Development of Rural Economies in Latin America and the Caribbean by IDB

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Ruben G. Echeverria Editor

INTER-AMERICAN DEVELOPMENT BANK Washington, DC 2001

Development of Rural Economies in Latin America and the Caribbean

Inter-American Development Bank 1300 New York Avenue, N.W. Washington, D.C. 20577

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Produced by the IDB Publications Section. The views and opinions expressed in this publication are those of the authors and do not necessarily reflect the official position of the Inter-American Development Bank.

Cataloging-in-Publication data provided by the Inter-American Development Bank Felipe Herrera Library Development of rural economies in Latin America and the Caribbean / Ruben G. Echeverria, editor.

p. cm. Includes bibliographical references. ISBN:1931003130 1. Rural development—Latin America. 2. Rural development—Caribbean Area. 3. Agriculture and state—Latin America. 4. Agriculture and state—Caribbean Area. 5. Agriculture—Economic aspects—Latin America. 6. Agriculture—Economic aspects—Caribbean Area. 7. Administrative agencies—Latin America—Reorganization. 8. Administrative agencies—Caribbean Area—Reorganization. I. Echeverria, Ruben G. II. Inter-American Development Bank. 338.1 D24—dc21

LCCN: 2001098585

Preface

Introduction

vii

Chapter 1. Investing in Rural Development Is Good Business

Alain de Janvry and Elisabeth Sadoulet

Chapter 2. Food, Agriculture and Natural Resources in 2020

Per Pinstrup-Andersen and Julie Babinard

Chapters. Importance of the Food and Agricultural Sector.... 61 Martin Pineiro

Chapter 4. Agriculture and the Macroeconomic Reforms of the 1990s

Jorge A. Quiroz

Chapter 5. Institutional Reform and Management of the Public Agricultural Sector

123

Roberto Martinez Nogueira

Chapter 6. The Increasing Importance of Nonagricultural Rural Employment and Income

159

Julio A. Berdegue, Thomas Reardon and German Escobar

Chapter?. Options for Investing in the Rural Economy

187

Ruben G. Echeverria

Chapter 8. Conclusions

213

About the Authors

223

Contents

Cover Photo: Carlos Cordovez

Graphic Design: Dolores Subiza

Modernizing the agriculture and livestock sector and improving the quality of life of the rural population are two of the highest priorities of the structural reforms in which the countries of Latin America and the Caribbean are engaged. This effort has the steadfast support of the InterAmerican Development Bank. Agriculture continues to be a significant economic activity in the region, irrespective of the criteria by which its performance is measured. Beyond the structural reforms in many countries of the region, agricultural activities and rural life in general continue to constitute a true bastion of ancient cultural traditions and autochthonous institutions that define national identities. These very real conditions must be weighed and considered in order to ensure the success of reforms to transform and modernize agricultural activities and improve social welfare in rural areas. The greatest challenge confronting rural development at present is to substantially reduce rural poverty, which in the 1990s afflicted more than 60 percent of the rural population and which is still a major cause of migration to urban areas. The proportion of people impoverished in rural areas is almost twice as high as that of urban areas. Other major challenges are related to productive transformation and technological progress of the agricultural, livestock, forestry and fishery sectors, which would expand and diversify the sector's production frontier amid conditions of rising productivity and global competitiveness. It would also expand exports, particularly those of nontraditional and higher value-added products, increase employment and income levels, and make for more optimal and sustainable use of natural resources. The beginning of this new century is a particularly propitious moment to promote the vigorous and sustained long-term development of Latin America's rural economies as a vital part of overall efforts to support social progress of the agricultural and livestock sector, economic and institutional transformation, and modernization. The Bank's support for the development of Latin American agriculture and other rural activities reflects a genuine institutional commitment that has existed since the Bank's inception and has been maintained and reinforced over the years. Our goal is to continue strengthening our traditional commitment to the development of this sector, which is im-

Preface

portant for the productive capacity and social well being of our borrowing member countries. Through this book, the Inter-American Development Bank seeks to enrich the dialogue on the challenges posed by agricultural development in the region and disseminate as widely as possible the ideas proposed at the Conference on Rural Development in Latin America and the Caribbean, which was held during the Annual Meeting of the Board of Governors of the Bank in New Orleans in March 2000.1 am confident that these ideas will enhance efforts to promote modernization and socioeconomic progress in our region, especially in rural areas. Enrique V. Iglesias President Inter-American Development Bank

PREFACE

This book brings together the main ideas presented at the Conference on Rural Development and Poverty Reduction in Latin America and the Caribbean, which was held during the Annual Meeting of the Board of Governors of the Inter-American Development Bank in New Orleans in March 2000. The purpose of the conference was to discuss a broad vision of rural development in the region, as well as a new IDE agenda to promote the reduction of rural poverty based on the lessons learned from the two last decades of sweeping changes in the region. Conference participants included representatives of civil society, nongovernmental organizations and the public and private sectors, ministers of agriculture and rural development, ministers of economy and finance, leading international experts, directors of international development agencies, and representatives from academia. The Government of Denmark provided financial support for the conference and the U.S. Department of Agriculture helped organize the field day after the conference ended. The book begins by analyzing how to turn rural investment into good business based on new perspectives on rural development in the region (Chapter 1). It then considers current world and regional trends with respect to food, agriculture and natural resources (Chapter 2). Chapter 3 reaffirms the importance of the agrifood sector and Chapter 4 examines the effect of macroeconomic reforms on agricultural performance. Progress to date and work yet to be done in the areas of institutional reform and public sector agricultural and livestock management reform are discussed in Chapter 5. Chapter 6 looks at the growing importance of nonagricultural productive activities in rural areas. This serves to introduce the analysis of agricultural and nonagricultural investment options in rural economies discussed in Chapter 7. The conclusions in Chapter 8 summarize some of the ideas discussed during the conference. The Inter-American Development Bank has had an active project portfolio in the rural sector over the past 40 years, with total loans of more than $17 billion in 1961-2000 constant dollars. During the 1960s, the Bank provided approximately 25 percent of total loan resources to rural development, not counting road, school, electricity and other projects that directly or indirectly improved the quality of life in rural areas. Toward the end of the 1990s, rural loans ranged between 2 and 5 percent of the Bank's total lending. Although these percentages mask the

Introduction

INTRODUCTION

effect of the large increase in total loan amounts over time, they nevertheless represent a dramatic drop in loans to agriculture and rural development that began in the early to mid-1980s. This was essentially attributable to both the decline in demand for rural investment projects during the period of reforms and adjustment, and to the relative scarcity of innovative loan instruments. Most large projects for irrigation and agricultural credit were carried out prior to the debt crisis, and, for various reasons, investment opportunities over the past 15 years for traditional projects have seemed less and less attractive. Such projects were associated with state subsidies, undercapitalized development banks, unviable public sector enterprises, and large producers taking advantage of subsidized credit. As traditional projects disappeared in the 1990s, a new family of programs emerged oriented toward supporting changes in sector policies, reducing the role of the state, and supporting technology and plant and animal health projects. Essentially, the agricultural sector lost its leading role in national development plans over the past decade because of the failure to consolidate a strategic vision to encourage governments to support the sector, despite its vital importance for growth with equity, and because of the pressing demand for resources for macroeconomic reform programs. The elements of this strategic vision exist today. The progress that has taken place as a result of economic reform programs, trade liberalization and regional integration has created new needs and opportunities in the agrifood sector and in rural areas in general. The region is rediscovering its ability to compete in agrifood production and to create new conditions to ensure a leading role for the sector in economic and social development strategies. In addition, there is a clear need to build a new regional consensus that would make it possible to direct rural investment policies more effectively, especially in view of the inconsistent results of 15 years of adjustment with low rates of growth, persistently high levels of rural poverty, unequal distribution of income, and frequent declines in agricultural profitability. This demonstrates a certain imbalance between innovative thought, policies and specific investment programs, particularly in relation to the challenge of modernizing the agrifood sector in order to promote growth without neglecting other rural investment needs. In summary, this book supports the growing consensus that in order to satisfactorily reduce poverty, macroeconomic policies must go hand in hand with social, institutional, microeconomic and environmental policies that bring about structural changes in the development of human capital and the quality of life of the rural population. The develop-

I viii I

| ix |

ment of rural economies requires a multisectoral economic strategy that includes agriculture, livestock, forestry, fisheries, agribusiness and food production; rural health and education; rural infrastructure, transportation and finance; mining and energy; agrotourism; and others. There must be a variety of complementary activities, including increasing the competitiveness of the agrifood sector, sustainable management of renewable natural resources, regional and municipal development, social development in rural areas, modernization of institutions and infrastructure, and regional and subregional economic integration. In short, all of these activities are part of a new approach to rural development in Latin America and the Caribbean. The challenge ahead lies in implementing the ideas discussed here at the local level, and in achieving a continuous and significant critical mass of investment that effectively improves the quality of life through the development of rural economies. We would like to thank all the authors for their collaboration in making this book a reality, the conference organizers, the participants for sharing their different perspectives, and the Government of Denmark and the U.S. Department of Agriculture for sponsoring the event. Special thanks as well to Ximena Anwandter and Eulalia Puig Abril for their hard work in editing this book.

INTRODUCTION

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Investing in Rural Development Is Good Business Alain de Janvry and Elisabeth Sadoulet

While there has beenprogress in reducing rural poverty in many Latin American countries over the past three decades, the problem not only persists in rural areas but also exacerbates urban poverty through migration. However, changing conditions over the past decade have allowed for significantly redefining approaches to rural development. This has enhanced the likelihood of success in reducing rural poverty. This chapter examines those changing conditions. We show that investing in the asset position of the rural poor can help them overcome poverty through any number of ways, including migration, agriculture, diversifying economic activities, and assistance. The return on these investments depends on better coordinating macro, sectoral and rural development policies; taking a regional approach to decentralized rural development; and rebuilding institutions that support income generating activities in rural areas. Putting these measures into place can help turn investment in the rural poor into a good business. The 1990s saw major changes in the way governments and development agencies approached rural development and poverty. This chapter documents these changes and extracts the lessons from them that will make such approaches more efficient and more easily reproduced in the future. Despite considerable heterogeneity in the various undertakings and outcomes, the chapter shows that: â&#x20AC;˘ New opportunities to combat rural poverty have emerged from the region's successful adjustment policies, a more dynamic agricultural sector, decentralization of economic activity toward rural areas, the blurring of the rural-urban divide, increased private sector servicing of rural areas, the proliferation of civil society orga-

ALAIN DE JANVRY AND ELISABETH SADOULET

nizations, more participatory forms of governance, and a greater recognition by governments of the inefficiencies and inequities caused by under-investment in the rural poor. Five fundamental contextual conditions for successful rural development are gradually but systematically being put into place: 1. More effective national-level coordination of macro, sectoral, regional and rural development policies. 2. A more pro-active approach to managing regional development in order to promote growth in rural areas, thus providing rural investment and employment opportunities in tandem with a demand-led approach to local public investment. 3. Municipal decentralization with devolution of the management of public funds and the coordination of programs to that level of governance. 4. Reconstruction of rural institutions based on the growing role of private and civil society organizations and public-private partnerships. 5. The proliferation of local organizations undertaking an array of initiatives to enhance service delivery and increase political representation. Establishing these contextual conditions requires investments that demand not only cash (e.g., for infrastructure development and demand-driven investment projects) but also soft investments to support institutional, organizational, administrative, managerial and behavioral changes. â&#x20AC;˘ Under these conditions, investing in improvements in the control of assets for a large subset of the rural poor can be good business, both for government and the private sector. These investments can help provide a variety of alternatives for rural households to escape poverty, including migration, agriculture, diversification of economic activities, and, as a residual option, assistance. To argue this message, we first review the record of how rural poverty has evolved in Latin America over the past two decades. We then analyze the determinants of poverty, stressing the high degree of heterogeneity that characterizes the rural poor, and, hence, the multiplicity of paths out of poverty that can be opened up to them. We discuss how to establish the five contextual conditions for the design of successful rural development interventions mentioned above. Finally, we show that, un-

der these conditions, there are many opportunities for successful investment in the assets of the rural poor that can lead to both efficiency gains and poverty reduction. High returns to investments in the asset position of the poor also require investments in establishing the context for rural development, and the two are complementary. The returns to investment in rural development measured by improved social indicators are thus to be assessed against these two categories of expenditures. The main message in the end is that while these new ideas for rural development can be effective in reducing rural poverty, they require major commitments by governments and international development agencies. Because many of the changes are subtle in nature, bottlenecks are more in terms of political will, managerial capacity and social mobilization than in the availability of financial resources. The range of experiences needs to be systematically analyzed, and bold experiments with alternative institutional and organizational schemes need to be designed to establish best practices for highly heterogeneous conditions. Evolution of Rural Poverty in Latin America Data on poverty in Latin America can be just as controversial as they are for other regions (Lustig, 1994). The data used here are compiled by ECLAC (1999) and have the merit of being comparable across countries and over time. The historical record gives the following perspective. Poverty increased with recession in the 1980s and declined with recovery in the 1990s. However, the incidence of poverty in rural areas in 1997 was still at the same level as in 1980 (54 percent), while poverty levels in urban areas rose from 25 to 30 percent over the same period. With population growth, this implies that the absolute number of poor increased even in rural areas from 73 to 78 million. Populations have become rapidly urbanized, with 64 percent of the population urban in 1980 and 78 percent in 1997. Combined with rising urban poverty rates, the share of rural poverty in total poverty consequently declined quite sharply from 54 percent in 1980 to only 38 percent in 1997. The incidence of rural poverty remains extremely high (54 percent) compared to that of urban poverty (30 percent). The gap is

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even greater for extreme poverty, which affects 31 percent of the rural population compared to only 10 percent of the urban population. Hence, a huge gap remains in the incidence of poverty across sectors, particularly for extreme poverty. The change in rural poverty has been quite uneven across countries during the last 17 years. The incidence of poverty rose in Mexico and Venezuela, remained constant in Honduras, and fell in Brazil, Chile, Costa Rica, Guatemala, Panama and Peru.1 Hence, overall trends hide considerable heterogeneity and also significant declines. Poverty is multidimensional, including people not only with low and uncertain incomes, but also poor health and low levels of education. However, the incidence of poverty as measured both by income and by basic needs such as health and education is worse in rural areas. Thus, on average, a 15-year old in a rural area has 25 percent fewer years of education than his or her urban counterpart (IDE, 1998). Poverty affects ethnic populations and female-headed households differently. In the Mexican ejido sector, for instance, the incidence of poverty is 68 percent for indigenous households compared to 37 percent for nonindigenous households (de Janvry et al., 1997). Finally, the decline in the share of the rural sector in total poverty has been due not to successfully reducing the incidence of rural poverty, but rather to rural-urban migration (de Janvry and Sadoulet, 1999a). Over 1990-97, 32 percent of the decline in this share was due to the falling incidence of rural poverty, while 68 percent was due to migration. However, since migration contributes to urban poverty, a decline in the number of rural poor relative to the number of urban poor is misleading. The impoverished people have simply relocated into urban areas, a Pyrrhic victory that does not solve the aggregate poverty problem. Rural poverty in Latin America continues to represent a waste of productive resources, a large welfare problem, and a source of negative externalities for the rest of society through migration, political destabili1 Data for Colombia are not comparable over time due to a change in the definition of poverty as it relates to the population being measured.

zation, and, in many cases, environmental destruction. A major challenge remains to effectively combat rural poverty, but this will not be achieved through the migration of households unprepared for successful absorption into the urban labor force, or through costly welfare transfers. It must be done instead through instruments that improve the income generating capacity of rural residents or prepare migrants for successful insertion into the labor force at their destination point. What Explains Rural Poverty? Designing effective rural development strategies first requires an understanding of what causes poverty and which of these causes can be altered by policy reforms and program interventions. There are both aggregate and micro level determinants of poverty.

Economic Growth to Reduce Poverty and Inequality Aggregate growth in GDP per capita has been heralded as the main instrument for poverty reduction (World Bank, 1990). While it is indeed clear that reducing poverty without growth would be virtually impossible, the question is whether growth alone is sufficient, and what complementary interventions are needed to make it more effective. Data clearly support the proposition that rural poverty is anti-cyclical with GDP per capita: the rural headcount ratio rose with recession and fell with growth. Hence, growth is, in the aggregate for Latin America, effective for poverty reduction (Morley, 1995). However, we showed elsewhere that growth is only effective for poverty reduction if two conditions hold (dejanvry and Sadoulet, 1999a): the level of inequality cannot be too high, and there must be sufficient levels of secondary education. Hence, growth is a weak instrument for poverty reduction in countries with high inequality (e.g., Brazil, Guatemala, Mexico, Chile, Venezuela and Honduras) or with low levels of secondary education in the adult population (e.g., Colombia, El Salvador, Brazil, Chile, Dominican Republic, Panama and Mexico). The impact of recession on poverty is, however, undiminished by the level of inequality and the level of education. Data also tend to support the proposition that inequality is exacerbated by income shocks, but does not seem to decline with growth. Hence, successive crises create ratchet effects in the level of inequality. Inequality has, however, been shown to reduce economic growth (see the review of causal relations by Kanbur and Lustig, 1999). There is an asymmetrical

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relation between growth and inequality, whereby higher inequality reduces growth, but growth is neutral on the level of inequality. As a result, there should be net social gains from reducing inequality. However, since inequality is not reduced by growth, it needs to be attacked through other instrumentsâ&#x20AC;&#x201D;either asset distribution programs that enable the poor to generate higher levels of income, or income transfers to compensate the poor for low incomes. It is clear that to have a significant effect on poverty, growth needs to be complemented by interventions that make the poor participate more broadly in the benefits of that growth by improving their asset position, in particular through the spread of secondary education. Direct interventions to reduce inequality can improve not only the poverty reduction effects of growth, but also serve to enhance that growth. Economic instability also has high costs to the poor, both through the direct impact on poverty and indirectly through rising inequality. Hence, important welfare gains can be achieved for the poor by reducing country exposure to economic crises, be they policy induced or transmitted through adverse external shocks (Lustig, 1999).

Household and Community as Determinants of Poverty What explains poverty at the household level? We turn for this to an analysis of household survey data. There are four observations that derive from this analysis. Lack of Access to Assets and Heterogeneity in the Control Over Assets Control over assets is the key factor in explaining household income. These assets include natural, physical, financial, human and social capital. Rural households have enormous heterogeneity in their endowments of these assets, and there are trade-offs in the way these assets combine in generating income. If conditions are right, investments that help provide the rural poor with the asset endowments needed to escape poverty can have high social rates of return. How to set up the conditions for this to happen will be discussed later, along with examples of profitable investments in the asset endowments of the poor. The Contexts in which Assets Are Used as Determinants of Poverty The income generation value of assets, and the variability of this income, depends on the context where they are used. This context is characterized

by markets, institutions and public goods. For many of those who live in poverty, markets fail due to high transaction costs, and there is a lack of institutional arrangements to reduce these market failures. In addition, access to public goods tends to be idiosyncratic. Many of the poor either have to deal with public goods that have not been designed for their needs, or they do not have access to the public goods they need. Access to assets is thus necessary but not sufficient to escape poverty if those with these assets face market failures, institutional gaps, or limited access to public goods. Lack of a level playing field in using assets is thus an important part of the explanation of what causes poverty (Barham and Carter, 1996). Investing in the context that allows the rural poor to valorize the assets they have is an integral part of rural development initiatives. The Importance of Off-Farm Activities as a Source of Income Analysis of the sources of income of the rural poor shows the significance of off-farm incomes. Off-farm income accounts for 55 percent of total Mexican ejido income, and some 73 percent of the households in that sector derive more than half of their income from off-farm activities (de Janvry and Sadoulet, 1999b). Farm households with little land derive 61 percent of their income from off-farm activities in Nicaragua (Davis et al., 1997), 61 percent in Panama (World Bank, 1998) and 67 percent in Chile (Lopez and Valdes, 1997). The poorest 60 percent of rural households in El Salvador derive 80 percent of their income from off-farm activities (Lopez and Valdes, 1997). That figure is 86 percent in Ecuador (Lanjouw, 1996). Among off-farm activities, agricultural employment is an easy entry activity that substitutes for lack of land, but hardly helps participants escape from poverty. By contrast, nonagricultural employment offers an important road out of poverty (Reardon et al., 1998). However, access to nonagricultural employment depends greatly on secondary education, proximity to urban centers, quality of infrastructure, and decentralization of economic activity toward secondary towns (Rello, 1996). In Mexico, the spread of maquilas throughout the entire country since passage of NAFTA has created booms in rural employment in regions such as the Gulf coast, with extensive direct benefits for the rural poor. These maquilas in turn serve as local linkages for services and the production of regional nontradables, adding indirect benefits to the direct employment effects. Communities and regions can have highly proactive roles in attracting these investments and maximizing local linkage effects. What these observations imply is that the rural-urban divide is in-

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creasingly blurred as far as sources of income for the rural poor and rural development strategies are concerned. Rural and urban labor markets have become increasingly integrated, with rural households deriving offfarm incomes in towns and cities and through migration, and urban residents participating in peri-urban agriculture and rural labor markets (such as the boias-frias in Brazil, and urban farm workers in Chile). Decentralization (e.g., maquilas in Mexico and the Dominican Republic) has brought industrial employment to rural areas. Industries linked to agriculture are emerging in rural areas where high value crops are produced. In the San Francisco Valley in Brazil, three jobs in activities linked to agriculture are created for every one new field job in export crops. The conclusion is that any effort to attack rural poverty must recognize the multiplicity of sources of income for the rural poor. Income derived from self-employment in agriculture is only one element of an anti-poverty strategy. Rural development consequently needs to simultaneously enhance the many dimensions that contribute to the incomes of the rural poor. Employment creation in nonagricultural activities located in rural areas, and usually managed by the non-poor, is an important part of the solution to rural poverty. For this reason, as we will elaborate below, rural development interventions need to take a territorial approach that coordinates and integrates the determinants of these many sources of income at a regional level where economies of scale exist and externalities can be internalized. The Many Paths Out of Poverty Taken together, heterogeneity in asset positions, idiosyncratic contexts characterized by market failures, institutional gaps and public goods biases, and the resulting multiplicity of household income strategies represent a multiplicity of paths out of poverty. This is the positive side of the story. But it can also complicate efforts to organize rural development interventions that address the heterogeneity of potential solutions. There are four basic potential paths out of poverty:2 Exit path. As we have seen from the historical record, migration as an exit from rural areas has been the dominant factor in reducing rural poverty in Latin America. The process has been spontaneous and unas-

Echeverria (2000) distinguishes an additional path, that is, through initiatives based on the conservation and sustainable use of natural resources. This achieves the purpose of breaking the vicious cycle of rural poverty and degradation of natural resources.

sisted, and has resulted more in simply transferring poverty to the urban environment than in successfully reducing aggregate poverty (Ravallion, 2000). Agricultural path. This applies to those with sufficient natural capital endowments, and occurs in market, institutional and policy contexts that allow for the profitable use of these assets. This path has been the traditional focus of integrated rural development (IRD) interventions (World Bank, 1987). Yet, integrating the components of a rural development package has until recently been attempted at administrative levels too far removed from the ultimate beneficiaries of rural development, namely the rural poor. The result has been mixed success in reducing poverty and generally unsustainable programs (World Bank, 1997). Multiple activity path. As shown by the data on sources of income for the rural poor, this path has been dominant among rural households in Latin America. Yet it has been generally unrecognized and unsupported, except for local interventions with limited success at scaling up. Institutionally, support for this path has fallen in the cracks of the bureaucratic structure, making it an administrative orphan. Major rethinking about the institutional design of rural development is needed to incorporate the off-farm income dimension into these strategies. It should also be clear that the agricultural part of this path is not the same as that of the agricultural path itself. For farmers involved in multiple activities, agriculture is often a part-time endeavor. The household's off-farm activities are often undertaken to generate liquidity for farm expenditures. The offfarm part of the multiple activity path is not the same as that for fully landless households that have more flexibility in the labor market and often better location relative to the sources of effective demand, as compared to rural residents who are part-time farmers. A typical observation is thus that part-time farmers achieve on average levels of household income that are lower than those of landless workers (Lopez and Valdes, 1997). Assistance path. This path has been well supported in the urban sector, but profoundly neglected in rural areas. It applies to the structural poor caught in poverty traps who need permanent income transfers to reach the poverty line, and to households in transitory poverty who need access to safety nets to avoid decapitalization of productive assets and irreversible adjustments to shocks (e.g., taking children out of school, reducing nutritional intakes that jeopardize normal physical development of children, and using distress sales of animals and land). While these paths are not necessarily mutually exclusive, households that come out of poverty can usually be identified with one or the

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other. Identifying which path offers the greatest promise is important for designing differentiated rural development interventions that can best help poor households escape poverty (see de Janvry and Glickman, 1991, for Ecuador),

Five Fundamental Conditions for the Design of Rural Development Interventions The changing economic, political and institutional context for rural development over the past decade has created both urgency and opportunities to put programs into place to address rural poverty. There has been considerable experimentation with a new participatory and decentralized approach to rural development grounded in the role of civil society organizations and local governance. These efforts depart radically from the previous state-led integrated approach to rural development. They have been pursued in a dispersed and all too often loosely rationalized fashion by governments, NGOs and international organizations under the initial leadership of the International Fund for Agricultural Development (IFAD). The heterogeneity of endowments, opportunities and constraints makes it necessary to design programs tailored to specific countries and even particular social groups. Still, there are a number of broad principles that can be advanced to secure success in these initiatives. The framework in Figure 1.1 shows the return to household assets as determined by the context where those assets are used. This context is multidimensional, with features corresponding to the roles of the market, the state and civil institutions. Given assets and context, households and communities can escape poverty following the paths of migration, agriculture, multiple activity and assistance. The outcomes are the five dimensions, discussed below that characterize livelihoods (Ashley and Carney, 1999).

National Coordination Off-farm activities offer important sources of income to the rural poor, even though these activities require a growth engine. In some cases, this engine comes in the form of ecotourism (e.g., Costa Rica) or in free-duty zone industries located in rural areas (e.g., Mexico and the Dominican Republic). However, for the vast majority of rural areas, the growth engine is agriculture that indirectly creates employment in nonagricultural

JH]

INVESTING IN RURAL DEVELOPMENT IS GOOD BUSINESS

Household asset positions Heterogeneity

Assets

Natural capital Physical capital Human capital Financial capital Social capital

Context

Civil society

State

Market Liberalization Globalization

1. National coordination

Lower transaction costs

2. Regional development

Improved factor markets

3. Municipal decentralization

4. Institutional reconstruction 5. Local organizations and collective action

Household strategies Paths out of poverty Behavior

Exit path Agricultural path Multiple activity path v Assistance path /

Intermediate outcomes Productivity of assets: Level and variability of return on assets held by the rural poor Outcomes Final outcomes Livelihood indicators: Income Security Empowerment Sustainability Welfare of women and youth

Rural development investment context Regional and municipal development funds Demand-driven , investment funds /

Investments in household assets Public and private investments in assets of the rural poor

Figure 1.1 Logistical Framework for Rural Development Investments

ALAIN DE JANVRY AND ELISABETH SADOULET

activities through linkage effects (Echeverria, 2000). Hence, sound macro and sectoral policies to achieve dynamic agriculture are preconditions for successful rural development (IDB, 2000). Adjustment policies and global economic recovery have generally been favorable to agriculture. The sector has benefited from greater macrostability and improved terms of trade for tradables (IICA, 1999). Among those who have benefited have been producers of tradables (particularly oil products, horticulture, fruits, flowers, meats and forestry products) along with producers with the capacity for supply response. These producers are quite often linked through contract farming with agroindustry and agroexporters. Yet, all too often, macroeconomic policy continues to contradict the needs of agriculture, with agricultural policy transformed into a passive appendage of macropolicy. This is reflected in appreciated real exchange rates despite trade liberalization, excessively high real interest rates created by lingering stabilization policies, continued taxation of agricultural exports to secure public revenues when fiscal reforms are insufficient, and urban biases in the allocation of public goods due to imbalances in the political economy. Latin American agriculture also continues to be seriously hampered by incomplete trade liberalization in the industrialized countries, which depresses world market prices and limits exports of processed farm commodities (Binswanger and Lutz, 1999). And macro and agricultural policies are rarely coordinated with a regional perspective on rural development. In particular, the speed of liberalization at the macro level has generally exceeded the capacity to respond at the micro level, threatening the competitiveness of smallholders. When macro adjustments outpace the micro level ability to respond, subsidy programs can be used to buy time and avert negative social consequences. The PROCAMPO program in Mexico has been effective in mitigating the negative impact of trade liberalization on farm incomes through temporary cash transfers. Yet, it could be more powerful in assisting the reconversion of agriculture toward the new set of comparative advantages if it were coordinated with the delivery of technical assistance and investment credit. There is an urgent need to return to a more pro-active agricultural policy that is coordinated with macropolicy as opposed to being a mere appendage of it. One of the objectives of this policy should be to link smallholders to the dynamic sectors of agriculture through rural development initiatives that counteract their marginalization due to declining subsidies and public support services. This is not a call, however, for a return to centrally integrated rural development. To the contrary, rural development interventions have become increasingly decentralized and demand-led. Still, countries need inter-secretarial coordinating boards

to jointly consider macro, agricultural, regional and rural development policy reforms. Politically, times are ripe for this type of initiative, since governments are moving from overarching concern with stabilization and adjustment policies toward greater concern for inequality, environmental sustainability, vulnerability to external and natural shocks, gender issues, and the defense of social values. These emerging concerns compensate for the declining political weight of agriculture. Coordination is, however, rarely achieved. Instead, rural development has been institutionalized in agriculture (Mexico), social welfare (Ecuador), environmental agencies, specialized agencies directly attached to the executive (Colombia and Nicaragua), or decentralized to the municipal level (Bolivia). In all these cases, coordination between macro, sectoral, regional and rural development policies was ineffective. Achieving such coordination requires that countries establish a national level coordinating board for rural development to which the different ministries involved would defer as regards the broad perspective of household incomes and welfare. Ministers of Agriculture can play a major catalytic role in promoting these boards and their operations. Coordinating boards should also call for participation by the private sector, international development agencies active in the region (IICA, FAO, IDE), civil society, and universities. Few countries have such an institution in place, but several are in the process of doing so. Costa Rica is introducing a Rural Development Council established by the president and his ministers, assisted by a National Institute of Rural Development supervised by members of government, corporatist organizations and civil society. Chile has established an Inter-ministerial Commission for Rural Development, assisted by a Technical Advisory Committee that includes NGOs and peasant federations (Arancibia, 1995). Coordination of agriculture and rural development is formalized in only a few countries such as Mexico. As a consequence, potentially effective rural development initiatives are often contradicted by macro and sectoral policy initiatives. And foreign donors interested in investing in rural development have no credible national counterpart institution with which to negotiate.

Regional Development Because rural households have so many different sources of income, rural development policies that aim to bolster rural incomes must go beyond an agricultural or sectoral approach. Instead, rural development needs to be addressed from a territorial perspective as part of a comprehensive re-

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gional approach. This requires organizing Regional Development Councils that can ensure coordination between the many agents acting in the region, and that can link rural development to regional development. The spread of democracy, greater decentralization of governance, and economic liberalization have significantly increased the need for regional coordination. Decentralization implies more autonomous state and municipal governments. Democracy gives a greater role to collective action and also makes it necessary for locally elected governments to gain legitimacy from their constituents. And economic liberalization and the downscaling of the role of the state give a greater role to the private sector. For these reasons, many countries are focusing on regional development to effectively coordinate government services, civil society and the private sector. While the principle of subsidiarity generally prevails—that is, devolving responsibility to the most local levels of governance—there are important reasons to introduce an intermediate level of governance between the states and municipalities. The objective is to attain greater economic, social and environmental homogeneity than at the national or state levels, while capturing the benefits of inter-municipal externalities and economies of scale in production, environmental management and the delivery of public goods. These local agencies typically include representatives of deconcentrated central and state government agencies, local governments, the private sector, corporatist organizations, NGOs, community-based and grassroots organizations, and local traditional structures of leadership (World Bank, 1999). They are charged with defining consultative development strategies to secure robust regional growth that will create, inter alia, investment and employment opportunities for rural development. Through a single regional window, they can handle the disbursement of public funds—both as grants and loans (clearly separated) and on a competitive basis—in response to the demands for projects from organized households and communities. They can also develop ideas for and with the private sector for region-wide investments, and coordinate the programming and budgeting of deconcentrated agencies that deliver public goods to competing clienteles with different preferences. Superior access to local information by these regional agencies can help them channel resources to project initiatives by the poor, while mitigating adverse selection and moral hazard problems. Rural development interventions should thus be an integral part of regional development programs. Some very successful regional programs, such as the Plan Sierra in the Dominican Republic, have been managed by NGOs to which government delegated authority over local public services .

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Regional development is of course not free from political and administrative obstacles. States may view regional councils as weakening their own regional policies and adding a costly layer of bureaucracy. Municipal authorities may see little gain by participating in regional councils, and national ministries may be anxious to hold on to well-established sectoral clienteles and controls over budgets and their execution. As a result, progress toward regional development has typically been slow, despite its promise for large potential efficiency gains. Yet, a regional approach to rural development is a fundamental complement to a demandled approach to generating opportunities for investment and employment and avoiding the dispersion inherent in a demand-led approach.

Municipal Decentralization There has been rapid decentralization toward municipal levels of governance throughout Latin America (Burki et al., 1999). The principle of decentralization is based on the idea that local authorities are better placed than centralized governments to collect information about the needs and capacities of the local population, monitor agents, and enforce contracts (Stiglitz, 1999). Municipal governments can engage in development planning to reconcile programs from different branches of government and coordinate actions with the private and civil sectors. Local provision of public goods can be better adapted to the demands of a heterogeneous local population, and often allows for identifying cheaper sources of supply than if provided centrally. This includes health, education, infrastructure (road maintenance, water supply) and the management of public spaces. Municipal governments can also promote development, stimulating private investment and participation by the poor. For these functions to be effectively fulfilled, decentralization must include not only devolution of the political and administrative rights to govern, but also fiscal control over local budgets and increased access to resources (Binswanger, 1999). This has been achieved in Bolivia through the Ley de Participacion Popular (Cossio Cortez, 1999), and in Mexico under Ramo 33. Huther and Shah (1998) find that the quality of local governance is strongly correlated to the level of fiscal decentralization. Finally, decentralization can help increase accountability by placing decision-making in the hands of local officials who can be more directly monitored by their constituencies. While promising, the conditions for decentralization to be successful are quite demanding, and success has consequently varied across communities. Conditions for success include democratic forms of local

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governance (and hence sufficient electoral competition) and effective representation of the interests of the poor (and hence the strengthening of local organizations and training of local officials to carry out technical functions that support participatory local development). Unless these conditions exist, decentralization can lead to increased corruption, diversion of expenditures away from the poor, capture by narrow interest groups that control the municipal government, and reduced accountability to the general public (Dethier, 1999). The potential benefits of local information are then lost to local capture. Excessive decentralization without corresponding regional integration can also lead to loss of economies of scale, inability to internalize regional externalities (e.g., in watershed management), loss of national consistency in government initiatives leading to misallocation of funds (see Cossio Cortez, 1999, for Bolivia), and increased isolation from the forces of globalization. Decentralization can also be more effective for some functions than for others. In schooling, for example, while teacher absenteeism can be monitored effectively at the local level due to the dispersed nature of information, setting curricula, administering examinations and monitoring the quality of education are better performed centrally. There is also evidence that while decentralization may have improved health infrastructure, it diminished the quality of health service delivery (Burki et al., 1999). In summary, municipal decentralization offers a potentially effective tool for profitable investment in the rural poor, and some major rural development programs in Latin America have been organized to capture this potential. The Community Support Program (PAC) and Municipal Fund for Community Support (FUMAC) in Northeast Brazil, the Municipal Solidarity Fund in Mexico and the Fondo DRI in Colombia all channel resources to communities through the municipalities. Under this approach, government targets poor communities and influences project priorities either by restricting the range of eligible projects or by offering different cost sharing formulas according to the type of project. Communities identify projects and submit proposals for financing to the municipal investment funds. The extent of participation by the poor has varied considerably, as has the choice of project priorities and the quality and sustainability (maintenance) of projects undertaken (Wiens and Guadagni, 1998). These lessons clearly show, however, that central governments and NGOs have a major role to play in turning the potential role of municipalities into a reality. Most important is to help the local poor enhance their capacity to engage in collective action for demand-driven projects to effectively reduce poverty. In analyzing Oaxaca's municipal funds program, Fox and Aranda (1996) find that the

effectiveness of decentralization on poverty reduction depends on how representative local governments were before receiving additional funds. In a detailed analysis of the performance of decentralized municipalities, Faguet (1997) concludes that devolving resources and power to local governments has increased the allocative efficiency of the public sector and led to more needs-oriented resource allocation, particularly toward health, education and civil works in smaller, poorer and more rural municipalities. Although less so than local capacity, effective democratic representation to achieve public accountability and public responsiveness are also fundamental to the success of a decentralized approach.

Institutional Reconstruction Implementation of stabilization and adjustment policies has resulted in fiscal austerity and the downscaling of the direct role of the state in the economy. For rural development, this has resulted in the contraction or foreclosure of many public institutions such as development banks, marketing parastatals, and extension services that had supported agriculture; the downscaling of subsidies that had often been used to compensate agriculture for appreciated real exchange rates and industrial protectionism; and the privatization of many state agricultural services. This wholesale institutional change has brought a range of responses across different agricultural sectors. The more commercial sectors have in general successfully gained access to new sources of institutional support through commercial banks, private merchants, contracts with agroindustry and professional organizations, or private consulting firms delivering technical advice. Still, much remains to be done in terms of strengthening basic services in order to increase competitiveness in the agriculture sector (Pineiro et al., 1999). The extreme poor have sometimes benefited from access to safety nets temporarily put into place by social funds. By contrast, the middle sector of smallholdersâ&#x20AC;&#x201D;the principal clientele of the agricultural component of rural development programsâ&#x20AC;&#x201D;has all too often lost access to the institutions that provide financial services, marketing and information about technology and market opportunities. This has created a serious institutional vacuum that threatens the very existence of this social sector, since it compromises its competitiveness vis-avis the commercial agricultural sector. As land markets become liberalized in a context of pervasive institutional gaps for smallholders, land could easily concentrate in the hands of a minority of commercial farmers. This could result in a massive migration of displaced smallholders, without them even having been given the chance to compete. A group that repre-

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sents the most potentially efficient producers would thus be displaced by others who were less exposed to institutional failures. Successful rural development thus needs to focus on the reconstruction of private and civil institutions that support an efficient smallholder economy (Gordillo, 1999). This includes a wide array of institutions that had been suppressed by the preponderant role of the state, or that failed to emerge for the same reason: credit unions, savings and loans associations and financial NGOs; marketing cooperatives and community storage associations; organizations involved in the co-production with government of public goods and services (i.e., infrastructure and its maintenance, research and development entities, and water user associations that assume the direct management of devolved water districts); and community organizations that can enforce cooperation in the management and improvement of common property resources such as grazing lands, forests and fishing grounds. Ministries of Agriculture, Rural Development and the Environment have major leadership roles to play in helping promote the emergence of these institutions, but broad partnerships and complementarities need to be sought across the spectrum of public agencies. Private suppliers of technical assistance and consulting services, which had been crowded out by subsidized public services, are increasingly displacing NGOs, since they may offer technically superior services and with greater accountability. Subsidies to the poor to access these services on a competitive basis can take the form of vouchers (e.g., INDAP for technical assistance to smallholders in Chile). The set-up costs of institutions typically require subsidies, which calls for a pro-active role of the state in support of institutional reconstruction in civil society. These institutions are key to enabling smallholders to reduce transaction costs in accessing markets, relaxing constraints on investment and factor use, and ensuring effective management of productive resources (i.e., in increasing the elasticity of supply response of smallholders and in securing their competitiveness). In all cases, the key to building civil institutions that can effectively substitute for former government agencies is to capitalize on the unique informational and enforcement advantages of local (often traditional) institutions. Their advantage in capturing local information allows them to control opportunistic behavior in the form of adverse selection and moral hazards in contractual relations. On the other hand, the disadvantages of their local nature, such as diseconomies of scale and high covariation, can be offset by better integrating local institutions and broader formal institutions. This has been done in Guatemala by linking credit groups with commercial banks through NGOs like Genesis

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(Sadoulet, 1999), and in the Dominican Republic through agroindustries (Key and Runsten, 1996). Cooperation by local institutions can also be achieved by linking the interests among members, exercising social pressure if rules are violated, and taking advantage of the long-term gains from the repetition of programs in stable communities. An important aspect of institutional reconstruction is to provide assistance through social safety nets. Safety nets have been used in response to crises in order to make reforms more politically palatable and avoid social backlashes. In recent years, the economic value of safety nets has been examined by analyzing the irreversible effects of household responses to crises. Hoddinott and Kinsey (1998) show that nutritional shocks on children from one to two years old may have permanent growth effects. Children who are taken out of school prematurely are also unlikely to resume their studies. Distress sales of productive assets can prevent subsequent re-capitalization. Another important lesson from safety nets is that they can be particularly helpful in a crisis if they are in place before the crisis occurs, even if they function in normal times on a limited basis. This is because ex-ante safety nets, such as guaranteed employment schemes, serve as risk-coping instruments that allow households to assume greater economic risks and earn higher incomes (Alderman and Paxon, 1992; Subbarao et al., 1997). Using safety nets as insurance schemes is, therefore, an effective social investment. Few such ex-ante schemes yet exist for the Latin American rural poor. Setting up safety nets once the crisis has occurred, such as in response to natural disasters, is more costly and less effective in helping households cope with crises. And it represents a missed opportunity in term of the gains from providing insurance when there is no crisis. Management of safety nets can also be more effective when it uses local participation for monitoring and enforcement (e.g., for the selection of beneficiaries) and when it is coordinated with other instruments (particularly credit schemes and technical assistance). Within the framework of multi-functional agriculture, the rural poor can be important providers of such environmental services as watershed management to prevent soil erosion and deliver clean water, preservation of biodiversity, and carbon capture. Building the institutions to pay for environmental services as an element of rural development can be good business for everyone. It requires fair valuation of the services provided, institutional mechanisms to tax environmental benefits, and transfer fees to those who deliver the services. Calculations for the Plan Sierra in the Dominican Republic (de Janvry et al., 1995) showed that these services provide the rural poor with legitimate and significant transfers that create incentives to reforest and adopt soil conservation practices

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in critical watershed areas. With the scarcity of water, the rising value of biodiversity, and the growing importance of global climate change, internalizing these services should become an integral element of rural development strategies. Paying for environmental services can generate large financial resources in support of rural development and play an important role in reducing poverty. These functions need to be managed at the regional level through agencies with a long-term presence in the region.

Local Organizations and Collective Action Local organizations have an important role to play in filling gaps when both markets and governments fail to deliver the desired services. At a time when governments are reducing their support to agriculture, there are rising expectations that local organizations can assume more of a role. This raises several questions: What functions are these organizations capable of fulfilling? What would be the conditions for their success or the reasons for their failure? Whom can they most benefit? Local organizations and the collective action they support can in fact carry out a number of functions, including the following: Serve as advocates in representing the interests of their constituencies in policy-making and in the allocation of resources for public goods. This includes the budgeting of regional and municipal funds for projects and complementary public investments. Because of the heterogeneity of poverty and the multiplicity of ever-changing investment opportunities, rural development programs must be demand-driven. Only the poor themselves, with appropriate technical assistance, have the information necessary to identify solutions that best fit their needs. Provide services to their members, such as access to information, reduction of transaction costs in accessing product and factor markets, storage services, transportation, insurance and credit. Examples include service cooperatives in agro-processing and marketing, group credit and village banking associations, community marketing, and technical assistance to local organizations such as the peasant-to-peasant movement in Nicaragua (ECLAC, 1998) and the CIAL for participatory research in Colombia and Ecuador (Ashby and Sperling, 1995).

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Assist in the delivery of local public goods through member contributions and cost sharing with the public sector. Engage directly in a host of innovative enterprises for income generation, including production cooperatives such as Coopesilencio in Costa Rica, which produces palm oil and has since diversified its productive activities (ECLAC, 1998); social forestry such as Mafor in Honduras; and collectively-owned microenterprises such as Asfepa, a women's organization in Costa Rica that manufactures tropical fruit jams. Studies by Baland and Platteau (1996) and Ostrom (1993), among others, have examined the conditions for the success of local organizations. These determinants can be grouped in the following three categories: The incentive created by expectations of individual gains from cooperation. This requires good technical knowledge of the problem at hand, trained managers, more private profitability from cooperation than from free riding, and a perception of fairness in the sharing of costs relative to the distribution of benefits. Incentives can be enhanced by access to external resources for training, investment and institutional development, support of NGOs for services, and access to private consulting firms. The ability of members to monitor the behavior of others. This is related to characteristics of the group, such as size, homogeneity of membership, and proximity. The ability to enforce sanctions. This depends on the cost of an exit option (e.g., through migration), the strength of shared social norms, the existence of forums for consensus building, charismatic leadership, the certainty that sanctions will be applied, the existence of conflict resolution mechanisms, and social capital among members that create linkages that can be used for punishment (e.g., the loss of patronage). Collective action can also easily fail. Indeed, systematic observation of grassroots organizations shows a great deal of heterogeneity in membership, functions and performance (e.g., across ejidos in Mexico). Participation can be costly for the poor, as in the case of the opportunity

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cost of time for income-earning women, and benefits must consequently be sufficiently high. Group action can also revive conflicts and reproduce or exacerbate longstanding inequalities in terms of power sharing, both by marginalizing the poor and extracting rents from them. Organizations typically create what is called a "middle class effect" that excludes the poorest. Extending membership to the poorer members of a community requires government intervention or assistance from NGOs. There is typically a long learning curve and high risks before organizations become effective, and this phase needs to be subsidized for the poor. Finally, there is often a critical mass that needs to be reached before an organization becomes effective, for instance, in voicing the demands of its members. Here again, subsidies may be needed to support the organization until this critical mass has been reached. Investing in these set-up and learning costs to help infant organizations achieve sustainability may be money well spent from public budgets. Experience with participatory approaches among the rural poor has yielded interesting lessons. One is that targeting for homogeneity in productive projects—e.g., excluding the non-poor or men—is not always optimal for either the poor or for women. In Petrolina, Brazil, irrigation projects relied on the concept of mixing small farmers with large farmers in export cooperatives so that the latter would assume leadership in introducing technologies, building institutions, opening markets and establishing a reputation with foreign importers (Damiani, 1999). In Bolivia, a rice processing association in La Campana, Santa Cruz incorporated a few large producers along with many smallholders to reach the necessary economies of scale (ECLAC, 1998). Heterogeneous credit groups are disadvantaged in terms of monitoring the behavior of members, but better at providing mutual insurance (Sadoulet, 1999). Projects for women are often best served if they have enough male participation to at least neutralize their opposition. Other issues remain to be explored. One of the most difficult is how to create social capital in areas— such as frontier communities with recent migrants—where it is absent. The role of external resources and agents in creating such capital needs further research (Durston, 1998).

Investing in the Assets of the Rural Poor The policy, administrative, institutional and organizational framework described above influences the choice of strategies to boost the livelihoods of households and communities. These strategies can help households

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escape poverty through the different paths previously identified: exit (migration), agriculture, multiple activity and assistance. The initial level of assets that the rural poor hold, and the nature of the context where these strategies are developed, determine the productivity of the assets and hence the return on investment in them and the outcomes in terms of improving livelihoods (see Figure 1.1). The likelihood that investing in the asset position of poor people will be good business is increased if the context in which those investments are made is improved. But while there have been many different experiences with such investments, there is still insufficiently solid impact analysis regarding returns on them. Examples of such investments follow. In each case, we stress the gains derived from a rural development context where there is greater coordination, regionalization and decentralization, and where the institutional and organizational setting is more developed.

Natural Capital: Investment in Access to Land If the incentive and institutional frameworks are favorable, access to land is a key asset that can help many of the rural poor escape from poverty through the agricultural and multiple activity paths (Hoddinott et al., 2000).3 Yet in many communities, there are extensive areas of idle or under-used land, while at the same time any number of households that could be competitive farmers are landless or under-endowed in land that they overuse and degrade. With the end of expropriative land reforms in most of Latin America, new mechanisms are needed to improve access to land for the poor through the use of land markets. Because these markets often fail due to the over-pricing of land relative to agricultural use (Binswanger et al., 1995), many countries have introduced land funds to promote access to land through subsidized land market transactions between large sellers and groups of small buyers (Deininger, 1998). There are extensive land market-assisted land reform programs in Brazil (Cedula da Terra) Colombia, and Honduras (Fondo de Tierras). While approaches vary across countries, community participation is usually elicited in identifying potential sellers, selecting beneficiaries, and endorsing transactions. While too recent to allow for economic evaluation, initial results in Brazil show the programs have been effective in targeting poor (but not extremely poor) households, as well as households with potential to be productive 1

Lopez and Valdes (1998) correctly observe that this is not always the case. Indeed, land has little income generation value for the poor if the incentive framework is urban biased, or if the poor are exposed to major market failures, institutional gaps and public goods constraints.

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farmers (e.g., households in rural villages, with relatively higher levels of education and a larger number of adults in the family) (Buainain et al., 1999). Experimentation with alternative approaches is needed to reduce the cost subsidies and to secure the competitiveness of beneficiaries. In much of Latin America, land rental markets have atrophied because of weak property rights. Fearful of not getting their land back, landlords are reticent to rent beyond short-term contracts, or they only rent to kin (Jaramillo, 1998). Historically and worldwide, the land rental market has been one of the most effective ways of facilitating access to land by the rural poor and youth. Rental contracts such as sharecropping allow for mitigating the capital and risk market failures to which many of the rural poor are exposed, and which undermine their competitiveness as farmers. There is hence an urgent need to reactivate these markets both by consolidating property rights for those who rent land out, and by providing access to credit and rural services to potential tenants. Following the examples of land market reforms that promote access to land in ownership, local communities could be mobilized to resolve locally many of the conflicts over land rights that prevent rentals, and to mediate land rental transactions. This would help both consolidate property rights for landowners and enhance the bargaining power of tenants in securing more favorable long-term contracts. Introducing land funds for access to rental land represents a good investment in the rural poor.

Physical Capital: Investment in Technology and Rural Infrastructure One way to escape poverty through the agricultural path is to raise productivity. To achieve this, the poor need a broad array of technological options that are appropriate to them, and in which they have had an active role in developing. Such is the case of CIAL in Colombia and Ecuador, the technical agrarian schools in Peru, and peasant-to-peasant actions in Nicaragua. All too often, scientific approaches have been opposed on ideological grounds in lieu of efforts to find complementarities. Such is the case with biotechnology and agroecology, regarding which advocates on both sides are polarized. With the wide array of possibilities it offers smallholders, biotechnology should be combined with the design of farming systems based on agro-ecological principles. Since biotechnology can only offer a few traits transferable by gene insertion, other traits need to be secured through traditional breeding. Improved cultivation techniques can be complemented by other approaches such as integrated pest and

nutrient management, chemical applications, integrated natural resource management and precision farming. Urgent attention should also be given to integrating the potential offered by agronomic and biological sciences into user-specific technological packages. This requires that intermediate institutions perform these functions. In some cases, this will be done by private seed companies, and in others by national, regional and international research centers. In general, the number of institutions available to perform these functions lags behind development of scientific advances useful to smallholders. In addition, technology can only be effective for poverty reduction if it is part of comprehensive regional and local strategies that coordinate and complement the technology with other instruments. Returns on investments in agricultural technology are typically large, although there are serious challenges regarding the efficiency of current institutional schemes and the financing of agriculture research activities (Echeverria, 1998). Because of historical neglect in agricultural research investment in the marginal environments where many poor farmers are located, there are indications, such as in Honduras, that rates of return from such investments maybe higher than for high-potential lands (Ruben, 1999). Among forms of physical capital, investment in rural roads in regions with potential marketed surpluses can be high. As comparative advantages shift with trade liberalization and technological change, new opportunities emerge for profitable investments in infrastructure. Other forms of infrastructure such as electricity and telephones can be delivered privately, and there is still vast under-investment in these services. Subsidies can be offered to private suppliers in regions with high densities of rural poor. These subsidies can help cover fixed costs, while leaving marginal costs unaffected in order to preserve incentives to achieve economically optimum levels of use. Rural telecommunications are fundamental for market intelligence, the decentralization of nonagricultural income sources toward rural areas, and the provision of education in remote areas (e.g., Telesecundaria). Where state monopolies have been removed, private investments in rural telecommunications have followed rapidly. Improved infrastructure is thus a key to helping people escape poverty using either the agricultural or multiple activity paths.

Human Capital: Investment in Schooling, Health and Nutrition There has been systematic under-investment in rural education. As a result, the quality of rural schools is typically far inferior to that of urban schools. In addition, the need for the poor to mobilize family labor to

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generate income and relax liquidity constraints often either prevents them from sending their children to school, or contributes to sending them in a state of poor health or nutrition that limits the children's ability to learn. The result is that poverty is inherited across generations through low investment in human capital, and eventually transferred to the urban environment through migration by people unprepared to compete in urban labor markets. As the results above show, access to secondary education is fundamental to finding employment in high-paying nonagricultural sectors. Hence, investing in rural education is important to help youth escape poverty either through the migration or multiple activity paths. In cases where agriculture offers opportunities for technological change or new activities, education is also fundamental for the agricultural path. Many governments have recognized that investing in rural education is good business. But it requires consolidating the supply side of education and creating incentives for poor parents to keep their children in school through secondary education. PROGRESA in Mexico and PRAF in Honduras transfer cash resources to poor rural parents in exchange for keeping children in school under adequate nutritional and health conditions (deLeon etal., 1999). Comparing the success of PROGRESA across communities (based on field visits) shows the importance of local coordination with other programs. Municipalities with the ability to coordinate local programs reallocate resources to improve the supply side of education, increase the capacity of health services to respond to higher demand, invest in transportation to schools, and reallocate some funds toward non-beneficiaries (e.g., through scholarships). Hence, local coordination of educational programs with others municipal activities far enhances the gains that could be derived from the educational programs alone. The social rate of return on investment in education in Chile has been calculated at 10 percent for secondary education and 12 percent for high school (Arellano and Braun, 1999).

Financial Capital: Investment in Threshold Capital Endowments Many households are caught in poverty traps because they do not have the minimum cash endowments to undertake productive activities. Many others remain impoverished due to credit constraints that prevent them from making optimum economic use of the assets they control and deprive them of a source of insurance. Most smallholders do not have access to formal credit, and transactions costs can be prohibitive: they account for 50 percent of the cost of credit in Mexico, 24 to 71 percent (according to the size of the loan) in Brazil, and 70 percent in Colombia

(Key and Runsten, 1996). Cash transfers to Mexican farmers through the PROCAMPO program, introduced to compensate for the decline in domestic prices caused by the North American Free Trade Agreement, show that relaxing liquidity constraints can have high rates of return. In the ejido sector, every transferred peso generated another peso of household income through the purchase of fertilizers and animals (Sadoulet et al., 1999). With 100 percent rates of return on cash transfers, this controlled experiment shows that there is a high payoff to investing in the development of financial institutions that can effectively service the liquidity needs of smallholders. This creates attractive opportunities for private lenders to invest in the financial assets of these smallholders. Comparing multipliers across households shows that those with access to technical assistance derived much greater benefits from the transfers. Yet, only some 13 percent of ejidatarios have access to the Alianza para el Campo Program, and only 17 percent to any form of technical assistance. Again, this illustrates the importance of complementarities and coordination between rural development initiatives: efforts to increase the productivity of resources create high rates of return from investing in the financial assets controlled by the rural poor.

Social Capital: Investing in Contractual Arrangements and Social Inclusion The purpose of regional development is to create local investment and employment opportunities for the rural poor, while the purpose of rural development is to make sure that the rural poor are able to capture these opportunities. Among the alternative approaches, contract farming and joint ventures between corporate interests and smallholders and rural microentrepreneurs are still vastly underexploited. Yet, successful examples have been observed all over Latin America. These include nontraditional exports in Guatemala under contract between the Cuatro Pinos service cooperative with a membership of minifundistas and a private exporter (ALCOSA) (von Braun et al., 1989); contracts with smallholders for the production of tomatoes for the concentrate industry in Chile (Tomic, 1991); an association between a cooperative of smallholders producing manioc and the agroexporting firm Magu Ltd. in Colombia (Marsh and Runsten, 1994); organic coffee production in Jamaica (Blue Mountain Coffee); export to the United States of organic vegetables produced by ejidatarios in Baja California (Jacobs Farms); and production under contract of poultry by 4,000 minifundistas for the firm Sadia Avicola in Brazil (ECLAC, 1998). In Petrolina, Brazil, large farmers have been used as

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leader firms to open sophisticated export markets for smallholders (Damiani, 1999). A review by ECLAC (1998) of durable contracts, financed by FIRA in Mexico between smallholders and agroindustry, found 39 percent of the contracted commodities were eggs and poultry and 29 percent vegetables. Pronasol in Mexico successfully pursued joint ventures between the state and microentrepreneurs using public equity funds (Cordera and Lomeli, 1999). One can only wonder why such initiatives are not more widespread. In general, rural venture capital has been timid, often due to the weakness of property rights in securing investments, lack of legal enforcement of contracts, and high transactions costs in rural capital markets. This is a vast area of potential progress that deserves urgent attention and where profitable public and private investments in the rural poor remain largely unexplored. Again, regional coordination of public and private investment and the development of agrarian institutions are important to create opportunities to scale up these experiences.

Conclusions Rural poverty in Latin America declined in the 1990s during the region's economic recovery. However, the principal mechanism that drove this declineâ&#x20AC;&#x201D;migration to urban areas and the resulting relocation of the same povertyâ&#x20AC;&#x201D;was clearly unsatisfactory. Rural poverty remains widespread and represents a waste of productive resources, particularly in specific regions of Latin America. This chapter has examined why aggregate economic growth is necessary but not sufficient to reduce poverty. Growth must be complemented by lower levels of inequality and higher levels of secondary education. But growth is ineffective in reducing inequality, and crises contribute to higher levels of inequality, creating irreversible ratchet effects that hurt the subsequent capacity of growth to reduce poverty. Inequality consequently needs to be attacked by reducing economic instability and through specialized programs that improve the access by the poor to productive assets. Finally, there are favorable conditions for a new approach to rural development in which investing in the asset position of the rural poor and improving the context that determines the productivity of their assets can be good business, both socially and privately. This approach has the potential to contribute to both economic growth and rural poverty reduction. Even if only on a modest scale that has varied in form and context, this new approach has started to spread in many countries of the

|~28~| 28

region. It is not easy to achieve, however, because investments in establishing the context for successful rural development are in part concessional. As a result, there is insufficient systematic knowledge and, consequently, failures along with success stories. For this reason, programs aimed at improving basic needs (health, education, electrification, roads, potable water and housing) have been more successful than programs aimed at increasing incomes (Vargas, 1999, for Colombia; Cordera and Lomeli, 1999, for Mexico). The five key dimensions to enhance the likelihood of success of this approach are as follows: At the national level, coordinate rural development interventions with macro and sectoral policy, and with initiatives by all other segments of society: the corporate sector, civil society, universities and international agencies. The objective is to eliminate policy inconsistencies and anti-rural biases that undermine rural development. Hence, countries that do not yet have one should institute some type of ministerial-level National Coordinating Board for Rural Development, assisted by a technical advisory facility such as the Rural Development Institutes in Nicaragua and Costa Rica. At the regional level, insert rural development initiatives into a comprehensive regional development strategy. Countries should establish Regional Development Councils to coordinate the contributions of the many agents involved in regional development, from deconcentrated public agencies to the corporate sector and NGOs. These councils should have as a primary objective to promote growth in the region and thus to create opportunities for investments and employment opportunities that benefit the rural poor. They can coordinate the disbursement of funds for demandled investment projects submitted by municipalities and organized citizens' groups. A regional approach is essential to capture economies of scale and to internalize externalities, particularly in agroecological regions, markets and indigenous territories that exceed municipalities. At the municipal level, pursue effective decentralization to enhance effectiveness in servicing the needs of the poor. Municipal governments benefit from access to local information for monitoring and to social capital for encouraging cooperation and enforcing contracts. While the decentralized management of rural development can be sabotaged by local vested interests, conditions for success

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ALAIN DE JANVRY AND ELISABETH SADOULET

include fiscal decentralization, political representation of the poor, democratic governance, strong mayoral leadership and enhanced managerial capacity. Rebuild institutions to service smallholder agriculture and rural areas that are alternatives to the parastatals that used to carry out (or all too often, fail to) these functions before structural adjustment. This includes institutions for the consolidation of property rights, access to financial services, management of local safety nets, participatory technological innovations, access to information about new opportunities, and associations to lower transaction costs in accessing markets. While largely based in the private and civil sectors, these institutions also require regulation and active involvement by the public sector. Promote local organizations and collective action by the rural poor, using the social capital that typically exists in rural communities, often in latent form. Where social capital is lacking, external agents and funds can be used to enhance it (Durston, 1998). Collective action can be directed at advocating the interests of the poor, providing services to members, delivering local public goods, and undertaking collective income-earning initiatives. Local organizations are essential to the success of a demand-led approach to rural development based on the regional and municipal access to funds and public services. If these conditions exist, rural households have the opportunity to escape poverty through four paths: exit (migration), agriculture, multiple activity, or, as a last resort, assistance. It is likely that, numerically, most Latin American rural households have been escaping poverty through the multiple activity path, even though this has been largely unrecognized by governments, and public assistance to rural nonagricultural employment has been generally lacking. When the five conditions we have identified hold, investing in the asset position of the rural poor can be good business, as it helps mobilize the productive potential of otherwise under-valued resources already in the hands of these households and communities, such as family labor and social capital. Seen in this perspective, a political commitment to attacking rural poverty is not a matter of ethics and solidarity with the poor, but rather simply a rational social investment, competitive with other uses of public revenues if properly designed. This approach to rural development as good business

can be used with regard to all paths out of poverty窶馬ot only the agricultural oath, but also the exit path (with migrants prepared to escape poverty once in the city) and the multiple activity path. There are countless examples where investments in the natural, physical, human, financial and social capital endowments of the rural poor have indeed had high payoffs. These investments yield incomes through both agriculture and a wide variety of other undertakings, particularly in nonagricultural rural employment. For this reason, success of this approach is not confined to the traditional sector of viable family farmers, but extends to many other households with little land but sufficient endowments in other types of assets. The political commitment needed to make the approach work involves extending these productive investment strategies to the poorer households. There are many strategies that can be used to this end, including heterogeneous group formation, linkages with the less poor, creative forms of contracting, and targeted subsidies to secure minimum thresholds in asset endowments and to assist entry. Exploring best practices to improve the context that determines the productivity of these assets, and to make these investments more effective, has just begun. And it opens an exciting agenda for creative initiatives in the design of rural development strategies that can contribute greatly to national development and to poverty reduction.

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References Alderman, H. and C. Paxon. 1992. Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries. Research Program in Development Studies, Discussion Paper #164. Princeton, NJ: Princeton University. Arancibia, F. 1995. Comision Interministerial de Desarrollo Rural. In Ministry of Agriculture, Sector publico, organizaciones socialesy ONG: Nuevos esquemas institudonales para el desarrollo de la pequena agricultura y el sector rural. Santiago, Chile. Arellano, S., and M. Braun. 1999. Rentabilidad de la educacion formal en Chile. Cuadernos deEconomia (107): 685-724. Ashby, J., and L. Sperling. 1995. Institutionalizing Participatory, Client-Driven Research and Technology Development in Agriculture. Development and Change 26(4): 753-70. Ashley, C., and D. Carney. 1999. Sustainable Livelihoods: Lessons from Early Experience. London: Department for International Development. Baland, J.M., and J.P. Platteau. 1996. Halting Degradation of Natural Resources: Is There a Role for Rural Communities? Oxford, UK: Oxford University Press. Barham, B., and M. Carter. 1996. Level Playing Fields and Laissez Faire: Postliberal Development Strategy in Inegalitarian Agrarian Economies. World Development (24): 1133-49. Binswanger, H. 1999. Fostering Economic Growth and Reducing Poverty: Can Decentralization Help? In FAO, Technical Consultation on Decentralization for Rural Development: Proceedings. Rome: FAO. Binswanger, H., K. Deininger, and G. Feder. 1995. Power, Distortions, Revolt and Reform in Agricultural Land Relations. In J. Behrman and T.N. Srinivasan (eds.), Handbook of Development Economics, Vol. IIIB. Amsterdam: Elsevier. Binswanger, H., and E. Lutz. 1999. Agricultural Trade Barriers, Trade Negotiations, and the Interests of Developing Countries. Washington DC: World Bank. Buainain, A., K.M. da Silveira, H. Souza, and M. Magalhaes. 1999. CommunityBased Land Reform: A New Way of Reaching out the Marginalized"? Campinas, Brazil: University of Campinas. Burki, S., G. Perry, and W. Dillinger. 1999. Beyond the Center: Decentralizing the State. Washington, DC: World Bank. Cordera, R., and L. Lomeli. 1999. El programa nacional de solidaridad y el combate a la pobreza rural. FAO, Regional Office for Latin America and the Caribbean, Politicas nacionales orientadas al alivio de la pobreza rural en America Latina, FAO homepage: www.rlc.fao.org.

Cossio Cortez, I. 1999. Bolivia. In FAO, Technical Consultation on Decentralization/or Rural Development: Proceedings. Rome: FAO. Damiani, O. 1999. Beyond Market Failure: Irrigation, the State and Non-Traditional Agriculture in Northeast Brazil. Ph.D. Dissertation, Department of Urban Studies and Planning, MIT, Cambridge, MA. Davis, B., C. Carletto, and J. Sil. 1997. Los hogares agropecuaros en Nicaragua: Un andlisis de tipologia. Berkeley, CA: Department of Agricultural and Resource Economics, University of California at Berkeley. Deininger, K. 1998. Negotiated Land Reform as One Way of Land Access: Initial Experiences from Colombia, Brazil and South Africa. Washington, DC: Development Research Group, World Bank. de Janvry, A., and P. Glickman. 1991. Encadenamientos de produccion en la economia campesina en el Ecuador. Rome: International Fund for Agricultural Development. de Janvry, A., G. Gordillo, and E. Sadoulet. 1997. Mexico's Second Agrarian Reform: Household and Community Responses. San Diego: Center for U.S.Mexican Studies, University of California at San Diego. de Janvry, A., and E. Sadoulet. 1999a. How Effective Has Aggregate Income Growth Been in Reducing Poverty and Inequality in Latin America? In Nora Lustig (ed.), Adverse Shocks and Social Protection: Policies Issues for the Developing World. Washington, DC: Inter-American Development Bank and the Brookings Institution. 1999b. Income Strategies among Rural Households in Mexico: The Role of Off-Farm Activities in Poverty Reduction. Berkeley, CA: Department of Agricultural and Resource Economics, University of California at Berkeley. de Janvry, A., E. Sadoulet, and B. Santos. 1995. Project Evaluation for Sustainable Rural Development: Plan Sierra in the Dominican Republic. Journal of Environmental Economics and Management 28(2): 135-54. De Leon, J., D. Hernandez, and S. Parker. 1999. Intergenerational Transmission of Poverty in Mexico: The Impact of the Education, Health and Nutrition Program (PROGRESA). Mexico City: PROGRESA. Dethier, J.J. 1999. Governance, Decentralization and Public Goods: Evidence from China, India and Russia. Bonn, Germany: Center for Development Research (ZEF), University of Bonn. Durston, J. 1998. BuildingSocial Capital in Rural Communities (Where It Doesn't Exist): Theoretical and Policy Implications of Peasant Empowerment in Chiquimula, Guatemala. Santiago, Chile: ECLAC. Echeverria, R.G. 1998. Agricultural Research Policy Issues in Latin America: An Overview. World Development (26)6: 1103-lil.

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2000. Options for Rural Poverty Reduction in Latin America and the Caribbean. Revista de la CEPAL 70 (April): 147-160. Santiago, Chile. Economic Commission for Latin America and the Caribbean. l99S.Agroindustria ypequena agricultura: vinculos, potencialidades y oportunidades comer dales. Santiago, Chile: ECLAC. 1999. Social Panorama in Latin America, 1999. Santiago, Chile: ECLAC. Faguet, J.P. 1997. Decentralization and Local Government Performance. Technical Consultation on Decentralization. FAO, Rome. Fox, J., and J. Aranda. 1996. Decentralization and Rural Development in Mexico: Community Participation in Oaxaca's Municipal Funds Program. San Diego: Center for US-Mexican Studies, University of California at San Diego. Gordillo, G. 1999. La ansiedad para concluir: La debil institucionalidad de las reformas estructurales en America Latina. Santiago, Chile: FAO. Hoddinott, J., L. Haddad, and S. Mukherjee. 2000. Assets and Rural Poverty. Washington, DC: IFPRI, Hoddinott, J., and B. Kinsey. 1998. Child Growth in the Time of Drought. Washington, DC: IFPRI. Huther, I., and A. Shah. 1998. Applying a Simple Measure of Good Governance to the Debate on Fiscal Decentralization. Policy Research Working Paper No. 1894, World Bank, Washington, DC. Inter-American Development Bank. 1998. Facing Up to Inequality. Economic and Social Progress in Latin America. Washington, DC: IDB. 2000. Strategy for Agricultural Development in Latin America and the Caribbean. Inter-American Development Bank Sustainable Development Department Policy and Strategies Report Series. Washington, DC. Inter-American Institute for Cooperation on Agriculture (IICA). 1999. La agricultura y el medio rural de America, un asunto estrategico en el presente y futuro. Paper prepared for the Inter-American Agricultural Meeting, Salvador de Bahia, Brazil. October. Jaramillo, C. 1998. El mercado rural de tierras en America Central: Hacia una nueva estrategia. In Inter-American Development Bank Sustainable Development Department Technical Paper, Perspectivas sobre mercados de tierras rurales en America Latina. IDB, Washington, DC. Kanbur, R., and N. Lustig. 1999. Why Is Inequality Back on the Agenda? Annual Conference on Development Economics, World Bank, Washington, DC. Key, N., and D. Runsten. 1996. Contract Farming, Smallholders and Rural Development in Latin America: The Organization of Agroprocessing Firms and the Scale of Outgrower Production. World Development (27): 381-401. Lanjouw, P. 1996. Rural Poverty and Non-Agricultural Employment in Ecuador. Washington, DC: World Bank Policy Research Department.

Lopez, R., and A. Valdes. 1997. Rural Poverty in Latin America: Analytics, New Empirical Evidence and Policy. Washington, DC: World Bank Technical Department, Latin America and the Caribbean Region. Lustig,N. 1994. Measuring Poverty in Latin America: The Emperor Has No Clothes. Washington, DC: The Brookings Institution. 1999. Crises and the Poor: Socially Responsible Macroeconomics. Washington, DC: IDB. Marsh, R., and D. Runsten. 1994. From Gardens to Exports: The Potential for Smallholder Fruit and Vegetable Production in Mexico. San Jose, Costa Rica: IICA. Morley, S. 1995. Poverty and Inequality in Latin America: The Impact of Adjustment and Recovery. Baltimore: The Johns Hopkins University Press. Ostrom, E. 1993. Crafting Institutions for Self- Governing Irrigat ion Systems. San Francisco: ICS Press. Pineiro, M., R. Martinez-Nogueira, E. Trigo, F. Torres, E. Manciana, and R.G. Echeverria. 1999. La institucionalidad en el sector agropecuario de America Latina: Evolucion y propuestas para una reforma institucional. Technical Paper from the Sustainable Development Department, Inter-American Development Bank, Washington, DC. Ravallion, M. 2000. On the Urbanization of Poverty. Washington, DC: DECRG, World Bank. Reardon, T., M. E. Cruz, and J. Berdegue. 1998. Los pobres en el desarrollo del empleo rural no-agncola en America Latina: paradojas y desafios. Santiago, Chile: RIM1SP. Rello, F. 1996. Ciudades intermedias y desarrollo rural: el caso de Zamora, Michoacdn, Mexico. Santiago, Chile: FAO. Ruben, R. 1999. Politicas y tecnologias para un uso sostenible de la tierra: La experiencia centroamericana. Holland: University of Wageningen. Sadoulet, L. 1999. Risk-Matching in Credit Groups: Evidence from Guatemala. Brussels, Belgium: ECARE, Universite Libre de Bruxelles. Sadoulet, E., A. de Janvry, and B. Davis. 1999. Cash Transfer Programs with Income Multipliers: PROCAMPO in Mexico. World Bank Development Research Group, Washington, DC. Stiglitz, J. 1999. Whither Reform? Ten Years of the Transition. Paper presented at the Annual Bank Conference on Development Economics. World Bank, Washington, DC. Subbarao, K., et al. 1997. Safety Net Programs and Poverty Reduction: Lessons from Cross-Country Experiences. Washington, DC: World Bank. Tomic, T. 1991. la agroindustria de la pasta de tomatepam exportaciones en Chile. Santiago, Chile: ECLAC.

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Vargas, R. 1999. Politicas nacionales orientadas al alivio de la pobreza rural en America Latina. El Programa de Desarrollo Integral Campesino del Fondo DRI. FAO Regional Office for Latin America and the Caribbean. FAO homepage: www.rlc.fao.org. Von Braun, J., D. Hotchkiss, and M. Immink. 1989. Nontraditional Export Crops in Guatemala: Effects on Production, Income and Nutrition. Research Report No. 73. IFPRI, Washington, DC. Wiens, T., and M. Guadagni. 1998. Designing Rules for Demand-Driven Rural Investment Funds: The Latin American Experience. World Bank Technical Paper No. 407. Washington, DC. World Bank. 1987. World Bank Experience with Rural Development 1965-87. Washington, DC: Operations Evaluation Department, World Bank. 1990. Poverty: World Development Report, 1990. Washington, DC: World Bank. 1997. Rural Development: From Vision to Action. ESSD Studies and Monographs Series No. 12. Washington, DC. 1998. Panama LSMS. Washington, DC. 1999. Mexico-Institutional Coordination for Regional Sustainable Development. Washington, DC: World Bank, Latin America and the Caribbean Region.

Food, Agriculture and Natural Resources in 2020 Per Pinstrup-Andersen and Julie Babinard

Agriculture and agroindustry play a significant role in the economies of Latin America and the Caribbean, accounting for about a quarter of the region's gross domestic product. While the contribution of agriculture to economic growth and social progress has often gone unrecognized, its potential for improving development, alleviating poverty and meeting food needs can be significant. Agriculture has strong multiplier effects for an entire economy. Despite tremendous human and natural resources, Latin America has made little progress in reducing poverty over the past 25 years. Poverty is widespread and income distribution is more unequal than in any other part of the world. Skewed income distribution and high levels of poverty exacerbate both food insecurity and malnutrition. In Latin America, almost 60 million people suffer from malnutrition. The principal challenges regarding Latin American agriculture in the next 25 years will be to make the sector more competitive while at the same time alleviating poverty and protecting the natural resource base. Government and the private sector must work together to add value to agricultural production through the development of agriculture and agribusiness, without forgetting the role of smallholders who produce a large proportion of important basic foods such as corn, beans and potatoes. Production should be developed according to the region's comparative advantage in agricultural and food production, in that way making the sector a more dynamic component of economic activity. In addition to improving agricultural competitiveness, efforts to boost production must also take into account the processes of political and economic transformations occurring in the region, including trade liberalization and increasing urbanization.

Chapter 2

PER PINSTRUP-ANDERSEN AND JULIE BAB1NARD

Agriculture, including agroindustry, is one of the largest economic sectors of Latin America and the Caribbean, representing approximately 25 percent of regional GDP. The primary agricultural sector alone accounts for about 10 percent of all economic activity. In addition to its important agricultural sector, the region also boasts bountiful natural resources. With only 8 percent of the world's population, the region has 23 percent of the world's potentially arable land, 12 percent of its cultivated land, 46 percent of its tropical forests, and 31 percent of its fresh water (Garrett, 1997). The abundance and diversity of Latin America's agricultural and natural resources provide it with a comparative advantage to compete in world markets and generate broad-based growth throughout both the rural and urban economies. Despite these resources, however, the region continues to struggle with poverty and malnutrition that can be traced in large part to skewed income distribution. On average, the Latin American countries have the greatest income inequality in the world (IDE, 1998). Over the next 25 years, the Latin American countries must feed growing numbers of people in the cities and will face increased competition abroad. As the region still faces high levels of poverty, malnutrition and food insecurity, the efficiency and vitality of the agricultural sector is of critical importance. Effective use of agriculture and the natural resource base can help solve not only these problems, but problems of environmental degradation as well. The challenge is to exploit existing and future opportunities without endangering the region's environmental assets. This chapter will argue that success in meeting the food needs of Latin America depends on the ability of the region's agricultural and food system to generate broad-based growth. The chapter will also examine the region's prospects for food security. While food security is better overall than in any other region of the developing world, increasing domestic production through investment in the agricultural sector could be the most promising approach to food security for all Latin Americans.

Food Security and Malnutrition in Latin America Compared to other developing regions, Latin American is relatively well off. The region's per capita income averages $3,390 per year, in contrast with $910 in East Asia and $510 in Sub-Saharan Africa (World Bank, 1998). Food energy supplies are also relatively high at 2,812 calories per person per day, compared to 2,706 in East Asia and 2,164 in Sub-Saharan Africa (FAO, 1999). Despite these socioeconomic indicators, income inequality has remained a stubborn problem throughout the region. Poverty is wide-

spread and income distribution is more unequal than in any other region of the world (USDA, 1999). While in Costa Rica and Uruguay inequality is relatively low by regional standards, other countries in the region have among the widest income gaps in the world. In Brazil and Chile, the top 10 percent of the population has almost 50 percent of national income, while the bottom 50 percent has little more than 12 percent (see Figure 2.1). Despite several years of sustained high growth in the region since the early 1990sâ&#x20AC;&#x201D;interrupted only by the Mexican financial crisis of 199495 and by the effects of the current worldwide financial crisisâ&#x20AC;&#x201D;Latin America has made little progress toward significantly reducing poverty (USDA, 1998). Although the region made some progress in reducing poverty between 1970 and 1980, poverty then began to increase once again, from 35 percent of the population in 1980 to 41 percent in 1990. Poverty particularly increased in urban areas, where the share of poor grew from 25 to 35 percent between 1980 and 1990. While most of the poor now live in urban areas, poverty is considerably larger in relative terms in rural areas (Echeverria, 2000). The share of rural people who were poor increased from 54 to 58 percent from 1980 to 1990, but that share fell back to its 1990 level in 1997 (see Figure 2.2). Insufficient income, unequal purchasing power and high levels of poverty exacerbate food insecurity and malnutrition. More than 50 million Latin Americans were undernourished between 1995 and 1997, representing close to 11 percent of the total population. This figure is down slightly from 13 percent for the 1990-92 period (see Figures 2.3 and 2.4). In addition, although there is less under-nutrition among Latin American children under five than in any other region of the developing world, 10 ten percent of the region's children were underweight due to insufficient food intake between 1987 and 1998 (see Figure 2.5). Malnutrition is very serious in Ecuador, Guatemala and Honduras, where 18, 25 and 27 percent of the children, respectively, are estimated to be underweight. Food consumption by Latin Americans in the lowest income quintile was estimated at only 79 percent of the minimum nutritional requirement in 1999, compared with 126 percent in the highest income quintile. While people in the lowest income quintile in Sub-Saharan Africa and Asia consumed 81 and 95 percent, respectively, of the minimum nutritional requirement in 1999, people in the highest income bracket consumed 119 and 123 percent of food requirements (see Figure 2.6). Over the past two decades, food imports, including food aid, have played an important role in Latin America's food security. Food production did not keep up with population growth, but imports prevented declines in per capita consumption. However, between 1980 and 1998, per

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PER PINSTRUP-ANDERSEN AND JULIE BABINARD

Source: IDE (1998).

Figure 2.2

Percentage of Population in Poverty in Latin America, 1980, 1990, 1997

Source: ECLAC (1999).

Figure 2.1

Income Distribution in Selected Latin American Countries

FOOD, AGRICULTURE AND NATURAL RESOURCES IN 2020

Source: FAO (1999).

Figure 2.4

Numbers of Undernourished People in Latin America, 1995-97

Source: ECLAC (1999).

Figure 2.3

Undernourished Population in Latin America, 1995-97

PER PINSTRUP-ANDERSEN AND JULIE BABINARD

Source: FAO (1999).

Figure 2.6

Food Consumption by the Poorest and Wealthiest 20 Percent of the Population, 1999

Source: USDA (1999).

Figure 2.5

Underweight Children in Latin America, 1995-97

capita food consumption increased less than 1 percent per year. In 1987, the food aid share of total imports reached 42 percent (USDA, 1999). Due to improved commercial capacity in the region and declining global food aid deliveries, this share dropped to 2 percent by 1998 (USDA, 1999). Despite a relatively slow increase in food production of 1.7 percent per year, strong commercial import growth of 2.1 percent over the next decade is expected to raise food supplies sufficiently to keep up with population growth. However, the average regional performance masks large variations among countries. Ecuador, El Salvador, Guatemala, Haiti, Honduras, Nicaragua and Peru are projected to have declining per capita consumption levels (USDA, 1999). These countries are already faced with nutritional food gaps. They are also the countries whose imports provide the smallest shares of total supplies.

Future Food Prospects for the Region in a Global Context Meeting Latin America's food needs in coming decades will require increases in agricultural production and trade. Between 1995 and 2020, the population in Latin America and the Caribbean is expected to increase by 38.5 percent and reach 665 million (see Table 2.1). Population growth in the region will represent 10.1 percent of the increase in the global population during that time period. From 1950 to 1990, the percentage of the population in urban areas increased from 41.6 percent to 71.5 percent, and it is expected to exceed 80 percent by 2020 (United Nations, 1999). Meanwhile, the region's rural population is expected to decrease by 3 million by 2020. Agricultural production and research systems in Latin America will be challenged to keep up with increased demand for food and changing dietary preferences. As they move from rural to urban areas, most people adopt more diverse diets. They tend to consume more livestock products, fruits, vegetables and processed foods. As in the rest of the developing world, except parts of Africa, prospects for economic growth in Latin America appear favorable, and rising incomes should push toward more diversified diets. The International Food Policy Research Institute's global food model—the International Model for Policy Analysis of Commodities and Trade (IMPACT)—projects that total income in Latin America will increase at an average of 3.6 percent annually between 1995 and 2020, raising per capita incomes by 74.5 percent to $6,270 (Table 2.2). Population growth, rapid urbanization, income growth and associated changes in lifestyles and food preferences will combine to prompt

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PER PINSTRUP-ANDERSEN AND JULIE BABINARD

Region

Population level1 1995 2020 (Millions)

Latin America and the Caribbean Africa Asia, excluding Japan China India

480 697 3,311 1,221 934

665 1,187 4,421 1,454 1,272

185 490 1,110 233 338

38.5 70.3 33.5 19.1 36.2

10.1 26.7 60.5 12.7 18.4

Developed countries Developing countries World

1,172 4,495 5,666

1,217 6,285 7,502

45 1,790 1,836

3.8 39.8 32.4

2.5 97.5 100.0

Population increases. 1995-2020 (Millions) (Percent)

Share of increase

Source: United Nations 0999). ' Medium-variant population projections.

significant increases in food demand in the region. Latin America is forecast to account for about 12 percent of the 690 million ton increase in the global demand for cereals between 1995 and 2020. Just Latin America alone will represent demand of about 218 million tons in 2020. With demand for meat products expected to reach 41 million tons in 2020, the region will account for 16.4 percent of the 115 million-ton increase in global demand for those products. In terms of developing countries, Latin America will account for about 14 percent of the 580 million ton increase in demand for cereal and an even bigger share of the 98 million ton increase in demand for meat (see Figure 2.7). Per capita demand for cereals and meat products in Latin America will continue to lag behind developed countries, although the gap will begin to narrow for meat. Per capita demand for cereals in the region is projected to increase by 43 kilograms and reach 335 kilograms by 2020, a 15 percent increase. During the same period, per capita demand for meat products is forecast to increase by 15 kilograms to reach about 64 kilograms by 2020, a 31 percent increase (see Figure 2.8). Increasing per capita demand for cereals (food and feed) and meat products in East Asia will far outstrip that of Latin America. Income levels are already relatively high in East Asia and are projected to continue to grow rapidly over the next two decades, triggering massive increases in demand. Per capita demand in East Asia for cereals is projected to in-

Table 2.1. World Population, 1995 and 2020

FOOD, AGRICULTURE AND NATURAL RESOURCES IN 2020

Region

Annual growth rate, 1995-2020 (Percent)

Per capita income level 1995 2020 (1995 US$)

Sub-Saharan Africa' Latin America and the Caribbean West Asia and North Africa Southeast Asia South Asia East Asia

3.40 3.59 3.83 4.44 5.01 5.12

280 3,590 1,691 1,225 350 984

359 6,266 2,783 2,675 830 2,873

Developed countries Developing countries World

2.18 4.32 2.64

17,390 1,080 4,807

28,256 2,217 6,969

Source: IMPACT simulations in July 1999 by IFPRI. ' Excluding South Africa.

crease by 66 kilograms to reach 373 kilograms by 2020, driven to a large extent by increases in demand for grain for feed. The disparities in food demand between developed and developing countries can be explained by lower incomes and greater dependence on roots and tubers for sustenance in the latter. In Latin America, as in the rest of the developing world, the poorest farmers and food insecure households are highly dependent on roots and tubers as a significant if not principal source of food and income. These foods provide an important supplemental source of carbohydrates, vitamins and amino acids in food systems that are dominated by other commodities. The production and processing of roots and tubers, which tend to be very labor-intensive, are also important sources of employment and income. IMPACT projections suggest that global demand for roots and tubers will increase by 37 percent between 1995 and 2020 and reach 864 million tons. Latin America alone will account for close to 10 percent of the increase in demand and reach 72 million tons by 2020 (see Figure 2.9). Demand for roots and tubers will grow by 1.5 percent per year over the same period. Demand for meat will grow much faster than for cereals in Latin America: 2.4 percent per year for meat compared to 1.9 percent for cereals. This trend is a global phenomenon. A demand-driven livestock revolution is under way in the developing world, with profound implications for global agriculture, health, livelihoods and the environment. Between

Table 2.2. Income Levels and Growth, 1995-2020

PER PINSTRUP-ANDERSEN AND JULIE BABINARD

Figure 2.7

Total Demand for Cereals and Meat Products, 1995-2020

Source: IMPACT simulations in July 1999 by IFPRI.

Figure 2.8

Per Capita Demand for Cereals and Meat Products in Latin America, 1995-2020

Source: IMPACT simulations in July 1999 by IFPRI.

FOOD, AGRICULTURE AND NATURAL RESOURCES IN 2020

Source: IMPACT simulations in July 1999 by IFPRI.

the early 1970s and the mid-1990s, the volume of meat consumed in the developing countries grew almost three times as much as it did in the developed countries (Delgado et al., 1999). With continued population growth, urbanization, income growth and changes in lifestyles and food preferences, meat demand in the developing world is projected to double between 1995 and 2020 to 190 million tons and increase by 25 percent in developed countries to 122 million tons. As in the rest of the developing world, demand for poultry will continue to exceed demand for the other commodities in Latin America. In response to the strong demand for meat products, Latin America's demand for grain for feed is projected to almost double between 1995 and 2020 to 104 million tons, while demand for cereals for human consumption will increase by 40 percent to 82 million tons (see Figure 2.10). By 2020,47 percent of the cereal demand in Latin America will be directed to animals, compared to 42 percent in 1995. By 2020, demand for maize in Latin America will overtake demand for rice and wheat (see Figure 2.11). These tendencies are common to all developing countries where increased demand for animal feed will prompt demand for maize to increase much faster than for any other cereal. To meet demand, farmers in Latin America will have to produce 59 percent more grain in 2020, most of which will have to come from yield increases. As

Figure 2.9

Share of Increase in Global Demand for Roots and Tubers, 1995-2020

PER PINSTRUP-ANDERSEN AND JULIE BABINARD

Figure 2.10

Demand for Cereals for Human Consumption and Animal Feed in Latin America, 1995-2020

Source: IMPACT simulations in July 1999 by IFPRI.

Figure 2.11

Increase in Demand for Major Cereals in Latin America, 1995-2020

Source: IMPACT simulations in July 1999 by IFPRI.

farmland cultivated with cereals will increase by only 14.8 percent or about 7 million hectares by 2020, improvements in crop yields will be required to bring about the necessary production. Food production in Latin America, as in most developing countries, will increase much faster than in the developed world. While cereal production in the developing world is projected to increase by 51 percent, and by close to 72 percent in Latin America, cereal production in the developed world is projected to increase by only 24 percent. By 2020, the developing world will be producing 59 percent of the world's cereals, up from 54 percent in 1995. Latin America's share of the developing world's cereal production will be 14 percent, and of world total cereal production, about 8 percent. In terms of meat, Latin America is projected to almost double its production between 1995 and 2020 to almost 44 million tons. The region's meat production will represent about 14 percent of total world production in 2020, up from about 12 percent in 1995. By 2020, the developing world will be producing 61 percent of the world's meat, up from 50 percent in 1995. Latin America is the only region of the developing world that is not forecast to increase its net cereal imports between 1995 and 2020. While net cereal imports by developing countries will almost double over that period to reach 192 million tons, net cereal imports in Latin America will decrease by 16 percent to 3 million metric tons by 2020. Like in most of the developing world, wheat will constitute the bulk of Latin America's net cereal imports. However, while the share of maize in developing country imports is projected to rise from 28 percent to 33 percent by 2020, the share of maize in Latin America will decrease from 4.5 percent to less than 1 percent of the developing world's total cereal imports. Trade in rice is forecast to remain small. About 12 percent of the developing world's cereal demand will be met through net imports from the developed world, up from 10 percent in 1995. Already a net exporter of meat, Latin America is expected to increase its exports 3.5 times between 1995 and 2020 and reach 1.9 million tons by 2020. On average, net meat imports by developing countries will increase eightfold by 2020.

Factors that Affect Agricultural Development and Food Systems Latin America has about 700 million hectares of potentially cultivable land, which represents almost 35 percent of its total area. Over 1992-94, when an average of 140 million hectares (7 percent) were in permanent

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cultivation, it was estimated that Latin America could feed its population in the year 2020 by cultivating only 4 percent of its land and using input intensive production techniques (Gallopin et al., 1991). Although agriculture production in Latin America lagged behind other sectors of the economy in the 1970s, in most countries today, agriculture is a vigorous sector. During 1980-90, the sector's annual growth rate of 2.1 percent was faster than the overall economy. From 1990-97, the sector grew at an annual rate of 2.5 percent, while regional GDP expanded at 3.2 percent (see Figure 2.12). In 1998, agriculture alone was worth close to $76 billion and contributed 7.8 percent to GDP. The contribution of agriculture averaged 20 percent of GDP in Guatemala and Nicaragua and between 10 and 20 percent in Brazil, Colombia and Ecuador. The primary agricultural sector on average accounts for more than 25 percent of total employment in the region. In several countries, this share is greater: 47 percent of employment in Bolivia, 52 percent in Guatemala and 39 percent in Paraguay. In the coming decades, a number of issues could significantly affect the evolution of agriculture in the region. They include the positioning of agriculture within national economies, the impact of trade liberalization, and weather fluctuations and climate change.

The Importance of Agriculture In the past, the potential of agriculture to contribute to an economic development strategy in Latin America often went unrecognized.1 During the 1970s, the agricultural sector and rural areas were severely affected by a policy strategy biased in favor of the industrial sector and urban areas (Krueger et al., 1991). By impoverishing agriculture, these policies encouraged rural-urban migration, which exacerbated urban unemployment (Garcia Garcia, 1989). If agriculture is to play a key role in food production, poverty alleviation and environmental sustainability, the sector must not be discriminated against in the future (Diaz-Bonilla, 1999). Agriculture and the food industry have greater backward linkages and income and employment multipliers than are found in the rest of the economy. People depend on agriculture for food and textiles, and the sector also generates employment in transportation, retailing and processing. As production and income rise, demand for nonagricultural goods and services increases. Increases in agricultural production and produc1

The so-called "agriculture paradox" relies on the fact that even though the importance of the sector is verbally recognized, in reality it is neglected in terms of investment priorities (Reca and Echeverria, 1998).

FOOD, AGRICULTURE AND NATURAL RESOURCES IN 2020

Source: IDE Statistics and Quantitative Analysis Unit calculations (1999).

tivity are, therefore, strategically important to national economies (Trigo, 1995). It has been estimated that every increase of $1 in agricultural output in Latin America increases overall economic output by almost $4 (Pinstrup-Andersen et al., 1995). In the future, agriculture will continue to play a vital role in the growth of the region, contributing to every aspect of economic activity: GDP, exports, food supply, the production of raw materials for the industrial sector, and employment opportunities. To be globally competitive, the region will have to continue to reform its macroeconomic policiesâ&#x20AC;&#x201D;that is, it will have to be an efficient, low-cost producer, flexible enough to respond quickly to changing market conditions (Garrett, 1997). This will be achieved by investing in the health and education of people in rural areas and by developing market infrastructure, including transportation and communications.

Trade Liberalization In addition to liberalizing agricultural trade under the auspices of the World Trade Organization (WTO), regional trade agreements have become increasingly important to Latin America. Trade within the Americas rose from one-fourth of total agricultural exports in 1981-83 to more

Figure 2.12

Average Annual Growth Rates of Overall Agricultural GDP in Latin America, 1980-90 and 1990-97

PER P1NSTRUP-ANDERSEN AND JULIE BABINARD

than one-third by the mid-1990s (Diaz-Bonilla and Reca, 1997). There are now 40 separate trade agreements in effect throughout the region. Some of the larger treaties include the North American Free Trade Agreement (NAFTA) and the Southern Cone Common Market (MERCOSUR). The share of trade among countries of the region increased from about 15 percent of total regional trade in 1988 to 21 percent in 1997 (USDA, 1999). This trade liberalization, combined with the implementation of an increasing number of trade agreements, expands the exposure of the region's agricultural sector to world markets. The impact on the different countries of the region will vary depending on whether they are net agricultural exporters or net food importers. The region was a net food exporter from 1995-97, with an average food trade surplus of $9.4 billion. However, if Argentina and Brazil are excluded—they are two of the largest net food exporters among all developing countries—the region was a net food importer, with a deficit of $300 million (USDA, 1999). For smaller net food importing countries, greater trade liberalization could exacerbate food price instability, which could hurt the poor by hampering access to food supply at adequate prices. Trade liberalization could also increase potential exposure of previously protected domestic markets. NAFTA, for example, affects Mexican small farmers producing maize, beans and other staples, because it induces greater competition from American commercial producers. Such competition could also cause cheap food imports to displace domestic producers, particularly small producers and minifundistas (Diaz-Bonilla, 1999). However, while the impact of trade and agricultural policy changes on poor consumers and small and near-landless producers is a source of debate, adequate design and funding of domestic policies to achieve agricultural growth and poverty alleviation will clearly be essential for food security in the region. Greater productivity and growth resulting from better trade and sectoral policies could help the employment conditions and income generation in Latin America. By focusing on sectors where the region has a comparative advantage, export performance could be improved, benefiting the poor and enhancing food security. The growth in recent years of exports of fruits and vegetables, whose production is labor-intensive, is an example of how Latin American countries can benefit from increased trade liberalization (Diaz-Bonilla, 1999). A related issue for the net food importing countries of the region and for the overall evolution of agriculture and food security in Latin America is how the region will finance food imports and close existing food gaps in the future. A major concern is the region's ability to finance food imports. Global agricultural trade liberalization is expected to re-

53 |

duce food aid availability as export subsidies fall and food import prices rise. Although food aid shipments for 1998-99 were estimated at around 9.5 million tons, about 52 percent larger than the previous year, the future of food aid to meet the region's importing needs is uncertain (USDA, 1999). Changes in agricultural policies in North America and the European Union, the implementation of the Uruguay Round trade agreements, and changing geopolitical and domestic concerns within donor countries have diminished interest in and support for food aid among donors, especially the United States. The U.S. reduced its food aid deliveries from over 10 million tons in 1993 to less than 4 million tons in 1996 (PinstrupAndersen et al., 1997). As food aid continues to be inadequate both in terms of availability and distribution, Latin America will need to increase its export earning capacity in order to support future food imports. In this respect, the region's import capacity will be linked to its economic growth and to its access to developed country markets.

Weather and Climate The impact of weather fluctuations and climate change on agricultural production in Latin America could lead to shortfalls in food production and a deterioration in food security. Local food shortages caused by unpredictable and abnormal weather can pose immediate challenges to meeting food security needs and preventing hunger. They can also lead to significant economic and social instability for national governments (Brookins, 1999). Several countries severely affected by Hurricanes Mitch and Georges in late 1998 were already facing food gaps. Although the impact of the hurricanes on food security has yet be fully assessed, the destruction of crops, farms and agricultural infrastructure will have a long-lasting impact on agricultural production and export earnings (USDA, 1999). The weather fluctuations and rainfall patterns caused by the reemergence in 1997-98 of El Nino, the warming of the sea surface off the South American coast, also had implications on food security. The phenomenon affects global weather patterns, resulting in more erratic and extreme conditions that threaten many countries in the region with both floods and drought at different places and stages in the cycle. According to a special report by the FAO Global Information and Early Warning System on Food and Agriculture (GIEWS), the Central American and Caribbean countries harvested an estimated 15 to 20 percent less cereals and beans in 1997 than in 1996 due to weather anomalies caused by El Nino. Losses in some countries were much higher. In Nicaragua, about 80 percent of expected maize production was lost in most drought-

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affected areas. In South America, drought conditions damaged pasture land and contributed to declines in milk production (FAO, 1997).

Agricultural Production and Sustainable Growth: Policy Implications Success in reducing poverty, eliminating malnutrition and meeting the food needs of Latin America will depend in large measure on the ability of the region's agricultural and food system to generate broad-based growth. Latin America has the resources needed to produce food for a much larger population and has the technological base to properly exploit its natural resources (Trigo, 1995). The economic and institutional reforms under way in most countries of the region are providing a new, less distorted macroeconomic environment for agricultural development. Taking advantage of the opportunities available to strengthen the agricultural sector and generate broad-based growth to eradicate hunger and malnutrition will depend on an appropriate set of policies. First, assuring access to knowledge and technological advances is a critical issue that Latin America will have to address to achieve potential gains in productivity. Thus far, resources for the transfer of research and technology have not been used appropriately to develop alternatives for marginal, low productivity areas where social problems are rooted in overpopulation. Available technologies and technical assistance have often not responded to the needs of small, frequently subsidized, resource-poor farmers. The technologies developed have often favored the use of capital, reducing the demand for low-cost and abundant labor. In the future, public and private institutions must foster improvements in technology applications in agriculture, especially for staple foods and grains that are produced primarily by small farmers in isolated areas (Pomadera, 1995). Small farmers still account for a significant proportion of the production of food staples in the region, particularly in mountainous areas. In some cases, they also produce important export crops such as tropical fruits, specialty vegetables, spices and medicinal herbs (Trigo, 1995). Smaller farms, including those in remote areas, must not be left behind in the process of technological change (Pomadera, 1995). Support for ongoing research is necessary, particularly at the farm level, to understand the resource constraints and ecological conditions faced by farmers, and to generate technologies that best meet their needs. Research into indigenous or traditional agricultural practices, which are often well adapted to the ecological conditions, should be emphasized (Garrett, 1997).

The goal of making the agricultural and food system of Latin America internationally competitive—indeed, of making the region a significant player in the international economy—can only be achieved if the region sustainably manages its natural resources. Ill-conceived policies and institutional arrangements in the past have often encouraged behavior that has caused environmental degradation and undermined the sustainability of agricultural production. Surplus extraction policies intended to speed up agricultural modernization, along with state intervention, have resulted in overexploitation of Latin America's natural resource base. The result has been widespread deforestation, soil degradation, overgrazing and loss of biodiversity affecting almost every ecosystem in the region. The Global Assessment of Soil Degradation (GLASOD) was the first worldwide comparative analysis focusing specifically on the extent and severity of soil degradation from World War II to 1990 (Oldeman, 1998). The GLASOD study found that in Central America, 63 million hectares, representing 31 percent of total land used, had been degraded; in South America, 244 million hectares of land had been degraded, representing 9 percent of total land used. Of total agricultural land, 74 percent had been degraded in Central America and 45 percent in South America (see Table 2.3). Using the GLASOD data, it was estimated that agricultural productivity in Central America was 37 percent lower than it would otherwise have been without soil degradation, the largest loss of any region (Oldeman, 1998). The cumulative loss for South America was 13.9 percent (Scherr, 1999). Since Latin America's natural resources form the basis for agricultural production, further losses could have devastating effects on the region's long-run prosperity. Existing and future productive opportunities must therefore be exploited without further endangering the region's environmental assets. A particularly difficult challenge in this regard will be the expansion of irrigation to new areas. Over the next few decades, Latin American countries such as Peru, Mexico, Costa Rica and Chile will likely depend on irrigation for half or more of their agricultural production (Scherr, 1999). Technological development will be critical to resource conservation in Latin America. With scientific and technological advances in soil management, the cost of sustainable and intensive crop production could decline for many types of soils now susceptible to degradation. Although the "Green Revolution" technologies have been responsible for enormous productivity increases by some small-scale farmers in Latin America, many other farmers have been bypassed. Efforts to assist these farmers—along with concerns about excessive dependence on Green Revolution technologies such as fertilizers, pesticides and irrigation—have prompted in-

FOOD, AGRICULTURE AND NATURAL RESOURCES IN 2020

1,475

Percent

121 206 64 28 63 72 8 562

65 38 45 74 26 25 16 38

Degraded Percent

793 978 478 94 274 156 439 3,212 31 20 14 11 11 35 19 21

243 197

68 10 29 54 84 685

(millions of hectares)

Total

Permanent pasture Degraded

Percent

4,048

896 66 621 353 156

1,273

130 344 112 25 4 92 12 719

19 27 13 38 1 26 8 18

(millions of hectares)

683

Total

Forests and woodland Degraded

8,735

796 644

1,131

198

1,663 2,787 1,516

1,966

494 747 244 63 96 218 104

30 27 16 32 9 27 17 23

Percent

1,216

321 453 139 61 79 158 6

19 16 9 31 7 20 1 14

(millions of hectares)

Seriously Percent degraded (millions of hectares)

Total

All used land

Sources: Scherr (1999). Notes: The last two columns refer only to land that is moderately, strongly or extremely degraded. In the GLASOD study, lightly degraded soil is defined as having somewhat reduced agricultural suitability, but suitable in local farming systems. Original biotic functions are still largely intact and restoration to full productivity is possible through modifications in farm management. Moderately degraded soil offers greatly reduced productivity, but is still suitable for use in local farming systems. Major improvements are needed that are typically beyond the means of local farmers, and the original biotic functions are partially destroyed. In strongly degraded soil, productivity is virtually lost and soil is not suitable for use in local farming systems. The original biotic functions are largely destroyed. Major investments or engineering works would be needed to restore land to full productivity. Extremely degraded soil is defined as z human-induced waste/and that is unreclaimable, beyond restoration, and with biotic functions that are fully destroyed. Data for permanent pasture and forests and woodland include arable and nonarable land.

Asia South America Central America North America Europe Oceania World

187 536 142 38 236 287 49

Africa

Degraded (million of hectares)

Total

Region

Agricultural land

Table 2.3. Global Estimates of Soil Degradation by Region and Land Use

[~56J] PER PINSTRUP-ANDERSEN AND IULIE BABINARD

terest in alternative or complementary approaches (Pinstrup-Andersen et al., 1999). The agroecological approach, for example, aims to reduce the amount of external inputs used by farmers by encouraging them to rely instead on available farm labor and organic material, as well as on improved knowledge and farm management. One of the great strenghts of this approach is that it promotes sustainable management of natural resources and participation by farmers in identifying problems and implementing appropriate solutions at the farm and community levels. Projects in more than 30 countries in Latin America, Asia and Africa have successfully applied agroecological approaches to sustainably expand yields and improve the livelihoods of small farmers. Biotechnology also has great potential for reducing the use of fertilizers, pesticides and irrigation water. Its application to agriculture has been mostly limited to helping farmers in the industrial countries and large farmers in a few developing countries. With the exception of larger or better-off countries such as Brazil or Mexico, most developing countries are unable to foster effective agricultural biotechnology research programs without the support or partnerships from outside the country. The Consultative Group for International Agricultural Research (CGI AR) centers are well placed to bridge the gap between biotechnology research programs in industrial countries and the needs of small farmers in Latin America. The extent to which modern biotechnology will contribute to the achievement of food security for all is still an open question. Most of the commercialization of transgenic seeds has occurred for soybeans, maize and cotton in the United States, and to a lesser extent in Argentina, Canada, Mexico, China and South Africa (see Figure 2.13). If focused on solving the problems of small farmers, biotechnology may help reduce production risks and increase productivity. In most developing countries, this would result in both higher incomes for small farmers and lower food prices for poor consumers. Biotechnology to make grains more nutritious could help combat widespread nutritional problems among the poor in developing countries. While projections regarding future food, agricultural and environmental conditions in Latin America do not suggest an impending food crisis, millions of families will in fact suffer. Ongoing poverty, particularly in urban areas, has uncertain effects on food security, nutrition and political stability. The rural poor still constitute a large share of the region's impoverished population, and, of course, much of urban poverty represents a flight from rural poverty (Mellor, 1995). Most small producers and rural families are poorly prepared to benefit from changes in agriculture production and trade that result from globalization. Processes of

FOOD, AGRICULTURE AND NATURAL RESOURCES IN 2020

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(Millions of hectares)

Source: James (1998).

macroeconomic adjustment and trade liberalization unfolding over recent decades have created opportunities for foreign investment and increased production for exports, as well as for greater demand for imports. These new policies influence agricultural production directly and demand for food indirectly. Agricultural production is directly affected by increased competition, and the structure of demand is indirectly affected by changes in employment patterns and income distribution. In the future, it will be important to increase market effectiveness in promoting growth and to improve the ability of the region to compete at the global level. Reaching these goals will require a stable macroeconomic and institutional setting, including appropriate regulations. Appropriate investment in infrastructure such as transportation, information services and public research on new technologies must be a priority. The abundance and diversity of Latin America's agricultural and natural resources give the region an enormous comparative advantage with which to compete on world markets and increase growth throughout economies. Stronger and more environmentally-friendly agricultural growth would generate employment, income and economic growth in both urban and rural areas. Increased agricultural production would also help achieve not only higher levels of food security within Latin America but also, as Latin America becomes a net exporter, increases in the global food supply.

Figure 2.13

Area of Transgenic Crops, 1998

References Brookins, C. 1999. Perspective in the APEC Region. Paper presented at the International Symposium on Recent Food and Agriculture Issues and Future. Theme 2: Coping with Local Food Shortage Caused by Abnormal Weather. AICAH, Tokyo. Delgado, C., M. Rosegrant, H. Steinfeld, S. Ehui, and C. Courbois. 1999. Livestock in 2020: The Next Food Revolution. The 2020 Vision for Food, Agriculture and the Environment. Discussion Paper No. 28. IFPRI, Washington, DC. Diaz-Bonilla, E. 1999. The WTO Round and Food Security for USAID Partner Countries. Notes prepared for the Economic Growth and Agricultural Development Training Workshop, Washington, DC. November. Diaz-Bonilla, E.,and L. Reca. 1997. Changes in Latin American Agricultural Markets. Trade and Macroeconomics Division Discussion Paper No. 24. IFPRI, Washington, DC. Echeverria, R.G. 2000. Options for Rural Poverty Reduction in Latin America and the Caribbean. Revista de la CEPAL 70 (April): 147-160. Santiago. Economic Commission for Latin America and the Caribbean. 1999. Panorama Social de America Latina: 1998. Santiago: ECLAC. Food and Agriculture Organization (FAO). 1997. The Impact of El Nino on Crop Production in Latin America: Global Information and Early Warning System on Food and Agriculture. Special Report. Rome: FAO. . 1999. The State of Food Insecurity in the World, 1999. Rome: FAO. Gallopin, G., M. Winograd, and I. Gomez. 1991. Ambientey desarrollo en America Latina y el Caribe: Problemas, oportunidades, y prioridades. Bariloche, Argentina: Grupo de Analisis de Sistemas Ecologicos. Garcia Garcia, J. 1989. The Impact of Trade and Macroeconomic Policies. In A. Maunder and A. Valdes (eds.), Agriculture and Governments in an Interdependent World: Proceedings of the Twentieth Conference of Agricultural Economists. Alder, UK: Darmouth Press. Garrett, J.L. 1997. Challenges to the 2020 Vision for Latin America: Food and Agriculture since 1970. The 2020 Vision for Food, Agriculture and the Environment. Discussion Paper No. 21. IFPRI, Washington, DC. Inter-American Development Bank 1998-1999. Facing Up to Inequality: Economic and Social Progress in Latin America. Washington, DC: IDE James, C. 1998. Global Review of Commercialized Transgenic Crops: 1998. ISAAA Briefs No. 8. International Service for the Acquisition of Agribiotech Applications. Ithaca, NY: CABI Publishing.

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Krueger A., M. Schiff, and A. Valdes (eds.). 1991. The Political Economy of Agricultural Pricing Policy. Vol. 1: Latin America. Baltimore: Johns Hopkins University Press. Mellor, John W. 1995. Agriculture on the Road to Industrialization. Baltimore: Johns Hopkins University Press. Oldeman, L.R. 1998. Soil Degradation: A Threat to Food Security? Report 98/01, International Soil Reference Information Centre, Wageningen, Holland. Pinstrup-Andersen, P., M. Lundberg, and J.L. Garrett. 1995. Foreign Assistance to Agriculture: A Win-Win Proposition. The 2020 Vision for Food Policy Research. Washington, DC: IFPRI. Pinstrup-Andersen, P., R. Pandya-Lorch, and M. Rosegrant. 1997. World Food Situation: Recent Developments, Emerging Issues and Long-Term Prospects. The 2020 Vision Food Policy Report. Washington, DC: IFPRI. . 1999. World Food Prospects: Critical Issues for the Early Twenty-First Century. The 2020 Vision Food Policy Report. Washington, DC: IFPRI. Pomadera, C. 1995. Comments: Latin America and the Caribbean. In N. Islam (ed.), Population and Food in the Early Twenty-First Century: Meeting Future Food Demand of an Increasing Population. Washington, DC: IFPRI. Reca, L.G., and R.G. Echeverria (eds.). 1998. Agricultura, media ambienteypobreza rural en America Latina. Washington, DC: IFPRI and IDE. Scherr, S. J. 1999. Soil Degradation: A Threat to Developing-Country Food Security by 2020? The 2020 Vision for Food, Agriculture and the Environment. Discussion Paper No. 27, IFPRI, Washington, DC. Trigo, E. 1995. Agriculture, Technological Change and the Environment in Latin America: A 2020 Perspective. The 2020 Vision for Food, Agriculture and the Environment. Discussion Paper No. 9, IFPRI, Washington, DC. United Nations. 1999. World Urbanization Prospects: The 1998 Revision. New York: United Nations. U.S. Department of Agriculture (USDA). 1998. Free Trade in the Americas. Economic Research Service, Situation and Outlook Series. WRS-98-1. ERS-USDA, Washington, DC. . 1999. Food Security Assessment. Economic Research Service, Situation and Outlook Series, International Agriculture and Trade Reports. GFA11. ERS-USDA, Washington, DC. World Bank. 1998. STARS CD-ROM Economic Database. World Bank, Washington, DC.

Importance of the Food and Agricultural Sector Martin Pineiro

The importance of the food and agriculture sector in Latin America is reflected in its contribution to total GDP (about 25 percent), its share of total exports (around 40 percent), and its potential for reducing poverty. Despite the sector's key role, however, Latin America has not developed a clear development strategy that articulates and exploits its comparative advantages and the opportunities presented by changing international and regional economic conditions. Such a strategy must adopt the notion of the countryside as a sphere of economic activities that go far beyond just agricultural production. Public policies and investment programs must integrate and articulate these different production activities into a new economic strategy for the development of the rural economy. The food and agriculture sector has played a major role in the economic development of Latin America.' The abundance of natural resources and, in some countries, the absence of other sources of wealth, historically gave the sector a central role in the accumulation processes that laid the foundation for the development that is the hallmark of modern societies. Even today, after decades of government-promoted industrial development, food and agricultural production still constitutes more than 25 percent of Latin America's gross domestic product (IFPRI, 1995) and more than 40 percent of its exports (Pineiro and Trigo, 1996). Indeed, in countries such as Colombia, Argentina, Nicaragua and Costa Rica, these indicators are often substantially higher.

' In this chapter, the food and agriculture sector encompasses crops, animal husbandry, the food processing industry, forest production, fisheries and fiber crops.

Chapter 3

MARTIN PINEIRO

The considerable importance of the food and agriculture sector is due to three primary factors: the sector's considerable weight in overall GDP, its large contribution to exports; and the very substantial proportion of the total population, particularly in rural areas, living in poverty. The relative importance of each of these factors varies from country to country. In many of them, however, an index of these three variables yields a comparatively high figure. This has helped attract attention to the rural sector in economic policy, but it has also engendered contradictions and hampered the capacity of countries to clearly define a policy for the sector. The difficulty is that the three factors are outcomes of different forms of economic logic and are associated with different interest groups. However, they are intimately bound with one another. Therefore, a strategy for the rural sector cannot avoid addressing them in a comprehensive fashion through the use of the appropriate economic policy instruments. The conceptual and operational definition of a strategy that harmoniously considers these factors and makes the most of the new opportunities created by scientific and technological advances, the globalization of markets, and the information revolution, is one of Latin America's greatest challenges. In most countries in the region, it is imperative that agroindustrial production play a primary role in their development strategies.

Agriculture and Economic Development Economic analysts over the centuries have documented the predominant role of the agricultural sector in the accumulation of wealth and economic development. In The Wealth of Nations in 1789, Adam Smith, the father of classical economics, was the first to argue that obtaining a surplus on the direct consumption of farmers is the essential step to industrialization and development. The contributions of the agricultural sector to economic development were formally expanded upon by Arthur Lewis (1955) and presented in highly elegant mathematical models by several authors (see Fei and Ranis, 1964). At the beginning of the 20th century, Latin America represented something of a paradigm that empirically supported the more positive elements of this thinking. Until 1940, the region's economic development was entirely dependent on the production of raw commodities, its central economic activity and the main vehicle for its trade relations with the rest of the world. In addition, in many countries the leading agricultural products helped forge the national social and political structure. Through

history, coffee in Colombia and Costa Rica and livestock and cereals in Argentina and Uruguay are obvious examples of the lasting influence of agriculture in general, and of these crops in particular, on these countries' development, relative wealth and social and political configuration. Starting in the 1930s and more intensely from the 1940s on, Latin America adopted a development strategy of its own that emphasized development of the industrial sector and assigned government a central role in the distribution of resources. It is important to note that the import-substitution strategy, at least as originally conceived, gave the agricultural sector an important role to play as a complement to the industrial sector. However, priority for the allocation of public resources was given to the industrial sector. Despite this, and notwithstanding a price policy that was in many cases adverse to the sector, agriculture grew at a rate of around 3 percent from 1950-80. At the same time, the region underwent an important process of industrialization, modernization and urbanization that laid the foundation for the emergence of today's complex societies. In the 1980s, the import-substitution strategy went into terminal crisis, which compelled a far-reaching economic reform centered on trade liberalization and greater fiscal and monetary discipline. This reform seeks to restore the region to a place in the world economy somewhat similar to the one it held before the Second World War. The strategy of more open development, in which trade plays a central role, is generating a profound economic restructuring. Agriculture has now reemerged in most countries as an important sector with a capacity to modernize and play a larger role in international trade. It must be remembered that, by international comparison, the region is extraordinarily endowed with natural resources for agriculture. Latin America has 23 percent of the world's arable land, 46 percent of its tropical forests, and 31 percent of its fresh water. Yet the region has only 10 percent of the world's population (Pineiro and Trigo, 1996). These natural conditions account for the region's comparative advantages in agricultural production and the historical importance of primary production in the aggregate GDPs and exports of most of its countries. This key production base also must be considered when contemplating strategies for future development based on creating dynamic comparative advantages generated by technological innovation and accumulating human and social economic capital.

IMPORTANCE OF THE FOOD AND AGRICULTURAL SECTOR

MARTIN PINEIRO

The Importance of the Food and Agricultural Sector Just as has occurred elsewhere in the world, as Latin American economies have diversified, the production and consumption of other goods and services have grown faster than the agricultural sector. As a result, the sector's share in regional GDP contracted from 15 percent at the end of the 1960s to below 10 percent in the 1990s (Reca and Echeverria, 1998). However, it is important to note that these agricultural figures include only primary production. The importance of the sector is significantly enhanced if one takes into account the inter-relationship between primary production and industrial processing activities, associated transportation and marketing services, and foreign trade. These activities can generate value four times as high as that of production, meaning that food and agricultural production would account for 25 percent of regional GDP (IFPRI, 1995). In Chile, Argentina, Brazil and Mexicoâ&#x20AC;&#x201D;where agricultural production accounts for less than 10 percent of GDPâ&#x20AC;&#x201D;the contribution of the agriculture sector rises to 30 percent if manufactures and related services are included, and to 40 percent taking the total for food and agriculture into account. In Uruguay, the primary agricultural sector generated only 12 percent of GDP and directly employed 150,000 persons at the end of the 1990s. But if the different chains of agroindustrial production are included, employment increases to more than 225,000 persons. Moreover, 50 percent of the industrial share of GDP is generated by manufacturing enterprises of agricultural origin. Taken together, exports of raw agricultural commodities and industrial products of agricultural origin provided more than 80 percent of the country's exports in 1996, or close to $2 billion. If these figures were added to those for forward linkages (manufactures, agroindustries, exports) and production of agricultural inputs, the economic importance of agriculture would increase even more (IDE, 2000). The growing importance of food and agricultural production illustrates the sector's potential to contribute to overall economic growth. This contribution is conveyed by the high correlation between growth of the agricultural sector and overall economic growth in the 1990s (see Figure 3.1). Moreover, the sector is even more vital if the social (the great magnitude of rural poverty) and environmental (the need for sustainable use of natural resources) aspects of operating in the countryside are considered. An important part of economic policy is to have a clear idea of the relative importance of agriculture and how this importance varies as economies grow. One of the explanations for the lack of public invest-

IMPORTANCE OF THE FOOD AND AGRICULTURAL SECTOR

ment in agriculture is the truism that its participation in total GDP diminishes when per capita GDP increases. This reasoning, together with perceptions that the exchange rate deteriorated in a secular way and that agriculture is supposedly unable to generate jobs, was the basis upon which the import-substitution strategy was developed. That strategy led to a decline in investment in the rural sector and a lost opportunity in terms of taking advantage of the region's productive potential. This strategy was different from agriculture policies implemented in more developed countries, such as Canada, Australia and New Zealand, which at the time had lower relative development and an endowment of natural of resources similar to that of many Latin American countries. A more complete manner of measuring the importance of the rural sector is to construct an index that incorporates the four dimensions mentioned earlier: i) agricultural GDP as a percentage of aggregate GDP; ii) exports of agricultural origin as a percentage of total exports; iii) the rural population as a percentage of total population; and iv) the impoverished rural population as a percentage of the total population in poverty (see Table 3.1). Figure 3.2 shows the relationships between the indexes that measure the importance of agriculture and the per capita income of the Latin American countries. As is to be expected, the index shows a negative correlation. The considerable importance of agriculture is seen in the coun-

Figure 3.1

Agricultural Growth and Total Economic Growth, 1990-98

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Country Argentina Brazil Chile Colombia Costa Rica El Salvador Guatemala Honduras Mexico Panama Peru Uruguay Venezuela United States Canada UK France Sweden Australia Hungary South Africa Kenya India

Rural poor as% of total poor1 20 (1986) 29 (1996) 15 (1996) 32 (1997) 58 (1997) 62 (1997) 67(1986) 55 (1997) 32 (1996) 52 (1997) 49 (1997) 23 (1986) 8 (1994)

46.4 43.5

Index of Agricultural Exports of Rural Aggregate population rural GDP index: agricultural origin as importance as % of total population as % of AÂąB population. total GDP, % of total of 1997' 2 19982 exports, 19973 agriculture 11 20 16 26 50 54 60 55 26 44 28 9 14 23 23 11 25 17 15 34 50 70 73

16 24 15 29 54 58 63 55 29 48 38 16 11 23 23 11 25 17 15 34 50 58 58

7 8 8 (1980) 13 14 13 21 23 5 7 7 8 4 2 4(1980) 2 2 4(1980) 3 6 4 29 25

43 26 12 25 41 26 46 23 5 4 10 30 2 6 6 5 10 2 20 11 7 38 12

22 19 16 22 36 32 43 33 13 19 18 18 6 10 11 6 12 8 12 17 20 41 32

Sources: 1

de Janvry and Sadoulet (1999), quoting ECLAC (1999). World Bank (1997 and 1999-2000). Taken as difference between total population and urban population. 3 Total exports: World Bank. Exports of agricultural origin: FAO. Note: In the countries for which no information on the rural poor is available, a homogeneous distribution of poverty between the urban and rural sectors is assumed. 2

tries of Central America and South America, which tend to lie above the regression lines. Figure 3.3 shows the same relation between the index of the relative importance of agriculture and the per capita income for the three groups of countries of Latin America, Africa and Asia. As per capita income grows, the importance given to agriculture diminishes. However, the index values decrease less rapidly in Latin America, which means that,

Table 3.1. Index of the Relative Importance of Agriculture

IMPORTANCE OF THE FOOD AND AGRICULTURAL SECTOR

Figure 3.3

Index of Importance of Agriculture and Per Capita GDP in Latin America, Africa and Asia

Figure 3.2

Index of Importance of Agriculture and Per Capita GDP in Latin America and the Caribbean

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given equal levels of per capita income, the importance of agriculture is higher in Latin America when compared to the other two regions. Figure 3.4 compares the same relationship between Latin America and the developed countries. The importance of agriculture is considerably higher in the Latin American countries. In the developed countries, the regression line is horizontal and, therefore, the importance given to agriculture does not diminish as per capita income increases within the high-income range. According to existing data, the index that measures the importance of agriculture reaches a maximum value between 8 and 10. Nevertheless, the tendency in Latin America indicates that the countries with the highest incomes are reaching values within the index of importance of agriculture that are lower than the ones found in the more developed countries of the world. If this tendency were to continue in the future, the agricultural sector in the region's higher-income countries would have little relevance. This would be less than optimal from the standpoint of regional production and distribution or population distribution, and, in turn, the social and political structure of such countries. This observation shows the importance of carefully analyzing policies followed by the developed countries in order to understand not only their economic strategies, but also those in Latin America.

Globalization and Economic Reforms: Consequences and Challenges The 1990s have been rich in economic and social changes. At the international level, the globalization of markets and the extraordinary advances in science and technology (especially biotechnology, communications and information processing) are transforming economies throughout the world, especially in countries most connected to the global economy. After several decades of an economic development strategy that gave preferential attention to the domestic market, Latin America made a significant effort in the 1990s to undertake economic and institutional reforms that connected the region to international markets, both for finance and goods and services. Many countries in the region now have economies that are comparatively open to trade and heavily dependent on the international capital market. The response of food and agricultural production to these new conditions has been generally favorable. In many countries, production is visibly modernizing and efficiency and competitiveness are improving in primary production and agro-industrial development. This is particu-

IMPORTANCE OF THE FOOD AND AGRICULTURAL SECTOR

larly true of temperate-zone production, for which international price trends has been markedly adverse (Pinstrup-Andersen, Pandya-Lorch and Rosegrant, 1999). Despite these positive responses to the new conditions, the potential for agro-industrial production to contribute to economic growth and increased exports is far from fulfilled. In addition, the domestic characteristics of the modernization process have generated new challenges and opportunities that must be taken into account when charting strategies for deepening the sustainable development of the food and agriculture sector. Productive Efficiency and Sustainable Use of Natural Resources Latin America needs to modernize its agricultural production and achieve efficient production based on exploitation of its extraordinary endowment of natural resources and on the technology available worldwide. Over the past three decades, and particularly in the 1990s, many of the countries in the region have made important progress, especially in temperate climate agriculture.

Figure 3.4

Index of Importance of Agriculture and Per Capita GDP in Countries of Latin America and the OECD

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Advances in production of these crops exemplifies the central features of the recent agricultural modernization process. Modernization relied on a technological package based on genetic improvement of a few crops of major world importance (wheat, maize and soybeans) and on the intensive use of agrochemicals and irrigation. For example, the use of fertilizers from 1960-80 increased 2,000 percent. The impact of this technological package (the "Green Revolution") on production and productivity was extraordinary and helped to significantly strengthen world food safety and raise the standard of living of the urban poor (Torres et al, 1999). Three decades after it began, however, the impact of the Green Revolution on production has significantly waned. It has become apparent that using agrochemicals and other industrial inputs has had a negative impact on the environment and has put growing pressure on fresh water supplies as well. Hence, the technical and political sustainability of this technological pattern needs to be evaluated in view of the rising concern of the non-rural population over environmental issues, especially in developed countries that are the principal markets for Latin American products. To date, Latin American agriculture has been relatively benign, using fewer agrochemicals than the world mean. The region still has abundant water resources. This situation presents an opportunity for the region to anticipate future events and keep its agriculture environmentally friendly by consolidating itself as an agricultural producer that is efficient but clean. A nonpolluting production structure would help to preserve future access to the markets of countries with environmental restrictions, reach special high-value market niches, and develop activities associated with the sale of environmental services. In summary, a strategy based on the efficient but sustainable use of agricultural natural resources is central to a modern and productive rural economy.

Value-added and Market Niches: The Role of Rural Agroindustry and Biotechnology One of the major challenges and opportunities for Latin America is the move toward the production of higher value-added goods directed at meeting new consumer demands. Even though Latin America has made important progress in agroindustry, this initial effort needs to be deepened if Latin America is to gain access to the new opportunities presented by international trade.

Competitive agroindustry requires the development of production and commercial procedures such as packaging, statements of provenance, and organic products directed toward gaining and retaining new products and trademarks. This should all be based on complex and knowledge-based institutional mechanisms whose development requires a joint public and private effort. Similarly, the differentiation of plant products of high value must be accompanied by the institutional mechanisms needed to ensure that they will be safe and of good quality, and are tested and certified as such. Latin America's technical and institutional weakness in these areas is considerable. One aspect of modern agriculture is the use of biotechnology to achieve higher efficiency, reduce costs and differentiate products. The recent Montreal agreement is beginning to resolve some of the debate over restrictions on the use of transgenic varieties, based on the concerns of consumers about genetically modified organisms. Taking advantage of this opportunity calls for special research and technological development, careful policies regarding public-private technological linkage, and a mechanism to attract private investment and the requisite regulatory framework on rights to intellectual property.

Modernization and Agroindustrialization: Economic Concentration and Equity Modernization of primary production and rapid agroindustrialization were major phenomena in most Latin American countries in the 1990s. These processes are important to increase production efficiency and to respond to growing demand for processed foods. They also offer an extraordinary opportunity to generate employment and added value. However, these economic transformations in agriculture have been accompanied by an important economic concentration and a loss of bargaining power by farmers. In the United States, the total value of production sold by farmers today represents only 22 percent of the total value generated in the chain of production. In the 1950s, this figure was 57 percent. Modernization has also led to a concentration of agricultural land. In the United States, it is estimated that by the year 2020 the number of farms will have dropped from 1,800,000 to 750,000. Similarly, in Argentina the average size of a farm in the Pampas region has reportedly increased by 20 percent. This economic concentration is even more pronounced in the agroindustrial sector, which, moreover, has undergone a considerable

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degree of transnationalization. In Costa Rica, 50 percent of vegetable production is now in the hands of one enterprise. In Argentina, two international firms and two local ones control almost 70 percent of the production and distribution of milk products. These figures show that the power of decision and acquisition of economic surpluses has moved progressively away from the farmer and toward other economic actors closer to the final consumer. In some cases, these powers are also moving away from domestic enterprises and hence into the international sphere. The consequences for income distribution could generate significant political processes adverse to agroindustrial development.

Rural Poverty and Migration In Latin America, rural poverty has diminished as a percentage of total poverty and in absolute figures. However, the main reason for the decline is migration to the urban sector (de Janvry and Sadoulet, 1999). Yet, rural development programs have generally had a limited impact on the poorer segments of the rural sector, and recent modernization has worsened the living conditions of even middle-level farmers. There is still considerable rural poverty in Latin America, and in relative terms it is much worse than urban poverty (Echeverria, 2000). Poverty is a consequence of not owning production assets or lacking the opportunity for economic activity and employment. It is aggravated by deficient living conditions engendered by weak communications, health and education infrastructure, all common in rural areas. Figure 3.5 shows the relationship between national per capita income and the degree of urbanization. It reports the urban population as a percentage of total population in Latin America, Africa and Asia. Table 3.2 shows that the degree of urbanization is greater in Latin America, at comparable levels of per capita income, than in a sample of developed countries of importance to the region. This accelerated urbanization process has put enormous pressure on labor markets and basic urban infrastructure, whose inability to respond adequately in every case has perpetuated poverty and marginality. Moreover, rapid urbanization has prematurely de-populated the countryside, which has lowered the average rural age and level of education and training. This is because within the rural population, at least in principle, those who move away are the most mobile and most able to find work and better their lot in urban pursuits. Solving the problems of rural poverty and migration to cities are major objectives of a strategy for development of the rural economy.

Figure 3.5 Urbanization

The New Vision of Agriculture: The Rural Space as a Sphere of Economic Activity The first step in building a new vision of agriculture is to change the way in which the general public associates the countryside with farming. Rural areas must be viewed as a setting for a range of economic activities that go far beyond agriculture. The countryside and its natural resources are the foundation for increasing economic and social development. While farming (including livestock raising and forestry) will continue to be the most important activity, there are several other activities important to a higher level of development. Perhaps the most significant are those associated with agroindustrialization, tourism, and regional arts and crafts. How all these economic activities are coordinated also influences their capacity to play an important function relating to the conservation of natural resources and the building of social capital, including the social and political functioning of communities. This broader vision of rural economic activity involves, on the one hand, the complexity of the economic and social structure in the sector and, on the other, the opportunities and challenges that must be identi-

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Table 3.2. Urbanization in Latin America and Selected Developed Countries

Country Argentina Brazil Chile Colombia Costa Rica El Salvador Guatemala Honduras Mexico Panama Peru Uruguay Venezuela United States Canada Australia South Africa United Kingdom Sweden France Hungary

Urban population as % of total population

Per capita GDP world ranking

86.3 (1994) 81.8 (1996) 87.9 (1996) 75.8 (1997) 49.8 (1997) 49.6 (1997) 41.5 (1990) 49.4 (1997) 74.7 (1997) 63.8 (1997) 71.3 (1997) 85.2 (1997) 93.4 (1994) 76 77 85 51 90 83 73 65

105 96 101 75 81 70 63 40 93 84 80 103 90 128 119 117 91 116 122 125 100

Source: World Bank (1997).

fied and fully exploited as part of any economic development strategy.2 The approach stresses that rural economic activity is the central component of an economic and social structure that performs important functions in the development of an overall economy. The concept has been developed by FAO, which classes the functions of agriculture and natural resources in three categories:

An important contribution in this area were reports by the European Community (1999) and the FAO (1999) related to agriculture in developed countries. Similar proposals emphasizing the complexity and depth of the rural economy and its importance to national economies were prepared by the IDE for Honduras (IDE, 1999) and the Dominican Republic (IDE, 2000).

The economic function consists of the contributions that the sector makes to overall economic growth. It is associated primarily with the production of tradable goods characteristic of agricultural production. The level of the rural contribution to the overall economy is determined by the development and maturity of the markets and the level of institutional development. The environmental function relates to conservation of natural resources and preservation of the environment. Of particular importance are the contributions that agriculture can make to the treatment of certain overall problems such as weather change, biodiversity and desertification. The social function relates to the development of social capital and the maintenance of community life, to which special importance is attached for the maintenance of democratic and cultural values. These potential rural functions are interrelated. Their relative importance is associated with the level of development and industrialization of a given country or region and with the public policies pursued. The importance of the environmental and social functions generally receives more explicit recognition in the public policies of the more industrialized countries (as can be seen in the common agrarian policy of the European Community). This new concept of the countryside has important consequences for development strategies, public policies and the institutional structures that need to be implemented.3

The countries of the European Union have resolved this dilemma with what could be called the "rich country's strategy." Over the years they have built up a common agricultural policy (the CAP), which, by protecting their domestic markets and providing subsidies for production and exports, has facilitated the development of agricultural and agroindustrial production and solved the worst problems of rural poverty. Latin Americans know that this solution has been achieved in part at their expense as well as at the expense of other countries whose production is not subsidized. While reaffirming the right of and necessity for the Latin American countries to demand in all possible forums that the European Union countries modify their policies and eliminate the subsidies that distort markets, it is also important to learn the principal lessons that have resulted from pursuit of this policy for more than 40 years.

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Public Policies for Development of the Rural Economy The Economic Policy Framework A strategy for development of the rural economy must begin with a framework of appropriate and stable economic and monetary policy. Exchange and tax policies must not be skewed against exporters, and the bulk of economic and monetary policy must be favorable to production activity. These general principles are widely accepted among economists and form the foundation of the economic and institutional reforms implemented in the region during the 1990s. Under this umbrella ol macroeconomic policy, the strategy for rural development must promote complex and heterogeneous strategies for employment and income generation for rural enterprises and families, and it must recognize the multifunctional nature of rural economic activities. In addition to economic and monetary policy, the strategy rests on six other pillars that include the areas of government intervention with the greatest potential: i) consolidation of a framework of public policies and institutional organization consistent with an integrated vision of the rural sector; ii) development of transportation, communications and water infrastructure; iii) strengthening of the institutional mechanisms that facilitate access to and efficient use of land; iv) development and consolidation of the markets for farm products; v) promotion of opportunities for the private use of semipublic property; and vi) provision of the agricultural services needed for production (technology, health and promotion of quality exports).

An Institutional Framework with an Integrated Vision of the Rural Sector Economic development of rural areas requires coordinated public policies and a suitable institutional infrastructure for implementing them. A longstanding problem for rural development has been the inability of the agricultural public sector to articulate government interventions and an investment program that is responsive to rural needs. In general, policy for the rural sector is decided and implemented in other institutional spheres of the public sector and without proper coordination by the political authorities in charge of rural problems. An expanded view of the countryside that includes the different economic activities carried on there and recognizes the multiplicity of purposes and functions of rural development makes institutional coor-

dination even more necessary to implement public policies. This expanded viewâ&#x20AC;&#x201D;which encompasses agroindustrial production, the production of regional goods, tourism based on natural resources, and the production of semipublic goods associated with preservation of the environmentâ&#x20AC;&#x201D; also implies a more complex concept of rural life. These activities give rise to new social actors, new needs, and many opportunities for employment and income generation. This increasing complexity has an immediate corollary in the sphere of sectoral policies and institutional organization to respond to these new social demands. The needed institutional developments are the principal elements of what has been referred to as the "third reform" of government (Pineiro et al., 1999). These new social demands raise two interrelated issues. The first is efficiency in the provision of services and the performance of certain functions that pertain to the public sector and cannot be delegated away. The second is the need for progressive political and administrative decentralization to bring public sector activities, and particularly those directed to rural economies, closer to the social actors who are to benefit from them. This decentralization must complement and proceed at a pace compatible with the political situation of the given country and its operating and budgetary capabilities. While it may be expected that progress will be spotty in the short and middle run, decentralization clearly is the trend. The direction and elements of decentralization and functional integration required to make room for the new economic activities being introduced in the rural sphere are the principal challenges facing new institutions in the rural sector (see Chapter 5). An additional challenge is to build the institutional machinery needed to enable coordination of these government activities by the political officials in charge of the rural sector. A proposal for Honduras, for example, is based on setting up a Rural Food and Agriculture Cabinet whose members would be from the different departments with jurisdiction over matters of importance in the rural sphere, and whose functions would be to coordinate public policies for a rural public investment program (IDB, 1999).

Development of Infrastructure Rural development, increased production, and the integration of rural production into urban and international markets are highly dependent on social infrastructure for transportation, communications and water, among other services. Infrastructure makes it possible to more efficiently use natural resources and take advantage of economic opportunities. It

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also enables people to stabilize and improve the quality of their livesâ&#x20AC;&#x201D; and consequently their capacity to produce and to better themselves socially and politically. Examples of the importance of infrastructure are found in the economic history of countries such as the United States, Canada and Australia. Early in the history of these countries, the patterns of their investments were much more decentralized and directed at rural areas than in most of the countries of Latin America. The exception is Costa Rica, whose relatively better development is due in part to the sizable social investments in health and education in rural areas dating back to the 1940s. A central problem of public investment is the decision-making mechanisms through which those investments are decided upon and implemented. These mechanisms are generally highly centralized and lack the requisite coordination with the priorities and needs of the users. One way to reverse this is to set up a rural investment fund, as proposed by IDB (1999). The fund would be based "on a decentralized plan in response to demands of municipalities, campesino groups, neighborhood associations, NGOs and others. The financing would cover a menu of public investments, including rehabilitation and maintenance of rural roads, telecommunications, energy, technical assistance, mini-irrigation projects, training, etc. It would apply standards of beneficiary eligibility, be non-reimbursable and require cofinancing from those beneficiaries in a proportion to be determined. This financing should be coordinated with similarly sectoral mechanisms already operating or to be established. The options could include the possibility of operating as a competitive first- and second-tier financial mechanism, channeling the bulk of public investment into small infrastructure or rural production support projects prompted by strictly local demand. The latter would be prioritized obviously in a perspective of multisectoral competition, and the competition between alternative projects in each community involved would be clearly seen at their own level. The Fund would be conceived strictly as a financial mechanism, with no capability or mandate for execution on force account, and as such would be consistent, and coexist, with the present institutional structure." Access to and Efficient Use of Land An important instrument to improve rural economies is proper development of the market for both the purchase and lease of land. These markets facilitate efficient use of resources and can improve equity in the rural sphere. Through the natural processes of subdivision and consolidation of land holdings, and in some cases as a result of rural develop-

ment and agrarian reform programs, most Latin American countries have improved their land ownership and tenure structure. However, a sizable number of countries still face serious problems in terms of agrarian structure that prevent modernization of the sector. The solution to such problems entails changes to agrarian legislation to enhance flexibility in land transactions and investments in the registration and deeding of rural land (including modernization of the institutions concerned with cadastral, registration and deeding processes). The development of an active land market (for example, by financing the purchase or long-term lease of lands) should also be promoted from both the institutional and financial standpoints (IDE, 1998). Leasing in its various ways is an important element that facilitates access to land by farmers who do not own the land, or by minufundistas. Besides, it allows a better use of the land according to its production capacities. Another measure that should be considered is taxing land in order to discourage the holding of assets unproductively for speculative purposes or for uses that do not fully exploit their potential. This could help to hold down the market price of land and make it more affordable to small farmers.

Consolidation of Commodity Markets The distinctive features of agriculture and the countrysideâ&#x20AC;&#x201D;such as the distance that separates farms from markets, the seasonality of production, and the perishability of some productsâ&#x20AC;&#x201D;make the development and maturing of markets both important and difficult. Developing these agricultural markets is directly tied to the existence of proper infrastructure, including storage facilities, and to the development of such institutional instruments as futures markets, commodities exchanges, warrants or certificates of deposit, and farm insurance. While these mechanisms must operate in the private sphere, initial efforts to develop them must come from government, which then must stay involved in a regulatory capacity. The importance of markets to farmers and the difficulties inherent in developing them on their own are recognized in the economics literature and in practical implementation of public policies. The priority given by the international banks to programs in this area is testimony to its importance, which has taken on even new dimensions as a result of the processes of globalization and trade liberalization that have occurred in the 1990s. As a consequence, the development and strengthening of markets for tradable farm products is a special priority both for public policies and for the region's investment programs.

IMPORTANCE OF THE FOOD AND AGRICULTURAL SECTOR

MARTIN PINEIRO

A particularly important part of the development of commodities markets is agroindustry. Agroindustrial ventures in production areas require physical infrastructure and proactive government policies for technological development, entrepreneurial training, and export promotion. The European economy offers innumerable examples of rural economies based on small agroindustries that have developed products, in some cases with designations of provenance, targeted at highly lucrative niche markets. Some examples in Latin America are Jamaican Blue Mountain coffee or, more recently, Angus beef in Argentina.

Opportunities for Private use of Semipublic Assets Growing concerns in the 1990s for preservation of the environment, which today have been expanded and organized into the concept of rural multifunctionality, have pointed to the importance of semipublic assets that can serve as a basis for commercial activities in the private sector. This requires devising mechanisms for public-private collaboration. Examples of semipublic assets that have generated private enterprise include: The development of national parks for specialized ecological tourism (Braulio Carrillo Park in Costa Rica); The use of biodiversity in the production of drugs and specific genes in biotechnology (INBIO, Costa Rica); and Stabilizing CO 2 levels through preservation of tropical forests and forestation, and then "selling" this service to countries that exceed the pollution ceilings agreed upon in the Kyoto Convention. The most common such arrangement to date to pay the country that stabilizes (sequestration) CO levels has been the Global Environment Facility (GEF), administered by the World Bank. However, there are also cases of private financing through enterprises that generate emissions (electric power companies and producers in England and the Netherlands). These examples convey the wide and varied range of semipublic assets that can be used by the private sector. Globalization, the enormous growth of tourism, and powerful environmental concerns will progressively generate new demands for these semipublic assets, and thus opportunities to convert them into key elements of strategies for rural development.

There are several advantages to identifying these assets and defining more precisely the public sector measures needed to make them available to the private sector. The most important is that doing so identifies clearly the public policies that are required and likely to be effective. It can be seen that policies to support the prices of farm products distort markets, are inefficient, and provide little effective support to those who need it most. Conversely, the development of appropriate institutions and the building of social capital are particularly important to promoting economic growth and social welfare because they exploit rural production potential.

Development of Public and Semipublic Assets Needed for Agricultural Production Latin American governments have played an important role in the delivery of agricultural services. From the end of the Second World War until the beginning of the 1980s, most countries in the region developed public institutions through which proactive government interventions could be implemented. The crisis of the 1980s imposed public sector reform on all of Latin America in order to reduce fiscal costs and make the delivery of services more efficient. An important element of this first reform was greater participation by the private sector in the delivery of agricultural services. By the end of the 1990s, the status of the agricultural public sector in the region was, on the whole, not very satisfactory. On the one hand, budgetary restrictions and institutional retrenchment left the weaker rural sectors out in the cold. On the other, it became more apparent that development of the rural sector requires some manner of efficient public sector participation in order to provide some agricultural services that cannot be properly delivered by the private sector without government support and financing. This is particularly true given environmental concerns and their close connection to agricultural production and the countryside. The emergence of these difficulties and the new needs of rural areas have set in motion a second government reform centered on getting markets and institutions to operate more efficiently and effectively. The core components of this reform are the adoption of more effective management practices in public agencies, and greater cooperation between them and civil society organizations. In addition, some countries are beginning to work, if only weakly, on third-generation reforms to strengthen their capacity to act in more specific spheres such as the conservation of

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MARTIN PINEIRO

natural resources and the promotion of environmental services. The great challenge for Latin America is to rebuild the national public institutions needed to support agricultural and rural development so that they can become partners with regional institutions, and jointly take advantage of the existing opportunities in the international sphere. The principal areas for government action follow. Technological Innovation Technological innovation in agricultural production is a leading source of economic growth. A sizable number of studies show the important role of innovation in the extraordinary expansion of agricultural production worldwide and in the high profitability of investment in technology (Alston et al., 1999). The rapid development of applications in biotechnology and information processing in recent years has given rise to a new institutional context and, at the same time, has generated enormous possibilities for more diversified agriculture that generates higher value added. One consequence of these changes has been the growing importance worldwide of the private sector as a generator and disseminator of knowledge. In Latin America, however, investments in the private sector in general, and in the agroindustrial sector in particular, are considerably smaller than in the developed countries. This is of particular importance to the sector because, while in the past comparative advantages in agriculture were mainly defined by natural resources, the primary determinant in the future will be the capacity to generate and use technology. These trends make for an unusual situation. The region has a fairly diversified production structure, with some crops dependent on transnational business, which supplies its own technology; others that get their technology from private enterprise; and still many other lines of production with relatively small markets, where the small farmer is important to the production structure. Many crops produced by this latter group serve markets that are too small, and the crops are produced under unique conditions from the ecological standpoint and in relation to the predominant economic and social structure. In these cases, there is not enough economic incentive for the private sector to play a major part in the production and dissemination of the technology needed. Hence an important role falls to government, not only in financing through its own agencies the strategic research not being done by the private sector, but also in matching local needs to the supply available in the region and world.

[U]

A first conclusion is that government participation is a necessity. A reasonable institutional model has three parts: i) an institutional mechanism (such as a fund for agricultural research) to finance strategic national research; ii) a public agency, in which the private sector has a share, to chart technological policy, identify strategic technological needs, and administer the agricultural research fund; and iii) a string of public (if they exist) and private organizations and universities to conduct research and transfer technology. Under this institutional arrangement, one of the principal responsibilities of the public agency is to connect the activities of national institutions with those of regional and international organizations operating in the region. The aim would be to find synergies, avoid duplication, and build up the critical mass needed for the subjects of the research. Health, Quality and Trade One of the consequences of economic globalization and the opening of markets is the imposition of consumption patterns, quality standards (including safety and sensory qualities), and health standards prevalent in the markets of the most developed countries. This is an outcome of three phenomena: i) the needs that emerge from exporting products to those countries, since the products must strictly comply with their sanitary requirements and other standards of quality and packaging; ii) the growing standardization of consumption patterns worldwide and the increasing adaptation of those patterns in the developing countries; and iii) the growing importance of transnational enterprises in the food and agriculture sector, which, as a result of entrepreneurial custom and culture as well as expectations to export to other more sophisticated markets, has introduced international quality standards in production intended for the markets in the producing countries. In this more sophisticated and demanding context, government must be able to i) develop regulations for food quality and safety concordant with the needs of international markets and with standards in international agreements such as those of the WTO; ii) oversee compliance with those regulations by the producers; and iii) plan and carry out in conjunction with the private sector the sanitary campaigns needed for the control and eradication of diseases. Participation by the public sector in these activities can be justified by their role in protecting the public interest. Pineiro et al. (1999) propose recommendations on ways to finance these activities and organize them institutionally.

IMPORTANCE OF THE FOOD AND AGRICULTURAL SECTOR

MARTIN PINEIRO

Promotion of Export Goods The economic development of Latin America was based on exports of agricultural commodities. Products such as coffee, bananas, livestock, cotton, sugar and cereals were for many years a pillar of the regional economy. However, as a consequence of trade liberalization policies implemented in the 1990s, the region's rural economy has become considerably diversified. An important part of this diversification has been the emergence of other crops such as soybeans, milk products and ornamental flowers, as well as the beginnings of potentially significant ventures for their agroindustrial processing. Resumed expansion of agricultural exports requires a deepening of agroindustrialization and certain forms of support from the public sector. Government support for export promotion, especially in the case of small enterprises with no export experience, can be justified by imperfections in the market for agricultural exports. These imperfections derive from three principal sources: Imperfections in the information market. To obtain this information requires market studies that are generally expensive, and a detailed knowledge of legal provisions on trade, health and customs, which are not always available to, or within reach of, the individual exporter. Externalities deriving from transaction costs. The quest for customers imposes large initial cost and entails i) a qualitative knowledge of real demand and adjustment of the product and its packaging to that demand; ii) promotional campaigns to make the product known; iii) identification of potential customers and the establishment of trust and a trade relationship; and iv) closing the deal. The unequally heavy burden of the entrepreneurial risk on the small entrepreneur. Launching exports of nontraditional products or exports to new markets carries a high initial cost and a high risk of failure. This risk is particularly important to small enterprises because the essential minimum volume needed to be of interest to potential buyers can amount to a substantial proportion of their total production. In addition, the high entrepreneurial risk incurred is not as serious if the venture fails for a large enterprise with its own financial backing and easy access to institutional credit. For a

small business, working capital is generally one of the leading constraints on its growth and development.

Conclusions The rural sector has played an extraordinarily important role in the economic and social development of Latin America. The process of globalization, along with the region's economic and institutional reforms in the 1990s, have repositioned agriculture for a renewed role in development, particularly in terms of participation in exports. In many countries, the agricultural sector has undergone considerable restructuring and modernization of its production. But these processes, while having positive effects on production and productivity, have also had undesirable effects on natural resources and have not been sufficiently helpful in alleviating rural poverty or rural-to-urban migration. The region must reexamine the role of the rural economy in development strategies. Latin America has made important contributions to economic thought. At different points in its history, the region has been able to define and implement visions and strategies of its own that corresponded to its particular conditions. The beginning of the century seems an appropriate juncture to rethink the rural economy and its possibilities for contributing to the region's economic and social welfare. An examination of what some developed countries have done, and of the region's own experiences, suggests important lessons that can lay the foundation for building a new vision of how to contribute to the development of the rural economy.

IMPORTANCE OF THE FOOD AND AGRICULTURAL SECTOR

MARTIN PINEIRO

References Alston, J., P. Pardey, and J. Smith. 1999. Paying for Agricultural Productivity. Baltimore: The John Hopkins University Press. Economic Commission for Latin America and the Caribbean. 1999. Social Panorama in Latin America. Santiago: ECLAC. de Janvry, A., and E. Sadoulet. 1999. Rural Poverty in Latin America. Causalities and Exit Paths. Paper presented at the Workshop on Assessing the Impact of Agricultural Research on Poverty Alleviation. CIAT-IICA, San Jose, Costa Rica. Echeverria, R.G. 2000. Opciones para reducir la pobreza rural en America Latina y el Caribe. Revista de la CEPAL 70 (April): 147-60. Fei, J., and G. Ranis. 1964. The Development of the Labor Surplus Economy: Theory and Policy. Chicago: Richard Irwin, Inc. Food and Agriculture Organization. 1999. The Multifunctional Character of Agriculture and Land. Rome: FAO. Inter-American Development Bank. 1998. Perspectivas sobre mercados de tierras rurales en America Latina. IDE Sustainable Development Department, Washington, DC. 1999. Honduras Post Mitch. Problemas y oportunidades para el desarrollo de la economia global. IDE, Washington, DC. 2000. Strategy for Agricultural Development in Latin America and the Caribbean. IDE Sustainable Development Department (RUR-102), Washington, DC. 2001. Republica Dominicana: politica agroalimentaria, competitividad y pobreza rural. Regional Operational Department Working Papers II. IDE, Washington, DC. International Food Policy Research Institute. 1995. A 2020 Synthesis. Washington, DC: IFPRI. Lewis, A. 1955. The Theory of Economic Growth. London: Allen and Unwin. Nores, G., M. Pineiro, E. Trigo, and R. Martinez Nogueira. 1996. El sector publico agropecuario en la Argentina. Reflexiones para sufortalecimiento. Buenos Aires: IICA. Pinstrup-Andersen, P., R. Pandya-Lorch, and M.W. Rosegrant. 1999. World Food Prospects: Critical Issues for the Early Twenty-first Century. Washington, DC: IFPRI. Pineiro, M., and E. Trigo. 1996. Hacia un sistema regional de innovacion tecnologica en el sector agroalimentario. IDE Sustainable Development Department, Washington, DC

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Pineiro, M., R. Martinez Nogueira, E. Trigo, F. Torres, E. Manciana, and R.G. Echeverria. 1999. La institudonalidad en el sector agropecuario de America Latina: evaluation ypropuestas para una reforma institutional. IDB Sustainable Development Department Technical Paper (RUR-101). IDB, Washington, DC. Reca, L, and R.G. Echeverria (eds.). 1998. Agricultura, medio ambienteypobreza rural en America Latina. Washington, DC: IFPRI and IDB. Torres, E, M. Pineiro, R. Martinez Nogueira, and E. Trigo. 1999. Agriculture in the Early XXI Century. Reflections on Its Evolution and Nature, and their Implications for a Global Research System. GEAR, Rome. Unpublished. World Bank. 1997,199-2000. World Development Report.. Washington, DC: World Bank.

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Agriculture and the Macro economic Reforms of the 1990s Jorge A. Quiroz

After several decades of substantial state intervention in their economies and inward-oriented development strategies, many Latin American countries instituted trade reforms, market liberalization and structural adjustment policies in the late 1980s and early 1990s. However, the depth and scope of the reform efforts has varied widely across the region. Six countries can be described as early reformers that were first to undertake structural reforms, implemented more drastic and deep change, and persisted for a longer time in these efforts. This groupâ&#x20AC;&#x201D;which includes Argentina, Bolivia, Chile, El Salvador, Mexico and Peruâ&#x20AC;&#x201D;serves as a useful benchmark for analyzing the final impact of structural reforms on economies in general and on agriculture in particular. It has been demonstrated that the reforms can result in high and sustainable GDP growth rates, high growth rates of agricultural exports, and macroeconomic stability. On the other hand, the reforms bring competitive pressures to vast segments of agriculture, particularly those related to import-competing activities. Two major policy implications follow. First, countries that have not yet completed the structural reform agenda must do so. The experience of early reformers shows what can be achieved if in-depth market and structural reforms are fully implemented. Second, it is clear that the reforms cannot be expected to benefit all economic activities within agriculture. Even a healthy macroeconomic environment, which has characterized most of the early reformers, will not head off a decline in the real exchange rate or substantial competitive stress on import-competing activities within the agricultural sector. Hence, a new battery of economic instruments and institutional adjustments are needed to cope with the transitional challenge that import-competing segments of agriculture will face.

Chapter 4

JORGE A. QUIROZ

Two groups can be distinguished among the Latin American countries that undertook reforms in the 1990s. First were those countries where the macroeconomic disaster of the 1980s was so serious that they were literally pushed into taking drastic measures. These countries quickly implemented a comprehensive package of structural adjustments, trade reforms and market liberalization measures. This group includes Boliviaâ&#x20AC;&#x201D; which actually began its reforms in the late 1980sâ&#x20AC;&#x201D;as well as Argentina, Peru, Mexico and El Salvador. The second group includes countries where the macroeconomic failure was less spectacular. These countries decided to get on the reform bandwagon because of long-term considerations. The group includes the Andean Community (Ecuador, Colombia and Venezuela). In these countries, there was less impetus for reform, reforms were less vigorous, and the policy package was less complete and consistent. The reforms were reversed to one degree or another in the mid1990s (Quiroz, 1996a, 1996b, 1997a and 1999). There are some cases that fit in neither group. One is Chile, which began its reform efforts in the mid-1970s, experienced mild reversals in the 1980s, and then reinforced its reform initiatives in the second half of the 1980s. Chile's particular policy response to the debt crisis of the 1980s was different than that of the rest of the region, and its success in terms of generating growth and macro stability may have served to stimulate other reformers in the 1990s. Another interesting case is Brazil, which is a late reformer and has followed a more incremental approach to trade liberalization, fiscal adjustment and the overall reform process. It is important to keep in mind these distinctions between different experiences when it comes to evaluating the impact of reforms in the agricultural sector. This chapter will distinguish the early reformers from the rest of the countries of the region when analyzing the macroeconomic environment and agricultural performance. Despite the recent problems that have affected the region, there is little doubt that the changes implemented during the 1990s contributed to a respectable economic performance that marked a considerable improvement over that of the previous decade. Real GDP growth in Latin America averaged 3.1 percent annually over 1990-98, a figure two percentage points higher than that of the 1980s. However, the GDP growth of the early reformers, which increased from 0.5 percent to 4.8 percent, amply exceeds that of other countries, which only increased from 1.2 percent to 2.6 percent. Despite doubling their growth rate with respect to the 1980s, these latter countries remain well below the minimum necessary performance required to tackle employment creation and poverty reduction.

In terms of macro stability, inflation rates of 16.1 percent per year over 1995-98 compare with an average of 502 percent during 1989 for the overall region. Unlike what happened in the early 1980s, the macro shocks coming from the Asian crisis and the flight-to-quality move of international capital flows did not prompt a quick reversal of trade reform efforts. With the sole exception of Ecuador, private capital inflows into the region did not stop abruptly and are on their way to returning to normal. Hence, future growth perspectives, in most cases, continue today to be far above what they were ten years ago. In all countries that in some way or another engaged in macro and trade reforms, agricultural sectors were not exempt from institutional change. Most countries removed their non-tariff trade barriers, reduced state intervention in local agricultural markets, and implemented measures conducive to more open markets. By international standards, it is recognized that the region went far beyond the rest of the world in the process of opening its agricultural markets to foreign competition (Ingco, 1995). In the process, state intervention and agricultural credit were also reduced in many instances. However, among policymakers involved with the agricultural sector, one can perceive in most countries today a sense of what will be referred to here as a "frustration of expectations." At the onset of the reform process, it was expected that the real exchange rate would increase as a result of trade liberalization.1 The expected increase was supposed to have a beneficial effect on the agricultural sector, both for exportable and import-competing activities.2 The reality, however, was quite different. Several countries of the region experienced a significant decrease in the real exchange rate, and the decline in fact turned out to be much larger in the early reformers than in the rest of the countries. This decline appears to be positively and systematically correlated with the degree of trade reform (Quiroz and Opazo, 1999a). The decrease in the real exchange rate and an increase in real interest rates, coupled with the dismantling of subsidized credit, posed severe difficulties for the agricultural sectors of 1 The real exchange rate is defined as the nominal exchange rate (units of domestic currency per dollar) times a foreign dollar denominated price index, divided by a domestic price index. Hence, a decrease in the real exchange rate becomes equivalent to a real appreciation of the domestic currency. 2 The influential study by Krueger, Schiff and Valdes (1992) helped to shape these expectations. According to the authors' analytical framework, trade liberalization, by inducing an increase in the real exchange rate, was supposed to reduce indirect taxation, thus improving the relative prices of both import-competing and export activities. See Quiroz and Opazo (1999a) for a discussion of this issue.

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JORGE A. QUIROZ

several Latin American countries. The problem was particularly acute for small-scale farmers oriented to import-competing activities, whose rates of nominal protection were also lowered in the reform process. These developments have created a sense of frustration among policymakers involved with the agricultural sector. The mood of the discussion today points towards a revision of the macro environment in which the agricultural sector operates. When performance is not up to par, the blame tends to fall on an overvaluation of the domestic currency and distorted interest rates. This chapter argues that it is futile and unproductive to further develop a macro agenda that would seem most suitable for the agricultural sector. The influence of a macro agenda based on the agricultural perspective on macroeconomic policies is bound to be very limited. In addition, as argued before, the macro performance of the region, despite its problems, looks quite respectable and successful over the past decade. This is not to say that given the benefit of hindsight, one cannot identify specific policy inconsistencies that resulted in overvalued currencies and distorted interest rates. The point is, however, that there are numerous cases where the real exchange rate decreased, with no further symptoms of inconsistencies or macro problems. The real exchange rate decrease seems to be almost a necessary ingredient of trade reform and structural adjustment in a world of free movement of capital inflows.3 What seems to be needed, then, is a comprehensive revision of further policy adjustments that need to be implemented at the macroeconomic level to better handle the new challenges arising from the macro environment. There are several structural characteristics of the agricultural sector in Latin America that impose severe rigidities to a fluid adjustment to the new macro environment. This chapter will identify areas for policy action in capital markets, pricing policies, the functioning of agricultural markets, and technology transfer and R&D investments. The next section briefly reviews Latin America's macroeconomic performance during the 1990s. The major conclusions are that macro performance was successful, especially when compared with the 1980s; early reformers did much better than the other countries; and the real exchange rate declined the most in those same early-reform countries. 3

In his influential cross-country analysis of trade liberalization experiences, Michaely (1991) concluded that an increase in the real exchange rate seemed to be almost a necessary condition for success of the reform. That seems to have been the case in a world of less mobile capital inflows. As will be argued here, in a world of highly mobile capital inflows, since trade reforms induce higher growth expectations, a deficit in the current account can be expected, with a necessary decline in the real exchange rate.

The implication is that there are no obvious grounds for criticizing the macro policies associated with the reformers. The subsequent section reviews the performance of the agricultural sector. The evidence suggests that the 1990s were almost a golden decade for agricultural export growth, and again, that these high export growth rates tended to be higher in the early reformers than in the rest of the countries. Yet, import-competing activities faced severe difficulties, which seems to be the source of the frustrated expectations of policymakers. This points towards policy actions that allow even greater export growth and endow the import-competing sectors with better tools to face foreign competition. The final section of the chapter examines the various areas where a second phase of sector oriented reforms are needed.

Macroeconomic Performance Table 4.1 summarizes the main macroeconomic indicators for Latin America in the 1990s, including information separated for the early reformers and the rest of the countries. It is important to keep in mind that reform efforts, particularly trade reforms, affected many countries in the sample. As discussed in Quiroz and Opazo (1999a), virtually all Latin American countries saw a sharp increase in trade volume as a percentage of GDP during the 1990s. In this regard, the distinction between early reformers and the other group puts to a large extent the time factor sideways (they began earlier), and also the more drastic reforms in areas different from trade liberalization (privatization of public enterprises and deregulation in general). The key points of Table 4.1 are as follows: Macroeconomic performance during the 1990s was substantially better than the 1980s. This is true both for early reformers as well as for the other countries. The sample average indicates that real GDP in Latin America grew at an annual average of 0.9 percent during the 1980s and at 3.7 percent over 1990-98. Only six of 26 countries had lower GDP growth rates in the 1990s. Similar positive results were achieved in inflation reduction. Early reformers did much better than the other countries. Early reformers went from an annual GDP growth rate of 0.5 percent in the 1980s to 4.8 percent in the 1990s. This compares with a modest improvement from 1.2 percent to 2.6 percent for the rest of the

AGRICULTURE AND THE MACROECONOMIC REFORMS OF THE 1990S

JORGE A. QUIROZ

(In percent) Real GDP growth Average Country

Real exchange rate growth Average

1980:1990 1990:1998 1989-1998

Rate of inflation

Average 1989

1995:1998

Early reformers Argentina Bolivia Chile El Salvador Mexico Peru

-1.1 0.0 3.4 -1.5 2.0 0.4

5.1 4.3 7.3 5.0 3.3 3.9

-61.2 12.9 -22.5 -22.1 -5.8 -59.3

3,084.6 15.2 17.0 17.5 20.1 3,321.10

1.2 8.7 6.7 6.7 26.5 9.6

Average

0.5

4.8

-26.3

1,079.30

9.9

Others Bahamas Barbados Belize Brazil Colombia Costa Rica Dom. Republic Ecuador Guatemala Guyana Haiti Honduras Jamaica Nicaragua Panama Paraguay Suriname Trinidad & Tobago Uruguay Venezuela

2.8 1.5 na 2.3 3.8 2.2 2.3 2.0 1.1 -3.1 -0.3 2.3 1.5 -1.1 3.7 3.7 -1.2 -2.1 1.0 0.7

0.8 0.7 4.3 1.7 3.9 3.8 4.2 3.2 4.1 5.6 -2.7 3.3 0.8 2.6 5.0 2.4 -0.3 2.3 3.8 3.4

-2.1 -5.9 2.4 -21.5 -25.9 9.1 -17.4 -21.5 -22.2 18.8 85.3 57.3 43.3 -25.6 24.6 -14.3 -32.7 17.2 -36.9 -40.4

5.3 6.1 0.0 1,289.0 25.9 16.5 40.6 75.7 11.3 89.7 7.9 9.9 17.2 4,770.3 -0.1 26.6 0.7 11.4 80.5 84.7

1.3 2.7 2.4 28.3 19.6 16.4 7.8 28.5 8.9 6.9 19.9 21.8 15.1 12.3 1.1 10.4 65.2 4.5 25.3 61.4

Average

1.2

2.6

-0.4

328.5

18.0

TOTAL AVERAGE

1.1

3.1

-6.4

501.7

16.1

Source: Total GDP (1990 US$) corresponds to the IDB database and the growth is point to point. Real exchange rate growth corresponds to (RER98/RER89-1)*100 and the source is the IDB database. Inflation rates were obtained from the IDB database.

Table 4.1. Macroeconomic Performance

countries. Sustained growth rates above 4 percent per year appear sufficient to increase income and employment and reduce poverty over time. Among early reformers, four of the six economies had such growth, but this was the case in only three of the 20 other countries. The early reformers experienced a much more systematic decline in their real exchange rates than the other countries. The real exchange rate declined by 26.3 percent during 1989-98 in the group of early reformers. In the other countries, the decline was only 0.4 percent, a negligible figure for all practical purposes. Only one of the six early reformers saw an increase in its real exchange rate (Bolivia), while that rate increased in eight of the 20 other countries. Real Exchange Rate Movements The evolution of the real exchange rate during the 1990s warrants special analysis. As stated previously, at the onset of the reform process, many observers expected that those countries engaging in market reform and trade liberalization would experience an increase in their real exchange rate. The intuition for expecting such an increase as a result of trade reform came from basic static economic models that ignored the influence of capital movements.4 The expected increase in the real exchange rate as a result of trade reform was further popularized in the region by the influential studies of Michaely (1991), Krueger (1992) and Schiff and Valdes (1992). According to the first two, who reviewed liberalization experiences from the 1970s and 1980s, an increase in the real exchange rate was a sine qua non for the sustainability of trade reform. According to the latter, the agricultural sector of less-developed countries faced lower terms of trade with respect to the nonagricultural sector, due in large part to indirect taxation,

Intuitively, an increase in import tariffs raises the price of importable goods and triggers substitution effects on consumption and production. On the consumption side, agents increase the consumption of both exportables and domestic goods. On the production side, resources are extracted from these two sectors and allocated to the import substitution sector. Since the country is a price taker on the exportable market, the net result is an increase in the price of the domestic good. The basic intuition applies also to a more sophisticated intertemporal stochastic setting, as long as growth, productivity effect and endogenous capital inflows are ruled out (Quiroz and Chumacero, 1994). However, whereas the intuition is valid in a specific-factor setting only with two factors of production (capital and labor) that are mobile across sectors, the final effect on the real exchange rate is ambiguous and depends on the intensity of the capital involved.

AGRICULTURE AND THE MACROECONOMIC REFORMS OF THE 1990S

JORGE A. QUIROZ

part of which was associated with a lower real exchange rate induced by the prevalence of trade barriers in the overall economy. The indirect taxation more than compensated, in many instances, for direct protection for agriculture. Hence, according to this framework, one should experience an increase in virtually all real agricultural prices as a result of market reform and structural macro adjustment programs. The evidence here suggests almost exactly the contrary: precisely in those cases where there is some agreement that reform efforts were more complete and longstanding, the real exchange rate decreased the most. Quiroz and Opazo (1999a) show that during the first part of the 1990s there was a negative correlation of -0.53 between increases in trade volume as a percentage of GDP and real exchange rate changes. During the second part of the 1980s, that correlation had been only -0.02, an insignificant figure for all practical purposes. Therefore, the negative association between trade reform and real exchange rate changes observed in the 1990s came largely as a surprise. The main difference between the 1990s and the 1980s, and between models that ignored capital inflows and reality, was the ample prevalence of capital inflows in Latin America. Total net transfers of -$99.1 billion over 1986-89 compare with $43.9 billion over 1990-93 and $38.9 billion over 1994-96 (ECLAC, 1998).5 There is general agreement that this change in capital inflows was largely responsible for the decrease in real exchange rates during the 1990s. However, to explain the real exchange rate decrease by referring to the capital inflows is clearly insufficient from a conceptual viewpoint. Capital inflows in today's world of free international capital movements are not less endogenous than the real exchange rate itself. Hence, a more fundamental explanation is needed. Two complementary hypotheses seem relevant in this regard: Monetary explanations. Within the monetary tradition, price stabilization policies, under some conditions, may induce a temporary appreciation of the domestic currency. Transmission channels are many and range from the influence of indexation practices in the presence of stabilization measures (Corbo, 1985; Kiguel and Liviathan, 1992), to wealth effects induced by the usage of the exchange rate as a nomin al anchor to abruptly cut big inflation levels

The net transfer of resources is defined as the net capital inflow (autonomous and nonautonomous) less the remnant of the net payment of profits and interests.

(Calvo, 1986; Obstfeld, 1985). This line of argument suggests real exchange rate decreases in cases where inflation is cut drastically. To the extent that stabilization measures are usually implemented together with a package of structural reforms, including trade liberalization, this would explain the negative correlation between trade reform and real exchange rate changes as an accident (a very common accident indeed). Growth expectations induced by the reform itself. Another line of argument, put forward by Quiroz and Opazo (1999a), suggests that the real exchange rate decrease cannot be taken as an accident, but instead is precisely what is likely to result from a comprehensive market reform process. This argument is inspired in the literature that emphasizes the inter-temporal nature of the current account as the net result of current income and expenditures, where the latter depend not on current income but on expected future incomes (SvenssonandRazin, 1983). According to this view, if something happens that makes economic agents believe that future incomes will be substantially higher than current ones, a deficit in the current account will occur. This in turn will induce capital inflows, provoking a downward movement of the real exchange rate. Since trade reform is usually implemented together with the removal of other distortions and inefficiencies (such as privatization of inefficient state enterprises, and overall deregulation), economic agents start finding grounds to expect a substantial increase in future income. Optimistic expectations push expenditures up, capital inflows in, and the real exchange rate down.6

It could be argued that this casual link of trade reform to expected growth to expenditure increase to domestic currency appreciation may fail to pass a more formal test because available empirical estimates do not warrant a sufficiently strong and robust impact of trade openness on economic growth (Edwards, 1993). Two comments apply in this regard. The first is that popular divulgence and public statements of business and political leaders typically attribute a major impact on growth to trade reform, probably beyond what is deserved in view of existing empirical studies (a point emphasized by Krugman, 1995). Therefore, if those opinions have an influence on economic agents' expectations, the casual link will still prevail. Second, calibrations done by the author on a simple three sector model suggests that 5 to 7 percentage points of increase in expenditures may contribute to about 10 to 15 points of domestic currency appreciation. From a permanent income hypothesis perspective, and from an investment perspective (e.g., the possibility of developing large-scale export-oriented projects that were indirectly taxed or distorted prior to the reform), an increase of 5 to 7 percentage points in expenditure may have some rational support in response to a trade reform duly accompanied by a global reduction of other distorting state interventions.

AGRICULTURE AND THE MACROECONOMIC REFORMS OF THE 1990S

JORGE A. QUIROZ

The previous analysis can be summarized more formally by means of a simple cross-country regression that explains the change in the real exchange rate as a function of the reduction in inflation and improvement in growth performance. The result of this analysis is displayed in Table 4.2, which presents the results of the regression:

where ARER90 is the percentage change of the real exchange rate during the 1990s (1989-98) for each country; g is the annual average growth in GDP observed during the 1990s (1990-98); and the dummy variable takes the value of 1 for all countries that had three-digit inflation levels in 1989 and achieved inflation rates of one-digit levels over 1995-98. As Table 4.2 shows, the regression analysis confirms that countries that achieved higher annual growth rates also experienced larger declines in the real exchange rate. Countries that implemented drastic price stabilization programs experienced acute declines in their real exchange rates. Drastic price stabilization efforts, as defined here, appear responsible for about 40 percentage points of decline in the real exchange rate. The inclusion of inflation reduction per se did not appear statistically significant. The point estimates imply that increases in the growth rate above 3 percent per year level generate decreases in the real exchange rate of about 0.6 percent per year per each additional point of GDP growth.

Macropolicy Implications The previous analysis suggests the following key policy implications at the macroeconomic level: overvaluation of the domestic currency should be judged mainly in light of the ability of the economy to achieve satisfactory growth rates. The decline in the real exchange rate cannot be taken per se as overvaluation of the domestic currency. Countries like Chile, El Salvador and Argentina were able to sustain the decrease in their real exchange rate levels because the real exchange rate has proven to be compatible with higher growth performance.7 On the other hand, the (necessary) correc7

In Chile and Peru, the Asian and ruble crisis of 1998-99 prompted an upward correction of the exchange rate in 1999. In Chile, since the crisis passed, the nominal exchange rate has began to revert to its pre-crisis level and there has been a steady and sustainable recovery of GDP growth rates. Hence a large part of the real exchange rate decrease in the 1990s seems to be here to stay, proving the point that a sustainable and credible growth rate constitutes the basic indicator for a lower real exchange rate. The judgment on Peru is still pending.

AGRICULTURE AND THE MACROECONOMIC REFORMS OF THE 1990S

Dependent Variable: A/?ÂŁ/?90

Sample: 26 countries

Variable

Coefficient

t-statistic

Constant G Dummy

19.41 -6.22 -40.64

1.86 -2.28 -2.64

Adj-R 2 -0.30

DW: 1.18

F-statistic 6.31

tion of the exchange rate in Mexico in 1997 was a direct consequence of the inability of the economy to achieve sustainable and high growth rates at the current exchange rate level. In light of this conclusion, it seems reasonable to infer that in a country such as Colombia, the domestic currency achieved the overvaluation zone towards 1998, since its mediocre growth performance made clear that a higher real exchange rate was needed to sustain diminished growth expectations (see Figure 4.1). Market reforms are crucial to sustain higher growth rates. Whenever the reform is successful in terms of achieving higher growth rates, a permanent decline can be expected in the real exchange rate. The crucial importance of market reform to sustain a high growth performance is derived very clearly from the available data on early reformers. This can be formalized by a regression of the form:

where g is the annual growth rate observed during the 1990s (1990-98); Early is a dummy variable that takes the value of 1 for early reformers and 0 for the other countries; and Devaluation measures the devaluation of the real exchange rate that each country had between 1985 and 1989, the rationale being that part of the growth during the 1990s can be explained by the initial push to export growth induced by the real exchange rate increases that many Latin American countries experienced in the second half of the 1980s in the aftermath of the foreign debt crisis. The results of this regression in Table 4.3 confirm the importance of the reform efforts for achieving higher growth rates. The real exchange rate changes in the second half of the 1980s, although important for explaining part of the variation of the sample, tend to be less relevant from a quantitative viewpoint in explaining growth. It seems inconsistent to expect higher real agricultural prices for all agricultural goods as a result of market reforms. It is unproductive to

Table 4.2. Real Exchange Rate, Inflation and Growth

100

Figure 4.1 Adjusted RER Growth and Real GDP Growth

Source: IDB database.

attempt to undertake a macro agenda that would promise the delivery of this result in the context of market reforms. A trade reform, by reducing the level of import barriers and eliminating export taxes, can be expected to increase the relative price of exportable agricultural goods vis-a-vis importable goods, whether agricultural or nonagricultural. The evolution of exportable agricultural prices relative to domestic good prices is uncertain, however, because domestic good prices can be expected to increase as a result of a successful market reform, and previous export taxes may not have been high enough to make a difference. On the other hand, the evolution of importable agricultural goods relative to a general price index can be expected to decline. Importable goods in less developed countries have tended to be directly protected (Krueger 1992; Schiff and Valdes 1992), and therefore, in the process of market liberalization, importable agricultural good prices will most probably decline with respect to domestic good prices. On the other hand, its evolution relative to importable nonagricultural good prices is uncertain and will depend on whether protection to import-competing activities was higher in the agricultural or the nonagricultural sector of the economy at the beginning of the reform process. The general rule then is that as a result of reform, an in-

JORGE A. QUIROZ

AGRICULTURE AND THE MACROECONOMIC REFORMS OF THE 1990S

101

Dependent Variable: g Variable Constant Early Devaluation^ 89 Adj-R2=0.36

Sample: 26 countries Coefficient

t-statistic

2.04 2.90 0.03

4.80 3.58 2.89

D.W.: 2.59

F-statistic: 8.14

crease can be expected in exportable agricultural prices vis-a-vis importable agricultural prices. Therefore, one should not count on real exchange rate movements to foresee a general increase in real agricultural prices as a result of reform. Importable agricultural prices will most probably decline as a result of trade reform. Given that, are there sensible ways to improve the predictable macro environment for agriculture that results from market reform? Should we attempt to influence the macro agenda with that particular purpose? The answer to the first question is most probably not, and the answer to the second one is definitively not. The market reform, if successful and credible, will push up future income expectations and open new and attractive investment alternatives for foreign capital. Those are big forces for larger current account deficits, larger capital inflows and a declining real exchange rate. It is very difficult to counteract those forces. One way would be to rely on restrictions on capital inflows and tight restrictions on government expenditures. The experience of the Chilean economy in the 1990s provides a good example. Notwithstanding systematic fiscal surpluses, tight controls on short-term capital inflows, and an explicit exchange policy designed to avoid declines in the market value of the dollar, Chile was not able to avoid a significant decline in the real exchange rate. With respect to the second question, the answer here is definitely negative. The objective of an economy is to generate growth and employment and to reduce poverty. These objectives appear to be reasonably well served in the long run by the standard set of policies that accompany a comprehensive market reform and structural adjustment process. The previous evidence shows that countries that engaged more forcefully in this process were capable of generating better growth performance, and that success along these lines was accompanied by a decline in the real exchange rate. It does not seem reasonable to try to deviate drastically

Table 4.3. Growth, Time of Reform and the Real Exchange Rate

JORGE A. QUIROZ

from any of the components of the standard market reforms only because the real exchange rate movement does not fulfill agricultural expectations. As a consequence, policy prescriptions at the macro level should reiterate the basic elements of a comprehensive reform: fiscal equilibrium, deregulation, privatization of inefficient state enterprises, and free trade in goods and services. For most Latin American countries, these are still unfulfilled objectives, and hence, the obvious recommendation is to persevere in implementing deep market and structural reforms. Achieving these objectives, however, will certainly not guarantee avoidance of an increase in the real value of the domestic currency. Indeed, the evidence suggests the contrary. There are no sensible grounds for a macro agenda coming from the agricultural sector. Nor is the real exchange rate decrease in successful early reformers to be blamed for under-performance of the agricultural sector. The causes for under-performance in these cases ought to be viewed from the micro level. And these micro-oriented reforms are relevant for any country engaging in trade reform, early reformer or otherwise.

Performance of the Agricultural Sector Real Agricultural Prices The evolution of real agricultural prices provides a useful starting point for the analysis of the agricultural sector in Latin America during the 1990s. Following Appendix 4.1, the percentage change of producer prices over time can be approximately decomposed as the sum of the percentage change in international prices, plus the percentage change in the real exchange rate, plus the percentage change in the equivalent tariff, plus other factors not directly related to trade policy measures. This allows us to better understand the evolution of agricultural prices over time. Tables 4.4 through 4.8 show the decomposition for two early reformers, Chile and El Salvador, as well as for Colombia, Ecuador and Venezuela. The pervasive and generalized decline of real producer prices for Colombia, Ecuador, El Salvador and Chile is the first key point to emerge. On average, real agricultural prices declined by 23 percent in Ecuador over 1990-98; by 19 percent in Colombia (1991-95); by 24 percent in El Salvador (1991-95); and by 25 percent in Chile (1990-99). The exceptions to this general trend, generally exportable goods, are few and modest: sugar and rice in Ecuador; sugar and milk in Colombia; and coffee in

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Table 4.4. Decomposition of the Rate of Growth of Domestic Prices of Selected Products, Ecuador, 1990-98 (In percent)

Product

Real Real Real producer international exchange price price rate

Poultry Milk Sugar Soya Maize Rice Wheat

-20 -32 5 -52 -12 9 -59

-67 -22 -56 -15

Average

-23

(1+Duty) (1+Others)

-22 -1 -23

-27 -27 -27 -27 -27 -27 -27

82 29 17 -17 10 -1 20

-8 -13 71 7 27 38 -29

-29

-27

Source: Based on data from SICA and Banco de la Republica de Ecuador.

Table 4.5. Decomposition of the Rate of Growth of Domestic Prices of Selected Products, Colombia, 1991-95 (In percent)

Product

Real Real Real producer international exchange price price rate

(1+Duty) (1+Others)

Rice Milk1 Maize Cotton ' Soya Sugar Coffee1

-17 3 -24 -30 -53 4 -18

-11 19 1 -3 20 18 26

-32 -40 -32 -40 -32 -32 -40

-6 -195 -55 5 -3 -3 n.a.

33 43 11 12 -38 22 n.a.

Average

-19

-35

-6

'Over 1991-96. 5ource:Quiroz(1997a).

El Salvador. In these three countries plus Chile, the evolution of the real exchange rate appears to have played a key role in the evolution of prices. In the absence of a decline in the real exchange rate, most agricultural prices would have not declined in El Salvador and Ecuador; would have actually increased in Colombia; and would have experienced only about half of the decline in Chile. In Venezuela, where the real exchange rate increased during the period considered here, real prices increased on av-

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Table 4.6. Decomposition of the Rate of Growth of Domestic Prices of Selected Products, Venezuela, 1992-96 (In percent)

Product Maize Rice Coffee Cacao Potato Pork Beef Poultry Milk

Real producer price

Real international price

45 29 32 -5 18 -18 -42 -7 -18

33 13 53 17 30 6 -20 7 3

Average

Real exchange rate

(1+Duty +Others)

-1 -1 -1

12 17 -21 -21 -12 -23 -21 -14 -20

-1

-11

-1 -1 -1 -1 -1 -1

Source: Quiroz (1999).

Table 4.7. Decomposition of the Rate of Growth of Domestic Prices of Selected Products, El Salvador, 1991-95 (In percent)

Product

Real producer price

Real International price

Real exchange rate

(1+Duty) (1+Others)

Rice Coffee Sorghum

-69 39 -41

-5 47 5

-32 -32 -32

4 0 0

-36 24 -15

Average

-24

-32

-9

Source: Quiroz (1996b).

Table 4.8. Decomposition of the Rate of Growth of Domestic Prices of Selected Products, Chile, 1990-99 (In percent)

Product

Real producer price

Real international price

Real exchange rate

(1+Duty +Others)

Wheat Rice Sugar Milk

-19 -15 -37 -28

-42 -36 -88 -19

-11 -11 -11 -11

34 31 62 2

Average

-25

-46

-11

Source: Based on data from Odepa and Banco Central de Chile.

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erage by 4 percent. One can expect that in other countries that experienced significant declines in the real exchange rate but are not included here (such as Brazil and Peru), there was a similar deterioration of real producer prices.8 One element that does not emerge clearly from the tables, but which does show up when the same analysis is done with monthly data, is the importance of the other factors in the evolution of real producer prices. Analyses of Peru, Ecuador, Colombia, El Salvador, Trinidad and Tobago and Venezuela show that significant inefficiencies in the trading, processing, storage and functioning of agricultural markets in general are responsible for acute inter-annual price declines. These declines, affecting mainly harvest prices of import-competing goods, would not happen in efficient markets because they tend to be seasonal, systematic and predictable, reflecting the absence of inter-temporal price arbitrage even after accounting for financial and storage costs. One tentative conclusion that emerges from the previous analysis is that, as a result of the various policy changes during the past decade, most real agricultural prices declined, although at the margin there was a relative improvement of exportable activities vis-a-vis importable ones. Equivalent import tariffs tended to decline during the first part of the decade. Indeed, according to Ingco (1995), Latin American countries were among the most successful in the world in terms of making progress in effectively reducing protection to agriculture in the context of World Trade Organization (WTO) commitments. Together with the elimination or reduction of state intervention in the trading process and the inefficiencies mentioned in the market operation, this was responsible for acute declines in real producer prices of importable agricultural goods, particularly at harvest time. This situation was further exacerbated by the decline in the real exchange rate and therefore, most prices of importable agricultural goods declined during the first part of the decade in spite of relatively high international prices during that period. Unlike importable goods, exportable goods were either unprotected through direct taxation or state trading or without any direct interven* Colombia, in particular, illustrates the influence of the real exchange rate in the process. During the first part of the 1990s, most real international prices relevant to this country increased, yet most real agricultural prices decreased in the process. Ecuador, on the other hand, shows what happened with price reforms in Andean countries during the second half of the decade: import tariffs and protection to agricultural importables tended to increase. This is true for Colombia, Ecuador, Chile and Peru. According to various estimates (Quiroz, 1998a; Quiroz et al., 2000; Quiroz and Pineiro, 1998), there are today signs of a partial reversion of past reform efforts regarding trade of agricultural goods.

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tion. As a result, they tended to benefit from the increase in international agricultural prices during the first part of the 1990s. At the very least, then, there must have been some significant relative incentive change favoring agricultural exportable activities relative to import-competing ones, particularly during the first part of the 1990s. Table 4.9 shows some basic indicators of agricultural performance during the 1980s and 1990s, separating again the data between early reformers and the rest of the countries. On average, agricultural GDP growth doubled in the 1990s compared with the 1980s both for early reformers and the other countries. But again, early reformers did much better: agricultural GDP growth exceeded that of the other countries by almost one percentage point per year. However, some important facts emerge that may explain the "frustration of expectations" mentioned at the start of this chapter. First, in the case of early reformers, the agricultural sector during the 1980s had been more or less capable of growing at rates equal or higher than the rest of the economy. On average, while the total economies of early reformers grew at only 0.5 per year, agriculture grew at 1.5. Between 198090, the rate of growth of agriculture in Chile, Argentina, Bolivia and Peru significantly exceeded GDP growth. During the 1990s, the rate of growth accelerated both within and outside agriculture, but in general, agricultural growth lagged significantly behind the rest of the economy. This growth differential must have put significant competitive pressure on agriculture: dynamic nonagricultural growth means higher wages, and competitive pressure for other uses of water, land, electricity and resources in general. In the case of the rest of the countries, since the nonagricultural economy was less dynamic, the difference in growth rates between agriculture and the rest of the sectors was less significant, although there is significant heterogeneity within this group. The additional part of the picture comes from the evolution of exports. First, early reformers again had a much better export performance than the rest of the countries: their annual agricultural export growth rate of 12.6 percent compares with 7.2 percent per year for the rest of the countries. While it is true that during the 1980s the early reformers had also exhibited a more dynamic export performance than the other countries, a more careful look at the data shows that this is the direct consequence of including Bolivia in the sample. If Bolivia is excluded, the export growth rates of the early reformers appear virtually equal to the other countries. It is clear, then, that the reform process pushed the export growth rate of agricultural goods in early reform countries to levels significantly above the other countries.

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Table 4.9. Agricultural Performance (In percent) Agricultural export growth

Agricultural GDP growth Country Early reformers Argentina Bolivia Chile El Salvador Mexico Peru

Average 1980:1990

Average 1990:1998

Average 1986:1990

Average 1990:1998

0.7 1.7 5.8 -1.8 1.3 1.1

4.1 3.2 5.4 1.5 1.7 2.7

7.6 53.1 17.6 -5.0 12.0 2.6

11.1 18.2 12.3 11.5 12.5 10

1.5

3.1

14.7

12.6

na -1.8 na 3.1 2.9 2.8 0.8 4.3 1.3 -3.3 -0.7 2.6 0.3 -2.5 2.4 4.5 0.6 -1.3 1.7 2.0

na -1.2 6.1 na 1.9 3.0 2.2 3.0 3.0 5.3 -2.1 2.2 3.2 3.9 2.2 2.3 -2.4 2.6 3.9 0.9

20.4 8.7 13.3 -0.6 5.4 6.1 -4.3 7.8 0.6 5.6 -12.8 2.8 11.5 -1.8 6.4 28.4 -7.6 20.0 16.0 37.0

16.7 9.1 4.4 6.0 6.6 10.7 1.8 11.6 8.9 9.3 -2.2 3.2 6.3 6.2 2.1 0.4 10.4 10.0 8.0 15.1

Average

1.1

2.2

8.1

7.2

TOTAL AVERAGE

1.2

2.4

9.6

8.5

Average Others Bahamas Barbados Belize Brazil Colombia Costa Rica Dom. Republic Ecuador Guatemala Guyana Haiti Honduras Jamaica Nicaragua Panama Paraguay Suriname Trinidad and Tobago Uruguay Venezuela

Source: For agricultural GDP (1990 US$), growth was calculated point to point using the IDB database. For exports, the source was FAOSTAT.

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Another important element is that in both groups of countries, the growth rate of agricultural exports significantly exceeded that of agricultural GDP, suggesting a transition process towards a more open economic structure. In the early reformers, the rate of growth of agricultural exports exceeded that of agricultural GDP by about 9 percentage points per year, while in the other countries, the average was a difference of 5 percentage points per year. The remarkable increase in export growth relative to that of GDP suggests four points. First, import-competing activities have significant problems coping with the new incentive environment; otherwise, it is difficult to understand such a big difference between export and agricultural GDP growth. Second, the volume of agricultural trade relative to agricultural GDP must have increased over time due to an increase in imports, with uncertain effects on the agricultural trade balance. This is confirmed in Table 4.10. In other words, the main effect of reforms is to increase trade. Both exports and imports increase, but the agricultural trade balance does not necessarily improve. Third, the response of exports seems generally consistent with the previous conclusion about relative prices and incentives between exportable and import-competing activities. Finally, relative prices matter for agricultural supply response, and there seems to be a very elastic agricultural export response to improved price incentives.

Policy Implications Perhaps the most significant implication of the previous analysis, from the policy perspective, is that while successful market reform implies an opportunity for export-oriented activities, it also poses a significant challenge for agriculture dedicated to import substitution. Agriculture faces competitive pressure from a declining real exchange rate (pushed down by the very success of GDP growth), from a more open economy with reduced trade barriers, from reduced subsidies of various forms, and particularly from less subsidies through state intervention in marketing. Finally, there are the competitive pressures arising from success in the overall economy: higher wages push costs up and the increase in asset prices pushes land values and rental costs up as well. While exports face many of these same pressures, they do not experience the decline in direct protection from international trade, and they benefit in relative terms. That benefit, although marginal, has been sufficient enough to generate and sustain enormous export growth. The policy implication is that market and structural reforms, even

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109

(In percent) Country

1990

1996

Argentina Brazil Colombia Costa Rica Chile Dominican Rep. Ecuador El Salvador Guatemala Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela

45 17 30 82 53 46 58 45 33 121 206 52 81 70 55 32 79 36

68 24 48 130 80 50 89 71 48 99 161 79 84 73 55 38 86 65

Simple average

Source: FAO and World Bank databases.

if successful (even more so in this case), must address what to do with vast import-competing sectors of agriculture that will face acute financial and competitive stress. The crisis in import-competing agricultural sectors gives rise to political and social problems because it often involves small and mediumscale farmers with little possibilities for reconverting to other areas of the economy, and because of geographic concentration. In Chile, for example, acute problems with milk, meat, wheat and edible oilseeds are virtually all concentrated in three southern regions and account for a large share of economic activities in those areas. In Ecuador, virtually all the rural activities in La Sierra are related to import-competing activities (with the recent exception of flowers). Peru has a somewhat similar situation. The conclusion, then, is that the very success of market reforms generates acute challenges for vast sectors of agriculture. Most of those challenges are related to geographically concentrated import-competing activities, involving small and medium-scale farmers. At least in cases where reforms have been successful in generating substantial GDP growth, there is little basis for blaming the macroeconomic environment for the

Table 4.10. Volume of Agricultural Trade over Agricultural GDP

JORGE A. QUIROZ

problems within the agricultural sector. The problem is not economic, but rather social and political. Nevertheless, rational use of economic instruments can help to handle these new demands.

Second-phase Reform Measures From a conceptual viewpoint, Latin America's agricultural sectors at this stage of development need to become more flexible in order to better mobilize economic resources, both within the sector itself and between the agricultural and nonagricultural sectors. Improved resource mobilization will facilitate even better export growth that can rapidly absorb employment from less competitive activities in rural areas. On the other hand, better functioning domestic agricultural markets and redefined pricing policies will allow a smoother transition and upgrading of potentially viable import-competing activities. Four main areas can be identified where policy responses need to be upgraded to cope with the challenges posed by the transition process: capital markets, land markets, pricing policies and risk management, and research and development and technology transfer.

Capital Markets In most Latin American countries, the links between capital markets and the agricultural sector are rudimentary at best, while the transition challenge needs a very sophisticated capital market response. The need for a fluid capital market functioning during a transition process is particularly crucial to quickly foster export growth. Exportable activities need fluid capital movement in order to respond more quickly, yet, as will be discussed below, the structure and functioning of capital markets in several Latin American countries impede this from happening. To begin with, the link between the capital market and the agricultural sector in many Latin American countries is narrowly restricted in public discussion to the single issue of agricultural credit. Existing price distortions usually coexist with a package of directed subsidized credit to the agricultural sector. Such was the case of Ecuador, Peru, Colombia and Venezuela, which undertook serious liberalization efforts during the first half of the 1990s. In most countries, the moderate opening of the sector to international trade was implemented jointly with substantial liberalization of the capital market, implying a partial or total dismantling of the existing institutional structures in order to provide subsidized credit

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to agriculture (mostly in the import- competing sectors). It was thought that the capital market would adjust by itself in the search for profitable alternatives within agriculture. But in the absence of intervention, the market in fact focused mainly on large producers and short-run credit (annual crops). In other words, the capital market failed in a broad sense to help the transition process, in that it failed to become an engine for major exportable projects and for quick reallocation of productive factors from importable to exportable activities, which are always key to any successful trade opening. Table 4.11 shows the level and trend of the share of agricultural credit versus total credit vis-a-vis agriculture in the overall economy in Argentina, Brazil, Chile and Peru. The main result is that in the course of the 1990s, when liberalization efforts were being consolidated in countries like Peru, Argentina and Chile, the share of credit to agriculture tended to decline. This was particularly true in Chile, and although there is a lack of consistent data for other countries, it is known that agricultural sectors in Colombia and Ecuador also suffered from a serious credit crunch. At the root of the problem is the need for additional substantial modernization of capital markets, which have a crucial role in meeting the transition challenge for agriculture. Three financial innovations are lacking in this regard: Term structure and funding of resources. Early reformers such as Peru, Colombia and Ecuador lack a strong term structure for financial credit instruments as well as sufficiently strong funding for resources. In Peru, for example, most of the financial investments in pension funds were allocated up until 1998 at terms of less than one year. Similarly in Colombia, practically all investments are government and financial short-term instruments. The result of this situation is that, technically speaking, there is no yield curve in those countries. Consequently, the funding of most of the banking sector is short term, and so is the lending structure, for obvious hedging reasons. Therefore, the banking sector appears better suited for annual crop lending, rather than for long-term plantation-based agriculture. Annual crops in these countries tend to pertain to the import-competing sectors, while plantations are identified with commodities with export potential. This problem, of course, applies not only to the agricultural sector, but to all kinds of industries. However, the effect on agriculture is particularly severe, because in other sectors the nature of the investors allows them to fund projects from foreign sources.

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IQRGEA. QUIROZ

Table 4.11. Agricultural Credit/Total Credit and Agricultural GDP/Total GDP (In percent) Argentina Year

1994 1995 1996 1997 1998

Share of Share credit of GDP

na 9.7 8.4 8.3 8.3

6.8 7.4 7.0 6.5 6.8

Brazil

Chile

Share of credit

Share of GDP

Share of credit

8.7 9.8 7.1 5.8 5.1

8.2 8.5

7.8 6.7 5.3 6.0

8.5 na na

4.9

Peru

Share Share of Share of GDP credit of GDP

8.9

8.8 8.5 7.9 7.8

6.0 5.7 5.5

5.4 5.8

7.6 7.3 7.5 7.2 7.3

Source: Figures based on Banco Central de la Republica de Argentina, Boletin del Banco Central de Brazil, Superintendencia de Bancos e Instituciones de Chile, Superintencia de Banca y Seguros de Peru and the Inter-American Development Bank.

A complete array of financial innovations is the remedy for these problems, and without those innovations the reallocation of resources from import-competing to export activities will not happen smoothly. Action is needed both on the funding and lending sides. In terms of funding, it is crucial to have long-term debt instruments available for long-term investors such as pension funds or insurance companies, which in turn are the only economic agents that should have their portfolio in long-term instruments. However, such investment instruments need in turn to be issued either in dollar-denominated or inflation-corrected cash flows, since Latin America's chronic history of inflation outbursts precludes the existence of long-term instruments denominated in nominal currencies. The virtual absence of such long-term instruments in the secondary markets in many of these countries requires an initial push from the policymaking side in the form of a government agency. In Chile, the problem has long since been resolved because the Central Bank itself conducts its monetary policy through active open market operations involving debt instruments with various terms, and all instruments with more than a one-year maturity are adjusted for inflation. These instruments provide a basic yield curve that paves the way for substantial trading in instruments issued by private parties. In Peru, the Financial Corporation for Development (COFIDE), a second-tier state financing institution, recently launched a program similar to that of Chile, and other countries such as Colombia have begun to explore such initiatives.

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On the lending side, innovation is more complicated because it entails restructuring project financing in agriculture in such a way that such efforts become eligible for investment from a pension fund standpoint. (Investment grade is what is typically needed.) This requires substantial financial innovation because agriculture, given its historical pattern of government intervention, is unaccustomed to systematic and consistent handling of various risks through private market mechanisms. Private equity investment funds. It has already been argued that trade reform in agriculture will likely imply a depreciation in the value of specific assets, and that the fact that many import-competing sectors enjoyed price levels above international ones does mean that they had abnormal economic rents. Hence, when a trade reform is implemented, farmers will likely have less capital marked to the real market value. This means that standard leverage ratios will increase, impeding investment in new and potentially successful sectors. In particular, those leverage ratios may be incompatible with the need to attract long-term financing from pension funds. It follows that during a transition process, the agricultural sector will need not only long-term financing, but also straight equity investment. The key point to understand is that the capital market needs to work well both in terms of credit and equity. Small producer specialization. There is a lack of sophisticated knowledge in Latin America to deal with small-scale farming from the standpoint of capital markets. The innovative financial experience of Southeast Asia in this regard does not seem easily applicable to Latin America. As a result, the region lacks the adequate channels for successful small-scale lending, so lending generally occurs either under subsidized conditions (less so for Colombia, Peru and Chile) or indirectly through processors and agribusiness. Inadequate handling of this process may prompt socially undesirable results. In Peru, the inability of market-oriented institutions to distinguish viable from nonviable small producers has forced the government to continually forgive past debts of small producers from the country's bountiful coastal region. This has delayed the process of reallocating natural resources that otherwise would have generated far stronger growth in exports, and it has of course strongly discouraged private market institutions from providing any sort of credit to small producers. Export-oriented

AGRICULTURE AND THE MACROECONOMIC REFORMS OF THE 1990s

entrepreneurs in Peru have to search for less productive desert areas instead of increasing their investments in the more richly irrigated coastal valleys. This is happening alongside substantial small-scale cultivation of low-value import-competing goods in those areas. The (political) fear of not knowing what exactly to do with small farmers and, in particular, the fear of the unknown (how many of them could survive in a new market environment), is generating a substantial welfare loss for the country as a whole. Given the absence of a well thought out policy framework to deal with this challenge, the hesitation of policymakers to let market forces operate freely is, at least, understandable.

Land Markets Reforms in land markets must accompany policy responses to improve capital markets. Unlike capital markets, however, changes needed in land markets are well understood by policymakers. Multilateral lending in this area, for example, has changed with the times. Land market reforms have usually revolved around titling and property rights, a key part of changes brought about by trade reform. A well functioning land market is crucial for a smoother and more rapid reallocation of productive resources if the original owners of a given piece of land are not suited financially, as one example, to undertake a new mode of production. Adequate land titling and well-defined property rights are also necessary (but not sufficient) conditions for long-term financing. There is little doubt that these institutional innovations are playing an increasing role in adjustments toward a more free trade environment. Well-defined property rights in Peru, for example, have been a crucial part of recent efforts to upgrade the country's sugar-producing sector, which has the potential to be the lowest cost producer in the world. Reforms in property rights and, in particular, the removal of size constraints, have allowed for the privatization of cooperatives that were in decline after almost three decades of poor management and property issues among members. In contrast, there have been signs of improvement in Trinidad and Tobago, a mild reformer to date where almost all the land belongs to the state, and where the state sugar company has among the highest production costs in the region. As important as defined property rights and adequate titling procedures may be, recent reforms have tended to overlook the causes of existing distortions in the land market. Simply put, there are often historical and political reasons for distortions in land markets and ill-de-

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fined property rights. These issues need to be well understood in order for policy prescriptions to have a significant impact in practical terms. At the bottom of the various malfunctions of land markets is the unresolved political issue concerning the distribution of resources among different ethnic and social groups. To achieve sustainable results, those issues must therefore be tackled in a direct and straightforward manner alongside land market matters. Otherwise, any improvements may turn out to be transitory formalities that are vulnerable to future political changes.

Pricing Policies and Risk Management When they become a binding constraint, tariffs tend to significantly increase the volatility of dollar-measured domestic prices of tradable agricultural goods. In effect, one of the realities of agricultural price interventions in lesser developed countries (and in the EU as well) is that price intervention is explicitly or implicitly aimed at less volatile domestic prices. Quiroz and Soto (1996) examined the behavior of domestic agricultural prices in a panel data analysis involving 78 countries. They found that 38 of the samples tended to completely isolate internal (dollar-denominated) prices from international price signals. As a result, if tariffication were to become a binding constraint, domestic prices would begin to fully reflect the impact of international price variations, radically different from the actual empirical behavior of most domestic agricultural prices. Price isolation from international price signals is particularly acute in highly distorted commodities such as sugar and milk. Given this, one must conclude that as trade liberalization progresses, one of the serious emerging challenge will be that agents involved in domestic agricultural markets will have to deal with volatility in dollar-denominated prices at levels not seen before. The experiences of Latin America's early reformers suggests four important considerations: Exchange rate risk can be as important as international price risk. As important as the volatility of international prices maybe, one cannot neglect the variance of real domestic agricultural prices induced by the variance of the real exchange rate. Available studies on price variability in the Latin American countries engaged in a price band system to neutralize fluctuations caused by international price variations show in several instances that the most important source of volatility came not from international price changes but from changes in the real exchange rate (Quiroz and Valdes, 1993;

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JORGE A. QUIROZ

Jaramillo et al., 1997). Hence, together with devising special mechanisms to handle international price risks, the problem of exchange rate volatility must be assessed. But the only way to generate the conditions for the emergence of a liquid and deep market for exchange rate hedging is through the use of flexible exchange rates that are highly mobile, and free capital inflows and yield curves denominated in local and foreign currency. It is important to recall that exchange rate hedging is nothing but a derivative built upon the rates for lending and borrowing in two different currencies. Therefore, the possibility for exchange rate hedging at more than a one-year term, for example, critically depends on the economy having lending and credit operations in domestic and foreign currency available at more than one-year terms. Necessarily, then, the issue of exchange rate hedging becomes directly related with that of long-term funding for domestic banks, which was discussed in the context of modernization of capital markets. In conclusion, the building of a yield curve in domestic currency, together with the availability of long-term financing in foreign exchange, are cornerstones not only for capital market improvements in the context of a trade reform, but also for exchange rate hedging. Catastrophic prices are more important than variability per se. This particularly applies to import-competing goods. Almost by definition, an import-competing good in a given economy has less of a comparative advantage than an exportable good, particularly if the existing resource allocation is the result of several years of antitrade bias. Given the high volatility of international prices, it follows that producers of an import-competing good will more likely face situations in which prices fall below production costs at any point in time. The problem becomes even more apparent when one considers that the information available on the time series characteristics of agricultural commodity prices shows that they are highly correlated over time, with strong departures from the normal distribution (Deaton and Laroque, 1992). This shift from normality implies, among other things, that there is a higher probability of finding both extremely low and high prices than in a normal distribution. Coupled with the high serial correlation, this implies that there is always a small but non-negligible probability effacing a sequence (two or three years) of extremely low prices. For a producer who is just facing the dismantling of earlier price protection, this is a particularly important time.

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The higher the probability and impact of sequential, extremely low prices, the more distorted the commodity is in world markets. In effect, if there are significant subsidies and protection for the good in question all over the world, then the international prices can even fall below the production cost of the most efficient producer and stay there for a sequence of years. There is no shortcut to solving this problem. The experience with price bands in several Latin American countries does not provide a suitable answer. They attempt to reduce the impact of international price fluctuations in general, but are useless in terms of focusing more narrowly on extremely low prices. There is no strong need to address the first problem, and the second, more critical problem is not well addressed by the system (Quiroz et al., 1999). The standard answerâ&#x20AC;&#x201D;to use international futures prices for contracts to hedge against price risksâ&#x20AC;&#x201D;is not suitable either. Most futures markets lose liquidity beyond 12 months, and therefore are not suited to handle the real problem, which is sequentially correlated low prices. Domestic trading infrastructure and institutions. Domestic marketing conditions are as important in determining domestic prices as the exchange rate and the international price level. Most Latin American countries lack adequate storage facilities and communications infrastructure, and there is practically a complete absence of basic trading institutions (e.g., trade with warehouse deposit certificates). Those factors can sometimes account for as much as 25 percent of domestic price variations over time. R&D and Technology Transfer Less developed countries invest a much smaller proportion of their resources in research and development (R&D) than developed countries do. Yet, a drastic trade reform process will inescapably render several traditional agricultural activities unprofitable and will increase the need for knowledge to achieve two objectives: Reduce production costs of the given output mix (productive process innovation); and Undertake new production alternatives that are a better choice for the available land and labor resources in the wake of trade liberalization (output diversification innovation).

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The need for a substantial effort in R&D has sometimes been underestimated. As is well known, R&D investment is subject to strong externalities. This implies that in the absence of some form of government promotion, the market by itself will tend to produce less than the socially desirable amount of R&D investment (Johnson, 1982; Pack and Westphal, 1986; Wade, 1990). Much has been learned over the past two decades about the best institutional arrangements to generate cooperation among producers in investing in R&D projects of shared interest and with a significant competitive impact (Gandal and Scotchmer, 1993; Katz and Odover, 1990). In the case of the early reformers, Chile is perhaps the most notable in terms of efforts in this area. There is, then, a substantial challenge in terms of upgrading the institutions and mechanisms for enhancing R&D and technology transfer. A high level of technology transfer and R&D investment facilitates rapid transformation, which in turn helps to sustain trade reform efforts.

Conclusions This chapter has reviewed the macroeconomic environment and agricultural performance of Latin American and Caribbean countries during the 1990s. Countries that undertook early and in-depth reform efforts had much higher GDP growth and significantly higher agricultural export growth than the other countries. A first conclusion, then, is that market and structural reforms, when applied comprehensively, deeply and over a long period of time, can generate the best conditions for economic development, employment generation and poverty reduction. However, contrary to what many observers expected, market reforms were not beneficial for all agricultural activities. Import-competing activities within agricultural sectors have been hard hit by the decline in the real exchange rate, a seemingly inevitable byproduct of successful trade reform, as well as by reduced direct protection. This affects largely small and medium-scale farmers. The answer to this new challenge lies not in reformulating macroeconomic policies but in improving macroeconomic designs. Four areas for improved public policies are capital markets, land markets, pricing policies and risk hedging, and R&D and technology transfer processes. Future efforts should concentrate on those areas in order to strengthen the competitiveness of the agricultural sector in a global economy.

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Appendix 4.1

Real Agricultural Prices: Decomposition Consider an agent producing a specific commodity i. What matters is the relative price of the good (P{) relative to a given numeraire (P). If we denote P. by the international price of the good i, E the nominal exchange rate (currency in U.S. dollars), P the general price level abroad, f, the tariff of the product and <t> as others factors intervening in the arbitrage between border and producer prices, we can decompose the domestic real price of good i into four components:

where the first component is the real international price of the good; the second is the real exchange rate; the third is the equivalent tariff of the product; and the last one summarizes the others factors. Taking logs to (1) and applying first differences, we obtain:

where:

The above decomposition, when applied to real agricultural prices, allows disentangling their different determinants. Therefore, using this identification process, we can assess the relative importance of the real exchange rate, international prices, domestic tariff protection, and other factors in the evolution of real agricultural prices. The other factors include primarily all the miscellaneous determinants that affect domestic marketing and play a role in the arbitrage (intermediation) between import costs and domestic prices in the case of an importable good, or the arbitrage between the FOB price and the producer price in the case of an exportable good.

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References Calvo, G. 1986. Temporary Stabilization: Predetermined Exchange Rates. Journal of Political Economy 94: 1319-29. Corbo, V. 1985. International Prices, Wages and Inflation in an Open Economy: A Chilean Model. Review of Economic and Statistics 57: 564-73. Deaton, A., and G. Laroque. 1992. On the Behavior of Commodity Prices. Review of Economic Studies 59. Economic Commission for Latin America and the Caribbean (ECLAC). 1998. ECLAC Database. Edwards, S. 1993. Openness, Trade Liberalization, and Growth in Developing Countries. Journal of Economic Literature 31: 1358-93. Gandal, N., and S. Scotchmer. 1993. Coordinating Research to Research JointVentures. Journal of Public Economy 51(2). Ingco, M. 1995. Agricultural Trade and Liberalization in the Uruguay Round One Step Forward, One Step Back? Washington, DC: World Bank International Trade Division. Jaramillo, C., R. Bustamante, and J. Barbosa. 1997. Tendencias de los precios relatives de los alimentos en Colombia. CEDE, Universidad de Los Andes. Johnson, C. 1982. MITI and the Japanese Miracle. Stanford, CA: Stanford University Press. Katz, M., and J. Odover. 1990. R&D Cooperation and Competition, Brookings Papers on Economy Activity, Microeconomics. Kiguel M., and N. Liviathan. 1992. Nominal Anchors, Stabilization and Growth: Some Thoughts on High Inflation Economies. In V. Corbo, S. Fisher and S. Webb (eds.), Adjustment Lending Revisited: Policies to Restore Growth: A World Bank Symposium, Washington, DC: World Bank Krueger A., M. Schiff, and A. Valdes. 1992. The Political Economy in Developing Countries. Baltimore: Johns Hopkins University Press. Krueger A. 1992. A Synthesis of the Political Economy in Developing Countries. In A. Krueger, M. Schiff and A. Valdes (eds.), The Political Economy of Agricultural Pricing Policy. Baltimore: Johns Hopkins University Press. Krugman, P. 1995. Dutch Tulips and Emerging Markets. Foreign Affairs 74: 2844. Michaely, M. 1991. The Lessons of Experience: An Overview. In G. Shepherd and C. Langoni (eds.), Trade Reform: Lessons from Eight Countries. Lanham, MD: National Book Network. Obstfeld, M. 1985. The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation. Review of Economic Studies 52: 605-25. Pack, H., and L. Westphal. 1986. Industrial Strategy and Technological Change. Journal of Development Economics 22.

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Quiroz, J. 1996a. Reformas macroeconomicas y el sector agricola, Ecuador: 19901995. Inter-American Development Bank. Quiroz, J. 1996b. The Agricultural Sector in El Salvador: Pricing Policies and Competitiveness. FUSADES and the World Bank. Quiroz, J. 1997. Reformas economicas y la agricultura Colombiana: 1991-1996. Inter-American Development Bank. Quiroz,}. 1998. Reformas agricolas en Peru: Balance y perspectivas. Inter-American Development Bank. Quiroz, J. 1999. Reformas agricolas en Venezuela. Inter-American Development Bank. Quiroz, J., and R. Chumacero. 1994. Trade Reform and the Real Exchange Rate: A Stochastic Equilibrium Perspective. ILADES-Georgetown University Research Series 1-74, Washington, DC. Quiroz, J., W. Foster, and A. Valdes. 1999. Agricultural Price Instability and Price Floors: A Proposal. Mimeo. Quiroz, J., and L. Opazo. 1999a. The Krueger-Schiff-Valdes Study Ten Years Later: A Latin American Perspective. Paper presented at the ASSA meetings in January, 1999. New York. Quiroz, J., and L. Opazo. 1999b. Domestic Adjustment Policies, Agricultural, Liberalization, and WTO: Lessons From Early Reformers. Mimeo. Quiroz,}., L. Opazo, M. Rios, and F. Rodriguez. 2000. Evaluacion del Programa Sectorial Agropecuario de Ecuador 1996-1999: Prestamo MAG/BID/831.832/ OC-EC. Study for the Programa Sectorial Agropecuario (PSA), MAG/IDBIICA. Quiroz, J., and M. Pineiro. 1998. El sector agropecuario en Colombia: Diagnostico y propuestas. Inter-American Development Bank. Quiroz, J., and R. Soto. 1996. International Price Signals in Agriculture: Do Governments Care? World Bank. Mimeo. Quiroz, J., and A. Valdes. 1993. Price Bands for Agricultural Price Stabilization: The Chilean Experience. ILADES-Georgetown University Research Series 1-64, Washington, DC. Schiff, M., and A. Valdes. 1992. A Synthesis of the Political Economy in Developing Countries. In A. Krueger, M. Schiff and A. Valdes (eds.), The Political Economy of Agricultural Pricing Policy. Baltimore: Johns Hopkins University Press. Svensson, L., and A. Razin. 1983. The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect. Journal of Political Economy 91(1): 97-125. Wade, R. 1990. Governing the Market. Princeton, NJ: Princeton University Press.

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Institutional Reform and Management of the Public Agricultural Sector Roberto Martinez Nogueira

The absence of mechanisms to formulate and implement public policy is a recurring theme in discussions on institutional change in Latin America, particularly in the case of agriculture. Although almost all countries of the region have introduced sweeping changes limiting the state's interventionist approach and assigning a new central role to markets, there is a widespread feeling that the institutional capacity of public agricultural sectors is still far from adequate. To change this situation, there must be further efforts to rethink the attributes of public management, design new organizational models, weave new institutional fabrics, and find new avenues for cooperation with civil society. This chapter describes and analyzes the different strategies that have been used to improve efficiency in implementing public policies. Despite considerable effort, management problems persist because of scattered and incomplete reforms, failure to fully comprehend institutional problems, limited strategic and analytical capacity, and the shortcomings of lead agencies in agricultural sectors. The chapter first presents the current institutional situation and the direction that actions must take to move beyond it. The second section discusses the distinctive challenges to be faced, the need to transform organizational and management models, and the experiences of countries of the region. The final section presents ideas for designing strategies to ensure more effective efforts and a more sustainable impact. The agricultural sector is joining the process of globalization through trade liberalization and macroeconomic policies intended to promote stability and growth. Productivity, efficiency and the capacity to participate in world trade have become fundamental to development. The consolidation of competitiveness requires continuous innovation, the

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promotion of entrepreneurial skills, and the development of efficient markets. Furthermore, consistent growth is only possible when products have higher value-added and are of better quality, exports are diversified, and attention is paid to the sustainability of resources and to socio-territorial linkages. This scenario puts heavier demands on agriculture. Some traditional products are threatened by stiffer external competition, and exports face new challenges in more demanding markets. Productive reconversion poses unprecedented challenges for entrepreneurship and infrastructure. The closer links between primary production and agrifood chains bring issues of negotiating capacity and food safety to the fore. Demands for quality are not limited to products, but extend to systems, technologies, processes and production factors. Environmental care and ecosystems pose new demands in terms of food, agricultural health and conservation. The progressive privatization of knowledge introduces new issues related to access to factors and inputs. Trade agreements, harmonization of rules, and the establishment of international standards make multinational forums for negotiation increasingly relevant. Countries, and particularly importing countries, take steps to protect themselves from the negative consequences of globalization by placing more restrictions on international trade. These changing circumstances have different consequences for different groups of producers. The danger of social polarization must be anticipated and addressed by including equity issues in all activities linked to development and sustainability. Sector growth increasingly hinges on the opening of new markets, better access to traditional markets, and the harmonious and sustainable development of rural areas.

Priorities for Reform The objectives of public policies have not changed over the years in most Latin American countries. But changing conditions now demand that the emphasis and fundamentals of those policies be adapted. Institutional reform of the public agricultural sector must therefore deal with the central issues targeted by those policies. This involves new mechanisms and courses of action in managing the sector in terms of the role and behavior of the state, the action framework for developing and deploying private sector capacity, and the process of invigorating civil society. As defined by Pineiro et al. (1999), these key issues and their consequences for institutional reform are as follows:

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Negotiations for international positioning make it necessary to boost analytical and strategic capacity to introduce and design a new vision of agriculture and rural development that supports policy formulation and underpins international negotiations. International competitiveness is closely linked to macroeconomic policy instruments, development of infrastructure, and the institutional and legal framework in which economic activity takes place. Since most of these instruments lie outside the sphere of responsibility of the public agricultural sector, the sector's position in the government apparatus needs to be rethought. Furthermore, technological innovation and agricultural health, quality, export promotion and market and entrepreneurial development should respond to common objectives, have more operating capacity, and develop new linkages with the private sector and civil society. Expansion of the agricultural sector, the growth of agroindustry and vertical integration demand shared criteria regarding actions to be taken in each of the stages of the production chain and with respect to intersectoral policies. The mandates of the ministries and agencies that provide services for agriculture should be revised, and new social players should be included among the clients they serve. The sustainability of agricultural production requires new institutional designs and policy tools for influencing decisions on technology selection and land allocation, including the decentralization of organizations and management in conjunction with the stakeholders involved. Social sustainability in rural areas requires the introduction of institutional innovations to create a new architecture that will integrate regional contributions and assistance, social services, community organization, promotion and markets. It also requires coordinated and selective actions based on national priorities and implemented with extensive local involvement and participation by civil society organizations. The integration and development of rural areas requires a broad and all-encompassing vision of them as an area for interrelated activities. The public agricultural sector must have the capacity to coordinate with other sectors responsible for delivering services

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(education, health care) or for developing infrastructure (roads). Reforms should also promote greater market transparency, reduce transaction costs, and expedite the operation of capital and risk markets to spur investments in marketing, storage, transportation, advisory services for production, and technical and entrepreneurial assistance, including selective actions and private sector promotion.

Process of Reform Many Latin American countries have followed similar paths in shaping their institutions. Prior to the 1970s, development of public agricultural institutions for more than a century was intertwined with state involvement as benefactor and regulator, culminating with introduction of the import-substitution strategy. The reform process launched as a consequence of the 1970s crisis has had a significant impact on the sector's role, make-up and modes of operation over the past 20 some years (Martinez Nogueira, 1998). Although reforms moved at different speeds and in different historical circumstances, they shared certain phases. The first phase was adjustment, which consisted of quantitative rescaling and cutbacks in budgets and personnel. This was done across the board, covering all sectors. The reasons cited for the adjustment were fiscal constraints and sometimes dramatic short-term factors. The results were relatively elementary policies, often instituted without sufficient deliberation or negotiation and not sustained by any theoretical framework. Restructuring was the focus of the second stage. Its key strategies were privatization and deregulation. The goal was to restore markets to the central role in allocating resources, in turn leading to a drastic reduction in state intervention. Restructuring impacted institutional architecture by redistributing roles among the levels of government. The design of the public agricultural sector was substantially modified: services were eliminated, marketing and market regulation mechanisms removed, promotional credit subjected to rules similar to those governing the financial system, and restrictions on production and domestic and foreign trade lifted. The impact was macro-organizational, and the transformation of management models was left for later. The various restructuring processes varied from country to country. In some, they followed serious political or economic crises, as in Chile, Argentina and Peru, where exceptional circumstances explained the speed with which restructuring was carried out. In other countries, the process

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was gradual, as in Brazil and Uruguay. And in others, such as the Caribbean countries, restructuring is still in its infancy. There has always been during the restructuring phase the intent to redesign institutions, although that intent has frequently intermingled with responses to new or continuing crises. Apart from its political foundations, restructuring has been based on a "public choice" theoretical framework, on the new institutional school of economics, and on agency theory. These approaches have provided the analytical tools for rethinking the role of the state and for designing modes of performance. Decision-making processes in this stage have been more complex, with the mobilization of more knowledge-based inputs (Bresser Pereira, 1994). New players, particularly the so-called technocrats and international organizations, have set the agenda for discussion and provided a new kind of leadership (Williamson, 1990). The result of these reform stages is a state whose profile is not a finished work, and which has no explicit new management model. It could be called a "remainder state," composed largely of what was left over from the efforts to adapt it to the new requirements (Martinez Nogueira, 1998; Pineiro et al., 1999). This institutional readjustment is in a transition phase without defined objectives or procedures for moving ahead. However, the changes have been sweeping, and their consequences form the starting point for further actions to build a new, effective, transparent and responsible state that will better serve society.

Agenda for Reform of the Public Agricultural Sector A third reform phase is now needed that focuses on the institutional reforms necessary to enable markets to operate with greater efficiency and to spur sector modernization. These reforms should consolidate the governance of complex systems that address growing uncertainties and the demand for innovation, equity and a strategic orientation (Evans, 1996). Changes are needed in terms of the system of rules, consolidation of property rights, clear regulations governing transactions that reduce risks, preservation of competition, internalization of production externalities, efficient and reliable judicial mechanisms for conflict resolution, and reduced corruption and clientage (North, 1990; World Bank, 1997). Transformation of state management methods is a condition for this institutional reform. The main concern is not rescaling the state apparatus or redefining the boundaries between government and the market. Rather, the focus must be on governance, institutional capacity, and linkages with society. The idea is not to change regulatory frameworks

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but rather the behavior and social conditions that perpetuate them. Nor is it a matter of redefining roles, devising organizational charts or systems, or incorporating technologies. The challenge is to build cultures of public service. Reform of the public agricultural sector cannot be limited to reducing the number of agencies involved or cutting back on staffer restructuring responsibilities (Israel, 1991). These aspects maybe necessary, but they are not sufficient for effective reform that responds to new realities in the sector, ensures social legitimacy and the capacity to act, promotes change, and enhances linkages among the social stakeholders. Modernization of management is a difficult conceptual process. It requires negotiation, technical capacity and mechanisms to process social demands. It is more exacting than the previous processes, since it entails reforming the administrative apparatus in a much more complex policy situation. The results are new skills and inter-agency networks, better use of complementarities, and more social participation and initiative. The protagonists are not just the managers and staff of public institutions. The process instead involves a social reorientation and the mobilization of public and private stakeholders. Adequate distribution of responsibilities, coordination, agreement and permanent cooperation are among the objectives of this modernization process. Exhaustive diagnoses of existing institutions all point to a series of issues that must be addressed, including: i) bureaucratization, which is the result of distorting the basic organizational model of public agencies in a way that leads to inefficiency and ritualistic behavior; ii) definition of the different sectors that is inadequate for tackling the new problems in a more complex agricultural setting; iii) excessive centralization that makes it difficult to deal with the specifics of agroecological, productive and socio-territorial issues; and iv) the persistence of a closed approach to management that impedes social participation and closer ties with the private sector (Pineiro et al., 1999; Martinez Nogueira, 1998). Many steps have been taken to address these problems (Trejos and de las Casas, 1999). Restructuring has frequently been accompanied by privatization of service delivery. Joint financing has been promoted and competitive funds have proliferated. There has been more intensive use of outsourcing and accreditation to enable the private sector to participate in policy implementation. And progress has been made in different forms of delegation and decentralization to better respond to the specifics as well as the diversity of agriculture. Decentralization is an issue in almost all attempts to introduce greater rationality and flexibility. Certain methods and techniques in what is called the "new public management" model are being incorporated into the action frameworks of government organizations, a

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result of management commitments and resource allocation methods based on targets and results (Peters, 1996; Lane, 1997). The assumption underlying many of these efforts is that public organizations are sufficiently flexible to absorb changes in policy direction, that political will is sufficient to bring about new behavior, and that the redesign of formal procedures is enough to alter management styles. The bet is on the capacity to respond to opportunities opened up by a public agricultural sector that cedes fields of activity to lower levels of government, the private sector, NGOs and producer organizations. The premise is that there are existing social resources that can be drawn on. Some of these assumptions need to be revisited, since evidence shows that they have not significantly impacted the ability to efficiently promote collective action or meet societal demands (World Bank, 1993). This result is explained by the discrete, isolated and unarticulated nature of these efforts, which have failed to include the institutional sphere in discussions concerning the content of substantive policies, and have lacked a basis for analytical capacity, strategies and realistic prospects. A series of outstanding issues therefore remain to be addressed.

Actions for Institutional Reform This section presents the strategies used to resolve the basic issues raised in diagnoses of the public agricultural sector. It also looks at the conditions necessary for such strategies to be effective, the weaknesses that remain, and the reasons why results of such efforts have often been disappointing. The Section Synopsis provides a summary of what will be discussed.

Debureaucratization The public agricultural sector was originally established to attend to an agricultural sector characterized by certain structural features: the production of commodities, scant or no capacity by producers to influence prices or demand, poor linkage and interaction among them, and separation from other units in the agrifood chain. The model of bureaucratic organization for designing government systems has been consistent with these features: efficient in performing routine tasks, formalizing procedures and dealing with homogenous administrative production of services supplied to a homogenous target public; highly centralized, with no room for participation by society; and functional on the basis of univer-

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Basic diagnosis

Strategies to overcome the problem

Bureaucratization

Management: • by results • by projects • by private law • by third parties

Inadequate sectorization

Coordination: • by interagency committees • by expanding areas of responsibility • by subordination to other ministries • by territorial integration

Limited participation

Participation: • in policy formulation and institutional management • in coordination and negotiation bodies • in implementation • based on demand

Centralism

Decentralization: • distribution • transfer to regional and local levels • hand-back to civil society • associated and networked management

sal criteria and on providing safeguards for citizens to protect them from arbitrary government actions. But, at the same time, the model generates rigidities and ritual behavior, is incapable of operating in conditions of uncertainty or of coping with distinctive situations from the very public it serves, and is inefficient in generating innovations. The new demands of the modern era have significantly altered the structural features of agriculture. Primary production increasingly forms part of a business cycle whose competitive position depends more on the capacity to add value through a suitable selection of technologies and products, efficiency in processes, differentiation based on quality or market access, appropriate strategies for linkage, and better negotiating capacity. It is a form of agriculture with higher entrepreneurial and managerial requirements, and with producers who are more active in all stages of the cycle and who have better organizational capacity and closer links to the financial, input and product markets. Policies for this new form of agriculture must abandon the assumption of homogeneity and replace it with differentiation and heterogeneity. The issues of competitiveness, conservation and the recovery of natural

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resources, promotion of small farmers, productive reconversion and local development can only be dealt with by paying attention to the specifics of socio-territorial, productive and market situations. Therefore, the public apparatus should have greater capacity to influence and act in a variety of fields and with a variety of players. It must have more flexibility and place greater emphasis on dialogue, cooperation and recognition of the diversity of an increasingly complex agricultural sector. All this makes it necessary to leave the bureaucratic model behind. Transcending the Bureaucratic Model Four types of strategies have been used to move beyond the bureaucratic model: Changing the rules of operation through management by results, while preserving the identity of public organizations; Creating specific areas within public organizations to deal with certain issues or problems based on special operating rules, such as management by program or project; Modifying the legal nature of public organizations so that they are governed by management under private law; and Promoting private delivery of public goods and services through management by third parties. These strategies share certain premises, have common requirements, and allow for the use of private management tools. They depend on the existence of central spheres with sufficient global and sector vision, the capacity to set priorities and determine operating parameters, and integrated programming and budgeting systems. They require mechanisms and information for follow-up and evaluation in order to keep control over products, results and impacts, systems of rewards and punishments, and sufficient political backing to enforce them. Some of these strategies allow for separation between performance of the function, its financing, and the production of services and their delivery to the targets of the action or the users of the service. In such cases, the size of the public apparatus is considerably reduced, competitive elements are introduced and bureaucratic logic is replaced by the logic of markets or quasi-markets.

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Management by results. This strategy preserves the nature of public organizations while introducing fundamental changes into their approach to taking action. It is based on the theory that inefficiencies are basically due to excessive restrictions on management. Conventional government action is deployed in a regulatory framework with a high concentration of decision-making in the organizational hierarchies, formalization of procedures, ex-ante control of the legality of administrative actions, and budgets allocated in function of inputs. The assumption on which this is based is that compliance with procedures is sufficient to assure that objectives will be accomplished, and therefore the idea is to regulate procedures and decisions in detail. Therefore, if management is to be made more flexible, there must be a shift from management based on procedures to management guided by results and impacts. This implies taking responsibility for the use of resources and being alert to the actual consequences of government intervention. To that end, extensive internal deregulation of the government apparatus is needed. Management by results starts with the allocation of resources to achieve certain policy objectives. It therefore implies changes in budget processes. It introduces methods and techniques that are widely used in the private sector into the public sphere, permitting greater freedom of action during operations, accompanied by greater responsibility for meeting commitments. It allows for changes in organizational strategies, going beyond the prevailing functional criteria to make room for new arrangements that are more horizontal or limited in duration for dealing with problems. It facilitates the outsourcing of activities by clarifying responsibilities, goals and processes. The necessary condition for greater flexibility is to bolster the analytical capacity of public institutions and sector management. This means that the organization's missions must be defined on the basis of policy demands, planning to define institutional strategies, and precise objectives and the delegation of responsibilities to accomplish them. Organizations must have adequate definitions of roles, clear delimitation of their areas of responsibility, and information to monitor management. Indicators should refer to the organization's production processes and costs, impacts and nature of relations with the milieu, the development of human resources, and the climate and labor environment. One example of this approach is the management modernization program in Chile. The counterpart of the management commitments formalized between the budget authority and public organizations represents greater freedom from certain restrictions on allocating resources, while allowing bonus systems to be established as rewards for effective

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contributions. These commitments or management contracts are only the first step towards more substantial reforms in the public service and its career paths, which pay greater attention to training as well as reward and punishment systems. Management under private law. The creation of public institutions that operate under private law is the consequence of the same rationale behind management by results. The traditional administrative model gives rise to organizations that behave like monopolies and which only have to answer to political mechanisms. They are regulated by their own rules of administrative law whose purpose is to guarantee the rights of citizens and safeguard the public good. These rules contain a strong control component for verification of the match between behavior and the established procedures. The focus is more on the correction of processes than on results and impacts. The consequences are often delays in management decisions, excessive red tape and dilution of responsibilities. Creating public agencies governed by private law is a way of overcoming these difficulties. The objective is to enhance the capacity for action and relations with the private sector, facilitating joint activity and agreements. These efforts are efficient avenues for public and private cofinancing of specific institutions or projects, and they encourage competitive behavior. This practice has been particularly widespread in promoting innovation. Colombia restructured its National Agricultural Research Institute (INIA), creating a complex system in which the lead agency, the Colombian Agricultural Research Corporation (CORPOICA), comes under private law. Other countries have taken similar steps, such as Chile with its own INIA and its Agricultural Research Fund (FIA), Uruguay with its INIA, and Argentina with its Argentine Foundation (Nores et al., 1996). This legal form permits greater managerial autonomy, salaries that are competitive with the private sector, and faster and more flexible responses to requirements in the fields for which the entities are responsible. These entities are mandated to carry out actions directed to a particular community that is generally represented on their management boards. This is a device for capturing demand and allowing the exercise of social control. Funding for these entities comes only partially from government and is generally used as an incentive to be efficient and to ensure that activities have more of an impact. For both reasons, these entities are able to develop local institutional schemes spurred by their financing requirements and by the corporate interest they attract. This means that attention must be paid to the mechanisms used to ensure that their actions are consistent with government policies. As in the case of

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management by results, this demands the capacity for strategic guidance by the ministries, effective participation by ministerial representatives in their management, monitoring and evaluation systems, and a clear definition of their mission. Management by projects. Almost all the countries of Latin America now use the management by programs or projects approach. This is often linked to financing by multilateral lending agencies or bilateral cooperation agencies. With defined objectives and activities and responsibilities assigned to units specially established to take charge of implementation, the programs or projects are installed within an administrative apparatus, yet they maintain their separate identity, frequently following special rules and paying better salaries. These organizational arrangements have overcome many of the shortcomings of weak public sectors, uncompetitive salaries, deficient regulatory frameworks and general inefficiencies. They operate in flexible ways tailored to the nature of their activities, and they are generally temporary in nature. In some countries, these executing units form true parallel public administrations governed by a different rationale and with control mechanisms that are out of the ordinary. These parallel administrations, particularly in smaller countries, often manage sums that are much larger than their budget allocations, have more and better technical experts, and offer working and professional conditions that sometimes have the effect of enticing away permanent ministry staff. The wider the gap between the operating qualities of these units and those of the conventional administration, the greater the need for sweeping changes in the bureaucratic, organizational and management models of public agencies (Martinez Nogueira, 2000). Management by programs or projects has also been introduced outside the framework of international financing in order to deal with particularly important issues or specific actions. The promotion of exports, support for innovation, technology transfer or the recovery or development of specific areas leads to such arrangements, often in association with other social stakeholders. In most cases, the problems cannot be dealt with through traditional ministry lines or their agencies. These arrangements are generally multifunctional, require different contributions, and call for the convergence of points of view, disciplines and interests. They are means for cooperation and complementary efforts, achieving coordination through shared programming and interaction on the field level. These projects should not be thought of as isolated instruments but as series of integrated actions. Lack of such coordination is common in rural development projects, which often reflect the preferences of do-

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nors or financiers. Such projects also have poor linkages among them and weak relations with the agencies that bear central responsibility for them. As such, they face the risk of being isolated from the other policy actions and the administrative apparatus. Management tends toward selfsufficiency, avoiding relationships that create dependency and uncertainty. The isolation and special operating conditions of these projects frequently make it difficult to strengthen the established competencies, which jeopardizes the sustainability of project efforts. Management by third parties. The outsourcing of services introduces market logic into the performance of public functions. It is most frequently used when the desire is to transform management. Fields to which this approach has spread include rural development, technology transfer services, studies for policy formulation and the preparation of programs and projects, zonal analysis, and the identification and preparation of projects for presentation to competitive funds. Through outsourcing, the public sector makes use of installed capacity in the private and social sectors (companies, consultants, producer organizations, NGOs) to implement policies. These capacities include technical resources, community relations and operating methods. They permit a more flexible approach to tasks, since execution is less dependent on the restrictions associated with the stock of human resources or equipment belonging to public institutions. The practice of accrediting professionals to carry out certain functions involving supervision or transfers of technology is also becoming more common. Third-party management has certain requisites that are frequently ignored. First, it requires transparency in the market that is being created. Some evaluations of outsourcing indicate that other conditions for effectiveness are clear definitions by the government as to which functions are eligible for outsourcing, the rules governing contractual relationships, and a determination of the commitments of both parties. This approach requires auditing mechanisms and supervisory capacity that call for a new type of regulatory state with very strict requirements for protection of the public good, transparency, and preservation of the quality of services. The existence of a weak administrative apparatus could make the outsourcing of certain services advisable, but that same weakness could feed into behaviors that are different from those envisaged in the policies. In such cases, social auditing has helped to reinforce the public administration's control capabilities. This is a lesson that can be learned from the experience of the Agricultural Development Institute (INDAP) in Chile in contracting technology transfer companies to serve the needs of small producers.

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Outsourcing can be developed where there is actual capacity in the private sector to participate in the production and delivery of public services. In some cases, attempts to move ahead with outsourcing have come up against problems of limited capacity in the private sector. In one case of privatization of services to provide comprehensive technical assistance to small farmers, private agents were unable to provide suitable assistance in business management. Competitive funds for agricultural research have had similar experiences. The funds were established with the expectation of promoting participation by new players, but their objectives were frustrated when those players were found to have shortcomings (Elliott and Echeverria, 2000).

Coordination The debate regarding the scope of the agricultural sector is ongoing. The sector traditionally had a fairly precise definition that denoted primary production and professional performance by agricultural engineers and veterinarians. It included market realities, actors, technologies, productive processes and products that were clearly differentiated from those of other sectors. This notion has been superceded by a more complex oneâ&#x20AC;&#x201D; expanded or systemic agricultureâ&#x20AC;&#x201D;that involves fields of social action and policy spheres that go beyond primary on-farm production. It includes associated services, transformation, processing and access to final-consumption markets. This broader approach to agriculture encompasses agrifood and agroindustry based on the differentiation of products, the quality of processes, and transactions between the different phases of the business cycle. The old thinking, governed by the primacy of agricultural supply, is giving way to the primacy of market demand, using this vantage point to reconstruct links with primary production, industry and marketing. The relationship between the agricultural and rural spheres is being rethought. The latter should be understood as an agroecological, socio-territorial and productive area. All of this involves a growing diversity of issues that require very specific instruments. Seen in these terms, agriculture loses identity and gradually acquires attributes that are shared with other sectors in the fields of market positioning, diversification of production processes, integration into investment packages, linkages among businesses, and environmental considerations. Clear conflicts arise between the nature of the problems to be solved, the traditional responsibilities assigned to ministries of agriculture, and the need for concurrent interventions with ministries of industry, trade, natural resources and environmental affairs.

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This issue goes beyond agriculture, since it refers to the conventional structure of the government apparatus. That apparatus was built on the sector concept, which is an arbitrary division of reality, associated in many cases with set knowledge in professions rather than with specific issues. This fragmentation leads to assigning responsibilities to institutions that take narrow approaches and have one-dimensional concepts and a biased organizational logic that make it difficult to take a comprehensive approach to agricultural policy issues. These problems concerning the assignment of responsibilities are evident in several ways. Examples are the treatment of productive chains, the inclusion of irrigation and infrastructure in rural development programs, the rural population that works off the farm under those programs, the relationship between promoting production and social policies, the linkage between urban and rural affairs, and the promotion of activities that make use of the natural and cultural heritage. What is required is integrated policy management based on identifying the scope of each problem and situation and obtaining coherent responses, as well as subordinating each intervention to the broader objective rather than allowing the distinctiveness of each case to dominate. Transcending the Sector Model Existing arrangements are sharply fragmented in the assignment of responsibilities and require high levels of coordination through four main mechanisms: Definition of shared objectives and joint programming. This requires the integration of high-level committees, with participation by the ministries involved in the new concept of agriculture and rural development. Reduction in structural differentiation, with an expanded Ministry of Agriculture that absorbs functions currently scattered among different public agencies. The aim is to take action in a more integrated fashion, with the ministry taking precedence over partial contributions by other government agencies. Creation of a hierarchy made up of a senior body that deals with all issues linked to production. In this area, the Ministry of Agriculture is subordinated to other senior bodies.

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Mutual adjustment among public organizations at the operational level. Existing organizational arrangements are not modified, but special mechanisms for integration and coordination are established at the local level in function of specific tasks. Coordination by inter-ministerial committees. Several countries have established inter-ministerial committees made up of ministers or their representatives. These committees are responsible for formulating policies, setting priorities and coordinating actions. Meeting only a few times a year, they sometimes have technical bodies that assist them in performing their functions. The effectiveness of these committees should be examined on different levels. They are useful for defining strategies and priorities. But it is also clear that they are not ideal for assuring coherence in execution, which depends on the capacity of the agencies responsible for implementation, the quality of programming, and existing operational mechanisms for dialogue and effective coordination. There have been frequent attempts to establish National Rural Development Committees to coordinate policies with a regional impact in the areas of public works, irrigation, promotion of production and social services. Such committees have almost always led a precarious existence, with a gradual waning of their influence on actions actually carried out. Their operation is not generally linked to the mechanisms used to allocate resources, despite the presence of ministries of the economy or finance on the committees. They do not generally approve programs and their capacity to supervise implementation is very limited. Each participating ministry tries to preserve its independence, and as a result, coordination ceases to be a technical problem and becomes a political issue. The results of coordination among agencies responsible for different services have been different, although variable. On this level, it is easier to carry out shared programming and ensure that institutional management coincides with what is actually carried out. These arrangements are heavily dependent on personal skills and leadership and on communications between the technical and operating levels. When permanent units are established to ensure coordination, both the potential and risks of the organizational model are similar to those entailed in management by project models. Coordination by expanding the responsibilities of the Ministry of Agriculture. As noted, the powers traditionally assigned to Ministries of Agriculture reflect a limited view of agriculture, i.e., primary production. Areas such as fisheries and forestry also form part of those powers, al-

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though their assignment to the same ministry depends on the history of each country and the importance of each of those subsectors. Nowadays, there is a trend toward giving Ministries of Agriculture new functions in the fields of agroindustry and rural development, as is explained below. Agroindustry and food. Inclusion of these areas under Ministries of Agriculture allows for better treatment of the linkage with markets for intermediate and final products and facilitates the treatment of issues that are becoming more important, such as food safety. This diversifies the ministries and introduces substantial changes in the networks of relationships they participate in. The interlocutors of traditional ministries are producer organizations with relatively homogenous interests. Only some services come into direct contact with individuals, such as extension services, some types of health inspection, credit or productive reconversion programs. With the incorporation of agroindustry, the situation changes radically. The range of actors broadens to include widely differing resources and organizational skills. In addition, it involves diverse technologies and processes that need regulation, public intervention and very specific instruments. In these circumstance, ministries must talk to large companies that operate in concentrated markets, with very specific technologies and patented production processes. The inclusion of agroindustrial chains under the ministries requires an adequate understanding of their structure and dynamics, including i) information on the entire business cycle, intermediate and final-consumer markets, and the main players; ii) mechanisms for linkage and coordination between public and private actors in matters bearing directly on production and on other variables that affect competitiveness; iii) flexibility in responses; and iv) consistency with the policies and regulations that are the responsibility of different government agencies. This has posed major challenges to ministries, which have had to renew their technical capacity, talk to stakeholders, and negotiate. The build-up of this capacity has followed an identifiable path: analyses of chains, studies on competitiveness, establishment of mechanisms to bring stakeholders together, and creation of programs to foster linkages by promoting certain chains. Despite progress, major analytical and policy efforts are required for better governance of these chains through agreements and mutual commitments. For the above reasons, it cannot be assumed that a single authority can manage the agroindustrial chains. A more reason-

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able alternative is an authority that promotes linkages and coordination. In consequence, the agricultural sector would have different levels of responsibility: i) central powers regarding primary production and its immediate links, particularly food processing (dairy products, pasta, prepared meats, oils); and ii) promotion and coordination of more complex chains or aspects that are not directly productive, but which affect the chains and require contributions from authorities in other sectors such as industry, foreign trade and transport. Rural development. There are various concepts regarding where responsibilities should lie for rural development. If Ministries of Agriculture are seen as production ministries governed exclusively by criteria to boost productivity and competitiveness, there is no room in them for rural development or poverty issues. The latter would be assigned to social policy spheres. As a variant on this concept, there is the additional function of Ministries of Agriculture of establishing and assuring basic property rights, which in many cases is a legacy of the old agrarian reform programs. Closer to an integrated vision is to give the Ministries of Agriculture authority over rural development and the socio-territorial and productive fields, which include social and physical infrastructure, social organization, and the links between the rural population and the world outside the sector. Under this approach, the ministries often have a deputy ministry for rural development (Mexico) or specialized institutions (INDAP in Chile or the recently-created Rural Development Authority in Nicaragua, although in the latter case it does not report to the Ministry of Agriculture). The institutional positioning of rural development has generally been scattered, with a proliferation of unrelated agencies, programs and projects that are guided by different criteria, respond to partial rationales, and are often associated with different sources of financing. The institutional innovation to overcome this situation is to create a new architecture in which the functions of policy and financing are differentiated, and execution involves extensive local intervention and participation by civil society organizations. This is a more encompassing and integrated view of rural development that coordinates interrelated activities. This institutional innovation requires a broader mandate for the public agricultural sector and for the development of better capacity to coordinate activities with other parts of the public sec-

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tor with responsibilities for delivering services (education, health care) or developing infrastructure (roads) in rural areas, alongside the private sector and with civil society. To achieve this, it is necessary to i) define the functions that require close coordination, which should come under the Ministry of Agriculture, as well as those that are central to agricultural activities; and ii) identify mechanisms that will permit the ministry to participate in functions that, although carried out by other parts of the public sector, demand joint work to create synergy and avoid unnecessary duplication and inefficiencies (e.g., roads, communications, education, health care, credit, tax policy). The capacity to design coordination mechanisms and integrated public policies is one of the main challenges of the new institutional framework. Actions of this type, carefully organized and adequately funded, would give the ministries a different profile from that which most of them currently have.1 Coordination through subordination to other ministries. As a result of reforms intended to assign the market a more important role in allocating resources, sector policies have lost the importance they had under interventionist models. Macroeconomic direction has come to determine the destiny of regions as well as lines and types of production. One consequence of this trend has been the notion that Ministries of Agriculture should be subordinated to Ministries of the Economy, as has been introduced in Argentina. Another alternative under discussion is to integrate the Ministry of Agriculture with the Ministry of Production, as has occurred in Venezuela. In this case, policy integration and coordination take place through a single senior authority, which settles issues and assures the coherence of programs, projects and actions. Different arguments have been made for and against this concept. Those in favor point to i) the convenience of having a common and coherent approach to the different sectors, par1 The assignment of broader functions to Ministries of Agriculture does not assure that policies will be comprehensive or coherent. The public agricultural sector is often composed of a series of institutions with very weak links, and the ministry does not have the capacity to supervise or guide them. The device of a principal administrative office (rectoria), adopted by some countries, is difficult to make operational. There are also ambiguities in its authority over organizations that enjoy a high degree of independence, sometimes having their own funds as well as direct links to governing bodies on which corporations are represented. In other cases, the fact that some components of the public agricultural sector are autonomous or decentralized-depending on the terms used in each country-means that the ministries have similar problems in exerting authority over them. The operation of agricultural councils runs into the same problems faced by the inter-ministerial committees discussed in the previous point.

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ticularly since the limits between them are becoming increasingly blurred and questionable; and ii) the conventional limits are products of institutional inertia, appropriation by professional corporations and an obsolete emphasis on production focused on supply and not on intermediate and final markets. Additional favorable arguments point to the benefits of achieving economies of scale by centralizing support services and other synergies at the national and local levels. The arguments against these alternatives note the specific nature of the different sector activities: i) seasonally, climate risks, the nature of agricultural markets, technological heterogeneity and the social organization linked to agricultural production; ii) the different make-up and organizational capacity of the public sector interlocutors in the different production sectors; and iii) the different nature of the policy instruments used. They also point to the danger that agricultural interests would not be duly represented if demoted from the ministerial level. Another significant objection questions the effectiveness of joining different sectors in a Ministry of Production, arguing that the merger will be simply a matter of form, since the specifics of the different sectors will in reality mean that each one will continue to operate separately at the subministerial level, without benefiting from the advantages of intersectoral coordination. Some of the arguments both for and against the merger have merit. Experience shows that formal insertion in a government structure is not sufficient to determine the real influence or relevance attached to agricultural interests in policy definition processes. However, what is truly important is the analytical and management capacity of the sector authority, its dynamism in generating proposals, its ability to bring together the most relevant players, and the dialogue it can maintain with the bodies that establish macroeconomic policy. Coordination through territorial integration. The rural area is a geographic space with a given supply and dynamic of resources, way of life, and institutional and social configuration. Territory is also a strategy used by players to defend the heterogeneity and specificity of their behavior. It is a place for conducting transactions of all kinds, lending spatial meaning to markets and making public policies local. From this standpoint, the scenario is radically different for policy formulation and implementation. The relevance of territory is determined by a number of factors, including the growing industrialization of agricultural production, which often takes place close to where primary production occurs; the rising importance of capital goods and industrial inputs that require a large network of markets, post-sales service and repair facilities; and the com-

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plexity of a rural life that now involves productive activities and services that are nonagricultural in nature. These phenomena give rise to new players, needs for services and infrastructure, and job and pro fit-making opportunities that are gradually transforming population distribution and social density in rural areas. All of this has an immediate correlate in sector policies and institutional organization. In this context, local coordination is a functional consequence of the very economic and social transformations taking place in rural areas, with more horizontal relations and a blurring of the line between functional and organizational spheres. There are three arguments explaining the need to take territorial factors into consideration: rural development, the linkage between primary production and processing, and the sustainability of production. Rural development requires actions for the modernization of production, market insertion, better organizational and negotiating skills, and a stronger capacity to establish associations for production, marketing and processing (IDE, 1998). These actions are carried out by many organizations from different levels of government and the private sector, and through community participation. The different mechanisms used to achieve better integration in which the actors retain their decision-making capacity include i) coordinating committees involved in concrete projects whose members are drawn from the above sources (such as PRODECOP in Chile); ii) working groups that are more open and informal, with a wide variety of participants, particularly representatives of prioritysetting and programming bodies (such as PRORURAL in Chile); and iii) decisions taken by inter-agency committees through programs that have been defined and agreed upon in advance (such as the Agricultural Social Program in Argentina). Agroindustrial complexes combine raw materials and suitable agroecological conditions, a history of primary production, technological capacity, processing plants and links with the markets for inputs and products. They are generally the product of bottom-up leadership based on final consumer demand. These complexes lend new significance to territory through the multiplication of transactions and relevant actors and a clearer view of the systemic interdependencies between production, business, society and infrastructure. Public intervention at the local level plays an increasingly important role here by facilitating the identification of opportunities, promoting projects and associated agreements, and building negotiating capacity (Schejtman, 1994).

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Sustainability assumes that it is necessary to base interests on the private rationale that prevails when selecting production technologies at the local scale that are compatible with the public interest. Therefore, sustainability requires mechanisms that will enable local actors to appropriate the rules for the sustainable use of resources, give them greater influence in decision-making, and permit them to permanently monitor the use of renewable natural resources through information, all at low transaction costs. Among the responses to this need are local administrative councils to ensure complementarity and interaction between the public and private sectors and civil society (Torres et al., 1999).

Participation Traditional organization of the public agricultural sector was built on a closed model based on three central assumptions: the weakness of civil society and the private sector, the assimilation of the public into the state sphere, and financing for its services exclusively from the public purse. The first assumption was based on the empirically correct evidence that civil society was poorly organized, had few entrepreneurial or management skills, was weakly linked, and depended on government to satisfy its needs and promote its interests. Accordingly, producers could not play significant roles in satisfying their requirements for services, market insertion or promotion of their own capacities. The situation has changed radically in recent decades. New players have appeared on the economic, social and political stage, making for a complex web of interactions with closer associative ties. Social organizations and companies have better capacity to identify needs, make demands and take independent initiatives, developing networks on the local, national, regional and international levels to exchange ideas, undertake cooperative actions and channel resources. There has been a proliferation of suppliers of services that once were state monopolies. Second, organizations interested in public affairs but not involved in government have been growing in importance. These entities have consolidated their legitimacy, their structural capacity, and their ability to express the demands of the public and to provide services in the fields of information, education, technology and social organization. They are able to service specific local needs, reduce transaction costs, and reinforce rules and expectations that lend efficiency to the markets and confidence to agreements. They form part of a growing block of social capital that should

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be tapped through different types of associations and by delegating or handing back services to the community, and transferring functions to self-management programs and projects, as for example, technology transfers, new infrastructure and conservation. The third assumption was that government functions should be financed from fiscal resources, and that the activities needed to perform them should be produced and provided by the public sector. The different types of outsourcing mentioned earlier, along with cofmancing mechanisms, can mobilize and tap third-party capacities, which represent another way to make the public agricultural sector more open. The closed nature of the public agricultural sector can also be seen in the limited spaces provided for participation by society. The conventional form consists of participatory mechanisms that are strongly centered on representation and leadership by service providers. The new institutional policies permit participation in initiatives, alternative solutions and project implementation. Participation has been stepped up with the new methods of delivering public services through linkages with social organizations or through the delegation of functions, with policies that actively promote social organization.

Transcending the Closed Model Strategies to open up the organizational model are chiefly based on public participation through coordination or supervisory mechanisms and social control in policy formulation, activities, and program and project implementation, These experiences are open to participation by: Organizations that represent the interests of producers, through different mechanisms for dialogue and consensus at the national, regional and local levels. This participation involves the definition of sector and institutional policies and priorities. Local producer organizations, associations and civil society organizations that help to identify local priorities and projects and provide joint management of services. A variety of stakeholders, though management based on demand, who help to determine the specific actions to be financed and carried out. Service providers who produce and deliver different services under contract.

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Participation in policy formulation and institutional management. Including producer organizations in different agricultural policy bodies has a long tradition. Despite this experience, however, organizations now face new demands on account of the greater complexity of the issues at stake, the diversity of the people they represent, the new conditions under which agricultural production and marketing take place, and the growing impact of international negotiations. In response to these demands, some producer organizations have developed the capacity to formulate proposals by establishing policy research and analysis centers. New forms of participation have been added to traditional ones as a result of changes in the legal status of some public organizations. The creation of public entities under private law generally includes mixed management bodies, often with private sector representatives predominating heavily, as in the case of agricultural research institutes. These arrangements reflect the expediency of responding to producers' needs, ensuring that research is relevant, and establishing social control. They are also a means of attracting additional funding. Participation in bodies for concerted action and negotiation. Councils are frequently established to promote concerted action at the central and regional levels. An example is the Regional Agricultural Committees in Costa Rica. In addition to traditional organizations, agroindustrial and agroexport boards of trade participate in these forums and constitute strategic focal points for action, projects and the promotion of ties with businesses and the private sector. Market liberalization and the withdrawal of subsidies have had a major impact on agricultural inputs and the consequences of reconversion of productive chains. The creation of bodies for concerted action to reduce uncertainties in supplies and costs, through the use of joint programming, is a novelty being introduced in various public agricultural sectors. The growth of markets, the rise of new regional associations, and the existence of new forums where countries can work out compatible policies and discuss the liberalization and elimination of protectionist barriers have also received attention from these organizations. This has already led to some interesting experiences. Continental networks of producers have been established to exchange information and design joint strategies. Participation in implementing policies and programs. Producer organizations are becoming more active in providing services and have established units for research and technology transfers and sanitary and

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quality control. These developments have enabled some producer organizations to become agents for the integration of production, the promotion of linkages in business cycles, and the identification and promotion of new niches in international markets. Also, privatization of government marketing bodies has placed these organizations on a more visible and strategic plane. In some countries, they perform tasks that were previously performed by the government, with a significant impact on their institutional profiles, the amounts of funding they control, and their management capacity. There are many specific examples of participation by producer organizations in implementing policies to i) promote exports, in conjunction with exporter associations, as in Guatemala and the Dominican Republic; ii) conserve resources under local agreements on land use and grassland reclamation, as in Chile; iii) promote agricultural health, such as the foundations to combat foot-and-mouth disease in Argentina; and iv) execute projects for productive, agroindustrial and community development. One particularly interesting experience is the transfer of institutional leadership of Uruguay's Agricultural Planning Institute (a training and technology transfer institution) to producer organizations, based on the expectation that the institute will become selffinancing. Organizations of small producers and campesinos are included in different ways in the identification of problems, demands and production initiatives, and even as participants in local or regional decisionmaking bodies. The new competitive funds to promote production also attach importance to the role of these organizations in generating demand (Uphoff, 1995). Particularly because they use innovative methods of participation, nongovernmental organizations interested in agriculture and resource conservation play a very important role in a wide variety of fields, including promotion of specific interests, social organization, technology transfers and project execution. These experiences, generally carried out in small communities, provide sufficient information to be replicated in models for social action targeted at promotion and development (de Janvry et al., 1995). Although expectations regarding NGOs have occasionally been disappointed, their contributions in the field of intervention are clear and merit the attention of public policymakers. Universities have undergone significant changes in recent decades and have grown in number. There are many new private universities, and programs have become more specialized and technical. Post-graduate courses have proliferated, and ties with the productive sector have grown closer. On occasion, universities receive specific funding for such pur-

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poses. Some Latin American countries have established research centers and institutes that conduct a wide variety of studies on the technological, economic and social aspects of agriculture. Participation through demand. Competitive funds are an increasingly used mechanism. The purpose is to bring the production of public services closer to the real needs of producers. Producers identify their needs, prepare the projectsâ&#x20AC;&#x201D;sometimes with assistance from specialistsâ&#x20AC;&#x201D; and share in the responsibility for execution. Rural development, technology transfers, export promotion and innovation and research programs are typical areas where this mechanism is used. The inclusion of private sector representatives on selection panels is another means of ensuring more opportunities for participation in bodies that make decisions on public policies. Participation by private service companies. Special attention should be paid to this method of involving the profit-making private sector. As mentioned earlier when referring to management by third parties, many Latin American countries have seen the rise and development of companies composed of technicians and professionals who provide different services for primary production and industry, replacing or complementing services that had formerly been provided exclusively by the public sector. These services include technology transfers, project and management consulting, and market analysis. In the new context for agriculture, the contributions of these companies are growing in importance. The competitiveness of expanded agriculture largely depends on the technical resources of these companies, since the services they supply can only be produced by companies that are large enough to incorporate these functions.

Decentralization For many years, the countries of Latin America had a common set of problems: the almost total concentration of functions in nation states, with high centralization in their technical and bureaucratic agencies. Regional units had scant decision-making capacity, and mechanisms for participation by local players were virtually nonexistent. This situation is changing. Local governments and social organizations now have or are able to build the capacity to take on roles that traditionally were the reserve of central governments. Responding to the same circumstances, needs and ideas that led to adjustment and restructuring, many Latin American countries have allowed regional and local governments to play a larger role in delivering

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services. Although this reform process is widespread, it has different motivations and is expressed in different ways. From one viewpoint, the transfer of capacity to local levels should generate a local political market in which demand would be directly confronted with the possibilities of meeting it. Another view is based on the old republican concept of voluntary association and the newer concept of social capital, where community activity has a significant democratizing effect, provides sustainability for change, and contributes to efficiency. Regardless of whether the idea is to create political markets or activate society, the transfer of services to provincial and municipal governments is a positive trend that will likely continue.

Transcending the Centralist Model The strategies used to move beyond the centralist model are to: Make changes inside public organizations toward greater distribution of functions, and delegating decision-making authority to the regional and local levels; Transfer functions and capacities to regional and local governments; Return functions to civil society organizations; and Establish horizontal mechanisms with multiple participation, different contributions and cofinancing arrangements. Distribution a/functions. This consists of delegating decision-making authority to the lower levels of public services, a process that often involves serious modifications in organizational structure, procedures and cultures. Although the general purpose is to boost management efficiency and bring management closer to local problems and needs, the distribution of functions has major consequences for participation and interagency linkage. The simplest forms of distribution consist of delegating certain administrative functions. Other forms involve local identification of priorities, design of action programs, and even delegating decision-making power for project approval. In these cases, the existence of producer organizations and formal mechanisms for inter-agency linkage can help to achieve greater flexibility in management, demand-driven programs, and the coordination and convergence of efforts. Examples are the experi-

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ence of 1NDAP and the Ministry of Agriculture in Chile in delegating more functions to the regions, and the creation of regional councils by INTA in Argentina. The distribution of functions can be one stage in the devolution of public decision-making powers to local players, with participation by the regional authorities in setting priorities and in discussing policies and means of institutional action. This distribution then becomes part of a process that goes beyond the limits of the institution to establish dialogue with the users of the services and representative local bodies. New institutional spaces for participation are created in order to improve the coordination and efficiency of public policy and the focus of social policies. Therefore, the distribution of functions is a facilitator of and prior condition for decentralization. From this standpoint, the process consists of significant changes in functions and operating methods. It requires systems for programming, resource allocation, follow-up and evaluation that ensure a unified strategy and do not stand in the way of flexibility at operational levels. In implementing this concept and its institutional effectiveness, the organizational levels in direct contact with users play a critical and determining role. The criterion to be followed in distributing powers and responsibilities in this distribution is to facilitate the best possible performance of functions in the field, linkage with social players, and alliance building. Transfers to regional and local levels. Almost all countries of the region have embarked on decentralization processes, transferring functions to the regional, provincial or local levels of government, as part of the process of redefining the regulatory and leadership role of central governments. This process has encountered uncertainties and tensions owing to political problems and a lack of capacity at the provincial and local levels. Decentralization is not a process of rethinking the rules and redistributing powers, but rather an avenue for building responsibilities, learning and growing. If this road is traveled too quickly, the quality of services will suffer, frustration and failure will replace learning experiences, and effectiveness will be poor. Decentralization should be carried out in agreement with the provincial and municipal governments, avoiding unilateral decisions by central-level officials who have scant comprehension of the local level and of the consequences and requirements of the new situation. As decentralization proceeds, areas and populations with better institutional capacity are often those best able to incorporate the new

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functions. Where there is institutional weakness, the situation is often very dicey. Therefore, institutional strengthening policies should go handin-hand with decentralization. That is why speeding up decentralization entails higher risks, even though without decentralization it is not possible to achieve acceptable levels of efficiency at local levels. In this case, the risks stem from the lack of an institutional framework at the grassroots level. The paradox can be solved through an emphasis on institution building. Evidence points to bottlenecks and problems that often produce outcomes very different from those envisaged, making it necessary to take a much more down-to-earth approach. To proclaim the value of democratization or set new store in the capacity for management that theoretically exists at the local level should not, in itself, result in an abrupt and unconditional transfer of power. Sufficient capacity must be developed to ensure that the objectives will be achieved and that patronage and clientage will not be reinforced. It is unnecessary to repeat the old arguments that the democratizing impact of the transfer of power to the local level is conditional upon the existence of participatory political institutions that ensure a minimum of democracy, and that it depends as well on having the social capital available. Gradual plans should be used, and they should be tailored to conditions that link organizational reengineering to the improvement of political institutions. It is therefore necessary to build up local capacity to deliver services, focusing particularly on the weakest areas of management. The transfer of functions without systematic support can widen gaps between regions and groups that will not be able be bridged or that are socially intolerable. Local areas with the weakest capacity for social organization and demand and the greatest poverty will be bypassed and find themselves even further away from having a relevant presence in the institutional mechanisms that have been established. Therefore, decentralization policies must be more complex than has been the norm to date. This is a political problem as well as one of social organization and institutional design, which must be solved in order to avoid greater disjunction in the functions of the state and the country in territorial and social terms. Devolution to civil society. The following are some of the experiences with devolving certain functions of government or public agencies to civil society organizations. Management by demand is a first step. The government finances actions within its established policy lines that stem from the initiatives of groups of producers or their organizations. Formulation

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of these actions often involves the participation of nongovernmental organizations or technical firms. Other forms of devolution include community or producer groups setting financing priorities for local projects, or defining lines of research for regional branches of research institutes. In some cases, public programs turn into projectsâ&#x20AC;&#x201D;and their financingâ&#x20AC;&#x201D;that include producers, producer organizations and NGOs. This is the case with Argentina's Agricultural Social Program. Social auditing is another procedure that empowers producers. In INDAP in Chile, producers monitor and evaluate the services provided by private technology transfer agencies. Associated and networked management. As mentioned earlier, there are many experiences in which government functions are carried out through different forms of cofinancing or through production by private entities. There are also instance where contact with beneficiaries is the object of different arrangements for external delivery, outsourcing or accreditation. Examples include mechanisms for technological linkage between agricultural research institutes and companies that produce inputs; competitive funds for research that require counterpart resources; participation by foundations, companies and professions in agricultural health activities through delegation and accreditation; and contracting of firms to provide technical assistance and training for producers. Considerable progress has been made in these types of association, which make better use of available capacity. However, there are certain requirements that were already mentioned in the section on management by third parties. First, association requires a prior definition of areas and functions that cannot be delegated and of government capacity for supervision and quality control, as well as an evaluation of tasks and a reengineering of processes in public organizations that relinquish areas of responsibility. Second, the private sector must be sufficiently mature to respond adequately, and there must be authentically competitive markets. Third, products and expected impacts must be predetermined, and there must be systematic follow-up and evaluation mechanisms and procedures for social participation and auditing. Another method of associative management is the network. Networks permit the integration of different contributions within a frame-

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work of cooperation rather than competition. They are resources for coordinating transactions between and inside organizations; they are groups of inter-related actors whose nature, intensity and consequences are specific to each network; and they are the result of choosing the participants, recognizing restrictions and making use of open opportunities in their operating contexts. These various networks can operate in different ways and for different purposes: For information on markets, technologies and playersâ&#x20AC;&#x201D;sometimes involving the establishment of committees to exchange ideasâ&#x20AC;&#x201D;extension activities gain a better understanding of opportunities and complementarities and facilitate contacts through study visits and in-service training. For cooperation with coordinated efforts or complementary actions that can count on public support, there are special incentives from competitive funds, with priorities attached to cooperation between local institutions, universities and training centers. By design, networks involved in territorial development, with mechanisms for the definition of priorities, identification of needs, structuring of demand and channeling of supply. They use strategic planning, mobilize actors, and create rules and incentives. In these cases, the idea is to institutionalize conditions to promote the development of shared services, pools of resources and joint development.

Conclusions The importance of institutional development in today's Latin America comes from the growing conviction that economic reforms of the past decade must be complemented by measures to rebuild government as a framework for proper operation of markets. This chapter has reviewed the content and direction of those efforts to date, as well as the conditions that can best ensure that they have a positive and sustainable impact. Strengthening institutional capacity must be included in substantial policies for production, marketing and infrastructure. Policies are more than simply an announcement of purpose, a definition

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ROBERTO MARTINEZ NOGUEIRA

of strategies, or the preparation of legislation. They constitute a cycle that includes formulation of programs, their approval, and the entire process of implementing them. It is the implementation of these efforts that actually determines their impact, and therefore a serious approach to policy must necessarily gauge existing capacity to introduce greater rationality, transparency and efficiency throughout the cycle. The lessons learned from limited or partial successes call for a fresh concept and a renewed strategy. If it is agreed that formulating and executing policies and programs constitute an integrated process, then strengthening sustainable capacity and improving analytical and management resources are necessary complements for achieving development objectives. Institutional capacity should receive priority attention, as opposed to the traditional view that it is an add-on to conventional policies and projects. A more mature view of state capacity is required. In the past, the conventional approach was that capacity was built by procuring inputs, building infrastructure, obtaining equipment, training personnel and installing information systems to support decisionmaking and management. Neither the complexity of institutional issues nor the demands of organizational change were adequately considered. Lots of money was spent, but the results were limited. New approaches should not make the mistake of thinking that building the means for developing capacity for sector governance, strategic management or efficient action is the same as building capacity itself. It is the latter that should be the objective of management reform. Actions should be supported by accurate diagnostic studies and a large technical component that introduces objectivity into the analysis. The focus must be on strengthening specific institutions and the relationships between them. Studies should make use of the full range of tools for institutional and organizational analysis, rather than merely being descriptive. In that way, the studies can truly identify the factors at play, dynamics of systems, rationality of the players, and opportunities for action.

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Interventions should be complex, since the issues themselves are also complex, and they must take account relationships that have an impact on the different levels of action. These efforts should not be reduced to supplying more inputs. Nor should they be carried out in isolation. Experience indicates that specific changes and the introduction of new organizational modes and management innovations are sustainable only if they respond to strategies for institutional change that recognize the complexity of the issues at hand. Without sufficient capacity in this field, the efficiency of action is questionable. Therefore strategies implemented to mobilize the resources available in the region for institutional reform should include establishing inter-agency networks, making use of existing capacity, and building a more mature understanding of the requisites, conditions and demands of institutional development. Although it is necessary to try out different modes of organization, management and social linkage, this will not be enough to surmount a challenge that requires more than just social resources. Above all, reforms in organizational and social management must meet demands for greater efficiency and effectiveness in government management, tap opportunities for participation, and exercise adequate external control. This will make it possible to firmly implement new approaches that delegate tasks to civil society and reaffirm its autonomy, while at the same time building new social management models. In this stage of transformation, institutional reforms must demonstrate how they will contribute to solving such pressing problems as international competitiveness, expansion of the agricultural sector through agroindustrialization and vertical integration, productive and social sustainability, conservation of the environment, and the integration and development of rural areas. From the outset, all institutional strengthening programs should include suitable approaches to attaining these objectives, linkage of analytical and strategic skills that address future needs and institutional skills, and the development of mechanisms to evaluate consequences and impacts.

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References Bresser Pereira, L.C. 1994. Reformas economicas y crecimiento economico: Eficiencia y politica en America Latina. In L.C. Bresser Pereira, J.M. Maravall, and A. Przeworsky, Las reformas economicas en las nuevas democracias. Madrid: Alianza. de Janvry, A., E. Sadoulet, and E. Thorbecke. 1995. State, Market and Civil Organizations: New Theories, New Practices and Their Implications for Rural Development. In A. de Janvry, E. Sadoulet, and E. Thorbecke, State, Market and Civil Organizations. London: McMillan-International Labor Office. Elliott, H., and R.G. Echeverria. 2000. Characteristics of Successful Agriculture Research Competitive Grants Programs. In "Competitive Grants in the Millennium." Proceedings of a meeting of EMBRAPA in Brasilia, Brazil. Evans, P. 1996. El estado como problema y como solucion. Desarrollo Economico 35(140). Inter-American Development Bank. 1998. Rural Poverty Reduction Strategy. Inter-American Development Bank, Washington, DC. Israel, A. 1991. Institutional Development. Washington, DC: World Bank. Lane, J. E. 1997. Public Sector Reform: Rationale, Trends and Problems. London: Sage. Martinez Nogueira, R. 1998. La transformacion de la agricultura y la nueva institucionalidad. In L. Reca and R.G. Echeverria (eds.), Agricultura, medio ambiente y pobreza rural en America Latina. Washington, DC: IDB. . 2000. Las unidades ejecutoras y la sostenibilidad de los proyectos. Consulting Report for the Inter-American Development Bank, Washington, DC. Nores, G., M. Pineiro, R. Martinez Nogueira, and E. Trigo (eds.). 1996. El sector publico agropecuario en la Argentina: Reflexiones para su fortalecimiento. Buenos Aires: Inter-American Institute for Cooperation on Agriculture. North, D.C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge, MA: Cambridge University Press. Peters, B.C. 1996. The Future of Governing Four Emerging Models. Kansas City: University of Kansas Press. Pineiro, M., R. Martinez Nogueira, E. Trigo, F. Torres, E. Manciana, and R.G. Echeverria. 1999. La institucionalidad en el sector agropecuario de America Latina: Evaluacion y prop uestas para una reforma institucional. Inter-American Development Bank Sustainable Development Department Technical Report Series, Washington, DC. Schejtman. 1994. Agroindustria y transformacion productiva de la pequena agricultura. Revista de la CEPAL 53: 147-57.

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Torres, R, M. Pineiro, R. Martinez Nogueira, and E. Trigo. 1999. Agriculture in the Early XXI Century: Reflections on Its Evolution and Nature, and their Implications for a Global Research System. Rome: Global Forum on Agricultural Research. Trejos, R.A., and L. de las Casas. 1999. Hacia una nueva institucionalidad: Cambios en la forma de conducir la agricultura. San Jose, Costa Rica: Inter-American Institute for Cooperation on Agriculture. Uphoff, N.T. 1995. Grassroots Organizations and NGOs in Rural Development. Opportunities with Diminishing States and Expanding Markets. In A. de Janvry, E. Sadoulet and E. Thorbecke, State, Market and Civil Organizations. London: McMillan-International Labor Office. Williamson, J. 1990. Latin American Adjustment: How Much Has Happened? Washington, DC: Institute for International Economics. World Bank. 1993. Latin America and the Caribbean: a Decade after the Debt Crisis. Washington, DC: World Bank. . 1997. World Development Report 1997. The State in a Changing World. New York: Oxford University Press.

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The Increasing Importance of Nonagricultural Rural Employment and Income Julio A. Berdegue, Thomas Reardon and German Escobar *

In the late 1990s, nonagricultural rural employment constituted more than one-third of total employment of rural households and some 40 percent of their total income. The weight of nonagricultural rural employment and income in the region has increased steadily since the 1970s, helping to reduce poverty, improve the quality of rural life, and modernize the farming sector. This chapter analyzes the relative importance of self-employment and rural nonagricultural wage-earning employment, and compares the available data with the predominant trends in rural development policies and programs. It proposes classifying the engines to promote development of rural nonagricultural jobs. It also analyzes the factors identified in various studies as being the primary determinants of access by rural households to nonagricultural employment, including characteristics of the economies of rural areas, household income levels, land access, education, existing infrastructure and gender. Finally, the chapter proposes criteria for designing and implementing policies and programs oriented toward promoting nonagricultural rural employment and income.

' The authors are grateful for the support from the International Network of Methodology and Research of Productive Systems (RIMISP) through the Inter-American Development Bank (IDE), United Nations Food and Agricultural Association (FAO) and the Economic Commission for Latin America and the Caribbean (ECLAC). This coordinated inter-agency effort made it possible to hold two seminars on the issues discussed in this chapter, to undertake case studies in several countries of the region, and to organize the copious amounts of information collected since 1997. The intellectual support and encouragement of Drs. Ruben Echeverria (IDB), Gustavo Gordillo de Anda (FAO), Kostas Stamoulis (FAO) and Beatriz David (ECLAC) were instrumental to this research.

Chapter 6

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

A large number and range of studies since 1994 have confirmed that nonagricultural employment generates 40 percent of the income of rural inhabitants, and that across the entire region this trend is rising. Nonagricultural employment and income have transformed the rural landscape in Latin America and the Caribbean and have had a significant impact on the characteristics of rural households and their members. This chapter first explains the relationship between nonagricultural rural employment and income and the processes of overcoming rural poverty, transforming the farming sector and modernizing the rural environment. It then describes the regional trends in nonagricultural rural employment and income and their various types, relative importance and potential. The dynamics of nonagricultural rural employment and its conditions for development are then discussed, along with factors that recent studies have identified as determinants of the capacity of rural households and inhabitants to gain access to such jobs. Finally, the chapter presents recommendations for designing public policies oriented toward promoting nonagricultural rural employment in the region. In this chapter, employment includes both self-employment and wage-earning employment. The meaning of rural varies from country to country, but in official definitions it usually refers to concentrations of populations below a certain threshold, which is generally set at 1,000 to 2,000 people. The definition of nonagricultural covers industry and manufacturing (secondary sector) and services (tertiary sector) and excludes the primary production of agricultural food products based on one or more production factors corresponding to natural resources. Nonagricultural rural income is generated by rural inhabitants through self-employment or wage-earning work in the economy's secondary and tertiary sectors. Many farming households also generate nonagricultural rural income. Wage-earning work in primary activities on farms is not included in our definition of nonagricultural rural employment.

Why Are Nonagricultural Rural Employment and Income Important? Rural nonagricultural employment and income are part of the solution to at least three major problems in rural Latin America: poverty, transformation of the farming sector, and modernization of the rural environment. Over the past 20 years, the number of rural poor in Latin America has not diminished significantly. In some countries and regions within

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them, poverty has even increased. According to ECLAC (2000a), 54 percent of the region's rural population in 1997 lived under conditions of poverty, and 31 percent were indigent. Research recently carried out for various countries in the region (see Reardon et al., 2000) consistently shows that nonagricultural rural income represents a very highâ&#x20AC;&#x201D;and in recent decades increasingâ&#x20AC;&#x201D;percentage of total income among poor rural households. In the absence of nonagricultural sources of income for poor rural households, the extent of poverty would be several times greater in all countries in the region. The same research also confirms that poor rural households resort to nonagricultural employment not only to increase total income, but also to offset the effects of sharp fluctuations in income flows during the year, which is one of the characteristics of rural poverty. Nonagricultural employment forms part of the livelihood strategies of the rural poor. This means that there is a strong relationship between agricultural and nonagricultural income flows, and between nonagricultural income and nonautonomous income. In this regard, the existence of assets in poor rural households and communities related to nonagricultural employment strengthens the multiplier effects of agricultural activities and vice versa. These relationships are essential in order for the poor to survive. Studies of the dynamics of rural poverty indicate that rural nonagricultural employment and income are a very important means of overcoming poverty for many rural households and individuals that lack the resources and types of capital required to seek other options for progress, such as emigration or self-employed agricultural work. This is especially true for rural women and for those who have attained higher levels of education (ECLAC, 2000b).

Effects of Modernization of the Agricultural Sector Modern agriculture is intensive in services and agroindustrial relations. The more modern and competitive the agro-rural sector in a broad sense, the larger the contribution of secondary and tertiary activities to rural GDP. In order for Latin American agriculture to be transformed and to increase its competitiveness, improved cooperation will be needed with input supply systems, agricultural processing chains, and systems for the distribution of fresh and processed products (Reardon et al., 2000). Modern agriculture requires cooperation with agroindustry in order to successfully meet the demanding quality and safety norms and standards of

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international markets. It also needs access to management, administrative and advisory services. All of these areas fall under the category of nonagricultural rural employment, in both the secondary sector (processing, agroindustry) and the tertiary sector (technical, commercial and transportation services). The agroindustrialization of agriculture is thus a broader process than growth in agroindustry itself. Agroindustrialization includes three sets of changes that lead to a larger role of nonagricultural rural employment in determining the ultimate performance of agrarian systems: i) the growth of agroprocessing, the distribution of products and input supply activities, and technical agricultural services; ii) organizational and institutional changes in the relationship between agroindustrial and agrofood firms (including supermarkets) and farms; and iii) the corresponding changes in the primary production spaces, i.e., on farms, such as changes in the composition of products, technology and market structures (Reardon et al., 2000).

Improved Quality of Life for Rural Inhabitants At least since the end of World War II, the term rural has been synonymous with backwardness, under-development, and with what must be left behind in the quest for progress and development. The rural-urban dichotomy is similar to that of backwardness-modernity, agriculturalindustrial, poor-prosperous.1 The development of nonagricultural rural employment offers a different option for modernizing the rural environment, through the in situ development of industry and services, and as part of a more general process of rural-urbanization that also affects the dimensions of culture, demographics, human settlements, etc. Just as the penetration of roads, electricity and television begins to slowly raise the quality of life among rural inhabitants to a level comparable to that of their urban counterparts, so does employment in industry, manufacturing, trade, tourism and other services offer options for labor or professional development that is, for many, more attractive than agricultural work (particularly wage-earning agricultural work). The rural areas that are showing a true increase in nonagricultural employment have changed the characteristics of the traditional landscape. They are areas for the growth of towns and medium-sized cities and for strengthening the ties between them and their rural hinterland through

' Jesus Bejarano, 1998, personal communication.

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nonagricultural trade, transportation systems, improved recreational services, banks, shops, restaurants, repair shops, etc. These rural areas, in the end, offer inhabitants not only better economic opportunities, but also greater options for narrowing the quality of life gap between the rural and urban environments. This view of nonagricultural rural employment and income as desirable elements of a more modern rural society contrasts with the conventional notion that views the decline of agricultural employment as a manifestation of the economic progress of nations. In our view, countries that develop active and positive strategies to promote nonagricultural rural employment and income may have a wider range of options than that based on the traditional notion that urban industrial development is capable of absorbing the agrarian-rural surplus. Trends in Nonagricultural Rural Employment and Income Reardon et al. (2000) reviewed various studies on nonagricultural rural income, based on data from the second half of the 1990s (Berdegue et al., 1999; Corral and Reardon, 1999; de Janvry et al., 1997; Echeverri, 1999; Escobal et al., 1998; da Silva and del Grossi, 1999; Lanjouw, 1997; Mendoza, 1999; Rello and Morales, 1998; Taylor and Yunez, 2000; Weller, 1997; Wiens, 1997; Wiens and Sobrado, 1998; Wiens et al., 1999). Unfortunately, there are not enough similar studies for earlier periods, so it is not possible to perform a time-series analysis of changes in nonagricultural rural income over the past 20 or 30 years (as can indeed be done in the case of nonagricultural rural employment). In any case, based on nonagricultural rural employment data, it can be estimated that in the early 1980s, nonagricultural rural income must have accounted for about 25 to 30 percent of total rural income in Latin America. In the second half of the 1990s, nonagricultural rural income often climbed above 40 percent of the total income of rural households in most countries in the region (Table 6.1). Even in countries with large rural populations, such as Colombia and Peru, nonagricultural rural income accounts for half the rural population's total income. Given the relative weight of the rural population in Brazil and Mexico, it may be estimated that nonagricultural rural income for the region as a whole is verging on 40 percent of total rural income. This is much higher than traditionally recognized in policies oriented toward developing Latin America's rural sectors, which in general are marked by an agricultural bias that does not reflect the importance of nonagricul-

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Table 6.1. Contribution of Nonagricultural Income to Rural Income, 1995-97 Country Brazil Chile Colombia Costa Rica Ecuador El Salvador Haiti Honduras Mexico Nicaragua Panama Peru

Year of survey

Percent of total rural income

1997 1997 1997 1989 1995 1995 1996 1990 1997 1998 1997 1997

39 41 50 59 41 38 68 38 55 42 50 50

Source da Silva and del Grossi, 1999 Berdegue et al., 1999 Echeverri, 1999 Weller, 1997 Elbers and Lanjouw, 2000 Lanjouw, 1997 Wiens and Sobrado, 1998 Weller, 1997 de Janvry and Sadoulet, 1999 Corral and Reardon, 1999 Wiens et al., 1999 Escobal et al., 1998

tural rural income. Klein (1992) studied the changes in nonagricultural rural employment in 18 countries in the 1970s (although in some cases he obtained initial data from 1950 and in others final data from the late 1980s). The results of his study are shown in Table 6.2. The main conclusions are that: Nonagricultural rural employment represents an increasingly larger proportion of total employment among the rural Latin American population. The growth of nonagricultural rural employment allowed for the entire loss in agricultural jobs to be absorbed. Even after offsetting the decline in agricultural employment, nonagricultural employment contributed another 1.5 million additional jobs. In summary, had it not been for growth in nonagricultural rural employment, Latin America would be facing a much greater population decline in rural regions and surely an even greater urban poverty problem than already exists. Table 6.2 shows that in the 12 years of the study (average for 18 countries), the number of people in rural households employed in nonagricultural sectors increased

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

1976 1970 1970 1964 1973 1970 1974 1971 1964 1971 1974 1970 1950 1970 1972 1972 1975 1971

Bolivia Brazil Chile Colombia Costa Rica Cuba Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela Total

1,501 29,557 2,695 4,882 585 2,633 1,940 1,062 1,363 1,949 755 12,207 329 449 730 3,618 1,020 3,014 70,289

Entire country

32 1,664 103 309 13 179 61 82 115 30 34 1,214 29 14 31 398 36 146 4,490

Urban households

660 11,426 466 2,118 199 610 835 531 767 1,398 425 3,889 193 173 340 1,157 130 464 25,781

Rural households

581 14,884 1,932 2,144 240 1,487 749 360 351 228 213 6,194 84 206 270 1,817 789 2,127 34,656

Urban households

227 1,582 193 310 131 355 294 88 129 291 81 909 21 55 88 245 63 276 5,338

Rural households Year

Entire Country

1988 1980 1982 1973 1984 1981 1990 1975 1973 1982 1988 1980 1971 1980 1982 1981 1985 1981

2,053 43,235 3,680 5,486 794 3,540 3,329 1,217 1,545 1,869 1,313 15,640 505 509 1,039 4,915 1,176 4,547 96,392

48 2,305 188 268 18 255 133 66 114 19 56 1,480 27 16 36 434 49 116 5,628

Urban households

820 10,355 456 1,610 231 535 902 519 769 1,202 554 4,220 209 129 408 1,392 120 417 24,848

Rural house holds

Last year Agricultural employment

Nonagricultural employment

First year Agricultural Employment

927 27,944 2,841 3,130 350 2,344 17,576 502 487 289 521 8,574 217 272 457 2,791 956 3,665 73,843

Urban households

257 2,630 193 476 194 405 537 128 173 356 180 1,365 51 91 136 297 49 347 7,865

Rural households

Nonagricultural employment

Source: Klein (1992).

Year

Country

(Thousands of people)

Table 6.2. Rural Nonagricultural Employment in Latin America NONAGR1CULTURAL RURAL EMPLOYMENT AND INCOME 1165 |

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

by 2.5 million, while the number of people from rural households employed in agriculture declined by 933,000.2 The data in Table 6.3 show that nonagricultural rural employment as a percentage of total employment in the region remained constant at 8 percent, although with respect to the number of employees from rural households, it grew from 17 to 24 percent, an average annual increase of 0.62 percent. However, these averages conceal a number of very different situations. National trends allow for identifying five such scenarios: Countries where the absolute number of agricultural jobs is rising faster than the increase in nonagricultural jobs: Bolivia, Honduras, Paraguay and Peru. Countries where the absolute number of nonagricultural jobs is rising faster than the increase in agricultural jobs: Costa Rica, Ecuador, Guatemala, Mexico and Nicaragua. Countries where the absolute number of nonagricultural jobs is increasing, the absolute number of rural agricultural jobs is decreasing, and the number of agricultural workers living in towns is increasing: Brazil, Chile, Cuba and Panama. Countries where the absolute number of nonagricultural jobs is increasing and the absolute number of agricultural jobs is decreasing: Colombia, El Salvador, Haiti and Venezuela. Countries where both types of rural employment are on the decline: Uruguay. Joining the first two groups, the countries added 1 million rural nonagricultural jobs and the same number of rural agricultural jobs. Nonagricultural rural employment rose from 20 percent of rural employ2

It is important to note that the number of agricultural workers with urban residences increased by 1.1 million, so the total number of agricultural employees (rural plus urban inhabitants) experienced a net increase of 200,000. That is, in 12 of the 18 countries, there was increasing urbanization of the agricultural labor force. This was especially acute in Chile (annual rate of 0.92 percent), Cuba (0.87 percent), Uruguay (0.73 percent), Brazil (0.55 percent), Ecuador (0.38 percent) and Panama (0.35 percent). The countries that bucked this trend were El Salvador, Haiti, Nicaragua, Paraguay, Peru and Venezuela.

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Table 6.3. Evolution of the Relative Importance of Rural Nonagricultural Employment Percentage of nonagricultural rural employment with respect to: Last year

First year Country Bolivia Brazil Chile Colombia Costa Rica Cuba Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela Total

Annual average change

Entire country

Rural total

Entire country

Rural total

Entire country

Rural total

15 5 7 6 22 13 15 8 9 15 11 7 6 12 12 7 6 9 8

26 12 29 13 40 37 26 14 14 17 16 19 10 24 21 17 33 37 17

13 6 5 9 24 11 16 11 11 19 14 9 10 18 13 6 4 8 8

24 20 30 23 46 43 37 20 18 23 25 24 20 41 25 18 29 45 24

-0.22 0.07 -0.16 0.26 0.19 -0.19 0.06 0.56 0.19 0.37 0.21 0.13 0.18 0.56 0.10 -0.08 -0.20 -0.15 0.05

-0.14 0.81 0.04 1.12 0.54 0.57 0.70 1.39 0.44 0.51 0.61 0.55 0.47 1.72 0.44 0.01 -0.36 0.81 0.62

Source: Authors' calculations based on Klein (1992).

ment in the early 1970s to 25 percent in the early 1980s, with a maximum of 46 percent in Costa Rica and a minimum of 18 percent in Peru and Guatemala. In all cases, countries that had a low percentage of nonagricultural rural employment in the early 1970s continued on average to have a low percentage 10 years later. The only country that deviated from this trend was Bolivia, which in 1976 was over the average for nonagricultural rural employment but in 1988 had fallen back to less than the average for its group. In countries where there was an increase in nonagricultural rural employment and a decline in agricultural employment, 2 million rural agricultural jobs were lost (half of those in Brazil and one-quarter in Colombia), while 1.5 million rural nonagricultural jobs were gained (1 million of them in Brazil). Nonagricultural rural employment for this group of countries increased from 15 percent of rural employment in the early 1970s to 22 percent in the early 1980s. However, the average for the

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group is strongly influenced by the enormous change in Brazil, where Nonagricultural rural employment increased from 12 percent of rural employment in 1970 to 20 percent in 1980. Colombia, Cuba and Panama are the other three countries where nonagricultural rural employment grew significantly in proportion to all rural employment. It must be assumed that in three of these countries a simultaneous process of urbanization of agricultural employment occurred: in Brazil, the number of agricultural workers residing in cities increased from 13 to 18 percent; in Cuba, from 23 to 32 percent; and in Panama, from 7 to 11 percent. Uruguay is a special case in that it lost sources of both agricultural and nonagricultural rural employment. No other country of the 18 considered in the Klein study experienced both growth in rural agricultural employment and a decline in nonagricultural rural employment. There is no significant correlation between the trends described above and changes in GDP, agricultural GDP, the economically active population (EAP), or the agricultural EAR This leads to the hypothesis that the trends reflect rather specific patterns of changes in agriculture, particularly its intensification and diversification, as well as nonagricultural activities based in the rural sector (agroindustrialization, tourism). Table 6.4 summarizes recent ECLAC data for the 1990s. The source of the data (national household surveys) makes direct comparison with Klein's results for the 1970s impossible. However, it is possible to speculate that in Chile, Colombia, Costa Rica, Honduras, Mexico, Panama and El Salvador, both absolute and relative nonagricultural rural employment has continued to rise at high rates. On the other hand, in Brazil and Venezuela, it has continued to rise, but at increasingly lower rates than those of the countries first mentioned. The ECLAC data allow for establishing with certainty that nonagricultural rural employment in the late 1990s became the dominant employment source for rural women who participate in the labor market. With the exception of Bolivia, rural women's share of nonagricultural rural employment is much higher than that of rural men. In nine of the 11 countries included in Table 6.4, between 65 percent and 93 percent of rural women participating in the labor market did so in nonagricultural activities. By contrast, in most countries, with the exception of Costa Rica and the Dominican Republic, agricultural employment is predominantly for rural men. Other studies by ECLAC (1999) allow us to extrapolate the importance of nonagricultural rural employment in some categories of labor force participation. Table 6.5 shows that self-employment in rural house-

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Table 6.4. Population Employed in Nonagricultural Activities as a Percentage of the Rural Employed Population Last year

First year Country Bolivia Brazil Chile Colombia Costa Rica Dominican Republic El Salvador Honduras Mexico Panama Venezuela

Year

Men

1990 1990 1991 1990

26 19.2 30.9 478

1990 1989 1989 1990

18.6 34.7 25.0 33.9

Year

Men

Women

47.1 67.2 71.4 86.8

1997 1997 1998 1997 1997

18.2 23.7 25.9 32.9 57.3

15.6 30.1 65.1 78.4 88.3

88.0 69.1 86.1 78.2

1997 1998 1998 1996 1998 1994

54.8 32.7 21.5 44.9 46.5 35.4

92.4 81.4 83.7 67.4 93.2 87.2

Women

Source: ECLAC (2000c).

holds continues to be predominantly in agricultural activities, with the exception of Costa Rica. In Colombia and the Dominican Republic, selfemployed nonagricultural work is much the same, although somewhat less than agricultural self-employment. Nonagricultural rural employment in the public sector is generally fairly low in the countries considered. This series of data is insufficient to break down wage-earning work into its agricultural and nonagricultural components, but by comparing the differences in the totals, the information available implies that most nonagricultural rural employment takes place through wage-earning activities in manufacturing, industry, trade and other private services.

Types of Rural Nonagricultural Employment Recent studies on types of nonagricultural rural employment (Weller, 1997; Reardon et al., 1998, 2000) consistently show that as much as half these jobs are of low quality and productivity, with low wages and little potential for development. These types of jobs have been called "refuge" nonagricultural rural employment, which is the nonagricultural equivalent of subsistence agricultural production: it contributes to increasing family income and to offsetting seasonal income fluctuations, but is not a real lever for overcoming poverty and for the sustainable development of rural communities and regions.

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JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

It is common to hear the argument that wage-earning agricultural employment is the primary source of income for landless rural inhabitants. Studies from various countries have shown that this is only true in the poorest areas and for the poorest households that have no asset other than unskilled labor. Except in some areas dominated by production for which there is a strong demand for permanently high-qualified workers (for example, flowers in Colombia), the contribution of wage-earning agricultural work to total household income does not extend beyond onetenth to one-half of nonagricultural rural employment. In addition, agricultural wage-earning employment is subject to the lowest levels of remuneration compared to any other type of job (self-employed agricultural work or either wage-earning or self-employed nonagricultural work. The main category of nonagricultural rural employment is wageearning work. This actual data contrasts with the orientation of many policies and programs aimed at promoting rural self-employment in family or joint venture microenterprises. Furthermore, wage-earning nonagricultural employment often offers significantly higher wages and better working conditions (labor contracts, access to social security systems) than nonagricultural self-employment. These trends are emphasized in the most dynamic rural areas with the lowest concentration of poverty. What is more, wage-earning nonagricultural jobs are the only type of employment where women can gain access to wages equal or at least comparable to those of men. In all other types of rural jobs (agricultural and nonagricultural self-employment and agricultural wage-earning), men typically earn much more than women. Nonagricultural self-employment is much less common in Latin America than agricultural self-employment (Table 6.5), despite the fact that the former often pays much better paying than the latter, which suggests that there are strong barriers to entry that prevent households from responding to the greater incentives. In Nicaragua (Corral and Reardon, 1999), Chile (Berdegue et al., 1999) and Colombia (Echeverri, 1999) only less poor rural households have significant access to nonagricultural selfemployment. In summary, nonagricultural self-employment is characterized by a strong degree of bimodality, in that it includes both non-dynamic activities that constitute refuge employment and others which, by being linked to dynamic markets, lead to productive and highquality jobs. In contrast to the conventional view, nonagricultural rural selfemployment in the manufacturing and small industry sector is much less frequent than wage-earning nonagricultural employment in the service sector. In fact, self-employment in the manufacturing and small industry

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Table 6.5. Distribution of the Employed Economically Active Population (EAP), by Labor Force Participation (Percent of total employed rural EAP) NonWage-earning agricultural employment selfin the public employment sector

Country

Year

Agricultural selfemployment

Bolivia Brazil Chile Colombia Costa Rica Dominican Republic El Salvador Guatemala Honduras Mexico Panama Venezuela

1997 1996 1996 1997 1997

79.9 63.8 26.6 25.0 11.3

20.1 13.9

1997 1997 1989 1997 1996 1997 1994

28.5 28.1 47.9 41.6 28.6 33.4 29.7

22.5 17.0 13.3 21.0 18.1 18.2 15.1

7.9 6.6 70

2.4 4.4 3.6 s/i 9.0 10.3 3.1

2.9 3.4 6.4 10.1

7.4

sector often corresponds to the category of refuge jobs, while wage-earning work in the trade and other service sectors is associated with higher levels of income. One portion of wage-earning employment in services corresponds to public service jobs (schools, municipal governments, construction and maintenance of public works). Weller (1997) reports that 25 percent of nonagricultural rural employment in Costa Rica, and 39 percent in Panama corresponds to public sector jobs. In a study that included data from 12 countries, ECLAC (1999) showed that between 3 percent and 10 percent of total rural employment corresponded to public service jobs. Multiple activities seem to be a less important characteristic than frequently assumed. It is true that a high percentage of rural households (typically 40 percent or more) earn income from different sources of employment. However, rural households that earn a significant percentage of their income from two or more jobs are relatively few. In Nicaragua, 40 percent of households earn income from two or more jobs, but only 18 percent earn 20 percent or more of their income from jobs in addition to their main source of household income (Corral and Reardon, 1999). A similar situation was found in Chile (BerdeguÂŁ et al., 1999). As de Janvry and Sadoulet (1999) and Reardon et al. (2000) argue, the avail-

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JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

able data indicate that households tend to derive their basic income from a primary job that corresponds to the one most consistent with their asset portfolio (land, skilled and unskilled labor, machinery and transport vehicles, emigration experience, social capital, etc.). Secondary jobs correspond to activities that are marginally important for escaping indigence or poverty (Berdegue et al., 1999), making use of available family labor during certain seasons of the year when the demand for labor for the principal job is low, and reducing the risk of income fluctuation when variances in principal income are negatively correlated with variances in secondary income.

Stages, Conditions and Development Paths for Nonagricultural Rural Employment The literature has consistently shown that the weight of the agricultural sector in GDP declines as per capita GDP increases. Hymer and Resnick (1969) theorize that this transformation begins in an initial stage of nonagricultural employment that is oriented toward the production of Z goods (such as the manufacturer of baskets, pots and other implements for local domestic use, traditional mills, trade in local fairs, transportation from farms to neighboring towns, etc.). These activities are carried out in the home and on farms more than in towns. They use labor-intensive traditional technologies, generally originating within the family nucleus itself. Production is geared toward domestic consumption or the local market. One example of this type of rural nonagricultural economy described by Figueroa (1981) is the Peruvian mountains. The supply and demand for labor for these jobs is local, seasonal and low-level, in that it is strongly dependent on the characteristics of subsistence agriculture predominant in these situations. According to Ranis and Stewart (1993), there is a second phase, characterized by the rise of nonagricultural modern goods. They are produced by using more sophisticated technologies that require greater skill and are more capital intensive. Demand originates from both urban regions and external markets. The higher local income linked to more prosperous agriculture also stimulates the production of higher quality consumption goods, as well as inputs and services for agricultural production. Better infrastructure (particularly roads) is especially important in facilitating an increase in this type of nonagricultural rural employment. Clearly, the transition to this second stage assumes growth in the demand for nonagricultural modern goods. This view of the development of nonagricultural rural employment

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as a process with successive stages does not adequately account for the range of situations found in Latin America. First, in every country there are regions that correspond to each of the two conditions. In other areas, both types of stages coexist, for example, according to household income levels or their position with respect to the urban nucleus of the city or province. Most important are the many situations where nonagricultural rural employment has developed to a significant degree without having passed through the stages described above. What is more, there are broad regions of Latin America that for decades have been stuck in this stage of primary Z goods and subsistence agriculture, without producing the expected accumulation of capital that would supposedly allow gradual progress toward greater development. Examples include the Andean altiplano and the agricultural regions of the Central American foothills (although even in these areas of concentrated rural poverty, there have been many examples of communities able to transform their production and gain access to new markets more dynamic than traditional ones, which furthered the transformation of the local economy). On the other extreme are rural areas—or what were rural until two or three decades ago—that jump directly to a stage of advanced urbanization. This has occurred with many coastal regions that are rapidly transformed by outside investment in sectors such as tourism or manufacturing. The view of development by stages of nonagricultural rural employment assumes that the engine of the process is endogenous to the rural sector, but experience tells us that these engines vary and often originate outside the rural sector. In cases where nonagricultural rural employment develops on the basis of an endogenous engine, there are recognizably distinct patterns. An initial generation of activities sometimes generates sufficient surplus as to promote the investment needed to develop activities that respond to local and regional demand and so on (as occurred in some rural areas of Sonora, Mexico that were transformed in the 1960s and 1970s as a result of the Green Revolution). In other cases, endogenous activities allow the accumulation of capital (physical, human, financial, etc.) up to the point at which the stage of development makes the region attractive for the investment of outside capital, which causes a breakdown in the trends. Examples are the fruit-growing regions of the Central Valley of Chile, or the agroindustrialization of the rural sector of the state of Sao Paulo over the course of more than a century, from the production of coffee for export, to sugar cane, to citrus fruit plantations, to agroindustries involving juice and other citrus byproducts (da Silva, 1998).

NONAGRICULTURAL RURAL EMPLOYMENT AND INCOME

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

There are various types of exogenous engines of nonagricultural rural employment. One is the influence of large cities on their rural or rural-urban surroundings. The city demands a combination of goods and services and offers a wide labor market. Many of the services are developed in situ in the rural environment (weekend houses, restaurants, hiking and fishing areas, etc.) and that leads to a demand for new skills (domestic workers and employees for stores, construction, repair shops, etc.). Other important exogenous engines that are easily recognizable within rural Latin America include investment in tourism, mining and manufacturing (maquilas). These exogenous engines often arise when previous investments (typically in medium-sized or large road infrastructure and electrification works) reduce the economic distance separating rural areas from the dynamic sources of demand for goods and services originating in rural nonagricultural activities. In addition to infrastructure quality and density, the economic distance between rural areas and sources of demand also depends on population density (Baumeister, 1999). In the end, the development of nonagricultural rural employment is basically explained by the existence of sources of demand for nonagricultural goods and services (engines) that the rural population can participate in producing. This focus may be applied to slightly modify the classification proposed by da Silva and del Grossi (1999), which in turn is based on a proposal by Weller (1997). This classification is shown in Table 6.6, where the first two rows correspond to nonagricultural rural employment based on production chains with agriculture (row 1) or other sectors of the economy (row 2). The other four rows correspond to nonagricultural rural employment oriented toward satisfying the demand for goods and services by rural consumers (rows 3 and 5) or urban consumers (rows 4 and 6). That is, nonagricultural rural employment engines maybe classified as follows: i) their position with respect to the employment itself (production or consumption chains); ii) endogenous (rural) or exogenous (urban); and iii) economic sector (primary, secondary or tertiary) or subsector (agriculture, mining, agroindustry, manufacturing, tourism, trade, etc.). This classification calls into question rural development programs that emphasize endogenous development, i.e., development based almost solely on mobilization of the capacities and assets of the rural population itself. In our classification, we can see that most nonagricultural rural employment is explained by investment decisions adopted by agents external to the rural sector.

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Table 6.6. Situations for the Development of Rural Nonagricultural Employment Situation

Engine

Examples

Nonagricultural rural employment through production links to agriculture

Agricultural production demands nonagricultural goods and services. Agricultural production allows for nonagricultural activities in trade, transportation and processing

Trade in inputs Machinery services Companies that hire labor Mechanical workshops Transporters Agroindustry

Nonagricultural rural employment through production links with primary nonagricultural activities

Primary nonagricultural activities located in the rural sector demand nonagricultural goods and services

Mining Fishing Hunting

Nonagricultural rural employment linked to consumption by the rural population

Rural population demands nonagricultural goods and services produced locally or outside the region

Retail trade Sewing workshops Transportation

Nonagricultural rural employment linked to consumption by the urban population

Urban residents require nonagricultural goods and services that may only be generated in the rural sector

Beach and countryside tourism Crafts Vacation home services

Nonagricultural rural employment linked to public services in rural areas

Public services in rural areas generate employment

Teachers Municipal employees Repair of rural roads

Nonagricultural rural employment linked of urban areas

Latin American cities require room to expand and grow toward their rural surroundings

Construction Industry Manufacturing

NONAGRICULTURAL RURAL EMPLOYMENT AND INCOME

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

Factors that Determine Access by Rural Households to Nonagricultural Employment and Income Reardon et al. (2000) summarized the results and conclusions of some 20 recent studies, all of them based on national or regional household surveys. One of the most interesting conclusions is the consistency of the primary determining factors of access by rural households and individuals to nonagricultural employment and income. These determining factors are cited below.

Regional Economic Dynamism Rural nonagricultural employment and income are strongly concentrated in areas characterized by dynamic and prosperous agriculture. The poorest agricultural regions, especially if they also have low levels of infrastructure, strongly depend on nonagricultural income not because of the high absolute levels, but rather because total income, particularly agricultural income, is low. This has been demonstrated in Chile (Berdegue et al., 1999), Colombia (Echeverri, 1999), Nicaragua (Corral and Reardon, 1999; Baumeister, 1999) and Peru (Escobal et al., 1998). Poor or depressed agricultural areas have a greater need for and dependence on sources of employment other than agriculture, but in fact have access to nonagricultural income levels that are quite low in absolute terms. In these areas, nonagricultural rural employment typically consists of refuge activities. By contrast, areas with dynamic and competitive agriculture depend to a lesser extent on nonagricultural employment, but in fact generate levels of nonagricultural income much higher than those in the poorer regions. Reardon et al. (1998) has called this situation the "mid-level paradox" of nonagricultural rural employment.

Level of Household Income At the micro (household) level, there is a correlation with the mid-level paradox. The poorest rural households, which face enormous difficulties in earning a living through agricultural self-employment, depend to a great degree on nonagricultural income. Yet the level of this type of income in absolute terms is very low. By contrast, households with high agricultural income also tend to have access to higher levels of nonagricultural income, although its relative weight in total income is less than in the case of the poorer households. What is occurring is that poor households are gaining access to nonagricultural refuge employment, while

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wealthier households have various types of assets (working capital, machinery and vehicles, labor skills and education, contacts, relations, etc.) that also afford them access to nonagricultural jobs that are more profitable and productive. Nevertheless, we must not lose sight of the fact that for thousands of rural households, access to even refuge nonagricultural rural employment allows them to increase their income above poverty or indigence levels. As a consequence of these micro- and mid-level paradoxes, Elbers and Lanjouw (2000) have concluded that nonagricultural rural employment in Ecuador, for example, generally does not reduce inequality in the distribution of rural income, but rather the opposite. It is very likely that this conclusion applies to many other countries in the region.

Land The conventional view is that households with greater access to land have less access to nonagricultural employment and income. Most available studies confirm that households with less land have a greater dependence on nonagricultural rural employment, but that households with more land have higher levels of this type of income. Rural households without land show bimodal behavior (Wiens, 1997, for Panama; Corral and Reardon, 1999, for Nicaragua; Berdegue et al., 1999, for Chile; and de Janvry and Sadoulet, 1999, for Mexico): those living far from urban centers, especially in areas that lack good road infrastructure, depend to a greater extent on wage-earning agricultural work or refuge nonagricultural jobs (i.e., of lower quality and productivity), while those located near cities or in dynamic rural areas have access to high-paying wageearning jobs.

Education Studies in Nicaragua (Corral and Reardon, 1999; Baumeister, 1999), Colombia (Echeverri, 1999), Mexico (de Janvry and Sadoulet, 1999) and Chile (Berdegue et al., 1999) consistently show that educational level is a powerful determining factor in access to rural nonagricultural employment and income. In particular, only households and individuals with higher educational levels gain access to better-paying nonagricultural rural employment (typically wage-earning jobs in trade and other services). Households and individuals with low levels of academic achievement have access to nonagricultural refuge jobs.

NONAGRICULTURAL RURAL EMPLOYMENT AND INCOME

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

Infrastructure It has been noted previously that the engines of nonagricultural rural employment frequently come about as a consequence of prior investment in infrastructure, typically medium-sized or large road infrastructure, electrification and irrigation works. These investments reduce the economic distance separating a rural zone from the dynamic sources of demand for goods and services originating in rural nonagricultural activity. This general analysis is confirmed at the household level. In Mexico, for example, de Janvry and Sadoulet (1999) have demonstrated that households living near urban centers have greater access to wage-earning nonagricultural jobs. Households near small towns show more nonagricultural and agricultural self-employment. Finally, wage-earning agricultural jobs (the lowest-paying activity) are of greater importance among households living in the rural hinterland.

Gender Gender has a significant influence in determining access to nonagricultural employment and income. In 10 of 11 countries analyzed by ECLAC (2000c), nonagricultural rural employment was a greater percentage of total rural employment for women than for men (Table 6.4). In most nonagricultural jobs, with the possible exception of wage-earning service jobs (at least in Chile, according to Berdegue et al., 1999), women earn lower pay than men for the same type of nonagricultural employment. In Mexico (de Janvry and Sadoulet, 1999) and Chile (Berdegue et al., 1999) women resort to different jobs than do men. In addition, there are important links between gender and other determining factors for gaining access to nonagricultural rural employment. For example, in Mexico (de Janvry and Sadoulet, 1999) access to land, emigration experience and indigenous conditions reduce the participation of men, but not of women, in wage-earning nonagricultural jobs, while the reverse occurs in the case of distance to urban centers, which affects the participation of women but not of men in the wage-earning nonagricultural job markets. Education is a determining factor with a positive effect for both sexes.

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Policies to Promote Rural Nonagricultural Employment and Income3 The studies reviewed in this chapter suggest ten lessons for designing and implementing policies and programs to stimulate the development of nonagricultural rural employment: Focus. Policies aimed at the rural sector must be oriented toward providing incentives (engines) that stimulate households to participate in nonagricultural rural jobs. Most rural development policies and projects develop the capacity of households to respond to such signals, yet fail to stimulate those households to participate. An important factor here is the fact that several engines of nonagricultural rural employment (tourism, manufacturing, industry, etc.) are exogenous to the rural sector. A rural development policy that addresses nonagricultural employment must promote the mobilization not only of capital, but also non-rural human and institutional resources that have the capacity, relationships and knowledge needed to initiate, develop and conduct new types of projects in the secondary and tertiary sectors. This should be facilitated by the process of rural urbanization (Schejtman, 1998) and by the growing importance of demand by rural inhabitants for new types of goods and services of rural origin (tourism, recreation, environmental services, etc.). Bias. The strong agricultural bias that characterizes rural development policies must be removed, and a position adopted that promotes land-use development and the rural economy as a whole. There are no reasons that justify the current exclusive reliance on agricultural development to improve the quality of life in rural areas or to overcome rural poverty. Furthermore, agricultural development itself necessarily requires growth in industry and services. In vast rural regions, betting solely and predominantly on agricultural development essentially means condemning residents to conditions of endemic poverty, marginalization and stagnation.

1 This section is based on the conclusions of the Latin American Seminar on the Development of Rural Nonagricultural Employment held in Santiago, Chile in September 1999. The seminar was organized jointly by the IDE, FAO, ECLAC and RIMISP.

NONAGRICULTURAL RURAL EMPLOYMENT AND INCOME

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

Differential treatment. Treatment of the wealthiest and the poorest rural areas must be different. In the former, the priority is to reduce the transaction costs faced both by agents that develop investments in the engines of nonagricultural rural employment and by rural households seeking to participate in nonagricultural activities. The public sector must take a proactive role in promoting conditions that increase the attractiveness of the poorest regions to the private sector (roads, electrification, telecommunications, irrigation). Public investment must also focus on developing the capacity of rural households to participate in a broader range of remunerable activities (education, access to credit, activation of land markets, etc.). In addition, in poor areas where relationships to dynamic markets are weak or nonexistent, development projects often promote the startup of microenterprises and other family or joint venture projects that end up being reduced to refuge nonagricultural employment. Such distortions must be corrected, since they fail to link the goods and services produced by these initiatives to dynamic markets that demand them. Cooperation. Local governments and entities that further cooperation between local social and economic participants may play an important role in promoting nonagricultural rural employment. In many countries, municipal and provincial governments control or participate in land-use planning decisions, educational systems, labor training, investment in public infrastructure works, the awarding of permits and licenses for establishing nonagricultural rural-based businesses, guidelines and content of technical assistance systems, assigning resources to rural development projects, and even in levying taxes, which are frequently powerful barriers to entry to realizing rural nonagricultural projects. It is at this level where conditions may be negotiated to allow a greater percentage of public and private investment resources to be channeled toward areas with little potential for agricultural development, but where there may be potential for nonagricultural rural employment. In areas where conditions are more favorable for agricultural development, local institutions may identify investments that contribute to strengthening more solid connections between agriculture, agroindustry, trade and other services. Lastly, resources that depend on local decisions may be employed in such a way as to break the traditional functional and structural disconnect between the urban nuclei and their rural surroundings,

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providing in exchange greater integration and complementarity between both segments. Agricultural development policies. These policies must be used to promote nonagricultural rural employment. Modernization and increased competitiveness of the agricultural sector cannot be achieved without the development not only of productivity in primary production, but also of the industrial, commercial and service sectors that are characteristic of modern agriculture. This includes technological promotion policies (research, technical assistance, transfer of technology), skill-building and training of human resources, and land and agrarian reform and financing. Yet, such considerations are often absent in the design of agricultural development policies. In other cases, even if there is a nominal willingness to consider providing for strengthening agroindustrial and agro-commercial chains, during implementation conditions are established or decisions are taken that end up subverting this purpose. Examples would be when technological research is favored in areas with low potential for cooperation with industry or services; when training is provided only or primarily for tasks related to primary production; when restrictions are established on credit in order for it to be aimed primarily at investments or working capital for farms, thereby marginalizing companies that provide services to agriculture or that process their products; and when agrarian reform settlements are designed with an exclusively agricultural logic. Institutions. In many countries there are gaps in public institutions that lead to nonagricultural rural employment becoming a type of no-man's land. The ministries responsible for industrial policies, housing, public works and education clearly have more of an urban orientation, while agricultural ministries continue their traditional approach to supporting that sector. The result is that no one is or feels fully responsible for policies that involve nonagricultural rural employment. Yet, such policies are indispensable for promoting the development of activities responsible for 40 percent of the income of the region's rural households. Education and infrastructure. Studies show there are certain determining factors that universally apply in favor of strengthening nonagricultural rural employment. These specifically include education

NONAGRICULTURAL RURAL EMPLOYMENT AND INCOME

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

and road and highway infrastructure. Everything that can be done in these two areas will have a favorable impact on the development of rural nonagricultural employment and income. But this effect can be maximized if the policies are associated with elements explicitly oriented toward promoting nonagricultural rural employment. For example, in several countries, there are pilot programs to improve the quality and relevance of public education, including rural technical education. These programs, however, frequently assume that relevant rural education means those that prepare youth to work in the agricultural sector. They often do not consider the increasing importance of nonagricultural activities as a basis for the rural sector. Similarly, while infrastructure policies (roads, irrigation) sometimes include components to prepare the population to take advantage of new conditions, these are often reduced simply to the agricultural environment, ignoring new options such as tourism, industry and manufacturing, trade and other services. Frequently ignored is the fact that a highway will not only be used to convey agricultural production to market, but also for more city dwellers to travel to the country on weekends and on vacation; or that a new dam will not only allow intensified agricultural production but will also stimulate an increase in tourism and recreational activities. Gender. Policies to develop nonagricultural rural employment must consider gender as a critical determining factor for access to nonagricultural rural jobs. Policies and programs to support rural women must pay more attention to facilitating access by women to the wage-earning job market in agroindustry, trade and other services. This would reverse the current bias in favor of creating manufacturing microenterprises that, in light of available studies, seem to offer fewer opportunities for real development of rural women as agents of sustainable economic processes over time. Instruments indispensable to strengthening the capacity of women to gain access to and reap the benefits from the rural nonagricultural labor market include education, labor training, better roads and transport systems that allow women to easily travel between their homes and places of work, the creation of day-care centers, and revised labor and social security policies and their adequate financing. International financing. Rural development projects with financing from multilateral and international cooperation agencies are

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often the primary strategy of public policies, especially in poorer countries and regions. In Latin America, such projects can no longer associate the term "rural" as being synonymous with "agricultural." These policies must promote activities aimed at the rural environment as a whole, including agricultural areas and small and medium-sized urban nuclei; generate incentives and develop capacities not only for agricultural activities, but also for all jobs important to rural inhabitants; consider not only farms, but also households as units appropriate for development; and offer differentiated options for the various social strata comprising the rural population, including farmers and landless rural inhabitants, men and women, the self-employed and wage-earners. The importance of agriculture. Finally, all of the above will be useless if the development of public policies and programs for the rural nonagricultural environment is made at the cost of reallocating resources that up until now have been available for agricultural sector development. After all, agricultural employment continues to be directly responsible for 60 percent of rural income, and that percentage increases significantly if nonagricultural income originating from activities directly related to and dependent upon agricultural production is also considered. These activities include agroindustry, trade in inputs and products, machinery and transportation services, and professional services. The promotion of nonagricultural rural employment and income cannot be made at the cost of agricultural sector development. The challenge is to mobilize additional public and private investment and capacity.

NONAGRICULTURAL RURAL EMPLOYMENT AND INCOME

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

References Baumeister, E. 1999. Empleo e ingreso rurales no agricolas en Nicaragua. Evidencia a nivel de dos municipios. Empleo e ingreso rural no agricola en Colombia. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDBFAO-ECLAC-RIMISP. Berdegue, J.A., E. Ramirez, X. Milicevic, G. Escobar, and T. Reardon. 1999. Empleo e ingreso rurales no agricolas en Chile. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDB-FAO-ECLAC-RIMISP. Corral, L., and T. Reardon. 1999. Empleo e ingreso rural no agricola en Nicaragua. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDB-FAOECLAC-RIMISP. da Silva, J.G. 1998. Novo Rural Brasileiro. Campinas, Brazil: Institute de Economia, Universidad de Campinas. da Silva, J.G., and M. del Grossi. 1999. Evolucao da renda nas familias agricolas e rurais: Brasil 1992/97. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDB-FAO-ECLAC-RIMISP. de Janvry, A., G. Gordillo, and E. Sadoulet. 1997. Mexico's Second Agrarian Reform. San Diego: Center for U.S.-Mexican Studies, University of California, San Diego. de Janvry, A., and E. Sadoulet. 1999. Asset Positions and Income Strategies among Rural Households in Mexico: The Role of Off-Farm Activities in Poverty Reduction. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDBFAO-ECLAC-RIMISP. Echeverri, R. 1999. Empleo e ingreso rurales no agricolas en Colombia. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDB-FAO-ECLAC-RIMISP. Economic Commission for Latin America and the Caribbean (ECLAC). 1999. America Latina (12 paises). Distribucion de la poblacion economicamente activa ocupada, segiin insercion laboral. Zonas rurales, 1980-1997. Table published in the statistics section of ECLAC's homepage, www.eclac.org. . 2000a. America Latina (18 paises). Magnitud de la pobreza y la indigencia. Table published in the statistics section of ECLAC's homepage, www.eclac.org.

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. 2000b. Empleo rural no agricola y pobreza en America Latina: Tendencias recientes. Discussion Paper. Santiago, Chile. ___. 2000c. La brecha de la equidad: una segunda evaluation. Second Regional Conference following up the World Summit on Social Development, Santiago, Chile, May. Elbers, C., and P. Lanjouw. 2000. Inequality and the Non-Farm Sector in Rural Ecuador: Evidence at the Household and Community Level. Mimeo. Escobal, J., V. Agreda, and J. Aguero. 1998. Las determinantes de la distribution del trabajo entre actividades agricolas y no agricolas en el sector rural del Peru. Paper presented at the III Simposio Latinoamericano de Investigaci6n y Extensi6n de Sistemas Agropecuarios. Centre Internacional de la Papa, Lima. Figueroa, A. 1981. La economia campesina en la Sierra del Peru. Lima: Pontificia Universidad Catdlica del Peru. Hymer, S., and S. Resnick. 1969. A Model of an Agrarian Economy. American Economic Review 59(4): 493-506. Klein, E. 1992. El empleo rural no agricola en America Latina. Working Paper No. 364, Programa Regional de Empleo para America Latina y El Caribe, Santiago, Chile. Lanjouw, P. 1997. Rural Nonagricultural Employment and Poverty in Latin America: Evidence from Ecuador and El Salvador. In R. Lopez and A. Valdes (eds.), Rural Poverty in Latin America: Analytics, New Empirical Evidence, and Policy. Washington, DC: World Bank. Mendoza, J.A. 1999. El empleo rural no agropecuario en Mexico. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDB-FAO-ECLAC-RIMISP. Ranis, G., and F. Stewart. 1993. Rural Nonagricultural Activities in Development: Theory and Application. Journal of Development Economics 40: 75-101. Reardon, T., J.A. Berdegue, and G. Escobar. 2000. Rural Non-Farm Employment and Incomes in Latin America: Overview and Policy Implications. Paper presented at the Seminario Latinoamericano sobre Desarrollo del Empleo Rural No Agricola, Santiago, Chile, September, IDB-FAO-ECLAC-RIMISP. Reardon, T., M.E. Cruz, and J. Berdegue. 1998. Los pobres en el desarrollo del empleo rural no agricola. Paradojas y desafios. Paper presented at the III Simposio Latinoamericano de Investigacion y Extensi6n de Sistemas Agropecuarios. Centra Internacional de la Papa, Lima. Rello, F., and M. Morales. 1998. El empleo rural no agricola en una region de Mexico. Paper presented at the III Simposio Latinoamericano de Investigacion y Extension de Sistemas Agropecuarios. Centre Internacional de la Papa, Lima.

NONAGRICULTURAL RURAL EMPLOYMENT AND INCOME

JULIO BERDEGUE, THOMAS REARDON AND GERMAN ESCOBAR

Schejtman, A. 1998. La cuestidn urbana en eldesarrollo rural. Elementospara una reformulacion de las politicas. Proceedings from Tercer Simposio Latinoarnericano de Investigation y Extension en Sistemas Agropecuarios. Centre Internacional de la Papa, Lima. Taylor, J.E., and A. Yunes. 2000. Los determinantes de la seleccion de actividades y de los ingresos no agricolas de los hogares rurales en Mexico, con enfasis en el papel de la educaci6n. Minieo. Weller, J. 1997. El empleo rural no agropecuario: el istrno centroamericano. Revista de la CEPAL 62: 75-90. Wiens, T. B. 1997. Rural Poverty in Argentina. World Bank, Washington, DC. Mimeo. Wiens, T., and C. Sobrado. 1998. Haiti: the Challenges of Poverty Reduction. World Bank Technical Papers. Volume 2. World Bank, Washington, DC. Wiens, T. C. Sobrado, and K. Lindert. 1999. Agriculture and Rural Poverty. Annex to Panama Poverty Assessment: Priorities and Strategies for Poverty Reduction. Washington, DC: World Bank Human Development Department, Latin America and the Caribbean Region.

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Options for Investing in the Rural Economy Ruben G. Echeverria

This chapter summarizes the elements of a rural agenda being developed by the Inter-American Development Bank (IDS) to meet growing demands of countries of the region. * The agenda is a work in progress assembled on the basis of a broad multisectoral view of the rural economy. It takes a range of considerations into account, including social aspects and issues of poverty and inequality, the environment, agriculture, agroindustry, agrifood, the development of microenterprises and small and mediumsized businesses, and basic infrastructure. The aim is to reach a consensus on the critical issues that affect sustainable rural development, with a focus on the complementarities of various areas of IDS activity, as well as on other technical and financial multilateral and bilateral organizations working in Latin America and the Caribbean. The emphasis is on the need to promote the rural economy from a territorial and integrated perspective. This chapter stresses the seriousness of the problem of rural poverty in the region and examines the potential for the agricultural and agroindustrial sectors to generate growth, reduce rural and urban poverty, and improve natural resource management. The chapter also analyzes lessons learned and promotes a new approach that supports policies and mechanisms to reduce rural poverty. The investment areas covered include consolidation of sectoral reform programs; modernization of the public sector and of technology, sanitation and information services; promotion of off-farm rural " A preliminary version of this chapter was presented at IICA's Inter-American Board for Agriculture Meeting in Salvador, Brazil in October 1999. The analysis is based on IDE strategies for rural poverty reduction (IDB, 1998) and agricultural development (IDS, 2000), as well as on several technical papers from the Bank's Sustainable Development Department and Regional Operations Departments.

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activities; land and water management; the development of rural financial markets; sustainable management of natural resources; infrastructure and the quality of rural life; and human resources and training. Lastly, the chapter emphasizes the importance of inter-agency collaboration to improve the effectiveness and efficiency of services provided to countries of the region. Most of the total population as well as the impoverished population of Latin America and the Caribbean live in urban centers. Yet in relative terms, poverty in the region is a rural phenomenon. More than half of rural households live in poverty and a third of them live in extreme poverty. Although there have been great advances in terms of reform, there is still relatively little growth and much inequality in the region. The incidence of rural poverty in many Latin American countries constitutes a major social and political challenge for the region. The ramifications of failing to address it range from rural violence to the production and marketing of illicit crops, and insecurity about land tenancy. Rural poverty in most of countries diminished slightly in relative terms during the 1990s. Between 1994 and 1997, the percentage of the region's rural poor fell from 56 to 54 percent and rural indigence fell from 34 to 31 percent, figures comparable to or greater than the 1980 figures (ECLAC, 1999) (Figure 7.1). Since the beginning of the 1990s, for the first time, the urban poor (principally female heads of household, parents with little or no formal education, and young people without jobs) have been more numerous than the rural poor. In 1997, it was estimated that the urban poor included 126 million people, while the rural poor numbered close to 78 million (Figure 7.2). However, the number of rural households living in extreme poverty (47 million) was larger than the urban figure (43 million). It is important to note that a portion of the growing number of urban poor has recently migrated from rural areas. Furthermore, rural poverty has likely worsened due to the economic conditions of many of the region's countries in recent years. This shows that there are few convincing results in the fight against rural poverty. The seeming improvement in some countries has been due more to rural-urban migration than to a reduction of the gap between living conditions in rural and urban areas. Most of the rural poor are small producers (approximately half of the total, or 40 million), while the landless rural population and indigenous groups represent 16 percent (13 million) and 33 percent (26 mil-

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Figure 7.1 Latin America: Rural Poverty, 1980-97

Source:ECLAC (1999).

Figure 7.2 Latin America: Urban Poverty, 1980-97

Source:ECLAC (1999).

Figure 7.3 Latin America: Total Poverty, 1980-97

Source:ECLAC (1999).

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lion), respectively (IFAD, 2000). According to various estimates, approximately one-third of rural households living in poverty cultivate small plots of land and have limited opportunities to solve their problems by farming. This means that more than 40 percent of the rural poor have no or limited access to productive resources that would allow them to generate adequate income through their own agricultural production. This situation becomes even more important in light of the fact that in the absence of an unlikely massive redistribution of land, the population of rural poor with little potential for making a living from farming will increase more than the population with access to adequate resources. Relative exclusion from the market and subsistence production as a mode of survival for these sectors of the population implies a future with little opportunity to overcome poverty. In general, the rural poor have scarce opportunities for productive employment, insufficient nutrition, poor health, a lack of educational services, and organizational capacity that is insufficient for them to effectively negotiate in behalf of their own interests. In the region's most urbanized countries, migration to cities has begun to decline, while in many others, where the rural population represents more than 25 percent of the total population, high levels of migration continue unabated. Nonagricultural income is an increasingly significant percentage of total rural incomeâ&#x20AC;&#x201D;close to 50 percent in many of the region's countries (see Chapter 6). Particularly significant is the relationship between poverty and ethnic contexts, poverty in older families, and poverty in households headed by women. Approximately 80 percent of the region's indigenous population lives in poverty (IFAD, 2000). In many cases, indigenous communities subsist on the region's most fragile land in isolated areas with little agricultural potential and few options for nonagricultural work. They often live near-in many cases, within-protected areas. Emigration towards urban areas remains the principal way to statistically alleviate rural poverty. But since this often simply transports poverty to cities, its effect on overall poverty is limited. In the meantime, the communities left behind risk losing their cultural and social heritage. Depending on each situation, there are at least five possibilities, along with combinations of those possibilities, to reduce rural poverty (Echeverria, 2000). Agriculture and rural nonagricultural economic activities constitute the most important ones. Another is sustainable use and conservation of the natural resources linked with rural poverty reduction. Migration to urban areas has been the traditional way to reduce rural poverty. Finally, increased assistance can be provided to those who

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need income transfers to overcome the poverty threshold or to gain minimum access to social security nets.

The Potential of the Food and Agricultural Sector In rural areas, the food and agriculture sector (agriculture, livestock, forestry, fisheries and agroindustry) has special importance, whether directly or indirectly, since the sector represents more than 25 percent of the gross regional product and more than 40 percent of exports. These figures are substantially higher in some countries, including Argentina, Colombia, Costa Rica, Haiti, Guyana, Nicaragua and Paraguay (IDB, 2000). This explains why agricultural employment directly accounts for more than half of rural income in the region, and even more if its links to commerce of inputs and products are considered. The process of economic reforms, along with the globalization of world markets, has provided new dynamism for the region's integration into the world economy due to changes in food production and to new international trade opportunities for products. In this sense, the 1990s mark a sharp change from the old paradigm of protected agriculture within a closed economyâ&#x20AC;&#x201D;limited to primary production and, with excessive intervention by the state and precarious links between economic agentsâ&#x20AC;&#x201D;to a sector more articulated with macroeconomic policy, more focused on competitive advantage, including collateral services, and integrated vertically and regionally. This progress toward greater competitiveness translates into growing efforts to increase productivity and quality while reducing costs. Increased scales of production (particularly in grains, meat, fruits, oilseeds and sugar) and a simultaneous process of mechanization and automation affect rural employment patterns and land markets. This can be seen today, in particular, in the MERCOSUR countries and northern Mexico. To the extent that there is political stability and a favorable macroeconomic outlook, the relatively low land and labor prices, along with expanding integrated markets, attract private investment and bring in multinational agribusiness. This provides incentives for the concentration and diversification of trade and agroindustry. This process of change has been accompanied in many cases (Brazil, Argentina, Mexico, Chile) by the formation of joint ventures with local investors in both agricultural and nonagricultural areas, as well as by mergers and concentration among domestic firms.

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As a result of these changes, some areas are beginning to develop agricultural sectors that are more technically advanced, more articulated with agroindustry, and more oriented to the international market.1 These changes are necessary for greater specialization in production and economic efficiency. At the same time, persistent urban and rural poverty and the fragility of some ecological systems make it essential to focus on opportunities to increase the competitiveness of the food and agriculture sector in the region within a framework of equity and sustainability.

Lessons Learned The magnitude, complexity and persistence of rural poverty in the region have not been approached with broad-based strategies, and they have not been addressed with sufficient and continuous allocations of resources (Aristizabal et al, 1992). In general, many projects are isolated and discontinuous, with little relationship to national strategies. The rural poor do not generally have the power to negotiate, nor are they the favorite clientele of governments and funding agencies. This translates into an absence of committed personnel prepared to carry out these programs, and it means that there is little analysis of the economic, social and cultural contexts in which interventions take place. Economic growth is a necessary but not sufficient condition for the reduction of poverty. Hence, targeted interventions are required, especially considering the inequality and low educational levels found in rural areas. Economic growth has mitigated rural poverty essentially through migration, a sign that part of the solution is outside agriculture, but not necessarily outside rural areas. The development of the food and agriculture sector is necessary for economic growth and for the reduction of rural and urban poverty. In most countries of the region, the sector (including linkages with markets for inputs and products) continues to represent a substantial portion of the economy and is an important source of revenue 1 Due to the high transaction costs in rural markets for basic goods, it is key to promote the integration of small farmers and producers into domestic markets, and to reduce interventions so that rural markets work better (Figueroa, 1998). This is particularly true for nontraditional export products (Damiani, 2000).

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for large segments of the population, especially the rural poor. However, history shows that the development of commercial agriculture alone will not generate benefits sufficient to significantly reduce rural poverty. Countries that implemented economic policies with strong negative biases against rural areas were not successful in modernizing their economies, even when partial subsidies were used to correct the biases introduced through relative prices. There must be an economic and institutional context that promotes access to productive resources by large segments of the population, along with productive investment, technological innovation and sustainable resource management. The development of the rural economy requires an economic context that assures the profitability of private enterprise within a stable long-term framework, generating agricultural and nonagricultural rural jobs and promoting the investment needed to develop basic infrastructure linked to production and to improve the quality of rural life. An active process of productive investment, development of infrastructure and adoption of technologies must accompany trade liberalization in order to ensure greater economic efficiency and improve the quality of rural life. The very significant deterioration in the terms of trade for farm products suffered by many Latin American countries has had negative effects on the sector's profitability and its capacity for investment and modernization. This process was, in part, a result of poor integration of primary production with industry, which impeded the exploitation of market niches and reduced the ability of the sector to negotiate in international markets. Other factors were the fall in the real exchange rate during the liberalization process and the low productivity and high production costs as a result of low investment levels in technology,2 Hence, it is essential to exploit competitive advantages by investing in technological innovation and avoiding the trap of being limited to the production of primary goods. The modernization of farm production processes initiated in many countries as a result of economic liberalization may temporarily require direct support, as well as simultaneous technological assistance and institutional arrange2

Distorted international commodity markets due to substantial farm support programs in the more developed countries also have contributed to lower prices of key products.

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ments that emphasize new products, new forms of markets, and articulation with agroindustry. Rural development programs have been relatively inefficient when they involved economic policies that failed to help farm production be profitable, facilitate access to productive resources for small producers with agricultural potential, or promote nonagricultural rural activities.3 Rural development policies have either coexisted with or attempted to counterbalance simultaneous contradictory macroeconomic and sectoral policies that tended to cancel out the effects of the development policies (e.g., food import-substitution policy, excessively high exchange rates, price controls on commodities, and high interest rates). The general lack of participation by beneficiaries in rural development projects has led to components unresponsive to demand, inappropriate interventions in terms of the pace of absorption in communities, and unsustainable initiatives. The lack of a gender perspective in rural development programs, as well as the loss of the potential contribution of women, the young and indigenous people in rural areas, has often contributed to excluding and marginalizing these groups, notably reducing rural development. The diversity of the rural population, changes in the economic environment, and the learning curve for the various players involved in the development of projects have all been at odds with the traditional rigidity of the design and execution of the project cycle. Project executions has also been negatively affected by the multiplicity of components, the centralization of decision-making, and the weakness of intermediary regional and municipal institutions.

The Need for a New Paradigm There has been a general acknowledgment in recent years of the need to move toward a new regional consensus to improve rural policy, especially considering that 15 years of adjustments have brought precarious results 'Nonetheless, many past rural development programs did take the initiative in channeling previously nonexistent basic services to the rural poor. Moreover, the programs had a clear focus of regional development, at least conceptually.

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in terms of low growth rates, persistent high levels of poverty, worsening income distribution, and declines in the profitability of some crops. This shows a certain imbalance between the current consensus regarding the situation and actual policy. There is also agreement that to reduce poverty, macroeconomic policy must be complemented by social strategies that produce structural changes in the development of human capital and the quality of life of the rural population. The definition of priorities in a new context of productive reconversion (new product lines and expansion to agroindustry and nonagricultural sectors) would be based on market orientation, changes in consumer preferences, greater integration of food and agriculture processes, and the growing importance of new areas such as chemicals and Pharmaceuticals, biotechnology and environmental issues. Within this context, sectoral policy should encourage conditions that help the private sector improve access to new product lines, guaranteeing a management and decision-making process based on the quality of information and ensuring greater decision-making autonomy, including aspects of risk and creativity. The potential for creating jobs through value added, as well as for attracting private investment, are central factors in formulating social policy for the rural sector. There is consensus that market liberalization offers opportunities for more efficient and competitive production arrangements based on economies of scale, integration, specialization and differentiation of products, marketing with a special emphasis on quality, and economies of product clusters and market niches. Though markets will contribute to greater efficiency and equity, however, they are not sufficient to meet the broad-ranging needs of rural society. Hence, specific interventions must address the issue of greater opportunity for a larger number of economic agents, if a true transformation of production is to occur. Of special importance is the status of thousands of small farmers who for lack of alternatives produce illicit crops, with all the legal, social and environmental consequences that entails. Privatization, budget adjustments to reduce the fiscal deficit, and the primary determining role of markets have meant less state intervention in rural areas and a dismantling of institutions. This makes it difficult to carry out rural development initiatives, insofar as civil society has not yet stepped in with new institutions, especially at the local level. In some areas, the reduction or withdrawal of the public sector has been sharply felt, as in social investment (education, health), the financial system, and infrastructure. Greater rural demand for investment in human capital, financial services and communications to face the challenges of

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competitiveness has not been met, and in many cases access to these services by the rural poor has actually been reduced. More integration of phases of production plays an important role in the need for a new approach to the agroindustrial sector. Toward the end of the 1980s, regional agroindustrial production was relatively extensive in the primary production phase, i.e., it involved low levels of capital and few industrial inputs per agricultural land unit (the use of fertilizers and agrochemicals was low compared with the rest of the world), while primary production was associated with a low level of industrial processing. These features began to change in the 1990s, especially in Brazil, Argentina and Colombia, where agroindustry and the food industry expanded. This process was led to a great extent by foreign investment, especially from large multinational food companies. This trend will increase in the future because of international demand for more highly processed products in various market niches where multinational firms are well positioned. There is a similar trend in Latin America's domestic markets, where middle- and high-income urban sectors increasingly are demanding products with greater value added. In these markets, domestic production faces increasing competition from products from other countries within regional integration agreements. Consequently, a greater emphasis on rural investment and, especially, the modernization of the agricultural sector, will certainly facilitate commercial openness and promote regional integration.

Priority Areas for Investment The priority investment areas described below constitute the basis for a new approach to the development of the rural economy that will contribute to economic growth, sustainable use of natural resources, reduced rural and urban poverty, and a better quality of life in rural areas. Depending on the particulars of each case, and keeping a territorial approach in mind, there will be any number of possible priority areas for rural development in each country, region and locality. Considering the experiences mentioned above, areas of investment where support from international development organizations could have substantial impact are briefly indicated below.

Consolidation of Reform Programs in Rural Areas Public policies in rural areas must be strengthened to ensure consistency with macroeconomic measures, promote legal reform, and support the

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process of decentralization (e.g., by giving municipalities the ability to design their own development plans and attract private investment, both domestic and international). The consolidation of reform includes the correction of anti-agricultural biases and the financing of social safety net programs for those who are not in a position to satisfy their basic needs. Though the economic reforms undertaken by most countries in the region are generally quite far advanced, they still need to be consolidated. The main tools of the reform process need to be refined, and undesired effects corrected. Possible measures include i) sectoral reconversion programs with temporary assistance for transitional processes that reengineer production, compensatory measures for low-income producers and consumers impacted by policy reforms (including temporary income transfers), and food assistance and production support for small producers; ii) development of new market instruments such as financing of inventories, risk management and farm product exchanges; and iii) support for private enterprise to channel private investment to the rural sector (agroindustry).

Modernization of the Public Sector and Basic Agricultural Services Changes in economic thinking in Latin America that have reduced the role of the state and focused on short-term needs in fiscal accounts have set off a process of reform in the organization of the public sector. Less effort has been dedicated, however, to defining clearly the state's new role and to rethinking the organizational structure best suited to the objectives in particular cases. Taking a new look at public and private institutions and their organizational structure is particularly important in connection with rural activities because there is a need for a certain amount of public intervention, especially in funding (in association with the private sector) and in regard to regulating key activities such as technological innovation, environmental conservation, health and safety of food products, and the provision of infrastructure. The weakened institutional capacity of the public sector will make it difficult to deal with the new challenges posed by food and agriculture systems, especially since the technologies used and the ways of organizing production itself are becoming ever more complex. This makes it increasingly difficult to deal with the problems of the sector in terms of isolated components, looking at each instrument or service apart from the others. Hence, the separation that still exists between the different

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organizations that provide public services must be overcome by using mechanisms that achieve greater horizontal articulation and integration of instruments and modes of action. In addition, from the point of view of policymaking, in responding to needs from economic processes that are increasingly integrated, it is not enough to concentrate on primary production and the social problems of rural areas. Policymaking must address the particulars and dynamics of the entire chain of agriculture and food activities. This means that Ministries of Agriculture must act more broadly, bringing agroindustry and distribution into their purviewâ&#x20AC;&#x201D; areas usually dealt with by scattered parts of the public sector. The management capabilities of the public sector could be strengthened by i) improving links with civil society in a way that recognizes the growing importance of the involvement of nongovernmental groups such as rural organizations that provide services in the areas of information, education, technology transfer and social articulation; ii) better coordination with the private sector, including supplementing funding through fiscal means with private sector production and by contracting out, tertiarization or accreditation; iii) greater efficiency and effectiveness in public administration by focusing practices more on products than process, lifting administrative restrictions, developing management contracts, and employing reward-based incentive systems; iv) greater integration and coordination of activities with other sectors (environment, industry, trade, health, etc.); v) decentralizing and distributing public activities and moving the institutional focus and structures to the local level; and vi) improving capacity to define policy and priorities. Better administration requires policies regarding professional development and remuneration that make it possible to attract and retain high-quality human resources. It also requires a level of funding and organization commensurate with its importance. Improved administration is particularly important for the following basic public services:4 Statistics, market information and promotion of exports. The public agricultural sector has a key role in collecting, processing, analyzing and disseminating basic agricultural statistics (national censuses and rural household surveys) to satisfy minimum needs for public information and to provide a basis for policymaking. It is also important for the public sector to provide information on markets in order to make them more transparent and to encourage competition. This includes technical support to improve ne4

See also Chapter 5, and Pineiro et al. (1999).

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gotiating capability in connection with international trade agreements. Finally, there must be national programs to promote exports that support value added for primary production through a processing industry that is based on farm products and responsive to new types of demand. This involves training for medium-sized firms and for producer organizations to help them produce and export quality products. A new context for technological innovation. Advances in biotechnology, computers and communications make for a new scientific and technological scenario that offers enormous potential in terms of forms of social organization and farm production processes. These changes also imply a transformation of scientific efforts and, hence, the institutional and organizational forms within which the process of technological creation and adaptation takes place. This is especially true in terms of incorporating new economic players into the innovation process and in connection with strengthening intellectual property rights. The new opportunities provided by trade liberalization make it essential to accelerate the process of technological development to increase production in a way that is competitive and sustainable. Carrying out this process requires a large-scale investment training plan in human resources, redesigning technological development organizations, rethinking the roles of the public and private sectors and producers in funding and executing technological development activities, establishing intellectual property rights systems, and providing the technical assistance needed to take advantage of new technological innovations, both in terms of production and institutions. These efforts must focus on implementing the organizational adjustments and mechanisms necessary to fund national innovation systems in accordance with the new role of the state, new priorities for technological development, and the need to strengthen human resources and basic research infrastructure. At the regional level, the priority is to strengthen cooperative programs for funding technological development, given the high investment costs required for research in new areas and the nature of current integration processes. Plant and animal health and food safety. This is a priority area because of its social and economic implications and its strategic importance for the promotion of exports. Requirements for trade in terms of food health and residues make it necessary to negotiate

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and adjust health and quarantine standards, and also to monitor them and make sure they are applied correctly. This demands scientific objectivity and effective technical implementation, which in turn requires an institutional system that reconciles public and private sector activities based on a number of general principles, including: i) definition of a clear health and trade policy and development of precise standards; ii) a decentralized organizational structure with shared authority that provides for transparency in administrative action; iii) updating standards relating to the careers of civil servants in this area (including standards governing hiring, training, stability of personnel, promotion and sanctions); and iv) technical audit mechanisms to make it possible to closely monitor the existence or adaptation of these standards as well as compliance with them. Investments in this area should concentrate on i) quarantine controls to prevent the introduction of exotic diseases; ii) health and traderelated quality standards through stronger health enforcement in the processing and marketing of products, especially in terms of systematizing and coordinating these activities at the federal, provincial and municipal levels to improve service and prevent overlapping functions; iii) promoting the adoption of food safety practices to supplement health services, ensure market competitiveness and protect public health; iv) eradication of diseases and pests through public sector efforts to coordinate and facilitate private sector action; and v) institutional reorganization that unifies animal health with plant health services under a single organizational structure with greater operational decentralization and more interaction with users. The public sector has an important role to play in establishing food safety systems, in cooperation with farmers, processors, marketers and consumers. These systems could include i) a food safety chain that is integrated from the farm all the way to the consumer; ii) an internationally harmonized regulatory framework of laws, rules, standards, guidelines, monitoring and inspection procedures, oversight methods and sanctions; iii) appropriate technical infrastructure, including production, processing and monitoring technologies; and iv) educational and informational activities for consumers, producers and regulators. Keeping in mind the ongoing processes of trade liberalization and regional integration such as the Free Trade Agreement of the Americas and the characteristics of the three above-mentioned areas (information and policy, technology and food safety practices), reform efforts must

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also take into account the need for effective institutions at a regional level, or at least the subregional level. Such institutions could add the needed scale to national efforts in these areas.

Promotion of Rural Off-farm

Production Activities

The inhabitants of rural areas include farmers, a varied social spectrum of seasonal workers, unemployed workers who have lost their agricultural jobs, workers indirectly linked to agricultural activities through services or employed by agroindustry, employees of social and municipal services, workers in tourism, fishing and industrial enterprises, and pensioners who have returned from the city. This large grouping encompasses many poor people and many forms of poverty, including people who work small plots of land and have little chance of escaping impoverishment as farmers. It also bridges the rural landscape with the semi-urban border of agricultural towns and very small cities, where features of two ways of life come together. Given that a significant segment of the poor rural population has few options in agriculture, high priority should be given to public investment and to the tax and financial incentives needed to attract private investment in areas ranging from ecological tourism to restaurants, recreational facilities, cultural sites, commercial and sports fishing, agroindustrial processing and industrial parks (see Chapter 6). At the same time, efforts should promote small businesses managed by families (trade, crafts, small manufacturing, furniture and woodworking, machinery service and repairs, etc.). There is great potential in the rural environment to process natural materials into craft items and other articles, drawing on such materials as wood, medicinal plants, fibers, fruits, nuts, flowers and deposits of semi-precious stones or stones appropriate for carving. The decentralization and improvement of rural financial services mentioned above would significantly help the development of small rural business and microenterprises, especially if access to microcredit were improved.

Improvements in Land Access Most of the region's countries have managed, through natural processes of subdivision and land reconcentration as well as through rural development and land reform programs, to improve the structure of land ownership and tenancy. It is important, however, to increase the security of rural land holdings and the efficiency of these markets by strengthening

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legal structures and modernizing systems of rural land records, titles and deeds. This will promote more transparent land markets and the titling and promotion of short-, medium- and long-term rural land leases, in turn facilitating the trading and sale of leased land-use rights and their use as collateral in banking. Consequently, it is crucial to broaden access to land, facilitating access by farmers and small farmsteads and making possible greater use of the land in accord with its productive capacity (Echeverria, 1998). This effort must support land purchases by small producers and help consolidate traditional land reform projects. Also important is to explore the possibility of taxing land in such a way as to discourage unproductive holdings, and decentralizing the administration of land taxes to local government agencies. Information and training systems must also be strengthened, improving the collection, processing and updating of information on land ownership and tenancy.

Development of Rural Financial Markets The development of financial markets (capital and risk management) to facilitate medium- and long-term investment is essential to the process of diversifying and modernizing the rural economy. It is particularly important to efforts to transform small farming in response to new market conditions, as well as to encourage nonagricultural rural activities. The introduction of reforms and economic stabilization was expected to lead to increased financial services, based on the premise that competition between private financial intermediaries subject to the rigors of the market would drive efforts to reduce costs, bring new products to market and expand services. But while a number of new organizations (NGOs, savings and loans, and selected commercial banks) have extended financial services to poor sectors of the population over the past 15 years, their coverage in rural areas has been very limited (IDB, 2000; Wenner and Proenza, 2000). It is essential to encourage reforms of the regulatory and institutional system to reduce transaction costs as well as the region's burgeoning informal sector; to support emerging financial institutions (savings and loan co-ops, NGOs, rural banks) dedicated to providing rural financial services; and to promote connections between formal and informal credit organizations and the use of nontraditional technologies to implement systems of guarantees to provide wider coverage. Reforms must also support efforts by private banks to penetrate rural areas. In creating reliable, sustainable and low-cost financial services for rural areas, it is important to encourage the emergence of micro finance institutions, mostly

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through small projects, technical assistance and the sharing of experiences. These programs would i) improve financial supervision and regulation systems, currently an obstacle to small loans; ii) develop the regulatory and institutional framework, which currently prevents the use of personal property (such as inventory, machinery and equipment and accounts receivable) as bank collateral, in order to reduce legal restrictions on repossessing this type of collateral in case of delinquency or failure to register for taxes; iii) develop capital markets through investment of risk capital in rural enterprises or in associations of small producers; iv) increase land titling and promote the creation of legal instruments to facilitate long-term land leasing and the purchase as well as the sale and transfer of land-use rights; and v) support the development of agricultural financing through commercial credit provided by buyers of product or sellers of inputs and intermediaries, eliminating existing obstacles to greater competition and supporting economically viable measures to organize small producers.

Sustainable Management of Natural Resources The sustainable use of natural resources is one of the most important challenges faced by rural areas throughout Latin America. The success of this effort will depend on action within the sector (institutions, policy, technology) as well as outside the sector (economic and political stability, education, transportation, communications), and will have profound implications for the region's future. Note should be taken of the lag in the design of institutions connected with environmental management in rural areas and their weak interaction with environmental units from other sectors. The development of institutions and instruments that stimulate natural resource management must be accelerated in a way that somehow takes into account the external benefits and costs of natural resource use. The pattern of agricultural development followed by most countries has often had negative effects on the environment. There has been pollution from the application of chemicals, salinization and erosion from both water and wind, and the negative effects of poor agricultural practices such as slash and burn agriculture and other farming activities detrimental to biodiversity and tropical forests. Hence, regulatory frameworks governing the production of food must encourage the sustainable use of resources. The growing connection between the environment and trade gives new economic importance to this issue, especially for countries with a large amount of agricultural exports. To articulate a sustainable pro-

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duction strategy for the long term means dealing with very significant demands in terms of the institutional structure of the public sector, the development of a proper regulatory framework, and the implementation of public investment programs, especially in connection with technological development. The deterioration of the region's natural resources represents an opportunity to develop a double response to rural poverty and the recovery of the quality of watersheds, soils, water, flora and fauna, and the rural landscape. This approach aims to harmonize productive activity with the recovery and conservation of ecosystems. A more agroecological focus in farming, fisheries and forestry production must become a fundamental principal of efforts to make optimum and sustainable use of natural resources, especially in view of the decreasing quantity and quality of available land and water in many countries of the region. Most of the rural poor live in areas with little agricultural potential, including degraded, eroded or semi-desert areas (e.g., the Bolivian altiplano, the Chaco, and northeast Brazil); lands that are fragile or marginal because of their mountainside location (some Central American locations); and wetlands. These populations are greatly dependent on natural resources for their subsistence in terms of water, food energy and income. But because of limits on the quality and quantity of these resources, people are forced to cross the upper limit of sustainability and begin, for lack of an alternative, to destroy this base. Compared with other regions of the world, Latin America still has great wealth in the form of natural resources. Nevertheless, the continuing destruction of those resources, along with desertification, climate change and the loss of biodiversity, pose an ongoing challenge to the region. The basis of a new rural strategyâ&#x20AC;&#x201D;which is germane to international agreements on such issues as climate change, biodiversity and desertificationâ&#x20AC;&#x201D;is to break the vicious circle of deforestation and the degradation of water and soil resources on the one hand, and to reduce rural poverty and migration to the cities on the other.5 The goal is to transform this vicious circle into a virtuous one that recovers natural resources and overcomes poverty. But support programs must be designed with this in mind. Measures might include long-term incentives (until the recovery of the natural resources is complete) for each land unit left unused in areas where resources have deteriorated, and special financing 5

The relationship between poverty and degradation of natural resources in a given locale depends on the level, distribution and type of poverty, as well as on the type of environmental problem involved, so recommendations should be based on the specifics of each case.

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for investment and reconversion of unutilized areas for reforestation, combined forest and grazing management, plant cover and other soil recovery practices. Finally, new demands in rural areas should be noted, going beyond food production and including conservation of ecosystems, biodiversity, essential natural processes and conservation of natural landscapes of esthetic and biological importance to support recreational and alternative economic activities such as ecotourism. Also high on the agenda should be the production of high-quality water resources for domestic and industrial consumption, as well as other environmental services of increasing importance, such as improving carbon dioxide processing and oxygen emissions, protecting against floods, and purifying polluted water and air. These services, along with the recovery and conservation ever more in demand by urban societies, should be valued and paid for by turning them into alternative sources of income for the rural population. In short, to achieve sustainable management of natural resources, priorities must include: Legal reforms to preserve natural forests and conserve their biodiversity and potential for producing environmental services, encourage reforestation on commercial plantations, and use water resources rationally and decentralize their management to facilitate equitable access and enforcement of regulatory standards. Institutional reforms to create, modernize and equip regulatory and administrative entities for natural resource management. Integrated management of watersheds that uses natural resources sustainably and involves participation by rural communities. This requires participatory planning for communities, including training programs, development of family-based production and nonagricultural activities, exploitation of wild flora and fauna, fish farming and natural fisheries, and the creation of incentives for activities that promote sustainable resource management (e.g., management of natural forests, reforestation, and promotion of soil conservation practices). Implementation of multicropping practices to increase yields without degrading soil and water resources. Related activities include promoting proper growing and reforestation practices in high ar-

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eas of water basins, creating jobs linked to soil conservation (e.g., zero cultivation, use of residues) and introducing better growing practices to reduce soil and water contamination caused by pesticides and chemicals. Development of small irrigation products or projects to rehabilitate irrigation systems for private users, including granting of water rights to users and associations of users to stimulate private investment in projects that make more effective use of water. Where justified by social benefits, design of instruments to compensate growers for the environmental services their practices provide, since in many cases the private benefits of such practices are limited (e.g., conservation of forests for carbon dioxide processing and regulation of the hydrological cycle). Strengthening the role of protected areas as a key element in rural development and in sustainable resource use, with a focus on consolidating current national systems of protected areas, promoting participation by rural communities in the management and rational use of resources (especially indigenous groups), and encouraging sustainable uses of biological resources, e.g., ecotourism and alternative natural products.

Improvements in Infrastructure and the Quality of Rural Life The development approach followed in most of the region's countries has favored cities as targets of both productive and social public investment. As a result, non-urban populations—including not only rural areas but also small and medium-sized towns—are at a disadvantage in terms of communications and social services, education and health. This has created a vicious circle in which the problems of rural life have encouraged migration to the cities not only by those who have trouble finding rural employment, but also by those who, though they have substantial wealth, opt to live in the cities, in turn diminishing the tax base and political resources of rural areas. The long-term sustainability of the region's economies depends in part on halting or slowing this trend. Investment programs to develop rural infrastructure and improve the quality of life— including potable water, electricity, housing, telecommunications and social services—have enormous importance because of their economic, political and demographic consequences.

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The lack of passable year-round roads in rural areas is a radical disincentive for private sector investment there in industry, mining and tourism. Investment in transportation infrastructure (highways, railways, navigable canals) has a positive impact on local employment via construction, improves access to social services, reduces costs of commercial transactions, opens new labor markets, and generates a set of externalities that are favorable to production and improve the quality of life. Investment in infrastructure will make it possible to integrate marginalized areas into the national development process, decentralize government activity, reduce transaction costs (access to information and markets), and strengthen rural towns and communities through public investment and by encouraging private productive activity. This investment will also increase opportunities for productive agricultural and nonagricultural development in rural areas and expand public services (especially health and primary and secondary education).

Human Resources and Training to Improve Employment Opportunities Investing in the rural population is undoubtedly the priority to definitively reduce rural poverty, as well as to address the short-term needs of these areas. These resources should be used to correct urban-rural inequalities in basic services and to expand and improve education and health services. The coverage, level and quality of these services is unequal in rural areas throughout the region. For many countries, laying the groundwork for all children in rural settings to have access to six years of primary education is a distant goal. For a few others, the current goal is to provide full access to four years of rural secondary education. The quality of rural education in most countries is inferior to the quality of urban education for equivalent years and levels of the educational process. This is due to the dispersion of the rural population, low matriculation rates, and disincentives to teaching in the rural environment. Also, curricula generally do not address the specific needs of the rural population. When it comes to defining and implementing the best educational services for rural youth as well as transfers to the older population, it is important to consider specific demographic aspects of each rural locality. Primary and secondary education is a determining factor both in terms of opportunity for access to the labor market and in terms of income level. The children and young people to whom this effort is directed constitute an important human resource for the innovations and changes that need to occur in the short and medium term. This is a key area for

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public sector intervention, which is needed to guarantee a basic level of formal education in rural areas. Access to secondary education constitutes the best guarantee that poor young people in rural areas, both women and men, will be better prepared to enter the urban or rural labor market. In terms of technical education, many countries have abundant vocational training that is largely irrelevant to the specialties and skills demanded by the market. In many cases, the supply of agricultural training is greater than the opportunities for obtaining work in the sector after training is completed. The objective must be to improve opportunities by offering technical training that is consistent with the demands of the rural and urban labor market, including the option of self-employment. Occupational training programs carried out by agreement with private firms (combining work experience with formal training) have been particularly effective. The development of management training programs as well as training in specific areas is critical to the competitiveness of private firms. Throughout the region, there is a scarcity of good training organizations with the technical and financial wherewithal to implement the innovative programs mentioned above. This means that there is ample opportunity for cooperation and funding in this area at a regional level. Finally, it is essential to strengthen the basic organizational capabilities of rural populations and facilitate their full participation in rural development through training in all aspects of legal structures, modes of participation, and project and organizational management and administration. Training should include personnel of the governmental organizations responsible for formulating and supervising rural development programs.

Conclusions Conditions currently exist to further the development of the rural economy in Latin America and the Caribbean by means of various instruments available to governments and technical and financial agencies dedicated to rural issues in the region. However, putting the proposed options into practice requires a great effort, both from the point of view of human resource training and in terms of the necessary investment in priority areas, which must be defined on a case-by-case basis. Technical and financial agencies can play an important role by working with the countries of the region to generate ideas and proposals, mobilize financial resources, and articulate regional and subregional efforts to strengthen and complement the individual efforts of each country.

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Though many of the elements mentioned here are already being used in various countries, the overall application of them is a mediumterm activity that requires systematic work with periodic review, development and revision of operational tools, and lines of funding. This work should start on the demand side in the countries themselves and be developed on the basis of dialogue between governments and technical and financial agencies. Due to the varying situations in different countries, actions must focus specifically on each country's needs, identifying alternatives at the regional, departmental and municipal level. To support implementation of the proposed activities, international financial and technical agencies that work with rural sectors in the region should make incremental efforts that focus on: Creating a climate of commitment to rural development that involves developing medium-term multisectoral programs in the framework of national, regional, municipal and local sector strategies. This effort should promote a process of transformation of rural societies that is participatory in nature and involves specific policies to overcome the social, economic, institutional and ecological disequilibria analyzed in this chapter. Recent economic and technological changes reflect growing interdependence among different areas of economic activity and imply that the creation of investment programs must be based on an integrated view of the rural economy. This requires sectoral studies of enough breadth and depth to serve as a basis for deciding on strategies for action. By identifying bottlenecks and suggesting priority courses of action and defining their interrelationship with other economic policy instruments, these strategies systematize the actions to be taken and also inform, create consensus and generate the political support needed for the investments selected. Establishing a significant portfolio of programs in each country. These programs should i) address high-priority problems in the context of the development strategy that has been designed and is consistent with national macroeconomic policy; ii) ensure solid technical, socioeconomic and environmental viability; iii) ensure that the government and/or executing organizations have the institutional structures needed to implement the project and have counterpart resources at their disposal; and iv) facilitate participation by the direct beneficiaries in determining and formulating the project. These criteria will determine the priority of each project in rela-

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tion to other investment alternatives. They will also help shape the social and political consensus needed to ensure that this support will continue into the future. Given that in many cases there is neither a local development strategy nor a local institutional structure to carry one out, technical and financial agencies should help governments obtain funds, particularly technical cooperation funds. With this approach in mind, programs should be designed with a medium-term time horizon (10-15 years), or in stages based on the particulars of each case. The first stage should concentrate on establishing the minimum political and institutional conditions necessary to implement the activities that are to unfold in subsequent phases. Strengthening inter-agency cooperation and dialogue among the different sectors at the national level in order to implement a development agenda for the rural economy. Increased cooperation between technical and financial regional and international agencies as part of a process of dialogue with the countries of the region has already forged a certain consensus on priority technical areas. There is also agreement on the need to deepen collaboration between the agencies, maintaining a country focus. An ongoing exchange of information between agencies will allow for increasing the number of projects financed and carried out at the regional, subregional and national levels. This in turn will make the services rendered to the countries of the region more efficient. The recently created Inter-Agency Group on Rural Development in Latin America and the Caribbean marks a strong start toward achieving closer collaboration among agencies with complementary activities. Despite the enormous challenges that must yet be overcome, there is a promising future for development of rural economies in Latin America and the Caribbean. Technical and financial organizations can play a fundamental role in supporting the efforts by countries to achieve rural development using a medium- and long-range multisectoral approach. The region's economic and social development will benefit greatly from a proactive approach to this challenge that facilitates the mobilization of resources for strategic investment, systematic thinking through policy dialogue, dissemination of ideas and practices, and the development of programs that incorporate economic reforms, institutional strengthening and investment projects in priority areas. This is the institutional challenge of the coming decade.

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References Aristizabal, G., J. Echenique, and R. de Villalobos. 1992. Combatiendo la pobreza rural en America Latina y el Caribe. Una nueva estrategia de desarrollo rural. Consulting Report for the Agricultural Division of the Department of Project Analysis of the Inter-American Development Bank, Washington, DC. Damiani, O. 2000. El Estado y la agricultura no tradicional de exportacion en America Latina: Lecciones de tres estudios de caso. Inter-American Development Bank Sustainable Development Department Technical Report (RUR-103), Washington, DC. Echeverria, R.G. 1998. Perspectivas sobre mercados de tierras rurales en America Latina. Inter-American Development Bank Sustainable Development Department Technical Report, Washington, DC. 2000. Options for Rural Poverty Reduction in Latin America and the Caribbean. Revista de la CEPAL 70 (April): 147-60. Echeverria, R.G, E.J. Trigo, and D. Byerlee. 1996. Cambio institucional y alternativas de financiacion de la investigation agropecuaria en America Latina. Inter-American Development Bank Sustainable Development Department Technical Report, Washington, DC. Economic Commission for Latin America and the Caribbean. 1999. Panorama Social de America Latina y el Caribe 1998. Santiago: ECLAC. Figueroa, A. 1998. Pobreza rural en los paises andinos. In L.G. Reca and R.G. Echeverria (eds.), Agricultura, medio ambiente y pobreza rural en America Latina. Washington, DC: IDB-IFPRI. Inter-American Development Bank. 1998. Estrategia para la reduccion de la pobreza rural. Washington, DC: IDB. 2000. Estrategia para el desarrollo agroalimentario en America Latina y el Caribe. Washington, DC: IDB. International Fund for Agricultural Development. 2000. Hacia una region sin pobres rurales. Santiago: Latin America and Caribbean Islands Division, IFAD. Pineiro, M., R. Martinez Nogueira, E. Trigo, F. Torres, E. Manciana, and R.G. Echeverria. 1999. La institucionalidad en el sector agropecuario de America Latina. Washington, DC: Inter-American Development Bank. Wenner, M., and F. Proenza. 2000. Financiamiento rural en America Latina y el Caribe: Desafios y oportunidades. Inter-American Development Bank Sustainable Development Department Technical Report, Washington, DC.

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Conclusions This chapter summarizes some of the ideas that emerged at the Conference on Rural Economic Development held during the Annual Meeting of the Board of Governors of the Inter-American Development Bank in New Orleans in March 2000. The discussions and findings of the panelists, commentators and participants attending the event were taken as a point of departure, without an attempt to exhaustively document all of the issues presented and discussed. The goal of this final chapter is to highlight several points raised during those discussions that might lead to the identification of new areas and instruments for interventions to help reduce rural poverty and bring about a sustainable increase in the agricultural competitiveness of the countries in the region. Trends in rural poverty in the region can be summarized as follows: The incidence of both rural and urban poverty is anti-cyclical. Consequently, poverty reduction requires economic growth, although growth alone is insufficient. In general, growth is more effective in reducing poverty when the level of inequality is lower and the level of secondary education is higher. Changes in rural poverty in the 1990s varied widely in different countries. Progress was made in Brazil, Chile, Costa Rica and Panama, but not in Mexico, Honduras, Peru and Venezuela. This demonstrates that it is possible to reduce rural poverty, despite marked regional differences. The relative drop in the number of rural poor with respect to the number of urban poor is generally not the result of successful rural development programs. It is primarily the result of migration, which has transferred rural poverty to the urban sector. Poverty levels are still much higher in rural areas. Poverty indicators are nearly twice as high in rural areas (54 percent of rural house-

Chapter 8

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holds as opposed to 30 percent of urban households), while extreme poverty is three times as high (31 percent of rural households as opposed to 10 percent of urban households). Rural inhabitants are not only poorer than urban residents in terms of income, they also have lower levels of education and health (basic needs). Rural poverty is also more common among ethnic minorities and households headed by women, thus making it necessary to concentrate interventions on these groups. In short, rural poverty continues to be a critical factor in development efforts of Latin America and the Caribbean, a huge waste of potentially productive resources (80 million people), and a source of negative externalities for the rest of society through migration, political destabilization and stress on the environment. Consequently, it is imperative to seek new approaches to the successful development of rural areas. In this regard, it is necessary to be aware of the primary causes of poverty at the household level. The first is that the poor have insufficient access to productive assets such as natural, physical, human, social and financial capital. The second is that the context in which these assets are used also affects poverty, especially taking into account market failures, the lack of institutions to support competitiveness, and insufficient access to public goods. These contextual conditions reduce the capacity of these assets to produce income, which can be supplemented by sources beyond the farm. This is of the utmost importance to the rural poor who engage in multiple productive activities (multiple sources of income), as well as to the rural poor who are landless. The most significant of these conditions are prospects for nonagricultural rural employment. As a result of the heterogeneous nature of the assets and contexts of poverty, there are numerous strategies for generating income and, consequently, alternatives for escaping it. These include migration, modernized family agriculture, multiple productive activities, nonagricultural rural employment, and social assistance. In designing rural development interventions, therefore, it is necessary to improve the effectiveness of each of these ways of reducing poverty. The lessons of the last two decades make it possible to identify certain basic steps needed for successful rural development programs. The first step is to ensure coordination at the national level between macroeconomic, agricultural and rural development policies. One way to achieve this is by establishing rural development councils that involve a wide range of public and private entities. The second step is to take a regional approach to rural development, thus creating opportunities at the local level.

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This approach can be implemented through regional development councils. The third step is to enact municipal decentralization, which includes genuine democratic representation, effective administration, and a sound fiscal base. The fourth step is to develop institutions to support rural income after the period of structural adjustment. This can be achieved through technological development, financial services and marketing programs. Finally, it is necessary to promote local organizations and collective action. Under the conditions that result from taking the aforementioned steps, investing in assets controlled by the poor is good business from both a social and a private point of view. Means of achieving this end include promoting investments in access to land and water (natural capital), technological development for small producers and infrastructure (physical capital), rural education (human capital), financial services for the rural sector (financial capital), and social inclusion (social capital). These investments in assets should be complemented by investments in the context of rural poverty, thus validating these assets, as well as by investments in basic needs. The degree of emphasis on the three types of investment programs mentioned above involves a choice between two alternatives for reducing rural poverty. If the objective is the slow disappearance of small agriculture in favor of large-scale commercial agriculture, emphasis should be placed on programs for investment in basic needs in order to promote an escape from poverty through migration and social assistance. Thus, over time, rural poverty will be reduced. The second alternative is to promote a dynamic and diversified household economy. This requires designing programs to increase income through investment in assets and the policy context. Programs should also promote new income opportunities that help people move out of poverty by modernizing small and medium-size commercial agriculture (family farms vs. industrialized farming), linking agriculture with the conservation of natural resources, and supporting nonagricultural rural employment and multiple productive activities. The modernization of small agriculture requires producers to be highly involved in the modern economy through the participation of family agriculture in the most dynamic agrifood sectors, contracts with agribusiness and agricultural exporters, mainstream venture capital firms, and modern technology for small-scale production systems. The potential success of this option is impeded, however, by the lack of institutions to support competitiveness. Promoting the household economy based on multiple productive

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activities requires a regional approach to development that creates rural employment opportunities that are not necessarily agricultural in nature. Producing income through self-employment is always demanding. A number of factors come into play here, such as the degree of economic decentralization and the amount of infrastructure, as well as the roles of education and professional training in gaining access to nonagricultural rural employment. From the above analysis, it would appear important at the macroeconomic level (Ministries of Economy and Finance) to support strategies to diversify small and medium-scale agriculture through a new institutional framework that coordinates national policy on rural development, regional development that generates opportunities, and effective municipal decentralization. Furthermore, there should be a new balance in rural development funding that includes basic needs (economic and social security) and investments in assets and context (new income opportunities), while at the same time providing for coordinated action with welfare agencies. At the sector level (Ministries of Agriculture), strategies to reduce rural poverty through dynamic small and medium-scale (family) agriculture must be strengthened. This can be achieved by revitalizing agriculture as a whole, with a major emphasis on investment programs that focus on the context of rural poverty and productive assets that generate new income opportunities; and by promoting greater participation of the household economy in the most dynamic agricultural sectors, poverty reduction, competitiveness and agribusiness. At the level of the multilateral development agencies, there must be more investment in rural development programs that emphasize assets and income opportunities; increased efforts to promote the establishment of regional rural development institutions that incorporate best practices in a coordinated, regional and decentralized approach; and increased investment in the development of international public goods, particularly in technology, plant and animal health and food safety.

The Food and Agriculture Sector as the Engine of Rural Economic Development The food and agriculture sector in Latin America accounts for approximately one-fourth of total GDP and nearly half the region's total exports. As a result of a strong multiplier effect with respect to the rest of the economy, the sector makes a considerable contribution to development, poverty reduction and satisfying food requirements.

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One of the profound changes in the region over the past two decades has been a major transformation in the agricultural paradigm. Twenty years ago, agriculture was considered separate from the rural environment and was carried out in the context of a very different macroeconomic policy framework, a consistent public sector intervention strategy, a coherent institutional model, an appropriate investment system, and a private production structure reinforced by policy. By and large, the sector had low growth rates and rural poverty was widespread. At the beginning of the reform process, trade liberalization was expected to increase the real exchange rate, thus producing a substantial improvement in the relative prices of agricultural products. Contrary to expectations, the real exchange rate declined in many countries of the region, which squeezed agriculture and left small producers and activities that competed with imported products in a particularly difficult position. The decrease in the real exchange rate was more pronounced in the cases of the early reformers than in other countries. Despite these events, agricultural and livestock exports rose at a rapid pace throughout the 1990s, with average growth rates of 12 percent for early reformers and 7 percent for the rest of the region. However, agricultural activities that competed with imports tended to lag behind. One main conclusion to be drawn from this period is that reforms can produce macroeconomic stability and high and sustainable rates of growth in GDP and agricultural exports. However, this has not alleviated competitive pressures on significant segments of the agricultural sector, particularly activities that compete with imported products. This has two major political implications. First, countries that have not yet completed their structural reform agendas should continue to pursue them, taking into account the experiences of the early reformers. And second, it is clearly not possible to wait for reforms to benefit all economic activities in the sector. Appropriate macroeconomic conditions such as those maintained by most early reformers, will not prevent a decline in the real exchange rate nor substantial competitive pressure on activities that compete with imported products. Consequently, it is important to have a new range of economic instruments and institutional adjustments to address the transitional challenges faced by segments of the agricultural sector that compete with imported products. The new range of policies, including trade liberalization aimed at improving competitiveness, establishes new conditions in which, generally speaking, specific sector intervention strategies are absent, institutions play a minor role, and investments are relatively small and remain below a sector adjustment ceiling. Agribusiness is in transition: control-

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ling land is less important than controlling knowledge, and gains in efficiency occur as a function of demand, scale, access to technology and information, and the availability of venture capital. As a result of this transition, there has been a modest increase in agricultural sector growth, but poverty has not declined. In rural areas today, the agriculture sector is one of the main engines of development due to its large current and potential contribution, its multiplier effects, and its direct and indirect impact on poverty reduction and the sustainable use of natural resources. In this regard, there is a growing regional consensus regarding the importance of developing a new paradigm rooted in promoting rural economic development. This new paradigm is based on taking advantage of the opportunities that arise from trade liberalization and regional integration, and incorporating them into an expanded vision in which rural areas are seen not only as agricultural areas, but also as places where all available resources can be mobilized to achieve several objectives (growth, competitiveness, poverty reduction, sustainability) while taking into account the synergies between them. Priorities within this new perspective include consolidating general and sector policy reforms and targeting public investment to modernization of the state, including more effective and efficient investment in areas with the characteristics of public goods and the promotion of private agribusiness activities that will be needed under these new conditions. To complement national-level activities, it is also necessary to invest in programs at the regional (international) level that clearly have economies of scale and that correspond to increasing levels of hemispheric integration. Such activities include information, policy analysis and training, agricultural technology, plant and animal health, and food safety. With regard to public policy, there must be consistency with macroeconomic policy, leadership and institutional responsibility to ensure implementation, and greater emphasis on the roles of the private sector and civil society as facilitators of activities through financing, rather than as direct participants. This means increasing the quality of governance, developing capacities, and establishing linkages with civil society, as well as making significant public investments in order to reduce rural poverty and finance the development of public goods that raise agricultural competitiveness. Examples are infrastructure, technology, technical training and product market development. There is also a need for measures to encourage venture capital investment and the creation of knowledgeintensive businesses, which would add value to agribusiness activities. In addition, public policies must focus on developing an institutional frame-

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work that is consistent with a comprehensive and territorial vision of rural development.

Institutional and Management Reforms of the Public Agricultural Sector The inability of public sector agricultural institutions in Latin America to formulate and implement policies is a recurring theme in discussions of ways to increase agricultural competitiveness and promote rural economic development. The attributes of government need to be reconsidered, and new organizational models and methods of collaboration with society must be designed to implement public policies more efficiently. Due to the strategic analytical constraints on organizations in the sector, the measures recently undertaken in this area have been isolated and incomplete. However, there is renewed interest in strengthening government institutions in order to develop the framework necessary for markets to function properly and to achieve growth with equity. There are three possible approaches that could be added to the agenda for modernizing the public agricultural sector. First, greater rationality, transparency and efficiency must be introduced to the entire process of preparing and implementing substantive sector policies. One priority should be to strengthen institutional capacity, analytical resources and management in order to overcome the tendency to regard these as supplements to conventional policies and projects. Second, it is vital to develop a more mature vision of the role of the state. In addition to its role in building infrastructure, training employees and designing regulations to support decision-making, the state must undertake administrative reform in order to improve its capacity to govern the sector, manage strategically, and act efficiently. These initiatives should be supported by rigorous technical appraisals that introduce objectivity into the analysis, focusing on strengthening specific institutions and their links to available resources such as inter-agency networks. Finally, institutional reforms should help the region become more competitive internationally, expand the agricultural sector through agroindustrialization and vertical integration, and support the environmental sustainability of production and the social sustainability of rural areas.

CONCLUSIONS

DEVELOPMENT OF RURAL ECONOMIES

The Increasing Importance of Nonagricultural Rural Employment and Income Nonagricultural employment plays a key role in alleviating rural poverty because a high proportion of rural household income comes from nonagricultural sources. This softens the blow of seasonal and year-to-year fluctuations in agricultural employment, while multiplying the effects of agricultural income. It can also serve as a way out of poverty for specific groups, including women and those with higher levels of education. Nonagricultural rural activities are essential to a modern agricultural sector, which relies on services and links to industry, trade, transportation, professional services, contract agriculture and processing. The presence of nonagricultural rural activities is indicative of the growing urbanization of rural areas. They provide options for improving the quality of life of rural populations, particularly through recreational activities, personal and professional services, nonagricultural commerce and rural housing. Economic activities that generate nonagricultural rural employment have grown significantly in recent decades, compensating for the fall in rural agricultural employment and reducing the rates of rural depopulation and urban growth. However, regional trends over the past decade mask considerable differences between individual countries. The presence of multiple activities at the household level is less significant than has traditionally been assumed. Although up to 40 percent of households generate income from more than one source of employment, less than 20 percent of these generate a major proportion of their income from a second source. The vast majority of rural households, therefore, tend to specialize in accordance with their level of assets and the number of incentives available. There are also considerable differences between types of nonagricultural rural employment. Many of these are "refuge" jobs characterized by low productivity, poor remuneration and minimal potential for development. Other relevant categories of nonagricultural rural employment are salaried positions in the service and industrial sectors and self-employment. Promoting nonagricultural rural employment requires recognizing the following types of work: i) jobs related to agriculture, such as input trade, machinery-related services, mechanical workshops, professional services and agribusiness; ii) jobs related to nonagricultural primary activities, particularly mining and fishing; iii) jobs that satisfy the basic needs of the rural population, such as nonagricultural retail businesses, workshops, transportation and personal and professional services;

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iv) jobs that satisfy the urban population's demand for goods and services, such as beach and countryside tourism, handicrafts and weekend domestic personal services; v) jobs deriving from public services, such as education, health, road repair and municipal employment; and vi) jobs related to urban expansion, such as construction and industry. Agricultural and nonagricultural activities complement and strengthen one another, and many of the types of employment mentioned above are exogenous to the rural environment. It is for this reason that rural development programs must mobilize internal and external resources and capacities. The ability of rural households to respond to the incentives created by nonagricultural rural activities depends on a variety of factors. First is regional economic dynamism, given that nonagricultural rural employment is heavily concentrated in dynamic areas and that lower levels of employment and higher levels of nonagricultural refuge jobs are found in poor areas with low agricultural potential. Second, an analysis of household income demonstrates that the poorest rural households with the fewest opportunities to generate agricultural income are the most dependent on nonagricultural employment, although their absolute level of nonagricultural income is very low. Meanwhile, rural households with higher agricultural income also have higher levels of nonagricultural income. In other words, a direct relationship exists between the development and modernization of small and medium-scale agriculture and the growth of nonagricultural rural employment and income. Third, households with less land are more dependent on, but have lower absolute levels of, nonagricultural income, while households with greater access to land generate more nonagricultural income. Fourth, level of education is a very strong determinant of the ability to respond to nonagricultural employment opportunities, especially those of higher quality and productivity. Only people with higher levels of education can gain access to quality nonagricultural rural employment. Fifth, higher levels of nonagricultural rural employment are found in areas with better transportation networks and irrigation infrastructure. Finally, gender is a major factor in gaining access to employment. Most of the female workforce in rural areas is engaged in nonagricultural activities. As for policies in support of nonagricultural rural employment, development programs should first recognize the heterogeneity of rural areas (with respect to incentives and capacities) and reduce their bias in favor of the agricultural and livestock sector, which in effect ignores 40 percent of rural income. In order to expand their operations and concentrate on rural economic development as a whole, programs must be de-

CONCLUSIONS

DEVELOPMENT OF RURAL ECONOMIES

signed not only to help households obtain nonagricultural rural employment, but also to strengthen the determinants of such employment, many of which are external to the rural sector. Ignoring external factors, many rural development projects go no farther than creating nonagricultural refuge jobs. Secondly, rural development institutions must be decentralized, given that many policy instruments for promoting rural employment are in the hands of local governments (education, certain public works, the issuance of business licenses, technical assistance systems, the administration or implementation of development projects and funds, and land regulation). The third key element in support of nonagricultural rural employment is the specificity of agricultural development policies. These policies usually concentrate only on primary production. In fact, they should also include such nonagricultural activities as i) nontraditional crops with possible links to agribusiness; ii) intensive service-based production systems; iii) financial systems that serve the needs of service, processing and manufacturing companies; iv) training in nonagricultural rural professions; and iv) the establishment of investment areas dedicated to nonagricultural rural activities. Finally, in light of the complementarity between agricultural and nonagricultural rural activities, nonagricultural rural employment should not be financed by reallocating the already limited resources previously dedicated to promoting agricultural development.

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About the Authors Julie Babinard Assistant to the Director General, International Food Policy Research Institute, Washington, DC. Her research has focused on policies aimed at reducing poverty, food insecurity and environmental degradation, (j.babinard@cgiar.org) Julio A. Berdegue President, RIMISP, Santiago, Chile. He is the author and editor of five books and many articles related to small-scale agriculture, rural development and the fight against poverty. His experiences cover virtually every country in Latin America and include the management of research, development, training and technical assistance programs through RIMISP and other NGOs, as well as technical management of government technical assistance and credit services for small farmers sponsored by the Government of Chile. He has served as a consultant to numerous international organizations. (jberdegue@rimisp.cl) Ruben G. Echeverria Head of the Rural Development Unit of the Sustainable Development Department of the Inter-American Development Bank, Washington, DC. At the IDE, he has helped prepare loans in support of rural development, strategies aimed at reducing rural poverty and developing the agrifood sector, and establishment of the Regional Fund for Agricultural Technology (FONTAGRO) and an interagency group for rural development. He previously worked for the Consultative Group on International Agricultural Research. (rubene@iadb.org) German Escobar An expert in production systems, rural development and institutional strengthening in Latin America. He is an international consultant and the Director of Research at RIMISP, Santiago, Chile. (gescobar@rimisp.cl)

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ABOUT THE AUTHORS

Alain de Janvry Professor of the Department of Agricultural and Resource Economics at the University of California, Berkeley. He has worked on issues of rural poverty, rural development and land access policies in many countries of Latin America, (alain@are.berkeley.edu) Roberto Martinez Nogueira Director of Grupo CEO, Buenos Aires, Argentina. Professor at the Universities of Buenos Aires and San Andres, Argentina. President of the Fundacidn FORGES. A consultant to the IDB and the World Bank. He has done work on government organization and rural development in Latin America and the Caribbean. (rmn@mol.com.ar) Per Pinstrup-Andersen Director General, International Food Policy Research Institute (IFPRI), Washington, DC. (p.pinstrup-andersen@cgiar.org) Martin Pineiro Former Director General of the Inter-American Institute for Cooperation on Agriculture (IICA). Director of Grupo CEO, Buenos Aires, Argentina. (grupoceo@mol.com.ar) Jorge A. Quiroz Partner of Gerens Ltda., Santiago, Chile. He is a corporate and government consultant in the areas of finance, industrial organization, economic analysis and policy design. He is a professor of applied econometrics in the Department of Industrial Engineering at the University of Chile, Santiago. (race@mailnet.rdc.cl) Thomas Reardon Professor at Michigan State University. An expert in agribusiness and nonagricultural rural employment, (reardon@pilot.msu.edu) Elisabeth Sadoulet Professor of the Department of Agricultural and Resource Economics at the University of California, Berkeley. She is an expert in economic development, household and community behavior models, and quantitative analysis of the impact of development programs. (sadoulet@are.berkeley.edu)

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