980s owing to a combination of overfishing and periodic appearances of the warm El Niño current. Production staged a recovery in the late 1980s, however, with catches returning to the levels of the late 1960s. The sector enjoyed two of its best years ever in 1993 and 1994.

Anchovies and sardines constitute the bulk of Peru’s catch, most of which is delivered to the fishmeal industry. Anchovies, in particular, account for about 80 percent of total production and are the largest single source of fish for reduction to fishmeal and fish oil. Traditional fisheries such as those for anchovy and sardine are excessive while others, such as those fisheries targeting horse mackerel and squid stocks (also abundant), still have potential for expansion.

Fishing and the production of fishmeal and fish oil came under government control in 1973. By 1990, however, the private sector had gradually worked its way back to producing half of Peru’s fishmeal. This process of liberalization has since continued and, by the end of 1996, ten of the state-owned fishmeal plants had been auctioned to the private sector.

The oil and fishmeal industry processes 90 percent of the national landings; it has an excess capacity despite the fact that some factories still use outdated technology and operate below their optimum capacity. In view of the limited potential for sustainably expanding the volume of catches, there is no justification to increase the total processing capacity, and future investments would be better aimed at improving and modernizing factories and processes by updating and replacing obsolete equipment. This would involve placing emphasis on the sanitary and hygienic aspects, improvements in handling and preservation of raw material, better yields and more efficient processes. Some enterprises are starting to produce special high-quality fishmeal, and this should be encouraged by paying due attention to market limitations.

As can be seen by the fish-oil and fishmeal industry alone, Peru’s fleet and plant capacity is considerably oversized, with around three times the necessary capacity of a bumper year such as that experienced in 1994. Any decision to increase the size of Peru’s fishing fleet needs first to take into account the availability of fish resources and the capacity to land, receive and market the catches. In fact, improving current facilities and processes should be the fishing sector’s first priority. In order to enter more developed and demanding markets, the canning industry, for example, which currently only uses 7 percent of its capacity, needs more modern technology and infrastructure to be able to produce low-cost products. The frozen fish industry, also with a large non-utilized capacity, has good prospects of expansion, since some products are well accepted in international markets. Improvements in the facilities for handling and treating fish, on-board and on land, will be needed to increase fresh fish production.

The last five years have actually wit-nessed somewhat of a revival in the fishing industry in Peru. Efforts have been made towards modernizing the poorly equipped and antiquated artisanal fishing fleet. Investments have included new fishing boats as well as high-technology plants for the production of prime-quality fishmeal used for fish farming and aquaculture.

There seem to be no major problems for increasing the internal trade of traditional industrial products, such as frozen and canned fish, but this is not the case for fresh fish or non-traditional products, which so far have not entered commercial marketing channels. There are good development prospects for the internal market, judging from population growth projections and the government’s intention to increase fish consumption, although this will require an improvement in landing, reception, storage, off-vessel sales, transport and marketing capacities and, consequently, heavy investment and state participation and support.

The export of a product that is of a higher quality and price and has a greater added value is an interesting alternative for the country. Expansion prospects for the international marketing of national fish products are generally good but, to a great extent, will depend on the improvements and modernization needed in several aspects of the capture and processing of fish as well as on better promotion of national fish products abroad.

In an attempt to work towards the sustainability of both the resource and the industry and to match FAO’s Code of Conduct for Responsible Fisheries, Peru’s Ministry of Fisheries has drawn up a new management and development plan. One important recent development has been the adoption of a licence scheme requiring payment for the right to fish. The proceeds from this scheme are intended to be used for monitoring fishing access rules and procedures as well as for research, the conservation and rational exploitation of the fishery resources and benefits granted to licence holders.


Despite all existing credit schemes and improvements in the economic and institutional environment, inadequate financing remains a limiting factor to agricultural modernization. The dismantling of the Agrarian Bank has created a vacuum that the government expects will eventually be filled by private financing sources. Private financing has been slow to develop, however, particularly owing to low profits from agricultural investment, relative to other sectors, and slow progress in land titling.

In the trade sector, current policies seek to stimulate an agricultural export sector that has been rapidly losing relative economic importance and to contain the deterioration of agricultural trade balances.51 The government has set the objective of increasing the value of agricultural exports to $1 billion by the year 2000, from levels of $400 million to $600 million in the mid-1990s. Much of this increase would be achieved through the liberalization of trade, investment and foreign exchange regulations, with the private sector leading the way. Other than traditional export products – coffee, cotton, vegetables and sugar – products with market potential such as fresh fruits, asparagus, flowers and Andean animal products are expected to gain a progressive market share.52 Although there is no direct state support for agricultural exports, a number of government programmes indirectly favour external competitiveness. In particular, the strengthening of the health authority, Servicio Nacional de Sanidad Agraria (SENASA), enables the promotion of exports through numerous phytosanitary and animal health activities.

Concluding remarks

The Peruvian Government can be credited with remarkable achievements in redressing what was, at the beginning of the 1990s, a chaotic economic, political and social situation. Its success in combating terrorism and violence has been an important factor in enabling these achievements.53 Government action has also created a less distortive basis for agricultural growth, while maintaining a degree of protection for the sector and for less-favoured segments of agro-rural society. By emphasizing infrastructural improvement, it has promoted marketing efficiency in a more effective way than previous mechanisms of direct intervention.54

Much remains to be done, nonetheless, to turn agriculture into a modern and competitive sector. Overcoming the complex natural, developmental and social problems involved will require, in the first place, the continuation of political stability that enables consolidating macroeconomic stabilization and reform. Pursuing reform that involves financial and monetary discipline is a particularly difficult policy option in a country afflicted by mass poverty and unemployment, as is Peru. This was recently illustrated by the set of measures implemented to cool down the overheated economy in 1996: regardless of their economic justification, these measures risked popular opposition owing to their short-term negative effects on growth, wages and employment.

Modernizing agriculture will also involve a reactivation of investment from both the public and private sectors. Public investment in agriculture has been declining55 and is likely to remain depressed until stabilization has been consolidated. Thus, the future of agricultural financing will much depend on the success of current public investment policies that emphasize the quality rather than the volume of public investment. Even more crucially, it will depend on the government’s ability to attract domestic and international private capital for financing, not only physical infrastructure, in particular irrigation projects and transport and marketing facilities,56 but also activities related to credit, research, extension and technology transfer. Such involvement of the private sector will require confidence in the overall political and economic environment as well as confidence in the agricultural sector’s potential as a profitable and competitive investment option.

Given the likelihood of continuing financial restraint and selectiveness in resource allocation, what should be the priority areas for agricultural financing? Perhaps the most authoritative opinion on this issue is that of farmers themselves. A recent survey explores what a representative group of successful Peruvian farmers consider to be basic ingredients for modernizing agriculture and gaining competitiveness.57 The following are seen as top-priority areas: extension, technology dissemination, entrepreneurial organization, credit and clear agricultural incentives. As second priorities, technical assistance, marketing efficiency and prices are mentioned. All these elements are, in the farmers’ opinion, still inadequately addressed by government policies, although it is recognized that, overall, the policy framework has created better conditions for agriculture.

That farmers place extension, technology and organizational issues at the top of their list of concerns is very interesting, since it suggests a shift in farmers’ perceptions of what is best for them, away from top-down direct state support. Such a new perception indicates awareness of the primary importance of human development and willingness by farmers to "help themselves" by acquiring technological and managerial expertise. This is an important message for policy-makers. There is ample evidence to confirm that agricultural extension can be, in many countries’ circumstances, the best way to achieve long-term development in both its economic growth and human resource components. Peru has a variety of public and private institutions that provide different forms of extension, technology transfer and technical assistance. Nevertheless, the system suffers from old inadequacies, and new uncertainties are emerging. Despite an abundance of extension personnel, very few are technically well trained and experienced. Key aspects such as post-harvest management, marketing information and linkages between extension and research are often inadequately addressed in extension programmes. Extension services fail to reach small-scale subsistence farmers, especially female-headed farm households and young farm families. Here, as in many other developmental problems, a common denominator is financial constraint. This raises two fundamental issues: i) the importance that should be assigned to agricultural extension compared with other areas that may give more visible and immediate returns on expenditures; and ii) what the role of the state should be vis-à-vis the private sector in the financing of extension, research and technology. While current policies emphasize a greater role of the private sector and NGOs and the creation of self-sustainable extension services, the viability of such an approach is contingent on the existence of profitable market opportunities. Indeed, the private sector has shown remarkable dynamism in importing technology and developing competitiveness, for instance for asparagus, broccoli, other vegetables and fruit. However, it is important that the reduced involvement of the state and the consideration of financial sustainability and cost-efficiency do not translate into reduced access to technological innovation and training for the vast majority of agricultural producers. These issues are particularly relevant in the context of the institutional reform under way and the efforts to develop a national plan for research and technology transfer.

42 Country data and estimates in this section are from the Economic Commission for Latin America and the Caribbean (ECLAC).

43 The real exchange rate was strengthened in 11 countries, while only five countries experienced a real devaluation.

44 The El Niño phenomenon, manifested in a rise in temperature of the ocean off Ecuador and Peru, occurs at intervals of several years. However, in 1982 El Niño started in October and continued throughout 1983. Through ocean-atmosphere interaction, it was associated with major natural disasters across the world and, in Peru, agricultural production shortfalls, devastating mud slides and a fall in fish stocks. Note: By mid-1997, there were signs that a particularly severe El Niño, perhaps the worst in the century, would occur late in the year.

45 The following section largely draws from: J. Escobal D’Angelo. 1992. Impacto de la política de precios y de crédito agrícola sobre la distribución del ingreso en el Perú: 1985-1990. Lima, GRADE.

46 The volumes of production purchased by the government at guaranteed prices represented in some cases a significant share of total production, but then tended to diminish markedly by the late 1980s. For instance, the shares at their peak levels in 1986-87 were around 50 percent for sorghum, 66 percent for soybeans, 25 percent for maize and 15 percent for wheat.

47 Subsidies through agricultural support credit by the Agrarian Bank have been estimated to have increased from $99 million in 1980 to a peak $495 in 1987. A. Gonzáles. 1989. Los subsidios financieros a la agricultura en el Perú, 1980-88. Debate Agrario, 6 (April-June).

48 Government of Peru. Encuesta nacional sobre niveles de vida, 1985-86. Lima.

49 The lowest rainfall for 70 years was recorded in 1992.

50 Between 1969 and 1992, the number of ownership titles issued totalled 123 000, of which fewer than 10 000, or 8 percent, were officially registered. Between 1993 and 1996, 160 000 titles were issued, of which 90 000 were officially registered. It is estimated that 17 percent of the 5.7 million land parcels recorded in the National Agricultural Census of 1994 have been officially titled.

51 Agricultural exports currently account for 14 percent of the value of total merchandise exports, compared with 21 percent in 1979-81 and 16 percent in the late 1980s. The value of agricultural exports is currently barely 30 percent of that of agricultural imports, down from 68 percent in 1979-81 and 49 percent in 1989-91.

52 A limiting factor to the expansion of trade in Andean animal products is the need to preserve the genetic resources. Because of this concern, an export quota has recently been introduced, limiting exports of llamas to 600 and alpacas to 1 700 units per year.

53 The role of organized resistance groups in rural areas (rondas campesinas) was as determinant as government and military action in the elimination of terrorism. Despite their peaceful nature and limited armament, many peasants became committed anti-guerrilla fighters after years of harassment and violence that claimed 25 000 to 30 000 lives in rural areas.

54 The poor state of roads had made land transport so onerous that rice from the Tarapoto zone 700 km north of Lima would have cost Lima consumers more than twice the price of rice imported from Thailand. About 10 000 km of road have been reconstructed since the early 1990s, greatly contributing to restore competitiveness to, inter alia, local rice.

55 Agricultural public investment fell from about $400 million in 1985-90 to $325 million in 1990-93 (annual averages in constant 1993 dollars), although its share in total public investment tended to rise (to about 28 percent in 1990-93, from 16 percent in 1980 and 24 percent in 1985-89).

56 Much of the public investment in agriculture in recent years has been absorbed by large irrigation projects initiated under previous administrations. Current policies emphasize the need to reconsider the approach to irrigation in the light of the failure of these projects to meet their economic and social objectives.

57 The survey was carried out in December 1995 by the Inter-American Institute for Cooperation on Agriculture (IICA) and the Asociación de Promoción Agraria (ASPA) under the auspices of the Konrad Adenauer Foundation. It involved 100 farmers from different parts of the country, selected on the basis of their successful production and economic performances.

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