2.1. Policy Reforms
2.2. Transitional Issues
2.3. New Market Compatible Policies
Product markets. Policies designed to liberalize product markets include the elimination of state marketing boards and ending government involvement in the procurement and distribution of crops. Guaranteed price schemes and producer price controls are being replaced by variable tariff or levy schemes. Many consumer price controls have been removed.
In Colombia, state marketing boards were scaled back dramatically after 1990, and procurement by IDEMA has been limited to very poor areas. In 1993, Ecuador introduced a price band system for major commodities to dampen swings in international commodity prices. Similar to the Chilean system for wheat and sugar, a variable levy is applied if the import price falls below a certain level. Since 1989, Mexico has eliminated guaranteed prices and involvement of the national food marketing board (CONASUPO) for all crops except corn and beans. Domestic trade in Nicaragua was liberalized after 1990 through the elimination of price controls and privatization of state managed trading activities. In Paraguay, most direct price interventions in agricultural markets were eliminated in 1989. The Peruvian reforms since 1991 removed consumer price controls, and liquidated the food marketing enterprise, ECASA. The guaranteed producer price mechanism was replaced by a price floor mechanism implemented through import surcharges. Venezuelan reforms between 1989 and 1991 reduced the number of products subject to the maximum retail price control, and most products were taken out of the minimum producer price regime.
Factor markets. Liberalization of factor markets included reduction and elimination of subsidies and the privatization of parastatals involved in input markets.
In Colombia, price controls on inputs were removed after 1990, and the rural development bank Caja Agraria stopped its involvement in input distribution. Law 07 of 1991 introduced a price band policy for eight "sensitive" commodities. In Ecuador, government input monopolies such as EMSEMILLA, FERTISA, and PONAMEC were privatized or descaled. Mexico privatized the state fertilizer distribution monopoly, FERTIMEX, and ended fertilizer subsidies by 1989. Venezuelan reforms between 1989 and 1991 eliminated corn meal and animal feed subsidies. Subsidies to fertilizer were reduced from 90% of value to 50% in 1992, and were eliminated in 1993.
Commodity and input price volatility. Increased reliance on international markets may raise domestic price volatility for products and factors. Price volatility is exacerbated by inconsistent exchange rate policies and poorly managed price stabilization programs. Price control systems are likely to induce rent seeking behavior.
The World Bank estimates that Ecuador's price stabilization policies via ENAC actually resulted in inter-year variability that was 10 times world price variability. It shows that, in the context of declining world commodity prices, Colombia's price band merely served to keep domestic prices high. The World Bank argues that a better policy is to use "safeguards" which are additional tariffs that are applied to existing tariffs to stabilize domestic prices. For Peru, the World Bank showed that the efficiency costs of the price stabilization scheme outweighed its benefits, and that Peru should modify its price floor mechanism to (i) include only primary food commodities, (ii) incorporate a true price band, and (iii) levy a flat tariff on products subsidized by other countries. In Ecuador, a high reliance in imported inputs (domestically produced inputs account for only 18% input use) and a fluctuating exchange rate policy led to highly volatile input prices.
Profitability crisis. Elimination of subsidies and trade liberalization in a context of appreciated real exchange rates, falling international commodity prices, and high interest rates has often created a serious profitability crisis in agriculture. In addition, the descaling of parastatals supplying factors has created an institutional vacuum in support of agriculture, particularly for the middle sectors of farmers who are not serviced by private agents. In Mexico, the profitability crisis of agriculture before December 1994 had led to large scale defaults on outstanding loans and to protest movements (El Barzón) of commercial farmers demanding debt forgiveness. More generally, the profitability crisis of agriculture and institutional gaps have prevented agriculture from responding vigorously to the agricultural reforms, postponing potential efficiency gains induced by the reforms until price incentives and supportive institutions are back into place. After December 1994, with price incentives restored by a 62% real devaluation of the peso, the profitability crisis has been overcome. The sector's elasticity of supply response remains, however, very low due to institutional gaps, high interest rates, low foreign direct investment, and continuing drought in the North-Central states, postponing again response to the reform.
Price stabilization policies. A well-managed safeguard or price band system may effectively reduce commodity and input price volatility. These policies are designed to create minimal market distortions and to be self-financing. An example of a safeguard policy is the price band system employed by the Andean group countries and Chile to protect domestic basic grains and oilseeds through a tariff surcharge above the basic 11% level whenever prices fall below a moving average of international prices. The Chilean price band system has successfully minimized rent-seeking behavior by insulating price levels from policy manipulation.
Price policies and poverty alleviation. Product price policies are relatively inefficient and blunt instruments to use to target the poor. Large commercial farmers tend to benefit disproportionately from most price subsidy schemes. In Peru, for instance, Javier Escobal (1996) calculates that the combination of exchange rate distortions, price subsidies, credit subsidies, and inputs subsidies resulted in an annual tax of US$ 331 million on small farmers and a subsidy of US$ 1,063 million for large farmers. There are, of course, indirect benefits for small farmers from these subsidies to large farmers via employment creation, but these are certainly highly inefficient policy instruments for employment creation. New approaches to poverty reduction increasingly target the poor via labor intensive public works projects and safety net programs such as targeted nutritional assistance programs, rather than by using price policies. Income support to small farmers can more effectively be achieved via decoupled instruments such as PROCAMPO's direct income transfers in Mexico.
Food price subsidies distort markets creating inefficiencies (Calegar and Schuh, 1988). Explicit or implicit food subsidies maintained through artificially low consumer prices or an overvalued exchange rate may have deleterious effects on agricultural and economic growth (Pinstrup-Andersen, 1988). Food subsidies through the price system tend to benefit the rich more than the poor in absolute terms (Alderman, 1986). In the context of the economic reforms, untargeted food subsidies through the price system have been largely canceled and replaced by targeted food subsidies. This raises the issues of differentiated interventions and targeting that will be addressed in Part IV of this report.