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Latin America and the Caribbean

REGIONAL OVERVIEW

 

General economic performance

In 1997, the Latin America and Caribbean region achieved its best economic performances in a quarter
of a century.
The Latin America and Caribbean region in 1997 achieved its best economic performance in a quarter of a century, despite the destabilizing effects of the financial crisis in Asia.22 The region as a whole exhibited a growth rate of 5.3 percent, up from an average 3.2 percent during the previous five years, while also achieving an inflation rate of less than 11 percent, down from 18 percent in 1996, 26 percent in 1995 and more than 300 percent in 1994.

 Unprecedented capital inflows exceeding $73 billion – two-thirds of which were in the form of FDI – more than compensated for the widening current account deficit, estimated to be $60 billion. Some improvement was recorded in the unemployment situation, which nevertheless remained a serious problem, especially in the Central America and Caribbean subregions and Argentina. Little progress was achieved in the reduction of poverty and inequality, which continued to be dark features of the region’s economic and social landscape.

 Two main factors explained the robust economic growth of the region: a strong recovery in investment, spurred by the overall favourable macroeconomic environment and general optimism of domestic and foreign investors; and a continued expansion of exports (reflecting increased export volumes, since average prices remained broadly stationary), with particularly dynamic intraregional trade.
 

FIGURE 31
LATIN AMERICA AND THE CARRIBBEAN
 

 The high levels of growth registered in 1997 are not expected to be maintained in 1998. Indeed, the 1997 boom chiefly reflected the recovery of Argentina and Mexico after the 1994-1995 Mexican crisis and, consequently, growth rates were far above the region’s long-term potential. Furthermore, while the first impact of the Asian crisis was relatively well absorbed – to a large extent owing to the progress achieved in macroeconomic stabilization and reform – it did have negative effects on trade and financial flows, the latter having slackened somewhat during the last quarter of 1997. It also underscored the risks of an excessive dependence on foreign capital in the face of too low a level of domestic savings to generate rapid and sustained growth, as well as underdeveloped domestic capital markets. The outlook will much depend on the course of events in Brazil, which accounts for a large share of the region’s output and is a leading trading partner for many of its neighbours. Because of its wide deficits in budget and current accounts, Brazil was particularly exposed to the effects of the financial turmoil in Asia, which resulted in sharp falls in share and bond prices and speculative pressure on its currency. The emergency fiscal and credit measures taken by this country stemmed the immediate crisis but introduced risks of a slowdown in growth, which is expected to decelerate to less than 1 percent in 1998. Although the impact of the crisis varied elsewhere in the region, several countries were facing prospects of lower growth, higher inflation and larger current account deficits in the short term. Overall, expectations for the region as a whole are for a slowdown in economic growth to about 3.3 percent in 1998.
 

Agricultural performance

Crop and livestock production rose by about 2.9 percent, but this increase was concentrated in a small number of countries.
Contrasting with the generally bright economic performances in 1997, this was on the whole a lacklustre year for agriculture in the region. Crop and livestock production rose by about 2.9 percent, slightly above the average of the previous five years and about 1 percent above population growth. However, the overall increase was concentrated in a relatively small number of countries. Out of 44 countries in the region, only 13 achieved some gain in agricultural production in per caput terms. For a number of these, including Argentina, Barbados, Bolivia, Brazil, Peru and Uruguay, this represented the continuation of an already favourable trend of the previous five years. At the other extreme, several countries in Central America and the Caribbean (Cuba, Dominica, the Dominican Republic, Grenada, Guatemala, Haiti, Panama, St Lucia and St Vincent) as well as Colombia and Paraguay recorded negative growth in per caput agricultural production in 1997, following already poor average performances over the previous five years. The rest of the region had mixed results, with Mexico exhibiting a weak recovery after a disastrous year in 1996 and Chile recording a less than 1 percent increase in agricultural production, its poorest result since 1985.

 Crop and livestock shortfalls in 1997 reflected in many cases the early effects of the El Niño phenomenon, the impact of which is to be fully felt in 1998. High temperatures and droughts in large areas of Central America, together with the alternation of droughts and torrential rains and flooding in Caribbean countries, have caused major losses in all farm activities and in some cases severe food supply problems (see World review, Food shortages and emergencies, p. 16). Among the worst affected were Haiti, Guyana and Jamaica but many other countries in the Caribbean area reported heavy losses from droughts. El Niño-related low rainfalls have also caused droughts and extensive forest fires in Central America and Brazil, while several Andean countries have been hit hard by heavy rains and flooding. In Peru, however, despite the severe El Niño effects, agricultural output rose by an estimated 5 percent in 1997. Indeed, some products such as hard maize and rice benefited from the rains, while preventive measures taken by the government limited the extent of the damage.

El Niño-associated calamities are likely to have a considerable effect on output in 1998 in several Latin American and Caribbean countries.
 The overall effect of El Niño-associated calamities on output is hard to assess as yet but is likely to be considerable in several countries. For instance, based on past experiences with El Niño, the Government of Colombia has forecast yield reductions in crop output during 1998 as follows: approximately 4 percent for cocoa, 4 to 5 percent for maize, 5 percent for both rice and milk and 7 percent for both barley and oil palm.

 Along with these problem areas, however, the region’s agriculture has also recorded success stories. In Argentina, record cereal output levels were achieved, as the area planted was unprecedented, owing to generally favourable prices, the continued adoption of advanced farming technology and favourable markets for Argentinian grains. The longer-term outlook also appears positive in view of reduced export subsidies and agricultural support worldwide. The prospects are also good for meat exports now that the International Epizootics Office has declared the country to be free of foot-and-mouth disease with vaccination. If no outbreak occurs in the next three years the “with vaccination” qualification will be removed, probably opening up new market opportunities for Argentinian beef at premium prices. A decision by the United States authorities in June 1997 to authorize imports of Argentinian beef after almost 70 years of prohibition was significant in this context.

 Agricultural performances were also favourable in Uruguay, where agricultural production rose by nearly 8 percent in 1997, with rice posting its fourth consecutive year of record output. Helped by a generally improving macroeconomic situation and a wider use of modern technology and management practices, agriculture is a leading growth sector of the economy. Meanwhile,  preferential access to the Brazilian market under the Southern Common Market (MERCOSUR) agreement is creating a strong increase in demand for many products, including rice, wheat, dairy, beef and fruits. Wheat output has also increased considerably in recent years, despite early fears that the entry of Uruguay into MERCOSUR would put the country in a disadvantageous competitive position vis-à-vis Argentina. Uruguay’s prospects for expanding agricultural markets are also improving thanks to successful efforts by both the public and private sectors to improve the sanitary and phytosanitary status of several of the country’s products.
 

Agricultural policies

The region’s agricultural sector has reacted favourably to the market opportunities propitiated by the reformed environment.
 Agricultural policies in the region have continued to follow the general objectives of domestic and external market liberalization. The agricultural sector has in many cases reacted favourably to the market opportunities propitiated by the reformed environment, all the more so since the improved economic conditions in recent years also reinforced internal and domestic demand. Several countries in the region that are already well positioned in international markets and others whose policies and programmes helped them gain competitiveness, have also benefited from the general move towards trade liberalization and regional trade agreements.

 Nevertheless, the removal of protective mechanisms that formerly shielded agriculture, including the exposure to market forces of farms at widely different levels of efficiency, has also produced crisis situations and new policy challenges. The recent experiences of two neighbouring countries, Ecuador and Colombia, exemplify the often contrasting consequences of liberalization. In the case of Ecuador, which enjoys a comparative advantage for a variety of products, the liberalization of the economy and trade of agricultural products as well as the reduction of import tariff rates over the last five years are seen as important factors explaining the overall robust production performance of the sector. Greater market opportunities prompted increases in agricultural investment and in the use of modern agricultural technology such as artificial insemination and hybrid seeds. Some sectors also benefited from the Andean Free Trade Area and accession to the World Trade Organization (WTO).

 In the case of Colombia, however, the policy of apertura (opening) is being implemented amid serious difficulties in the sector. With economic opening, Colombia is expected to specialize in production lines where it enjoys a comparative advantage – such as cut flowers, coffee, sugar cane, fruits and vegetables – and away from grains and oilseeds. Indeed, several of the “comparative advantage” crops have registered gains in both production and productivity. However, external competition rendered most grain and oilseed crop cultivation unprofitable, causing a sharp decline in the production of these commodities, an accentuation of unemployment and rural poverty and a loss of dynamism in rural business activity. Moreover, the elimination of subsidized credit aggravated farm debt levels. In order to meet the domestic demand, including for the dynamic mixed feed industry, large volumes of imports were required.

 Such conflicting effects of market liberalization pose increasing difficulties for policy-makers in the region. The persistence or aggravation of social problems, causing riots and civil unrest in some countries, have required compensatory and contingency measures in favour of the most underprivileged sectors. Nevertheless, in many cases the scope of these measures has been gradually reduced and their transitory character explicitly underlined.

 Within this overall context, there were wide variations in the way economic and social concerns translated into policy action in the region. The following sections review some recent policy developments in four key areas: programmes and measures in favour of agriculture; agricultural credit and financing; food prices and consumer protection; and action towards environmental conservation.
 

Programmes and measures in favour of agriculture

Although nearly all countries have maintained some form of support to the agricultural sector, such support has tended to diminish and to focus on subsectors considered to be of strategic importance. The Government of Argentina, strongly committed to market principles and facing severe fiscal limitations from the Convertibility Plan adopted in 1991, does not provide any specific financial support to the sector. Nevertheless, the sector has benefited from the reduction and elimination of export taxes, while export tax rebates have also been reduced. A similar situation is found in Paraguay where, despite the fundamental importance of agriculture to the economy, government direct intervention is modest and is mainly intended to assist small producers in coping with emergency situations such as harsh weather conditions and credit shortages.
Farm support has focused on economically promising producers and crops, in particular those better able to generate foreign exchange.
 In many cases, farm support has focused on economically promising producers and crops, in particular those better able to generate foreign exchange. Examples are Honduras, where the policy orientation is beginning to shift towards medium- and large-scale farming rather than focusing on small subsistence farming; and the Dominican Republic, where support has focused particularly on competitive export crops, although some food staples such as rice, beans, potatoes, onions and poultry meat have also received official assistance.

 In Mexico several programmes are being implemented to promote production growth while easing the transition to a more market-oriented economy. The comprehensive Alianza para el Campo (Rural Alliance) programme encompasses several other initiatives, including PROCAMPO (which aims at rationalizing crop production by abolishing crop price supports and replacing them with direct government payments that are made on a per hectare basis and do not affect commodity prices); PRODUCE (Direct and Productive Assistance to Agriculture); various programmes to restock the Mexican cattle herd; and technical assistance, including research and education aimed at improving the output of coffee, livestock and crops.

 In Peru, the government has continued to purchase small amounts of agricultural products directly from producers. Some of these are milk, rice, cotton and alpaca wool fibre. Although producers complain that the amounts bought by the government are insufficient, the purchases have in some cases helped to support prices.

 Nicaragua has set up the National Council for Agricultural Production (CONAGRO), an institution designed to boost productivity. CONAGRO is the state entity that submits proposals on agricultural production policies and implements the policies upon approval by the Ministry of Agriculture.

 The Government of Colombia continues to operate commodity-specific absorption agreements, originally designed to induce processing industries to purchase local crops at fair price levels determined by the government and tied to costs of production. Such agreements currently apply to maize, sorghum, malting barley and wheat. Nevertheless, the emphasis is now on using these agreements to foster closer working relationships throughout all elements of the marketing chain and ultimately to shift the responsibility for defining sectoral policies to the private sector. An example of this new approach is the yellow maize absorption agreement, implemented in February 1997, which established a formula for automatically setting the price that the mixed feed industry will pay growers over the next five years. Grower prices will no longer be tied to costs of production, but will be adjusted gradually to reflect international price levels.

The Government of Colombia aims to shift the responsibility for defining sectoral policies to the private sector.
 The Government of Colombia is also considering expanding the operation of existing price stabilization funds – the most important fund being for cotton – to products that were not covered initially. A palm oil price stabilization fund, established in 1996, initiated operations in 1997. A cocoa fund also exists but is not operational and is being reorganized, and price stabilization funds for dairy products, meat products and bananas are being considered.

 In Venezuela, producer prices for most agricultural products are determined by supply and demand, but the government continues to mandate producer prices for raw milk, rice, maize and sorghum. The government tends to set these prices, without reference to world prices, at levels that ensure that even inefficient producers can make a profit. The subsidy resulting from this policy is absorbed entirely by the animal feed- and food-processing sectors and, ultimately, the consumer. Mandated producer prices for white maize and sorghum were increased sharply in 1997 in an attempt to counteract poor performances the previous year. Although such increases did boost production, they also entailed risks of distortions in the animal feed, poultry and swine sectors and of declines in chicken, egg and pork output. Many maize flour and animal feed manufacturers refused to pay the government-set prices – those of sorghum, for instance, were twice the c.i.f. price of imported maize. In the case of feed maize, this led to the imposition of an import licence system to force feed mills to purchase domestic sorghum.

 A comprehensive Support Plan for Basic Grain Production in Honduras, launched in May 1996, was intended to boost grain production from the 1996/97 second crop and during the entire 1997/98 season. The plan provided for a National Complementary Credit Guarantee Fund and other credit components. It also included a $15 million technology transfer programme, increased technical assistance and greater distribution of improved seed use by transferring many government-owned silos to farmers and financing other rural storage projects as well as investing in several irrigation projects.
 

Privatization

Parastatals, government-assisted agro-industries and cooperatives incur heavy financial costs but also represent important sources of income and employment.
 Further progress has been recorded in this difficult area, despite considerable debate and opposition in some countries. While it is acknowledged that parastatals, government- assisted agro-industries and cooperatives incur heavy financial costs, they also represent important sources of income and employment. An example is provided by the sugar industry in Peru. The 12 sugar cooperatives, which involve almost 300 000 employees and their families, together with associated businesses, have been under pressure to alter their management and collective ownership structure, which is seen as an obstacle to necessary outside investment. Heavily indebted, the cooperatives face major financial problems and some are unable to meet payroll obligations, a situation that has led them to sell portions of their capital stock to the private sector. Foreign investors are also interested in entering the sugar industry, but a number of problems have yet to be solved concerning the workers’ social benefits, housing, education and health care.

 Despite similar difficulties, other countries have advanced in the process of privatization. Moves have been under way for the privatization of Costa Rica’s Coffee Institute (ICAFE). In El Salvador, the cooperatives set up during the first phase of the 1980 agrarian reform have since accumulated large debts. The private sector has pressed for their privatization, and legislation allowing the breakup and sale of the cooperatives has been approved. In addition, the privatization of government-controlled sugar mills was initiated, despite strong opposition from mill workers who demand a larger share in the mills. Most sugar mills were privatized in the course of 1996 and 1997. Nicaragua has pursued the privatization of the parastatal Nicaraguan Enterprises of Basic Foods (ENABAS).

 Haiti has achieved some progress in its privatization programme, although the ambitious original completion date of March 1998 was not met.

 In Jamaica, an emerging issue in the drive to make the banana industry more competitive is the cost of maintaining the three parastatal agencies currently involved in marketing and sales of the banana crop.
 

Agricultural credit and financing

Small farms have been penalized by the public sector’s reduced role in agricultural financing as well as by the conditions for obtaining private credit.
 A lack of affordable credit has remained a central concern of agricultural producers in the region and a key constraint to the modernization and diversification of farm activities. The reduced role of the public sector in agricultural financing and the hard terms and conditions for obtaining private credit have penalized small farmers in particular. Although many governments have maintained special lines of credit in their favour, the amounts involved have remained generally modest.

 In the case of Argentina, the government makes some credit available to smaller agricultural producers, but such funds are limited and many farmers can only obtain loans at very high interest rates. So-called investment pools, formed to support crop growing, have gained importance in recent years and have helped to ease financial constraints in certain cases. These pools rent farmland, provide inputs and technical expertise and divide profits (or losses) equally among shareholders. In the absence of affordable credit for small- and medium-scale farmers, these investment groups offer many participants an opportunity to keep their farms and also eliminate a large element of risk.

 In Peru, farmers have continued to face financial difficulties, despite the relatively favourable production trends and the somewhat greater availability of short-term credit in recent years. Similarly, in Paraguay credit shortages continue to affect small farmers above all, as they tend to suffer from wide swings in cash availability. Credit support is being provided to subsistence farmers who agree to diversify their output by planting different crops.

 In August 1997, the Venezuelan Government abolished a preferential interest rate for agricultural loans, which had been 85 percent of the commercial rates offered. However, small farms still have access to preferential rates through the Ministry of Agriculture’s Agricultural Credit Fund.

 Brazil’s 1997/98 crop plan, announced in mid-1997, included a reduction in interest rates from a flat 12 percent (1996/97 crop) to different levels according to the size of the producer (9 percent for small producers). About $1 billion were allocated to this programme, of which 20 percent was to cover production costs and 80 percent to cover investment costs.

 New credit lines and guarantees have been introduced through various channels in Honduras in an attempt to stimulate growth in farm activities. Greater liquidity in the financial sector and diminishing inflation in 1997 also had a positive effect on commercial lending rates. However, response has so far been only moderately encouraging. Heavy investments are being made in the banana, palm oil and cultivated shrimp industries, which may serve as a catalyst for the sector.

 Guatemala entered the 1997 having signed the Peace Accords that concluded its 36-year internal conflict. In response, the international community pledged almost $2 billion in funds to be paid over the next four years in support of economic and social development. This assistance will help finance, in particular, the large investments required to improve transport and trading facilities and services as well as to enhance the competitiveness of the agro-food sector.
 

Consumer prices and access to food

Most countries have relaxed the rigid food price controls that were characteristic of past policies in the Latin America and Caribbean region.
 Most countries have relaxed or even altogether ceased the rigid food price controls that were typical characteristics of past policies in the region. The benefits of economic reform and growth, added to the general decline in inflation, are expected to give consumers more than adequate compensation for the reduction in price controls. However, as such benefits have not yet trickled down to the majority of the population in many cases, various forms of intervention have been required in favour of needy groups.

 A particularly extensive programme of food assistance for poor and vulnerable populations is that implemented by Venezuela. When price controls were eliminated in 1996, the government established the Strategic Food Programme (PROAL), providing for the sale of staple foods in special marked packages at prices 40 percent below the prevailing retail prices. Under a similar programme, the Supply and Agricultural Service Corporation (CASA), certain food products are sold at subsidized prices in special stores located throughout the country, mostly in poor neighbourhoods. Food coupons are also distributed to low-income families under the Family Subsidy Programme which, in 1997, had a target population of 2.9 million (about 13 percent of the total population). Furthermore, about 1 million mothers receive subsidized food under the Mother and Infant Food Programme (PAMI). Finally, about 1 million students in poor neighbourhoods receive free milk, mid-morning snacks and lunches at school.

 In January 1997, the Government of Honduras also laid down a programme to protect the consumers’ basket of basic goods. This basket is composed of 20 products (including beans, maize, rice, milk, sugar, vegetable oil and shortening, chicken meat and coffee). The plan involves considerable restructuring of the government’s chain of small retail stores, BANASUPRO: its distribution channels will be redesigned and it will concentrate on supplying only the 20 products contained in the basket of basic goods. Financial support from the government in 1997 was to amount to about 20 million lempiras ($1.5 million). Upcoming policy developments may include modern consumer protection legislation as well as new weights and measures legislation. The creation of a Consumer Protection Institute to strengthen efforts in this regard is also being considered.

 The Government of Guatemala does not directly subsidize consumer food prices or provide for any direct food assistance programmes. Nevertheless, the Ministry of Economy publishes the food prices offered by different retail stores, highlighting the best prices, in local newspapers. The Ministry describes this action as an effort to create competitiveness among retailers and to educate consumers.

 In the Dominican Republic, although the inflation rate in 1997 was below 10 percent, food prices rose much faster than others, as drought and major storms caused shortages of basic foodstuffs. Lower-income groups were particularly affected, and a call for a national strike was partially attributed to these price increases. In order to alleviate shortages of staple foodstuffs, the government decided to authorize substantial tariff-free imports of these goods.
 

Environmental protection: forestry

 Authorities in the region have continued to emphasize the need to ensure a sustainable use of natural resources, and legislative measures have been introduced or reinforced to this end. Policy action has focused mainly on strengthening the regulatory framework for forest resource exploitation.
In Guatemala, deforestation destroys an estimated 90 000 ha per year, three-fifths of which is attributable to fuelwood consumption and land-clearing activities and two-fifths to timber production, most of it illegal.
 Guatemala exemplifies the difficulties involved in preserving the forest resource base, while maintaining dynamism in the forest and manufactured forest products industry (which represents about 2 percent of the country’s GDP and approximately $10 million in foreign exchange annually). Deforestation is officially estimated to destroy a total of 90 000 ha per year, with three-fifths of this attributable to fuelwood consumption and land-clearing activities and two-fifths to timber production, most of it illegal. The deforestation rate is likely to rise in the post-war period, as people encroach on areas that were formerly inaccessible owing to the civil conflict.

 In Costa Rica, following charges of widespread infringement of forestry regulations, the authorities ordered the suspension of all lumbering activities in the Peninsula de Osa area. A 90-day suspension of all tree felling was enforced, allowing time for a stock inventory.

 In Paraguay, export prohibitions have been extended since 1994 to all unprocessed and semi-processed wood. These restrictions are intended exclusively to address the acute problem of deforestation and to preserve domestic species, yet they may also encourage production by local sawmills. Particular emphasis has been placed on strengthening the regulatory framework governing forest exploitation and reafforestation activities as well as on the control of illegal wood exports. There has been little response, however, and the programme could benefit from financial assistance.

 In Nicaragua, concern about overexploitation of forest reserves led the National Assembly to ban further logging concessions. A specific prohibition has been issued against felling West Indies cedar (Cedrela odorata) and mahogany trees.

 In Honduras, more than 1 million ha of forest area has been estimated to be under some form of management plan, while the public auction system for selling public forest resources has been transparent and competitive.
 

Experiences in institutional decentralization

 The redimensioned role of the state, some aspects of which are illustrated in earlier sections, has also revived interest in decentralization. A recent and significant experience in Latin America is that of decentralization through “municipalization”, which has assumed major importance and is of considerable relevance to rural development. The process started in the mid-1980s but has gained momentum in recent years. Taking the municipality as a basic territorial unit for decentralization, it promotes all types of participatory activities and institutions at the local level. Examples of this approach can be found in Brazil, Colombia, Nicaragua and Bolivia – this last being perhaps the most successful recent experience (see Box 9).23


 

BOX 9
MUNICIPALIZATION AND PEOPLE'S PARTECIPATION IN BOLIVIA


The 1994 People’s Participation Law launched the process of decentralization through the municipalities. The process continued at the departmental level with the promulgation of the Administrative Decentralization Law in 1995. Following are the main aspects of the People’s Participation Law:

• The creation of urban-rural municipalities that allow for the incorporation of the rural sector in the municipal context. The municipality constitutes the basic territorial unit of the national planning system for the implementation of policies and public management.

• The proportional allocation of fiscal resources to all municipalities based on their population. The law has led to a radical redistribution of fiscal resources in favour of the most disadvantaged regions and rural areas of Bolivia. Before embarking on the decentralization process, the central government had decision-making power for 75 percent of public investments, while at present it has that power for only 30 percent of the same funds.

• The transfer to the municipalities of numerous responsibilities that were previously the domain of the public administration. Among these are the funding and management of health and education services, small-scale irrigation infrastructure and local roads. The municipalities have decision-making power regarding the utilization of the public investment funds placed at their disposal.

• Legal recognition of rural communities, indigenous villages and local governing bodies that existed before the promulgation of the law. In addition, it assigns them specific responsibilities and duties in the field of municipal planning and management and defines them as entities of popular participation.

• The establishment of a municipal Supervisory Committee, composed of representatives of the rural communities, indigenous villages and local governing bodies that have legal status and control over management of the municipality.

Despite the progress it represents, the People’s Participation Law does have certain limitations. In particular, by defining territorial organizations (local governing bodies, rural communities and indigenous villages) as entities of people’s participation, the possibility of including other local actors who are not strictly territorial in the participatory process is limited. This is the case, for example, with associations of producers and other economic agents.

The Bolivian decentralization process reached the departmental level through the promulgation of the Administrative Decentralization Law, whereby the departmental prefecture becomes the focal point for national-level policies and supply of resources, departmental policies and development plans and municipal priorities and requests.

The process in Bolivia was duly prepared with community participation in a series of planning exercises at the provincial level, leading to the establishment of municipal development plans for 150 municipalities. This exercise not only constituted a training process, but was also an important part of an information campaign on cofinancing modalities and motivated communities to request a contribution of resources from their local governments.

The Bolivian experience shows that local governments are able to comprehend the needs of the population and to respond adequately. Furthermore, decentralization has had the implicit role of ensuring the presence of the state in many municipalities where it was previously absent.
 
 

 Source: I. Cossio. 1997. Bolivia: descentralización, participación popular y desarrollo rural. Paper presented at the Technical Consultation on Decentralization, 16-18 December 1997, FAO, Rome.

 


 

BOX 10
DECENTRALIZATION AND MUNICIPALIZATION IN COLOMBIA


Colombia’s 1991 Constitution was the culmination of a process, initiated in 1986, whereby local autonomy acquired a predominant position in the country’s institutional structure. Municipalization was manifest in the election of mayors, for instance, and in the deliberate creation of opportunities for community participation.

The country’s municipalization process is explicitly oriented towards rural development. In 1987, the municipalities were assigned the task of administering basic public services and, in the agricultural sector, it was decided that they would provide direct and free technical assistance to small-scale producers. For this purpose the Municipal Units for Technical Assistance in Agriculture were set up. Almost all municipalities have one of these technical units which, according to the First National Census, provided assistance to 435 000 small farmers in 1995 whereas, in 1990, prior to their creation, only 120 000 small farmers had been reached. This implied a 220 percent budget increase for such services. At the same time, the cost per beneficiary of these services went down by 10 percent. In 1993, each unit assisted an average of 167 beneficiaries; in 1994, the number reached 269 and in 1995, 436.

In 1993, the establishment of the Municipal Rural Development Councils was approved by law. These councils were formally open to farmers’ representatives and were presided over by the mayor, with the participation of representatives of town councils, farmers, guilds and rural communities. The functions and structure of the Municipal Rural Development Councils are defined by the town council based on a proposal put forward by the mayor, with no allowance made for rural associations and communities to participate in its elaboration, except through previous informal negotiations with the mayor. In those municipalities where civil society is weak, especially where farmers have no organizational framework or participatory experience, it is very difficult for these rural development councils to take on the characteristics stipulated by law, and in many cases their establishment would appear to be merely a formality. Rural development councils have been formed in 925 of the 1 074 existing municipalities but, according to information available from the Ministry of Agriculture, only 128 seem to be functioning.

Several reasons can be cited for the limited impact of this initiative. A lack of consolidation of rural organizations, combined with the insufficient and untimely dissemination of information on the rural development councils, resulted in inadequate participation by such organizations. Contrary to the case of Bolivia, where existing organizations were the driving force behind the strengthening of municipalities, here it was hoped that the municipality would promote organization and participation. Another handicap was the insufficient training of social actors and municipal staff to be able to take advantage of the possibilities offered by the rural development councils.
 
 

Source: E. Perez. 1997. Los consejos municipales de desarrollo rural o la reglamentación de la participación campesina. Paper presented at the Technical Consultation on Decentralization, 16-18 December 1997, FAO, Rome.

 

 An equally informative example of municipalization is seen in Colombia (see Box 10), where major efforts have been made to create technical assistance and rural development councils at the municipal level. However, a number of shortcomings have so far limited the impact of these initiatives.

 A number of observations can be made concerning experiences with the process of municipalization. The increased role of municipalities has frequently not been accompanied by the transfer of the necessary resources to fulfil the new tasks assigned, nor by the creation of conditions required to ensure participation of the most disadvantaged groups in grassroots organizations. Bolivia’s example is indeed remarkable: first in that its municipalization process successfully incorporated previously existing organizations; and, second, in that it put a special emphasis on people’s participation, which in turn led to the strengthening of local governments.
 
 

CHILE

MAP 7
CHILE
 

General characteristics

 A 1992 census put Chile’s population at 14.5 million people, of which 15 percent live in rural areas and a similar proportion are engaged in agriculture as their main activity. Of the total population, about 23 percent live below the poverty line, down from 40 percent in 1989. The prevalence of poverty in rural areas is significantly higher, however, reaching more than 30 percent of the rural population. The significant decrease in poverty levels is a result of the economy’s high rate of growth in the last eight years as well as the strong emphasis that the last two democratic governments placed on social policies – public social expenditure has increased dramatically, reaching $7.8 billion in 1996.

 Agriculture contributes 7 percent of GDP. However, its weight in the overall economy is much greater than this figure suggests. In fact, if industrial products closely linked to agriculture are included, the sector’s contribution to GDP would rise to nearly 15 percent and its share in export earnings to more than 30 percent.

 Out of a total area of approximately 75 million ha, Chile has about 5 million ha under arable land and permanent crops, while natural and improved pastures cover some 13 million ha. About one-third of the total arable land is irrigated. Forest and woodland cover 16.5 million ha. Some 18 percent of the country’s territory is under natural parks or reserves, a high proportion by any standard.

 Owing to its geographical span and topography, Chile is made up of diverse agro-ecological zones and has a wide variety of microclimates, although it is the only country in the region without tropical agriculture (except for a few small valleys in the northernmost part of the country).

 In the desert conditions of the north, extending from the border with Peru to some 400 km north of Santiago, agriculture is almost absent, except in small oases. Dryland agriculture starts some 400 km north of the capital, where rainfall levels of up to 200 mm allow some very extensive livestock (mainly goat) production. The irrigated areas are similar to the oasis agriculture of the extreme north but are of greater importance, as they are the main producers of early grapes and other fruits for the international market.

 Chile’s prime agricultural area stretches from 200 km north to 500 km south of the capital. It is here that most of the export fruits and vegetables as well as high-quality wines are produced. This area has a Mediterranean climate with hot dry summers and rains in winter, which steadily increase in level from north to south, reaching 800 mm at the southern point of this macroregion. The topography is mainly an uninterrupted central valley which has been described as “... one of the best tracts of real estate in the world, comparable to the Napa Valley in California ...”. It is surrounded by the Andes to the east and the coastal range to the west. On the Andean piedmont and the coastal range, extensive livestock and annual crop (mainly wheat and legumes) production are carried out and, in the last 20 years, forest plantations (mainly of radiata pine and eucalyptus) have been expanding.

 Further south and down to the end of continental Chile, about 1 500 km south of Santiago, rainfall, occurring in summer, continues to increase and the terrain becomes hilly and suitable for pasture-based dairy production as well as for cereal crops and natural and plantation forests. Continuing south, the central valley is submerged by the Pacific Ocean, leaving the coastal range, which breaks down into large and small islands, and the Andean range, which peaks at a height of just 1 200 m in this region. This macroregion bears a strong resemblance to New Zealand, which is at the same latitude. In Patagonia, the southernmost part of Chile, sheep and beef cattle production are the main activities, now complemented by some market gardening for regional consumption.
 

Economic development and policies

The agricultural sector has led a vigorous recovery of the Chilean economy from its 1982-1983 crisis.
 The Chilean economy has made a vigorous recovery from the 1982-1983 economic crisis, when GDP plummeted by 14 percent the first year and by a further 0.7 percent the following year. The recovery, led by the agricultural sector followed closely by other tradables such as mining, forestry, fisheries and natural resource processing industries, has seen GDP expand at an annual rate of about 6 percent since 1984. Such rapid expansion  was made possible by the introduction of certain pragmatic measures to strengthen the rigid macroeconomic policies implemented during the first phase of the military government, most of which are still in force today. Paramount among such pragmatic moves was the reintroduction of a managed market for foreign exchange, as compared with the fixed exchange rate policy implemented in 1979 – which, according to many, led to the crisis. This consists of “dirty flotation”, whereby the Central Bank fixes a band within which the forces of supply and demand are left to determine the current rate. However, interventions by the Central Bank (buying and selling) can occur at any moment to counter speculative movements, while the floor and ceiling of the band are adjusted monthly according to internal and external inflation. There was also an initial rise in the uniform import tariff from 10 to 35 percent, but it was soon dropped to the current 11 percent.

 As the crisis of the early 1980s had resulted from an over indebtedness of the country’s private sector, strong pressure from international lenders forced the public sector to assume the payment of private debt in order to renew the flow of foreign resources. This was accompanied by state intervention to correct the asset situation of the main private banks and by more stringent regulations for the country’s financial operations. While these measures allowed the economy to set off on a fairly self-sustaining pattern of growth, the enormous cost of the government’s paying off private external debt and intervening to consolidate the banking system is still being paid by the nation as a whole and is preventing the Central Bank from taking a more active position in the foreign exchange market. Indeed, the government still owes the Central Bank about $6.6 billion for the bank rescue operations of 1983.

Foreign investment has significantly expanded, reflecting the climate of confidence instilled by the reintroduction of a stable democratic regime and the continuation of proven economic policies.
 With democracy reinstated, economic development since 1990 has continued at the same rate, since the economic policy remained basically the same as that of the post-crisis military period. Significant changes have occurred, however, in certain critical areas. For example, foreign investment has significantly expanded, reflecting the climate of confidence instilled by the reintroduction of a stable democratic regime and the continuation of proven economic policies. In fact foreign investment commitments increased by 250 percent between 1990 and 1996, exceeding $4.5 billion in the last year. This has proved a mixed blessing, however, since capital inflows, combined with the continuing dynamism of the export sector, have led to a significant appreciation – an estimated 26 percent in real terms – of the national currency since 1990.

 The centre-left governments since 1990 have placed greater emphasis on addressing the equity problems brought forth by the market-oriented development model. Upon election, the new government launched an expanded taxation programme, with new taxes being periodically introduced as the well-riddled electoral system allows (a new tax reform is currently being discussed). The increased public revenues have been used mainly in social expenditures, especially for health and education, the latter having been designated a priority sector by the current government. In fact, public social expenditure has risen by 50 percent since the early 1990s. Together with rapid economic growth, these efforts account for the drop in absolute poverty mentioned earlier. However, this has not been achieved at the expense of investment, which rose from 18 percent of GDP during the military government, to 24 percent during the first democratic government and is currently nearing 27 percent.

Public expenditure in infrastructure has expanded significantly and new legislation has allowed for massive private investments in this area.
 Another high-priority sector, which had been left behind, is infrastructure, where not only has public expenditure expanded significantly, but new legislation has been enacted to allow for massive private investments in road construction, telecommunications, power, etc.
 

Historical overview of Chilean agricultural development

 The post-1930s crisis period. After the crisis of the 1930s, which caused Chile’s foreign exchange earnings to fall to one-third of their normal level, the country embarked on an import substitution strategy. Although this move generated an important industrial sector, it severely punished agriculture and fed an increasing inflationary process which peaked in the mid-1950s with annual rates of nearly 100 percent. Agricultural production increased at a sluggish 1.8 percent per year, well below population growth which rose at about 2.5 percent in those years. The mounting import bill that resulted from this gap between production and population growth was a heavy burden to the economy. The major blame was placed on the very skewed land distribution system prevailing in the country at the time, although it was also realized that the “cheap food prices policy” had some responsibility for the sector’s poor performance. It was, however, politically unpalatable to liberalize food prices under the conditions of latifundia tenure, since higher prices would primarily have aggravated distortions in wealth and income distribution within the sector (to the detriment of the urban poor) and would have brought only marginal increases in production. This state of affairs set the stage for the land reform process which, prompted by the Alliance for Progress Programme, got off to a slow start in the early 1960s.

 The land reform period. In 1964, following the election of the centre-left Christian Democratic candidate, the process of land reform gained momentum. New legislation was approved, facilitating the expropriation of large productive as well as unproductive estates and allowing the unionization of farm workers. As a result, 3.6 million ha (12 percent of the country’s agricultural land) were expropriated and organized into new joint exploitation units. At the same time, about 50 percent of the farm workforce was organized into unions, reaching a higher rate of union membership in six years than that of urban workers, who had been allowed to form unions since the beginning of the century.

Chile’s comparative advantage in agriculture is mainly in fruit and wine production in the Central Valley and dairy and forest products in the south.
 At the same time, a strong production promotion policy was enacted, with increases in the administered prices of basic foodstuffs at the farm level and a series of comprehensive subsectoral promotion programmes. Based on strategic planning studies, the government designed and began implementing a set of programmes to promote what were seen as the main comparative advantages of Chilean agriculture, namely fruit and wine production in the Central Valley and dairy and forestry products in the south. The programmes included the provision of long-term credit, technical assistance, public investment in basic processing infrastructure, improved wine production, milk processing and cellulose plants as well as special incentives for the organization of cooperatives for these products. During this period, the state’s strategic planning capacity could be said to have laid the basis for Chile’s modern agricultural sector.

 As a result, and despite the normally disruptive effect brought about by accelerated social change, growth in the gross value of production jumped from the sluggish 1.8 to 2 percent recorded since the 1930s to a sizeable 5 percent per annum, which is double the population growth rate. This enabled a halt in the persistent increase in the food import bill, despite the boost to internal demand caused by the income distribution policies implemented during this period.

 The land reform and unionization processes were greatly accelerated during the Allende period, with little regard paid to their effects on the productive process. Land seizures became widespread, severely undermining the confidence of the remaining large- and medium-scale farmers. In addition, the new units in the reformed sector were either transformed into state enterprises or exploited de facto or de jure in a communal system, thereby undermining production incentives also. The result was a collapse in agricultural production, which fell by 4.8 percent per annum between 1970 and 1973. In fact, the deteriorating conditions in rural areas became a determining factor in the coup that took place on 11 September 1973.

 The military regime. This period, which lasted from September 1973 to March 1990, can be divided into two subperiods which are separated by the economic crisis of the early 1980s.

The period from 1973 until the early 1980s was one of profound structural changes in which the latest theories of market liberalization were tested.
 1973 to the early 1980s crisis – the orthodox period. Government measures in this period focused on halting the hyperinflation then prevailing (1 000 percent in 1973), and on achieving full and rapid economic liberalization. As the country chose to follow the “shock therapy” proposed by the economist Milton Friedman in 1975, this was a period of profound structural changes and one in which the latest theories of market liberalization were tested in a practically “friction-free social laboratory”. Agricultural policies merely reflected the government’s objectives for the economy as a whole. In fact, the main objectives for the sector were: the liberalization of agricultural markets; a reduction in the role of the state; and the assurance of full guarantees to private property in the countryside. Perhaps the most significant sectoral policy was the full regularization of agricultural reform, a process that was completed towards 1979. By then, about 30 percent of the land that had been either legally expropriated or seized towards the end of the Allende period was returned to its previous owners; another third – mostly Andean piedmont, coastal dryland and potential livestock farmland in the south – was difficult to divide and was auctioned off to the highest bidder; and the rest was allotted in private plots to the former estate farm workers.


 

BOX 11
FRUIT EXPORT "MIRACLE"


Within 20 years, Chile had become one of the world’s leading exporters of off-season temperate fruits. How did this happen so rapidly? As in the case of most “miracle” stories, achievements were based on hard facts. The potential that the country’s exceptional climate and geographical location offered for temperate fruit production had first been discovered in the late 1950s and early 1960s as a result of the strategic planning capacity developed by the public sector at the time. Expansion of the fruit subsector was spurred by public sector support in the form of long-term investment credit to finance plantations and processing infrastructure (packing and cold storage plants).

The subsector grew at a moderate rate until the concurrence of two critical developments: i) the liberalization of international trade that occurred during the military period and initially entailed a high real value for foreign exchange; and ii) a shift in tastes in the developed country markets, especially the United States, away from foods rich in carbohydrates and fat towards vitamin- and fibre-rich foods. Combined, these factors caused the fruit trade to expand dramatically during the 1970s and early 1980s, when only Chile and South Africa were in a position to meet such a demand and the latter faced more stringent political difficulties than Chile. Another determining factor was the deregulation and dismantling of the farm workers’ union, which resulted in low real salaries and production costs and extraordinarily high rates of return in fruit production (rates of 30 to 50 percent were quite common for some varieties).

 


 
PICTURE 10
Apples are inspected, packed and stored for off-season export
Fruit exporting is an important and growing subsector in Chile.

 In the meantime, however, the reduced support from the state and the high interest rates of the recently liberalized market (in some years reaching 60 percent in real terms) meant that these new owners did not have the means to farm their land properly and were forced to sell at very low prices. By the mid-1980s, it was estimated that nearly 50 percent had sold their activities, despite efforts by the growing NGO movements (led by the Catholic Church and other religious denominations) to replace the dwindling state support services. The sector’s response was erratic, especially in the face of policies that kept changing according to macro directives. The value of production between 1974 and 1984 returned to the sluggish 2 percent per annum of the 1930-1960 period, but showing considerable differences within subsectors and regions. Thus, while fruit-tree plantations took off at yearly rates of about 8 to 10 percent during this period, livestock production was severely affected by the drop in domestic demand that resulted from macroeconomic adjustment and high unemployment rates. Annual crops expanded strongly in the early years of the period (probably responding to the improved environment for private property). However, when the exchange rate was fixed in 1979 as part of a new macroeconomic experiment – the “monetary approach to a balance of payments”, production began to fall in response to the appreciation of the national currency. Another subsector that began growing strongly in this period was plantation forest. In this case, expansion was a response to enhanced incentives brought about by a scheme that subsidized 75 percent of plantation costs and exempted forested lands from property taxes.


 

BOX 12
PRICE BAND SYSTEM


The price band system sets a minimum and a maximum import entry price for a particular merchandise. If the entry price is below the minimum, a variable levy is applied to increase the entry price until it reaches the floor of the band. If the entry price is above the ceiling of the band, then existing tariffs are reduced until the two coincide. If such tariff reductions were not enough to bring the entry price in line with the ceiling, an import subsidy would have to be applied (this has never happened). Between these levels, the market operates freely.

The floor and ceiling are calculated by sorting the last 60 monthly international prices of a commodity in descending order and then crossing out the 15 highest to leave the 16th price as the ceiling of the band. At the other extreme, a similar procedure is followed to determine the floor, the lowest 15 prices are crossed out and the 44th price is taken as the floor of the band. Each year, the first year of the series is dropped and the last comes into the calculation.

 


 
The severe balance-of-payments crisis starting in the early 1980s forced a return to more pragmatic macroeconomic policies
1983-1989: Return to pragmatism. The severe balance-of-payments crisis starting in the early 1980s forced a return to more pragmatic macroeconomic policies, i.e. a managed market approach. This involved, in particular, a substantial currency devaluation, with the real value of the dollar practically doubling between 1981 and 1987. This allowed agricultural and all tradables to recover their profitability. In addition, the government implemented a proactive agricultural policy, comprising the following components:

Price band. A price band was established for the major import-substituting products, initially including wheat, oilseeds, sugarbeet, maize and rice, although the last two were later dropped. This system allowed internal prices to follow, with a lag, the trend of international prices, but prevented day-to-day fluctuations from creating havoc in internal markets (see Box 12, Price band system).

Special credit. The government resumed special credit grants to the sector, after having abolished them as part of its “macropolarization” of agriculture. This was done through the still unprivatized state bank and the national Institute of Agricultural Development (INDAP), which provides support to small farmers. Funds were lent at positive, but reasonably low, real interest rates (7 percent per annum) and with repayment periods in accordance with the agriculture production cycle. This included investment credit refinanced by the multilateral financial institutions, the Inter-American Development Bank (IDB) and the International Bank for Reconstruction and Development (IBRD).

Technical assistance. As part of the policy package to recover agricultural dynamism, a strong state-backed technological transfer programme was implemented in favour of both the national agricultural research institute (INIA) and INDAP, assisting small farmers.

Other measures. Other significant measures included the relaunching of the state-owned sugarbeet-processing industry, which resumed its contract farming scheme and became a significant force in the revitalization of agricultural production in the central and southern regions of the country. Also worth mentioning was the establishment of a special fund to subsidize small-scale private water control schemes.

 As a result of this package, the agricultural sector was in a position to lead the country’s economic recovery, with production expanding by 7 percent per annum between 1983 and 1989. Yields increased substantially: those of wheat, traditionally lingering around 1.5 to 1.7 tonnes/ha, jumped to 3.3 tonnes by 1989; maize yields practically doubled in the same period, from 3.5. to 7.3 tonnes/ha. The revitalization of the sector enabled a fall in agricultural imports from a peak of $900 million in 1981 to $270 million in 1989. Furthermore, because of depressed demand (per caput consumption of most staples was still below 1971 levels), self-sufficiency was reached in traditionally deficit products such as wheat, maize, rice and dairy and meat products. Employment in the sector rose by 30 percent overall between 1982 and 1989.
 

Chilean agriculture in the early 1990s

 The new democratic government sought to maintain those elements of the economic policy followed by the military government that had shown effectiveness, while also introducing changes aimed at enhancing an equitable distribution of the benefits achieved through development. In line with this general approach, three major objectives were laid down for agriculture:

• maintain and improve the dynamism of agricultural production;

• protect natural resources and revert the deterioration that had followed the unchecked expansion of economic activities;

• actively promote the participation of small farmers in the modernized agricultural sector and combat rural poverty.

 Of these three objectives, the third had priority but was the most difficult to achieve. Chilean agriculture shares a strongly segmented, dual agrarian structure with the rest of Latin America. The small farm subsector accounts for 25 to 30 percent of total agricultural production but represents about 70 percent of all agricultural producers and owns about one-third of all agricultural land. However, the subsector has a larger share in the traditional annual crops (wheat, pulses, tubers) and livestock and a much lower share in the more dynamic fruit and high-quality wine subsectors. Moreover, small farmers tend to be more concentrated in the marginal lands of the coastal range, Andean piedmont and southern Chile; thus, in addition to their traditional social marginalization, they start with a scarcer and lower-quality resource base than the commercial sector.
The three objectives listed above provided the framework for the following major policies and programmes of the new government.

 Production dynamism. When the new government arrived it was clear that the sources of expansion of agricultural production were reaching a limit. Traditional crops and livestock products were reaching the limits of internal demand and fruit exports were also facing stiffer competition from other sources, having lost profitability compared with the high levels of the 1970s and 1980s. The strategy in this respect was to expand the demand for these products while improving the capacity for a flexible response on the supply side.

 Domestic demand for agricultural products increased steadily throughout the period as a result of the various distribution policies of the government as well as the strong growth in economic activity and real wages. However, the most significant actions in this area concerned the improvement of internal marketing conditions. These were achieved through the active involvement of the parastatal grain agency, COTRISA (see Box 13, p.212), which prevented the oligopsonistic practices of the milling sector, causes of havoc in the past.

 On the external front, cashing in on improved political conditions, the government signed free trade agreements with several Latin American countries, the most significant being those with Argentina and Mexico. At the same time, an offensive to persuade Asian markets to open up to Chile’s products, on the grounds of the country’s exceptional health standards, began to bear fruit.

Chilean agriculture benefits greatly from the country’s Mediterranean climate; however, to exploit this asset fully, irrigation is indispensable.
 On the supply side, the government embarked on a major effort to relaunch irrigation development. Chile’s main advantage in agriculture is its Mediterranean climate but, to exploit this asset fully, irrigation is indispensable. Whereas no irrigation development had been carried out by the previous administration, with an investment of $500 million, the new government has reinstated large state irrigation works; assisted private farmers in rehabilitating and expanding existing schemes; promoted new medium-scale projects; and given special impetus to the existing subsidy scheme for small works, opening it up to the small farm sector. The overall plan is expected to be completed towards the year 2000, by which time Chile’s current irrigated area of 1.3 million ha should have increased by 30 percent.


 

BOX 13
ARE ALL PARASTATALS BAD?


During the privatization drive of the late 1970s, the existing state marketing agency was abolished, yet part of its storage facilities were kept as state property. When the price band system was established after the 1982 crisis, inherent imperfections of the internal cereal markets (e.g. oligopsonistic practices on the part of the millers and small local buyers – usually truck drivers) led to the realization that a buying agency needed to be established in order to make the landed price of the band operative in the internal market. Given the military government’s mistrust of any form of direct state action, this function was entrusted to the Confederation of Commercial Grain Producers’ Cooperatives (COPAGRO), which operated for the government by way of an open credit line from the state bank and the state- owned storage facilities. After a few seasons under this scheme, COPAGRO went bankrupt and the government was forced to establish a new incorporated company in which the state held the majority share but the millers and producers had a minority share. Thus, the abolished parastatal grain agency was reborn under a new name, Comercializadora de trigo SA (COTRISA), with a token private sector participation but with a transitory horizon in the view of the military government.

With the advent of the democratic government, which had fewer ideological complexes about state intervention in agricultural markets, COTRISA’s role was enhanced and defined as a permanent state function to ensure that the wheat market operates smoothly at the farm level. COTRISA had to be prepared to buy all the wheat that farmers were willing to sell to it at the landed floor price of the band (the full cost of importing wheat at the floor price), less the storage and financial costs of holding the national harvest until it was fully consumed. The credibility of the agency’s commitment to buy all the wheat offered was crucial for the stabilization and establishment of a competitive buyers’ market. To prove its credibility, COTRISA had to set the correct buying price; if the price was too high, it would be quickly detected by the buyers who would then refrain from buying, thereby causing the agency to be flooded with wheat until it was forced either to modify the price or to stop buying. This was precisely what happened when the new democratic government came into power in March 1990 towards the end of the wheat marketing season.  As the previous government had fixed too high a buying price, COTRISA was obliged to ration its buying. The new government lowered the price and, within 15 days, the market was stabilized and the run on COTRISA stopped. That same year, the agency had to buy about 8 percent of the country’s total wheat production; since then, it has bought between 0.2 and 3 percent of total production but the wheat markets have operated smoothly in all seasons. Since the beginning of the democratic period, COTRISA’s policy has changed from setting up buying outlets in the central valley to opening outlets mainly in the remoter areas of the drylands of the Andean and coastal ranges, where most of the small farmers are located but there are fewer buyers. It has also shifted from a policy of operating the outlets directly to one of contracting them to small farmers’ cooperatives and NGOs. In fact, COTRISA outlets increased from five directly operated concerns in 1990 to 27 in 1994/95, of which only seven were directly operated by the agency itself. The opening up of a new outlet in remote areas immediately raises the prices paid by traditional buyers to the level offered by COTRISA, and such increases have ranged from a low 2 percent in a fairly connected and hence competitive locality to 22 percent in remote localities and in the first years of the scheme’s operation. As COTRISA has gained credibility the differentials have decreased, as have purchases.

Today COTRISA is a major player in Chile’s wheat market, although it intervenes very little, as witnessed by its actual purchases. In some seasons, COTRISA’s successful catalytic operations have been extended to the rice and maize markets (the latter is not covered by the price band system), where the agency has had a similar hand in effecting market transparency.  As in the case of grain, after a few weeks, the agency has managed to stabilize markets and has all but stopped having to buy supplies, despite oligopsonistic buyers’ attempts to test its ability to handle an unknown market.

 

 With the aim of improving the supply response, the government has also implemented an ambitious IDB-supported programme to improve INIA’s research capacity. The programme gave priority to adaptive research on small farm systems, on dryland agriculture and on more ecologically sustainable research, while also reinforcing the capacities of the health control agency, SAG.

 Natural resource conservation. Since very little had been done in this area in the past, efforts were mainly oriented towards the establishment of new norms and legislation on maximum air and water pollution levels. Consequently, major conflicts arose with the mining sector, the main air pollutant in rural areas. Legislation to regulate natural forest exploitation and transfer of land from agriculture to urban uses was also elaborated and discussed. In these two areas, where private commercial interests are extremely powerful and strongly opposed to any regulation, little progress could be made despite their importance for the country’s population. In the case of natural forests, however, a cadastre indicated a total of 13.3 million ha, far more than the area that was thought to have been left after the exploitation of these resources for wood chip exports.

Government action in support of small farmers included expanded technical assistance and credit programmes as well as new mechanisms to help them compete with the commercial sector.
 Promoting the small farm susbsector. The new government’s action in support of small farmers was aimed at expanding and improving the coverage of existing technical assistance and credit programmes as well as creating new mechanisms to help this subsector compete with the commercial sector.

 Regarding technical assistance, opportunities were created for participation by NGOs, including farmers’ organizations, and closer links were set up with INIA. Beneficiaries were also involved in periodical evaluations of the programme, and the modality was changed from individual to group assistance. In four years, the programme doubled its coverage from 26 000 to 51 000, which still represents only 20 percent of the country’s small farmers.

 On the credit side, a major effort was made to increase the coverage of the various schemes, expanding them to benefit the smaller and poorer farmers who were not previously covered, as well as farmers’ organizations. A series of new programmes were implemented in order to improve their insertion into the more modernized agricultural sector. These included a major land titling programme which involved some 50 000 farmers during the period; the incorporation of small farmers into the forest plantation subsidy scheme, covering 27 000 ha; and the establishment of various marketing assistance schemes. An interesting programme in this respect was the linking of agro-industrial plants to the activities of small farmers following the outgrower scheme. In this programme, INDAP channelled the technical assistance and credit programme through cooperating agro-industries that agreed to provide secure contracts at sowing time and fair pre-established prices.

 Perhaps the most successful new programme was the inclusion of small farmers in the existing small-scale irrigation subsidy scheme. This programme had formerly been monopolized by commercial farmers, since its funds were allocated under an auction system whereby special points were assigned according to a beneficiary’s proposed contribution. The new government’s innovations were to separate small farmers’ auctions from those designed for commercial concerns and to provide special financing to conduct related studies. This led to an explosive demand from small farmers, and about 130 000 ha benefited as a result.

 All these programmes had a definite organizational bias which enabled small farmers’ cooperatives to double in number since 1989 and to achieve a rapid expansion in their activities. However, there is still a long way to go before the small farm sector will be strong enough to compete with the burgeoning commercial sector.

The proportion of rural population living under the poverty line fell from 52 percent in 1987 to 34 percent in 1992.
 Special development programmes were formulated, in coordination with the municipalities, for areas with the highest concentration of rural poverty. Under these programmes, special funds were allocated to finance productive activities identified and implemented by the beneficiaries themselves. They are now serving as a testing ground for new approaches to combating rural poverty. Nevertheless, the main efforts in this area focused on expanding state social services for the poor which, until 1990, had scarcely reached rural areas. In particular, action was taken to improve the coverage and quality of education and health services. At the same time, subsidized housing more than doubled its coverage and a similar increment was achieved with investment in rural roads and rural water supplies. The outcome was a decrease in the incidence of rural poverty of 200 000 people. The proportion of rural population living under the poverty line fell to 34 percent in 1992, down from 52 percent in 1987, but still above the 28 percent estimated in 1970.
 

Chilean agriculture since 1994

 In this period, the government followed a similar programme, aimed at reinforcing the revitalization and diversification of agricultural production and modernizing the small farm sector. New instruments were created and others were modified: INDAP was decentralized and a comprehensive project approach was followed at the local level. Special assistance mechanisms were implemented to help small farmers’ organizations enhance their capitalization and managerial capacities.
Chile has negotiated free trade agreements with Canada and Mexico as a first step towards possible membership of NAFTA.
 In line with the ongoing process of opening up the national economy, agricultural policies have been strongly influenced by the various trade negotiations in which the sector has also been a major player. Of special significance has been Chile’s entry into the Asian Pacific Economic Cooperation Council (APEC), which has helped open up Asian markets to Chilean agricultural, forestry and fisheries exports. Another important event has been the negotiation of associate status with MERCOSUR, the trade bloc comprising Argentina, Brazil, Paraguay and Uruguay. While in the case of APEC, the sector’s main interest has been in opening up new markets, the emphasis with MERCOSUR has been on establishing gradual tariff-reduction rules and internal programmes to help in the necessary reconversion of traditional crops (cereals, oilseeds, livestock). Such reconversion is needed in view of the strong competition expected from low-cost producers of these commodities, mainly in Argentina and Uruguay. Free trade agreements have also been negotiated with Canada and Mexico as a first step towards possible membership in the North American Free Trade Agreement (NAFTA), as well as with the EU.

 These new agreements have been the object of intense debate within the sector and in the political sphere. The government has committed significant additional resources to the required modernization of the sector, including special assistance for the groups and areas most likely to be affected by these agreements. The Ministry of Agriculture has the lead role in promoting the transformation of the sector’s production systems. The elimination of rural poverty, a priority task, is considered the responsibility of the public sector as a whole, but of the social ministries in particular (education, health, housing, etc.) and also of local governments.  Two core commitments have been established by the government:

• the Commitment for the Development of Rural Areas, which focuses on emerging non-agricultural economic activities in rural areas and on activities that are strictly social in nature;

• the Commitment for Agriculture, designed to help the sector confront economic internationalization and increase its competitiveness by allocating supplementary budgetary resources.

A six-point agricultural action plan was defined with the aim of increasing producers’ capacities and assets and improving the trade environment:

i)  Expand agricultural land under irrigation and improve efficiency in water resource management.

ii) Rehabilitate degraded soil, improve the quality of producers’ land and recover the natural heritage.

iii) Improve the sector’s health standards with a view to enhancing exports of agricultural products.

iv) Encourage technological innovation and improve managerial capacity so as to enhance competitiveness of the sector.

v) Improve marketing facilities and systems, increase transparency in domestic markets and promote the sector’s entry into international markets.

vi) Strengthen the development of forestry, enhancing its dynamism and involving small and medium-scale farmers in the process; promote the sustainable management of native forests and strengthen public institutions in the sector.

 Sectoral performance. Agricultural production increased at an annual rate of about 4 percent during the 1990-1996 period, thus slowing down from the 6 percent per annum achieved after the 1982 crisis. This resulted from the combination of three negative exogenous factors. First, the inflow of foreign capital caused a marked appreciation of the national currency, impairing the competitiveness of agriculture which, in Chile, is almost fully tradable. Second, the steady growth of the economy, combined with the government’s determination to improve income distribution, led to significant real wage increases, thereby affecting the profitability of labour-intensive activities such as agriculture. Finally, international prices of basic foodstuffs (mainly wheat, rice, maize) experienced a pronounced downturn in 1992 and 1993 and, after a temporary recovery, resumed a downward trend. Under the country’s trade regime, these price declines were immediately transmitted to domestic markets – the price index of annual crops decreased by 16 percent in real terms between 1990 and 1993. Also of note was the severe effect of at least four years of drought during the 1990-1997 period.

Forest products account for about 35 percent of total agricultural exports and are expanding at an annual rate of nearly 30 percent.
 These trends conceal wide variations within the sector, reflecting the strong structural changes in Chilean agriculture. Some subsectors showed substantial growth, for example wine, forestry products, vegetables and dairy products, while others (fruits) expanded at a steady, although more moderate rate and others recorded significant reductions in growth (wheat and oilseeds). This occurred, however, amid a generally steady increase in productivity. Census data indicate average national yield levels of 3.8 tonnes/ha for wheat, 9.1 tonnes/ha for maize and more than 50 tonnes/ha for sugarbeet. Exports continued to grow strongly at nearly 12 percent per annum throughout the period. Total agricultural and forestry exports reached $4 750 million in 1997. About 35 percent of these exports were forest products, which continued to expand at an annual rate of nearly 30 percent. Agro-industrial exports, especially wine, have shown an accelerated rate of expansion (42 percent per annum) which shows no sign of abating. The value of total wine exports is currently $434 million, up from $150 million in 1993. A strong modernization of the wine industry took place during this period, together with a diversification of brands and types of wine caused by shifts in international market demand and foreign investments. Agricultural imports also expanded sharply, on the one hand reflecting increased domestic demand brought forth in particular by improved incomes among the poorer segments of the population; and, on the other hand, reflecting the reduced production of import-substituting crops. Nevertheless, the sector’s balance of trade has continued to be strongly positive, reaching about $3 000 million in 1997, up from $1 500 million in 1989.
 

Concluding remarks

 Chile’s agricultural development, having evolved through the widely changing political and economic circumstances experienced over the past decades, provides a number of lessons that are relevant to many other country situations.

 One obvious lesson to be drawn from the Chilean experience is the need to establish close cooperation between the public and private sectors. Attempts at substituting state control for private sector initiatives in agricultural production and marketing during the 1970-1973 period resulted in major production failures. Vice versa, a short-sighted absence of state intervention during the early period of the military government also resulted in an erratic response from the sector.
 

FIGURE 32
CHILE: DOMESTIC SUPPLY AND UTILIZATION OF SELECTED PRODUCTS
 

 The government played a major role in providing guidance and support in the launching and development of what are, today, the three main pillars of the country’s modern agriculture: fruits, forestry and dairy products. Government intervention has also proved essential in the promotion of a competitive marketing system throughout the country as well as in the more traditional areas of health control, research and extension. Chile’s experience also suggests that the state cannot forfeit its role in the definition and implementation of sectoral policies. In the case of Chile, adjusting macro policies alone has proved not to be enough.

 The above does not mean that sectoral policy can be designed in a vacuum or against the macroeconomic setting, as unfortunately is often done. In fact, few economic sectors are so sensitive to even minor macroeconomic variations. Movements in the rate of exchange, the interest rate and minimum wage levels have a direct impact on the profitability and, hence, the development of the sector. Policies that subordinate the allocational functions of the exchange rate to anti-inflationary objectives can be very costly to agriculture. Widely different macroeconomic circumstances, such as those of the 1982 crisis and, to a lesser extent, the “Dutch disease” of the 1990s – a result of the country’s ability to attract foreign investment – have had similarly negative effects on the sector’s performance.

Chilean agriculture today is probably one of the least distorted agricultural sectors in the world, and the large reduction of state intervention has left the sector very lean and flexible.
 The advantages of economic pragmatism can be considered another important lesson, which probably holds for any sector, country or period. However, the Chilean experience in agriculture is particularly illustrative. The large reduction in distortive state interventions has undoubtedly left the sector very lean and flexible, allowing it to respond to market signals. Chilean agriculture today is possibly one of the least distorted agricultural sectors in the world. At the same time, however, the implementation of measures that might appear to be distortions (namely price bands and parastatal intervention in marketing) has been crucial in ensuring the stable growth of agricultural production, yet without isolating the sector or specific crops concerned from market forces. This is shown by the sharp drop in area under wheat and oilseeds, which has nevertheless been accompanied by significant productivity increases. The experience with price bands has added evidence to Peter Timmer’s24 contention that, stabilizing the market of one major staple commodity, even at the cost of temporary protection, can be a critical element for agricultural development and food security. Periods in which ideological development models have prevailed over social, political and sound economic evidence (1939-1952, 1970-1973 and 1974-1982) have witnessed a deterioration in agricultural performance.
 

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