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close this bookAgricultural and rural development policy in Latin America. New directions and new challenges. (FAO Agricultural Policy and Economic Development Series - 2) (1997)
close this folderI. Neoliberal Policy Reforms and New Directions in Agricultural Development Policy
View the document(introduction...)
View the document1. Washington Consensus and Agriculture
View the document2. Redefining the Role of the State
View the document3. New Approaches to Agricultural Development Policy

(introduction...)

The purpose of this paper is to analyze and assess recent trends in agricultural development policy in Latin America, to identify and synthesize new policy directions, and to highlight emerging challenges and avenues for policy innovation. The paper begins with an overview of how the general evolution of the Latin American countries toward the adoption of neoliberal economic policies and the retrenchment of the state in the wake of economic reform are impacting the design of policies and the structure of policy making institutions. Part II examines economic and agricultural performance in Latin America during the last 25 years. This section provides a necessary benchmark from which to judge the success or failure of recent policy reforms. Part III analyzes the evolution of agricultural policy in the specific areas of trade, product and factor markets, land reform and land markets, research and extension, and irrigation. Part IV explores emerging trends, issues, and challenges that define current policy debates and impact the structure of policy making institutions, including local responses to globalization, policy differentiation, new approaches to poverty reduction, institutional reform and reconstruction, and the sequencing of reforms. The final section summarizes the main themes of the paper and presents a normative perspective on the future direction of agricultural policy in the region.

1. Washington Consensus and Agriculture

While economic reforms had been initiated as early as 1973 in Chile and Uruguay, and briefly in 1976 in Argentina, in the other Latin American countries it was the debt crisis of 1982 that triggered a series of reforms that have become the foundation for Latin America's current strategy of economic development. With International Monetary Fund and World Bank assistance, countries burdened with debt service obligations designed austerity programs for their economies that included reductions in central government expenditures (government budget deficits fell from a continental average of 5.5% of GDP in 1988 to 1.8% in 1995), decreases in the growth in money supply, exchange rate devaluation, and wage repression. Structural adjustment loans were tied to economic reforms that included the removal of trade barriers and impediments to foreign investment, financial liberalization, privatization of state enterprises, deregulation, and reforms of the tax system and property rights laws (Williamson, 1995). Inspired by the success of the high growth East Asian countries, the neoliberal, export-oriented approach to development has become, in the after-math of the debt crisis, the dominant paradigm of economic development in the region. As a result, adoption of free market-free trade (FMFT) policies in Latin America has been widespread, with almost all countries in the region conforming, to various extents, to the orthodoxy of the "Washington consensus", even if frequently combined with non-orthodox instruments, particularly in transitory attempts at price controls.

Structural adjustment and the process of adopting FMFT policies are re-defining the relationship between agricultural policy and economic and social policy, and altering the context of the debate surrounding the choice of an agricultural development strategy (Schydlowsky, 1995; Woller, 1994; Sheahan, 1992). For the most part, agricultural policy reforms have occurred in the context of broader economic reforms, and agricultural policy has in most instances been directly dictated by macroeconomic policy, with often little explicit concern for agriculture, rural development, or poverty. The perceived success of FMFT policies in curtailing inflation (which fell from a regional average of 196% in 1991 to 19% in 1995), promoting trade (intra-regional trade doubled in the 1990-94 period and regional exports grew at the average annual rate of 6%), attracting foreign investment, and restoring economic growth has served to entrench the fundamental precepts of the neo-liberal paradigm, causing contemporary agricultural policy debates to center less on whether and where to apply market-oriented prescriptions, and more on how to implement these policies while meeting the economic and social criteria of the sector. As many countries in the region are emerging from the economic crisis, increased attention is being focused on designing and implementing policies that maximize economic efficiency within a market compatible framework, while pursuing social objectives that consider poverty, inequality, sustainability, and income growth.

In spite of renewed growth, the FMFT reforms have been far from successful. Recoveries remain weak with a continental growth rate in GDP of only 0.8% in 1995 and an expected 3% in 1996, with setbacks in Mexico, Argentina, Peru, and Venezuela. Unemployment remains high in most countries and real wages have failed to rise in spite of recoveries. While the incidence of poverty has fallen where recoveries have occurred, inequality has either failed to decline or increased (Altimir, 1995). Cuts in subsidies and rising prices for public services have reduced the welfare of the middle class. Perception that the benefits of growth are not fairly shared is widespread. Progress in democratic representation is exposing governments to sharp pressures against continuation of the reforms. Popular discontent has taken the form of guerrilla insurgencies in Mexico, Colombia, and Peru, opposition to the presence of technocrats in higher office in the ruling party in Mexico, strong showing of the opposition parties in the presidential elections in Nicaragua, election of populist leaders in Ecuador and Venezuela, and increased symptoms of social breakdown, including urban violence, delinquency, drug trafficking, and corruption of the police and judicial systems. Managing the social backlash to the FMFT reforms, and adjusting the course of these reforms to increase their political sustainability, are currently among the prime concerns of Latin American policy makers and international development agencies. The sustainability of economic recoveries, dependent as they are on foreign direct investment and hence on the perceived investment climate, hinges upon ability of the Latin American governments to manage the political feasibility of the reforms. And this affects the course of agricultural and rural development policies as well.

2. Redefining the Role of the State

The move towards freer markets has required governments to surrender control over many of the policy instruments that were used as the pillars of the import substitution industrialization (ISI) strategies that prevailed until the introduction of the reforms, and that served to either tax or compensate the agricultural sector, with a net bias against agriculture (Schiff and Valdés). Examples of policy instruments no longer at the disposal of governments adhering to the FMFT orthodoxy cover the spectrum of public policy. Tariff rates and quantity restrictions on trade have in principle been eliminated or subjected to international regulation under the terms of particular trade agreements. Many countries have moved from fixed, and often multiple, exchange rates to floating or "pegged" rate regimes. In regards to product and factor markets, subsidies, price controls, and quantity restrictions have been eliminated or greatly descaled, with prices and output increasingly market determined. Credit subsidies and special credit programs have been reduced, with interest rates and the composition of borrowers removed from policy discretion. Land markets have been deregulated and agrarian laws changed, freeing the land market to respond to market forces.

In practice, however, governments have had varying degrees of success in surrendering control over these policy instruments. Quantity restrictions have effectively been removed and tariffication has been widespread, including the use of tariff-rate quotas as instruments compatible with elimination of quantity restrictions. However, uneven progress toward freer trade is due to both pressures of farm producers and fiscal interests of governments. In general, the dilemma of agricultural trade liberalization in the early 1990s is that it has occurred in an adverse context of falling international commodity prices, appreciating real exchange rates, high interest rates, and falling subsidies, all of which have combined in creating serious profitability crises for agriculture (Valdés, 1996; Gardner, 1996). This is generating pressures on governments to either restore protection of the import-competing sectors or seek direct income transfers decoupled from price interventions. For governments, trade interventions were sources of economic revenues (export taxes and import tariffs) and political power (discretion over the allocation of exemptions and compensatory subsidies; see Bates, 1981) for policy makers and bureaucrats, and have economically benefited politically influential vested interest groups who appropriated the compensations through rent seeking activities. As a result, Valdés (1996) observes that the effective rate of protection remains sizeably negative on exportables in many countries (Colombia, the Dominican Republic, Ecuador, Paraguay, and Uruguay) while there is protection for the import competing sectors. Progress toward reducing the anti-agriculture bias in price policy has thus been highly uneven across countries and commodities. Most particularly, the anti-agriculture bias of direct price interventions has, except where there are transitory foreign exchange crises as in Mexico, been replaced by indirect taxation as a consequence of appreciation of real exchange rates associated with capital inflows. Indeed, the chronic weakness of domestic savings creates a strong policy dilemma between growth and appreciation as foreign capital inflows must be relied upon as the primary source of investable funds.

To a great extent, agricultural policy reforms in the last decade can be characterized as a process of "rationalization" of sectoral policy with macro policy, i.e., of trimming and cancelling government programs and policies in agriculture that could not be justified under the FMFT paradigm. Hence, there has been a paring down, if not the complete elimination, of government functions not satisfying the classical rationalizations for state intervention in a market-oriented system. The role for government is increasingly limited to the promotion and regulation of free and competitive markets, and to the provision of goods and services where markets fail - as in the cases of public goods, negative externalities, natural monopolies, asymmetric information, economies of scale, and very high start-up costs. In terms of agricultural programs, the public goods character of infrastructure - such as transportation, marketing, and irrigation - and services such as research, extension, and export promotion justify at least partial public provision. Negative externalities call for government intervention in environmental protection and resource management. Asymmetric information may cause markets to fail and may justify a public role in, for instance, the certification of seeds or product quality. Government is also expected to provide the legal institutions to enforce property rights (land titling, patents on technological innovations), enforce anti-trust legislation, and regulate rural financial and crop insurance systems.

With the loss of policy domain over many classical instruments of agricultural policy resulting from market liberalization and the submission of agriculture to macroeconomic policy reforms, the scaling back of government programs through the process of rationalization and privatization, and the downsizing of government intervention due to fiscal austerity measures, the state has played a less active role in agricultural policy during the last decade, both in terms of economic and social objectives. The ascendancy of the market paradigm has caused the role of the state and agricultural policy to be increasingly determined by the needs and limitations of the market system. Beyond its role of facilitating a competitive market system, agricultural policy has been defined negatively by that which the market cannot accomplish either because markets fail or do not exist, or because they produce socially undesirable outcomes. In addition, while macropolicy has been typically proactive (e.g., the promotion of regional trade agreements, greater independence of central banks), agricultural policy has all too often been a passive appendage of macropolicy initiatives, seeking adjustments of sector to macro initiatives as opposed to pursuing proactively specific sectoral policies. Instead of focusing on differentiated complementary microeconomic reforms to promote the competitiveness of the different classes of farm producers, policy reforms have had a tendency to focus on macro-level adjustments and on the design of government interventions to compensate losers in the transition to FMFT policies in order to make the reforms politically feasible.

3. New Approaches to Agricultural Development Policy

Despite, or perhaps because of, the retrenchment of the state, there is an emerging consensus on the need for a more active role for the state in redressing the social failings of the market system (UNICEF, UNDP, FAO, CEPAL). This emergence coincides with a growing appreciation that market-oriented economics does not necessarily imply an adherence to laissez-faire social policy. Free competitive markets, while economically efficient, may be "socially" inefficient, justifying state intervention when markets fail in terms of social criteria. Citizens may express via political systems preferences for an allocation of goods, income, or wealth among the population, or over time, that differ from the market allocation. These social preferences may differ in terms of: (i) poverty and equality - that is, the intra-generational distribution of income or wealth; (ii) sustainability - that is, the inter-generational distribution of income or wealth; or (iii) economic growth - the market induced growth rate may not equal the socially optimal growth rate. The state, via macro and agricultural policy, can alter market outcomes ex ante or redress outcomes ex post.

While the scope for state intervention is large, the ascendancy of the market orthodoxy has had important implications for the design of development policies that address the main issues of poverty, equality, sustainability, and growth. New market-based policies are distinguished from older approaches to the same social issues by the compatibility of the new policies with the FMFT paradigm. Market-compatible policies alter market outcomes while maintaining, as much as possible, the fundamental market incentives. In other words, these policies attempt to achieve social goals while minimizing price distortions, and respecting constraints dictated by supply and demand, price stability, budgetary balance, and equilibrium in the balance of current accounts.

Some of the defining characteristics of the market-compatible agricultural development programs include: (i) minimal direct government involvement in markets - policies are achieved through economic signals (taxes and subsidies) rather than through government ownership; (ii) targeting specific groups for assistance through differentiated interventions; (iii) using lump sum transfers as opposed to price policies to minimize market distortions; (iv) improving the access to assets, reducing the transactions costs, and raising the productivity of targeted groups (to allow their own initiatives in the context of market forces to raise their incomes); (v) using market transfers of productive assets rather than legislative control (e.g., grants to poor to purchase land rather than imposing size limits on land holdings and tenancy controls); (vi) maximizing the use of the private rather than the public sector (e.g., the private provision of publicly funded extension); and (vii) decentralizing governance to seek to achieve both efficiency and welfare gains in policy making and government interventions compared to central administration. Some contemporary policy reforms have tried to achieve social objectives such as increasing the productivity of the poor, or raising nutritional levels, while maximizing the use of the private sector (corporate initiatives as well as grassroots, corporatist, and non-governmental organizations), reducing government bureaucracy, and minimizing efficiency losses resulting from economic distortions.

While the methods of approaching social issues are increasingly guided by the market orthodoxy, the extent to which the state should intervene to promote agricultural development remains fundamentally a political issue, determined by the balance of power between groups within countries. The scope and scale of redistributive policies, and the level of social welfare expenditures on rural development are determined through the political process. The political arena is also where intertemporal tradeoffs in the use of natural resources will be resolved, where the immediate needs of the poor for land to farm or graze will be weighed against the preservation of ecosystems for future generations (ECLAC, 1991; Bramble, 1995). Political battles over present versus future consumption will determine expenditures on research and extension, investment in infrastructure, and tax and saving programs.

In recent years, major changes have occurred in the balance of forces from which policy making and implementation emerges, leading to new approaches to agricultural development policy. Most Latin American governments have made significant progress toward greater democratic representation and toward decentralization of governance. Complementary to these changes, civil society has made a quantum jump in the degree of organization, particularly of the historically weaker segments of society. The last decade has witnessed a proliferation of grassroots and non-governmental organizations that have incorporated many of the rural poor, both as clients of service organizations and as instruments of political representation. As a consequence, new attention has been given to institutional reforms and constituent organizations as a way of improving the allocation of public resources given the diverse needs of an heterogeneous population. Heterogeneity results from highly varied asset endowments and highly varied constraints on performance resulting from differential access to markets, credit, infrastructure, information, and insurance. An heterogeneous population inevitably demands and requires a highly differentiated policy response to the problems of competitiveness, poverty, and sustainability. Decentralization of governance and proliferating social movements have induced governments to be increasingly responsive to the diverse needs of the population, and have increased the ability of the neediest segments of the population to fight within their political framework for greater access to public services by what has become known as demand-driven development.