I. DEVELOPING COUNTRY REGIONS

SUB-SAHARAN AFRICA
ASIA AND THE PACIFIC
LATIN AMERICA AND THE CARIBBEAN
NEAR EAST AND NORTH AFRICA

The following review examines recent economic and agricultural performances in the four developing country regions and highlights the main policy developments affecting their agricultural sectors during 1992 and 1993. Following the customary approach, the review then focuses more specifically on the experience of selected countries in each region: Ethiopia in Africa; Bangladesh and Sri Lanka in Asia; Mexico in Latin America and the Caribbean; and Egypt and the Syrian Arab Republic in the Near East.

SUB-SAHARAN AFRICA

Regional overview
Ethiopia

Regional overview

The economic performance of sub-Saharan Africa was dismal yet again in 1992. The average growth rate of the region (excluding Nigeria) was 0.9 percent, a slight recovery from the meagre 0.2 percent achieved in 1991.¹ However, these averages mask a great diversity among individual countries. According to the African Development Bank (AfDB),² more countries (16) experienced negative growth rates in 1992 than in the previous year (13) and fewer countries (19) experienced growth rates of more than 2.5 percent than in 1991 (23). Moreover, economic growth fell far short of population growth. Consequently, in per caput terms, output shrank by 1.1 percent in 1992, meaning the sixth successive year of decline. Overall, the picture is that of worsening economic and social conditions.

¹ UN. 1993. Economic Recovery, 6(4).
² AfDB. African Development Report 1993.

The UN Economic Commission for Africa (ECA) estimates output growth to be about 3 percent in 1993 (for Africa as a whole).³ That growth rate, if achieved, would merely keep abreast with the projected population growth rates.

³ECA. Economic Report for Africa 1993. UN.

Figure 7 SUB-SAHARAN AFRICA - AGRICULTURAL AND PER CAPUT FOOD PRODUCTION

Figure 7 SUB-SAHARAN AFRICA - AGRICULTURAL TRADE

Figure 7 SUB-SAHARAN AFRICA - AGRICULTURAL EXPORTS (Index 1979-81 = 100)

Figure 7 SUB-SAHARAN AFRICA - AGRICULTURAL IMPORTS (Index 1979-81 = 100)

The slow growth (1.7 percent) in the combined output of industrialized countries constrained demand for developing country imports and capital flows to the developing world. Moreover, the demand for primary commodities remained weak and their prices declined in spite of a small recovery in world trade during the year.

Terms of trade for sub-Saharan exports deteriorated further in 1992. Despite lower inflation in the industrialized countries, the main trading partners of sub-Saharan Africa, import prices rose by 3.2 percent during 1992. Meanwhile, prices of exports fell, albeit less pronouncedly than in 1991. Among the main agricultural commodities exported by the region, only logs, tea and sugar registered higher export prices in 1992 than in 1991. Cocoa and coffee recorded their eighth and sixth consecutive years, respectively, of falling prices. Prices of almost all metal and mineral exports from sub-Saharan Africa fell during the year. Moreover, in 1993, improvements are expected only in aluminium and diamond prices.

With continuing poor prospects for export earnings relative to the value of imports, sub-Saharan Africa requires an increasingly large volume of external resource flows. However, foreign direct private investment in the region has traditionally been small ($1.7 billion in 1991) and can be expected to remain so, particularly as private resource flows to countries labelled as bad debtors are rare. The hope that structural adjustment programmes would accelerate the flow of foreign private finance seems to have been misplaced.

Unfortunately for sub-Saharan Africa, which has traditionally depended on official resource flows, the flows of Official Development Assistance (ODA) to the region have actually declined of late. ODA net disbursements, which amounted to $11.5 billion in 1990, were down by about $1 billion (in real terms) in 1991. Meanwhile, at $6 billion, total multilateral net disbursements remained the same in 1991 as in the previous year.

BOX 3 THE DEBT PROBLEM IN SUB-SAHARAN AFRICA Total debt for sub-Saharan Africa was more than $183 billion in 1992, up from about $178 billion in the previous year. At that level, the debt stock exceeded the 1992 annual regional GDP by 6 percent. Interest arrears on long-term external debt alone were a staggering $14 billion. Nearly one-fifth of hard-earned export revenue was used to service debt in 1992. Although that figure signifies a third consecutive year of decline, the debt-service ratio remains stubbornly high. A significant share (some 10 percent on average between 1985 and 1991) of total debt originates from loans for projects in the agricultural sector. In 1991, the latest year for which data are available, outstanding agricultural long-term external debt was just over $13 billion, up from about $12.5 billion in the previous year. For 1991 alone, net long-term flows on debt (or net lending) to agriculture, at $727 million, were the lowest since 1985; nevertheless, they represented 23 percent of total net flows on debt. Despite years of efforts to reduce the sub-Saharan African debt burden through rescheduling and debt forgiveness, only a small amount of debt has so far been affected. In 1991, only $3.8 billion of Africa's debt (mostly in sub-Saharan Africa) was cancelled. During 1992, only nine countries secured the "enhanced Toronto terms", which allow for a cancellation of or reduction in the interest charges offered by some creditor countries. The amount of debt involved is significantly less than it would have been with the cancellation of two-thirds of the entire stock of eligible debt, as envisaged under the "Trinidad terms". Furthermore, only two countries had recourse in 1992 to the IDA Debt Reduction Facility, which is oriented towards reducing commercial debt, because of the creditors' reluctance and debtor countries' domestic constraints as well as debtors' failure at times to comply with structural adjustment conditionality. Multilateral debt, rather than commercial or official bilateral debt, is fast becoming the major problem in sub-Saharan Africa. During the 1980s, most countries were lured away from contracting commercial market debt by the prestructural adjustment experience, commercial banks' reluctance to lend to debt-burdened countries and donor persuasion, and they consequently resorted to heavier borrowing from multilateral financial institutions. Almost 40 percent of total sub-Saharan Africa's official long-term debt in 1992 was owed to multilateral institutions from which the debtors can not expect debt rescheduling or cancellation.

The growing disparity between resource inflows and debt service payments resulted in reduced net transfers to the region in 1991 relative to 1990. For example, for the agricultural sector alone, the net transfers of $377 million in 1991 (the latest year for which data are available) represented less than one-half of net transfers in 1990.

Wars and civil strife, notably in Angola, Liberia, Mozambique, Somalia and the Sudan, contributed significantly to the overall economic decline in 1992, as did the sometimes chaotic political situations in such countries as Togo and Zaire where looting and rioting destroyed the infrastructure required for economic development.

The level of agricultural production in 1992 remained virtually unchanged over that of 1991, the major cause being the drought that affected East and southern Africa. As a whole, the latter experienced a decline of 7.7 percent over the previous year and accounted for 16 million of the 40 million people estimated by FAO to be facing food shortages in sub-Saharan Africa. Elsewhere in Africa, growth was slow; in central Africa, agricultural output grew by 1.4 percent and, in West Africa, the growth rate was 2.9 percent. Civil strife exacerbated the already disastrous food supply and access problems in Mozambique and Somalia.

Cereal production fell by more than 5 percent for the region as a whole. In southern Africa, where cereals are the main staple, output fell to less than one-half of the 1991 level. Thanks to less dramatic changes in cereal and non-cereal food items elsewhere in the region, notably in Ethiopia, the Sudan and in West and central African countries, the aggregate food production sector increased slightly - by nearly 1 percent - over the previous year. The output of non-food agricultural commodities, on the other hand, fell by about 5.7 percent.

Over a longer period, sub-Saharan Africa has, contrary to popular belief, maintained trend growth rates in agricultural production comparable to other regions of the world.⁴ In fact, from 1981 to 1992, aggregate production increased at a rate of 3 percent per year, with slight declines in 1982, 1986 and 1990. The problem in the region has always been the population growth rate which has outstripped growth in production, thus resulting in a declining per caput output. For instance, although agricultural output increased marginally (0.3 percent) in 1992, per caput production declined by nearly 2.8 percent. The prospects of a reversal of this trend depend on both the region's ability to slow population growth as well as its capacity, assuming more benevolent weather conditions and fewer wars and civil disruption, to increase production through sustainable and intensive agriculture.

⁴ UN. 1992. Economic Recovery, 6(3).

With respect to policy developments, structural adjustment programmes with emphasis on short-term objectives continued to guide policy reforms in most countries in the region. The pursuit of adjustment with transformation and the harmonization of short-term policy goals with medium- and long-term development objectives were hardly in evidence. The latter were the objectives of the African Alternative Framework to Structural Adjustment Programmes for Socio-Economic Transformation (AAF-SAP) adopted recently by the Organization of African Unity (OAU).

Fiscal reform played a central role in efforts to strengthen domestic economic management. The success rate in reducing budget imbalances varied considerably, however. Benin and the Gambia, for instance, were able to reduce their budget deficits as a proportion of GDP, but many other countries failed to do so.

Monetary policy emphasized a tight control of money supply as well as adjustments of interest rates. Going against the grain, however, Zaire embarked on a course of monetary expansion, and its inflation rate reached huge proportions. Interest rate adjustments were an important plank of monetary policy and real interest rates were raised by several countries, including Cape Verde, Comoros, Côte d'Ivoire, Djibouti, the Gambia, Guinea-Bissau, Kenya, Malawi, Mali, Mauritania, Tunisia, the United Republic of Tanzania, Zambia and Zimbabwe. Ghana and Mauritius adjusted their nominal bank rates downwards but they remained positive in real terms.

The move towards market-determined exchange rates continued in many sub-Saharan countries in 1992 either through outright devaluation of national currencies (e.g. Ethiopia, Malawi, Mauritania and Rwanda) or by flotation (Nigeria) and foreign exchange liberalization (e.g. Algeria, Uganda, the United Republic of Tanzania and Zambia).

Public sector reforms, which have included trimming the size of the civil service and curtailing government consumption, were a continuing feature of the reform programme. Privatization also played a major role in public sector reforms of such countries as Chad, Côte d'Ivoire, Ghana, Mozambique, Nigeria, the Sudan, Uganda and Zambia.

Policy reforms in agriculture continued in most countries, often within the overall framework of structural adjustment programmes negotiated with the World Bank and the IMF. Market liberalization remained an important component of agricultural policy reforms, with agricultural parastatals being dismantled, privatized or restructured in countries such as Burundi, Côte d'Ivoire and Mozambique. In some other countries (e.g. Ethiopia, Kenya, Malawi, Mali, Uganda, the United Republic of Tanzania, Zambia and Zimbabwe), some or total decontrol of agricultural marketing has been effected. Agricultural market liberalization has also been planned for implementation in other countries, including Lesotho and the Central African Republic.

Some countries have embarked on a policy of diversifying the agricultural export base, moving away from a reliance on one or few export crops, as international prices for traditional exports continue to crumble. For example, Benin is promoting the production of palm oil, coconut and groundnuts as well as pineapple and exotic fruits and vegetables, along with the traditional export, cotton. Uganda is planning to diversify into sesame, tobacco, hides and skins, spices and fish after regaining a market share in its traditional exports: cotton, tea and coffee. Typically, the fisheries sector has featured prominently in the drive towards diversification. Mozambique, Namibia, Nigeria and Sierra Leone are just four of the countries that have embarked on aggressive fish farming campaigns.

The drought in southern Africa has led to the region's agricultural development policies being focused mainly on drought relief, increased food production and diversification within the food sector. In Malawi, in addition to supporting maize production (the main staple for most of the population), the government is promoting the production of cassava - a drought-resistant crop - as a security crop, as well as promoting local production of vegetable seeds. Zambia is encouraging the production of sorghum, millet and cassava in its food crop diversification strategy to reduce dependence on maize. In Zimbabwe, price and non-price incentives have been provided to farmers to ensure an increase in grain production. Other countries in the region have followed similar trends.

Food security has also been a major preoccupation elsewhere in the region. Nigeria's five-year ban on wheat imports (lifted temporarily at the end of 1992) was designed to promote domestic production and was a partial success. Senegal has launched a programme intended to achieve an 80 percent self-sufficiency in food. In Burkina Faso, a project to prevent seasonal hunger and malnutrition has been launched; and in Djibouti, efforts are under way within the broad arena of food security to encourage greater consumption of local products, including food.

The drought in the southern part of the region has been a catalyst in the reorientation of agricultural policies towards a more efficient exploitation of irrigation potential in the region; Malawi is one of the countries that are actively addressing this issue.

Environmental protection has also received some attention within the context of agricultural policies. The Global Coalition for Africa, in its first annual report, contends that four-fifths of the cropland and pasture land in sub-Saharan Africa is at least partly degraded; and that deforestation might have been a cause of the significant decline in rainfall in the Sahel, in coastal areas along the Gulf of Guinea, in Cameroon, northern Nigeria and East Africa.⁵ Environmental concerns have led, for example, to a government ban on the felling of some tree species in Zaire and to a ban on the exportation of 18 log species in Ghana. Several other countries have outlined strategies to develop forests and rationalize the exploitation of fisheries resources.

⁵ The Global Coalition for Africa. 1992. African Social and Development Trends. Annual Report, p. 11.

Although policy emphasis was heavily weighted towards national concerns in 1992, intra-African trade, in particular, but also economic and political integration, generally, received a boost through a number of important decisions.

The Preferential Trade Area for Eastern and Southern African States (PTA) amended the PTA Rules of Origin: all goods originating from member states, regardless of the nationality of the producers, are now subject to preferential tariffs.

In August 1992, the Southern African Development Coordination Conference (SADCC) was renamed the Southern African Development Community (SADC) in anticipation of the potential accession of post-apartheid South Africa.⁶

⁶ The prospects of a settlement of the political quagmire in South Africa have been enhanced by the announcement of a tentative date (April 1994) when the country will hold multiracial elections.

The apparently renewed commitment to economic integration results from the recognition that the region's future may lie in collective self-reliance as the international economic environment becomes increasingly hostile, thereby threatening accelerated growth in the small, often fragmented, individual economies of sub-Saharan Africa. Self-reliance was one of the themes of the international conference, held in Dakar from 16 to 18 November 1992, entitled "Trampling the Grass: Is Africa's Growing Marginalization in the Newly Emerging International Order Reversible?" The conference was hosted by the African Centre for Development and Strategic Studies (ACDESS), a major new African think-tank.

Ethiopia

The country: general characteristics
The economy
Economic policies affecting agriculture
Agricultural sector policies
The impact of policies on agriculture
Current issues in agricultural development

The country: general characteristics

Situated in northeastern Africa, Ethiopia constitutes the largest part of the Horn of Africa.⁷ It spans an area of 1 223 600 km² (one of the largest countries in Africa) and has an altitude ranging from 100 m below sea level to more than 4 000 m above sea level. The second most populous African country after Nigeria, Ethiopia has a population of 55.1 million.⁸

⁷ Eritrea, officially independent since May 1993, is included in most of the reported data because of insufficient information to permit systematic reporting on Ethiopia only.

⁸1992 estimates.

⁹T. Desta. Disaster management in Ethiopia: past efforts and future directions. Presented to the United Nations Sudano-Sahelian Office (UNSO) Workshop on Drought Preparedness and Mitigation. Early Warning and Planning Services Relief and Rehabilitation Commission, Addis Ababa, May 1993.

¹⁰ For more information, see T. Desta, op. cit., footnote 9.

The economy

Ethiopia is one of the poorest countries in the world, with a per caput GDP of $120 and 60 percent of its population living below the poverty line.

Agriculture accounts for 50 percent of the country's GDP and 90 percent of exports. In terms of area under cultivation, cereals (teff, maize, barley, wheat) are the major crop category, followed by pulses (horse beans, chickpeas, haricot beans) and oilseeds (mainly neug and linseed). Coffee is the main export (accounting for 57.3 percent of total agricultural exports), followed by hides and skins (28 percent), live animals (3.3 percent) and vegetables.¹¹ About 78 percent of the total value of production from manufacturing industries is based on the processing of agricultural products (food processing, beverages and textiles).

¹¹ AGROSTAT data for 1990.

The overall growth of GDP during the 1970s and 1980s (1.9 and 1.6 percent, respectively) closely follows the trends in the growth of agricultural production (0.7 and 0.3 percent, respectively) and both magnitudes are well below the population growth rate (estimated to be 3 percent).

Economic policies affecting agriculture

The search for proximate causes of both agricultural and general economic stagnation in Ethiopia since the mid-1970s leads to a set of interrelated structural constraints and policy factors. In addition to the harsh agroclimatic conditions, inadequate and poorly maintained infrastructure, environmental degradation and inadequate technology have contributed to the decline of agriculture.

At the policy level, macroeconomic and sector-specific policies have contributed to the creation of a negative environment for agricultural growth. The rise to power of the revolutionary government in 1974 marked the beginning of an era of tight direct government controls on the production and distribution systems. A brief description of the policies implemented as well as their effects help explain the nature and magnitude of the problems facing Ethiopia today.

Macroeconomic policy: a deceptive internal balance. In Ethiopia, macroeconomic policies have traditionally been characterized by prudent fiscal management. The fiscal deficit was kept at an average of 7 percent of GDP for most years between 1975 and 1989, with the exception of drought years.

Relatively low deficits were achieved despite increasing public expenditure (from about 17 percent of GDP in fiscal 1974/75 to 47 percent in 1988/89). An aggressive policy of fiscal receipts prevented the deficits from ballooning. The budgetary effects of external shocks were mitigated by foreign disaster-relief flows. In general, foreign flows of grants and loans left about half the deficit to be financed internally. As the government avoided recourse to inflationary financing, average inflation was kept close to 9 percent during the 17 years ending in 1991.¹²

¹² For details, see World Bank. 1990. Ethiopia's economy in the 1980s and framework for accelerated growth, Washington, DC.

¹³ For detailed Ministry of Finance data, see A. Teferra. 1993. Ethiopia: the agricultural sector - an overview, Vol. II - statistical annex. Paper prepared for the Policy Analysis Division, FAO.

Institutional constraints on private business activity, for example a ceiling of 0.5 million birr (br) of fixed assets per manufacturing enterprise and a lack of investment opportunities and consumer items increased the amount of deposits (demand and savings) made by households and private businesses. High levels of deposits could be attracted at low interest rates (forced savings) and they were, in turn, mobilized for financing the domestic deficit. As a result, 85 to 90 percent of domestic financing came from the banking system.¹⁴

¹⁴ See footnote 12.

Agricultural sector policies

Between 1974 and 1993, the agricultural policy environment as well as that of the economy as a whole can be divided in three periods:

· 1974 to 1988, when "command economy" measures were implemented and consolidated;

· 1988 to 1991, when a number of previous measures were abandoned and reforms were made towards a more liberal economy;

· the post-1991 period (the revolutionary regime collapsed in 1991), during which several of the 1988-1990 reforms were consolidated and additional measures were taken to liberalize the economy.

The pre-1988 situation. In March 1975, the government announced sweeping changes in the structure of land tenure and labour relations in rural areas. The major elements of the law (Proclamation 31 of 1975) were: i) the nationalization of land and the abolition of private landownership; ii) a ban on tenancy contracts; iii) the prohibition of hired rural labour in private farming; iv) guaranteed access to cultivable land for all households.

Individual farm units were organized in peasant associations (PAs) which allocated and reallocated land among households, collected taxes and production quotas and organized voluntary labour for public works. The PAs, in turn, formed service cooperatives (SCs) which carried out supply, marketing and extension functions. Producers' cooperatives (PCs) were composed of individual households which commonly managed their consolidated farms. A number of large state farms were also established. By 1989, there were 17 000 PAs and 3 700 SCs, while the socialized sector (PCs and state farms) comprised 3 300 PCs with a total of 290 000 members.

Despite efforts directed towards the "socialization" of agriculture, the structure of production basically remained private because peasants strongly resisted integration in PCs. By 1988, the share of individual peasant holdings in total cultivated land was around 94 percent, with the remainder divided between PCs (2.5 percent) and state farms (3.5 percent). The allocation of public resources between the socialized and the non-socialized sectors was not proportionate to their importance, with the bulk of financial resources, modern inputs and extension personnel allocated to the socialized sector whose productivity performance often did not justify this disproportionate allocation.

"Villagization" (the grouping of the population in designated villages) became national policy in 1985. By 1989, one-third of the rural population had been transferred to villages. In 1985, in the wake of the drought, the campaign to resettle peasants from drought-stricken areas to uncultivated lands was intensified. Poor organization and settler selection transformed the scheme into an extremely costly project which required continuous subsidies in order to survive.

Pricing and marketing policies also reflected the tendency towards heavy state control. The Agricultural Marketing Corporation (AMC) was responsible for wholesale domestic procurement of grains, oilseeds and pulses and for cereal imports. The AMC was responsible for collecting all the marketable produce from PCs and state farms and required individual farms to deliver a quota based on their assessed capacity to produce a marketable surplus. From 1980, a pan-territorial pricing system was in effect for the quotas, with procurement prices remaining fixed until 1988 when they were increased by 7.7 percent.

Even after their increase in 1988, procurement prices for teff, wheat and barley were, respectively, 37, 61 and 45 percent of free market prices. There were intermittent bans on private trading in major producing regions until 1988. In addition, private traders were obliged to sell the AMC a share of their purchases (ranging between 50 to 100 percent) at br 4 to br 5 more than the price paid to farmers. AMC procurement was not particularly successful and its share of grain purchases reached a peak of 11 percent of the total grain crop in 1986/87, as both individual farmers and traders had strong reason to evade controls.

The functioning of the public procurement system created a market "dualism". On one side, there was the public distribution system which delivered to mills, hospitals, urban associations (kebeles), educational institutions and the army. On the other, there were (poorly integrated) free markets where grains and pulses were sold at substantially higher prices.

Exports of pulses and oilseeds, coffee and livestock were also handled by parastatals. Livestock products for export were procured at market prices while domestic trade was free. Coffee farmgate prices have been kept low (at 35 to 45 percent of their f.o.b. value) even under the overvalued official exchange rate.

The reforms of 1988. Faced with economic stagnation and mounting social problems, in 1988 the government initiated a programme of economic reforms aimed at liberalizing the economic system. The government pointed to the following causes for the economic stagnation:¹⁵ i) the negative effects of suppressing private economic activity; ii) the unbalanced allocations of investment in peasant agriculture in favour of the low-performance socialized sector; and iii) neglect of market forces and the private sector in favour of central planning that led to resource underutilization and inefficient investment.

¹⁵ Presidential Address to the Ninth Plenary Session of the Central Committee of the Workers's Party of Ethiopia, November 1988.

Another set of reforms was introduced in 1990, liberalizing the foreign investment code, while plans existed to allow the hiring of rural labour. As the country plunged increasingly into civil strife, political instability and institutional disintegration, those policies were not put into effect.

The post-1991 economic environment. In May 1991, the Transitional Government of Ethiopia (TGE) assumed power. It faced an economy that was devastated by the long period of civil strife, with low living standards and deteriorating infrastructure and social conditions. In addition to the deep-rooted problems of poverty in the country, there was the challenge of providing a livelihood for 350 000 demobilized soldiers and their families as well as for a large number of war refugees and displaced civilians.

Along with measures to establish peace and security in the country, a wide-ranging programme of economic and social reforms was introduced by the government with support from the donor community.

On the macroeconomic side, the government devalued the birr from br 2.07 to br 5 per US dollar and, in May 1993, a limited exchange rate auction system was established for essential items.

In agriculture, the government guaranteed use, lease and inheritance rights to land. In the transition period, land redistribution has stopped and the hiring of rural labour is now allowed. The TGE has announced that an elected government should handle the land tenure issue by referendum. The AMC lost its monopoly power so most grain is now marketed by private traders and the quota system has been abolished. Since January 1993, all export taxes have been abolished, with the exception of the coffee export tax. A 15 percent subsidy on fertilizer has been instituted as partial compensation for the effects of the devaluation. In the transport sector, trucking has been liberalized and there are plans to parcel and sell the government trucking company.

The impact of policies on agriculture

The effects of the policies (both macroeconomic and sector-specific) followed from 1974 to 1991, especially those applied before 1988, created an overall negative environment for agricultural growth, thereby contributing to the virtual stagnation of agricultural output.

Institutional changes with respect to land caused a drastic reduction in the size of farms which often were not sufficient to support a household. Tenure uncertainty had serious environmental implications while the small size of the holdings and the lack of timely distribution of fertilizers and seeds (exclusively distributed by the public sector) have contributed to the stagnation of yields.¹⁶

¹⁶ Average cereal yields are about 1.2 tonnes per hectare for the smallholder sector, two-thirds as high as those in Kenya for comparable soil fertility and climatic conditions. For pulses and oilseeds (at 0.65 tonnes and 0.5 tonnes per hectare, respectively), yields are among the lowest in the world.

Although the land actually controlled by PCs and state farms was only a small percentage of the total land area cultivated, according to the Ten-Year Perspective Plan 1982/83-1993/94, most individual farmers were to be organized into PCs. The final objective was for 44 percent of the cultivated land to be allocated to individual farms, 49 percent to PCs and 7 percent to state farms. Although the plan was never implemented, its provisions - along with the uncertain land tenure system and the frequent land reallocations within PAs - created great uncertainty among individual farm households and acted as a disincentive to long-term investments by farmers as well as to sustainable farm practices.

Furthermore, the marketing system was not conducive to the production of a marketing surplus, as low prices were paid for quota deliveries. Restrictions on interregional movements prevented the integration of deficit and surplus areas, a situation that was exacerbated by the poor condition of rural roads, tight controls on the transport and hauling system and the long distance of the majority of small peasant holdings from all-weather roads. The relative neglect of rural infrastructure greatly reduced overall investment efficiency.

It is difficult to single out the impact of the liberalization measures taken between 1988 and 1990, as their effects are clouded by the severe disruption of markets caused by the war. There is evidence of a reduction of spatial price dispersion and increased market integration for cereals following liberalization, despite the worsening security situation.

Thus far, the response of the economy and agriculture to the post-1991 reforms is encouraging, although it is difficult to establish with precision a correspondence between policies and performance. Exogenous factors (favourable weather) and non-economic factors (increased peace and security) have played a positive role in expanding economic activity.

On the macroeconomic side, after a reduction of 5.2 percent in 1991/92, real GDP is expected to grow by 7.5 percent in 1992/93, one percentage point above the government target. Inflation fell from 45 percent in the period June 1990/June 1991 to 14 percent in the corresponding period 1991/92. It is believed that the country had already absorbed the effects of the devaluation, as a large number of foreign exchange transactions were taking place on the parallel market at br 7 per US dollar.

The projected strong performance of real GDP is linked to the agricultural sector's continuous strong performance during the last three years. Cereal production showed a strong recovery, with a total production of 7.3 million tonnes in 1990/91 (a record crop), followed by a near-record crop in 1991/92 of 7.1 million tonnes and a projected 7.7 million tonnes in 1992/93.¹⁷

¹⁷Sources: For 1990/91, Central Statistical Authority data; for 1991/92, Ethiopian Ministry of Agriculture estimates; for 1992/93, FAO. 1993. Food-supply situation and crop prospects in sub-Saharan Africa. Rome. Note: Data include non-food uses.

Current issues in agricultural development

Recent policy reforms constitute the beginning of deep structural changes needed to set the Ethiopian economy on a sustainable development path. Ethiopia is, and will stay for some time, an economy in transition between two different economic development models. Among the numerous issues currently facing Ethiopian policy-makers, two are analysed more extensively in this report: i) food security and poverty alleviation; and ii) natural resource degradation.

Poverty and food insecurity. The extent of the problem and its root causes. Food insecurity (defined in its most basic form as a situation where the food needed for a healthy life is not accessible to all people at all times) is both a chronic and a transitory phenomenon in Ethiopia. It is estimated that 50 percent of the country's total population (between 23 million and 26 million people) are subject to food insecurity. More than 20 million of these people live in rural areas. In cases of consecutive periods of natural and human-caused calamities, poor households sell their assets, deplete their food stocks and become highly vulnerable or destitute and in need of continuous flows of food assistance to survive. Over the last two decades, transitory food insecurity has manifested itself in the famines following the droughts of 1972-73 and 1984-85.¹⁸ In Ethiopia, refugees and people displaced by the civil war are highly vulnerable groups requiring assistance.

¹⁸ Similar consequences were averted in the 1987 drought because of early warning and adequate preparation.

¹⁹ For instance, the period 1979-1984.

²⁰ For more information, see IFAD. 1989. IFAD: Special Programming Mission to Ethiopia. Working Papers Nos 1 (Macro-economic performance and trends) and 7 (The dynamics of rural poverty). Rome.

²¹ Ethiopian National Institute data. See I. Loerbroks. Statement on the occasion of World Food Day 1992, 16 October, Addis Ababa, Ethiopia.

²² In addition to the level of per caput income, access to social services is another dimension of poverty. Such access, if it exists, can compensate for some of the consequences of low income. In this report, only the elements of poverty directly affecting access to food are examined. For a detailed analysis of the different dimensions of poverty in Ethiopia, see The social dimensions of adjustment in Ethiopia: a study on poverty alleviation. Addis Ababa, Ministry of Planning and Economic Development. May 1992.

²³ Using 1982/83 survey data, IFAD estimated that only 5 percent of rural income was saved.

²⁴ According to the World Bank, assuming 5 percent real GDP growth and 3 percent population growth, it will take 35 years for the per caput GDP of Ethiopia (of $120) to double.

Safety net measures. Past policies for poverty alleviation emphasized untargeted commodity subsidies administered mainly through the public distribution system. Beneficiaries of the subsidies were members of the kebeles, PCs and cooperatives who were issued rations of subsidized food and other commodities (soap, salt and kerosene). Families had access to the same rations irrespective of income, the intention being (especially in the urban areas) the creation of a self-targeted system where the more privileged households would not be willing to queue in the kebele shops to obtain lower-quality items. The problems with the system of generalized commodity programmes were: i) it had a strong urban bias, i.e. urban consumers, representing 15 percent of the population, were receiving about 60 percent of the subsidies; ii) although it provided significant relief to poor households, it benefited disproportionately the middle- and higher-income ones, as very poor households could not afford to buy their ratio at subsidized prices; and iii) the economic costs of those programmes (i.e. using border prices at equilibrium exchange rates) were extremely high. As prices were liberalized and the exchange rate was devalued, the programmes became unworkable.²⁵

²⁵ World Bank calculations show that, at the shadow exchange rate of br 5 per US dollar (which, after 1991, became the actual exchange rate), the benefits to the poorest 30 percent of the urban population amounted to about 16 percent of the total cost of the urban commodity subsidies. For the rural sector the share was 5 percent (after adding the cost of the fertilizer subsidy). The total weighted share (urban plus rural) was about 12 percent.

Food aid for development. Food aid increased from about 3.5 percent of total food availability in the first half of the 1980s (up to 1984) to 17.2 percent during the second half, reflecting the effects of the 1984-85 drought.²⁶ The TGE has taken a clear position against free food distribution in its programming of food aid resources. This position is based on the belief that free food distribution is ineffective in arresting or reversing the trend towards impoverishment and that it could destroy the survival mechanisms of the poor. Thus, a number of proposals exist for the use of food aid as a development tool through employment-generating public works programmes. The basic elements of these proposals are: i) selection of labour-intensive projects, mainly in the rural areas, based on food-for-work or cash-for-work compensation - the latter being funded with proceeds from monetized food aid; ii) a self-targeting mechanism by which the cash or food-equivalent wage is set below the market wage, thus attracting only the truly poor and vulnerable.

²⁶ See footnote.

· a system for setting the appropriate wage level has to be established;

· the main orientation of the projects must be decided, i.e. whether projects will be selected strictly in terms of economic cost-benefit criteria or whether such economic efficiency will be compromised in favour of projects that make a significant difference in the level of employment (putting more emphasis on the project's social safety net features).

²⁷ This section is derived for the most part from FAO. 1985. Ethiopian Highlands Reclamation Study. Project report. Rome.

Deforestation constitutes another serious environmental problem. In less than a century, the country's forest and woodland cover has been reduced from 40 percent of the total area to 16 percent in the 1950s and an estimated 4 percent at present.

Past policies concerning the agricultural sector amplified the adverse resource degradation and depletion effects of agroclimatic parameters. Villagization schemes placed an excessive demand on forest resources for building material. No effort was made to explore and introduce new energy sources in the rural sector, so wood and dung remained the only sources of energy. As the demand for such resources grew with population, deforestation and the deprivation of land from valuable nutrients increased. Uncertainty about land tenure acted as a disincentive to investments in soil conservation. Inadequate funding for agriculture and its disproportionate distribution in favour of state farms and cooperatives resulted in a shortage of funds for research on appropriate peasant technologies. In general, the policy environment discouraged the integration of conservation activities into the farming practices of peasants. The situation was exacerbated by a lack of appropriate land-use and forest policies. While the resettlement of rural populations may be, in principle, an efficient method of addressing imbalances between patterns of human settlement and available resources, the way it was implemented in the past in Ethiopia made it ineffective.

In its 1985 Ethiopian Highlands Reclamation Study, FAO recognized that isolated conservation measures are bound to be both highly costly and ineffective. The study suggested a broad-based development strategy (conservation-based development strategy or CDS) so that conservation measures are integrated into mainstream agricultural development activities at all levels (farm, agricultural, national).²⁸

²⁸ "The term Conservation-based Development implies not only the allocation of more resources for conservation but, even more importantly, ... the integration into agricultural and rural development objectives and criteria of improved land-using systems. This could result in a significant reduction, if not the removal, of absolute poverty." Executive Summary, p. 12, in FAO. 1985. Ethiopian Highlands Reclamation Study. Rome.

A number of policies included in the recommendations of the Ethiopian Highlands Reclamation Study have already been implemented (more secure tenure, more freedom for the private sector, voluntary resettlement and better incentives to farmers) but much more needs to be done. Land-use and forest resource policies are necessary prerequisites for a successful environmental resource conservation strategy. Accordingly, a forestry action plan is an important component of the national conservation strategy that the Ethiopian Government plans to complete by April 1994. Within a well-established set of rules for forest management and conservation, a greater role will be allowed for private sector participation in wood harvesting and processing. Incentives will be given to farmers and rural communities for reforestation and tree planting.

ASIA AND THE PACIFIC

Regional overview
Bangladesh
Sri Lanka

Regional overview

Growing intraregional trade and investment flows
The challenges of economic transition
The environment and sustainable agriculture
Sectoral policies following macroeconomic and structural reforms

Asian and Pacific countries continued to show strong and steady economic growth in 1992. The Asian Development Bank (AsDB) estimates the average annual GDP growth rate for the region to be 7 percent in 1992, up from 6.3 percent in 1991. Despite the prolonged global recession, the AsDB expects regional GDP to increase by 7.2 percent in 1993. Three significant factors contributing to the region's ability to maintain this solid growth performance are: i) a continuing increase in disposable incomes, which is sustaining domestic demand; ii) the continuing expansion of intraregional trade; and iii) positive results from earlier policy reforms in many Asian economies.

Following are some individual country experiences in 1992:

· The output of China's industrial output increased by 20 percent in 1992, contributing to the country's impressive 12.8 percent increase in GDP. Even though drought affected many parts of the country, total grain production increased by 1.7 percent to an estimated 443 million tonnes. Tea, sugar, tobacco, fruit and vegetable production also increased compared with 1991 levels.

· All of India's economic sectors improved in 1992 -the country's GDP increased by 4.2 percent. Agriculture, which was aided by a good monsoon, grew by 3.5 percent. Foodgrain production increased to a record 177 million tonnes compared with 167 million tonnes in 1991. However, heavy monsoon rains and floods in July 1993 are likely to have serious implications for this year's grain production.

· In Pakistan, a 30 percent increase in cotton production spurred agricultural GDP to a 6.4 percent increase in 1992. The large cotton crop is attributed to higher farmgate prices, a wider use of improved seeds and favourable weather. In contrast, Nepal experienced unfavourable weather in 1992. Its agricultural GDP increased by only 0.5 percent and foodgrain production declined by 6.5 percent.

· Southeast Asia reported mixed agricultural performances. Agricultural GDP increased by 3.5 percent in Thailand and 1.2 percent in Malaysia, but fell by 1 percent in the Philippines. In Malaysia, the production of palm oil, sawlogs, livestock and fish increased, while rubber and cocoa declined. In the Philippines, a severe drought reduced corn and rice production while the logging ban and related conservation measures curtailed forestry production in 1992.

· Viet Nam produced a record rice crop of 21.1 million tonnes, 1.2 million tonnes more than 1991. Total food production increased by 9 percent and agricultural GDP increased by 6.3 percent in 1992. Wide access to inputs and agricultural policy reforms are credited with improving yields and expanding area under cultivation. Laos' agricultural sector also recorded an outstanding year in 1992. Its agricultural GDP increased by 8.3 percent, with rice production growing by more than 20 percent.

Figure 7 ASIA AND THE PACIFIC - AGRICULTURAL TRADE

Figure 7 ASIA AND THE PACIFIC - AGRICULTURAL EXPORTS (Index 1979-81 = 100)

Figure 7 ASIA AND THE PACIFIC - AGRICULTURAL IMPORTS (Index 1979-81 = 100)

Growing intraregional trade and investment flows

Despite a slow-down in the world economy in 1992, the international trade performance of the developing countries of the Asia and Pacific Region continued to be buoyant. Exports rose by 13 percent as a result of improvement in production efficiency, low inflation rates and favourable impacts of the policy reforms initiated in recent years.

One key factor sheltering the Asian economies from the global recession was the significant growth in intraregional trade and investment. In 1991, intraregional trade expanded by 23 percent compared with a 15 percent increase in exports to the rest of the world. This development is strongly supported by the ongoing regional division of labour, specialization and the relocation of production within the region in response to the opportunities offered by the various countries' relative factor endowments, macroeconomic policy environments and resulting comparative advantages.

In addition to large inflows of direct foreign investment, substantial flows of investment capital from Japan and newly industrialized Asian economies to the developing countries within the region continued. In particular, vast investment opportunities and the spectacular rate of growth in China attracted millions of dollars of investment by overseas Chinese.

The outcome of the ongoing Uruguay Round of multilateral trade negotiations (MTNs) is keenly awaited in view of its influence in shaping the application of the principles of non-discrimination and market access for exports from the region. The emergence of the North American Free Trade Association (NAFTA) is, however, viewed with some wariness because of the likely diversion of direct foreign investments from Asian countries.

Against the backdrop of these changes in the external environment, Asian countries have moved ahead with the creation and promotion of subregional trade arrangements. The member states of the Association of Southeast Asian Nations have launched the ASEAN Free Trade Area (AFTA) with a goal to remove tariffs on most commodities traded within the region in the course of the next 15 years. Likewise, the South Asian Association for Regional Cooperation (SAARC) summit in Dhaka earlier this year adopted a resolution to create a South Asian Free Trade Area (SAFTA). However, because of differences in size and the state of economic development between member nations, many difficult issues need to be resolved before these regional arrangements can emerge as an effective means for coordinated action.

The challenges of economic transition

During the past two years, the number of Asian countries undergoing transition from a centrally planned to a market-oriented economy more than doubled when six former Soviet Asian republics (Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) joined China, Laos, Mongolia and Viet Nam in this process. There is considerable variation among these countries in terms of the problems of transition, approaches followed and the degree of success achieved. Most of them require structural transformation which can only be achieved over a number of years through persistent and consistent efforts. There are also problems of short-term stabilization and macroeconomic management as well as the need to create and strengthen institutions necessary for a market economy. Both problems seem to be more acute in the case of former Soviet Asian republics than others.

While, initially, all countries undergoing transition faced high inflation, unemployment and underemployment, China, Viet Nam and to some extent Laos have been able to reduce these by stimulating agricultural production, private investment and foreign direct investment. Mongolia and the former Soviet Asian republics, on the other hand, are facing severe shocks of transition.

For example, in 1992, in contrast to the economic growth of 12.8 percent and an inflation rate of 6.4 percent in China, Mongolia's real GDP fell by 7.6 percent and the inflation rate spiral led to 320 percent. In China and Viet Nam, the rural communities - whose production systems are based on the household unit and are equipped with labour-intensive technologies -responded well to market signals. In contrast, farming communities in Mongolia and the former Soviet Asian republics, which have a longer tradition of communal farming using heavy equipment and depending on input supplies from state enterprises, face more difficulties in adapting to the new situation. It also appears that, in the latter group of countries, price liberalization did not bring about the expected supply response because of a monopolistic control over inputs and the tendency of the monopolistic enterprises to curtail production and raise prices.

Judging by the experience of some countries in transition (China and Viet Nam), which suffered initially from short-term macroeconomic instability and inflation, it appears that an appropriate institutional structure is equally as crucial as macroeconomic stability for a successful transition. The transition process requires the public sector and foreign donors to have an active supporting role in creating and consolidating a favourable policy framework and institutional environment that will enable the efficient functioning of a market economy.

In addition, improvements are essential in the government's capacity to deliver public goods (research, extension, transport and communications infrastructure, health, education and other social services), which remain in the domain of the public sector even in a highly developed market system.

The environment and sustainable agriculture

Rapidly increasing population pressure, urbanization, the excessive use of chemicals in production processes and the unsustainable use of natural resources are contributing to serious water and air pollution, deforestation, soil erosion, desertification and flooding throughout the region.

While the improved seed and fertilizer technology, complemented with a vast expansion in irrigation facilities, removed the spectre of hunger from many populous Asian countries, in some cases it also added to environmental degradation. Moreover, maintaining or raising the present yield levels demands a more intensive use of natural resources, which has adverse environmental consequences. For the Pacific countries, global warming and the resulting rise in sea level are the most serious, although uncertain, environmental threats. The externalities involved with these types of environmental issues require concerted group actions by the international community.

Developing Asian countries have realized the close connection between rural poverty and environmental degradation. Increasing population pressure on agriculture, the result of inadequate growth in off-farm employment opportunities and a lack of access to yield-improving technologies, is forcing many Asian farmers to cultivate marginal lands and overuse other natural resources for their immediate survival. In many Asian countries that are striving for equitable and sustainable development, poverty alleviation is a core element of the national development plan.

Many countries are grappling with the complex task of achieving poverty alleviation and environmental protection goals within a somewhat conflicting framework, containing socio-political commitments to achieving equity as well as market liberalization policies aimed at resolving macroeconomic imbalances. It is argued that market-based policy instruments emphasizing the removal of input subsidies, output support prices and protective tariffs may act as a two-edged sword. While tending to discourage uneconomical and unsustainable input use, with positive effects on the environment and the evolution of sustainable farming practices, these policies tend to increase food prices, consequently having negative income effects on the poor, who often are net buyers of food, and thus mitigating the achievement of poverty alleviation goals in the short term. Policy formulation in such situations may call for a compromise between economic efficiency and a pragmatic understanding of the short-term socio-economic political situation.

Finally, the cost of reversing environmental degradation is very high. For most developing Asian countries, investing in such activities would entail drawing resources away from other important development projects. It has also been realized that preventing environmental damage costs less than restoring the loss. Thus, there is an increasing emphasis on the incorporation of environmental considerations in policy formulation as well as in development project selection and the evolution of appropriate production systems.

Sectoral policies following macroeconomic and structural reforms

Having established a growth-oriented macroeconomic policy framework in the course of implementing stabilization and structural adjustment programmes, a number of market-oriented Asian countries, such as Bangladesh, Indonesia and the Philippines, have moved on to sectoral reforms. It is realized that the macroeconomic policy reforms cannot be fully effective in improving efficiency and unleashing the farmers' production potential unless sectoral constraints on growth are tackled.

A comprehensive package of agricultural sectoral policy reforms generally consists of the withdrawal of input subsidies, the dismantling of expensive public food distribution systems and the removal of subsidized credit and protective tariffs as well as other barriers. It also entails freeing import restrictions, encouraging private sector participation and investing in infrastructure to promote the efficient operation of market mechanisms.

The task of designing efficiency-oriented equitable agriculture sector policies is not easy, however. Among other things, policy-makers have to take into account the differential impacts of sector policy changes on various sections of society as well as dealing with diverse coalitions and interest groups who react differently to policy changes. These reforms are therefore being carried out selectively and in sequence, with due consideration given to the socio-political realities of the countries concerned. For example, in some cases fertilizer subsidies have been gradually reduced (in India and Indonesia) while an active public sector role in foodgrain procurement, distribution and buffer stock management has been maintained.

In some Asian countries, the reluctance to carry out agricultural sectoral policy reforms seems to have been reinforced by the delayed finalization of the Uruguay Round of GATT negotiations as well as by protective trade policies and trade blocks outside the region.

Bangladesh

The agricultural sector
Rice and foodgrain policies

With an estimated per caput GNP of $225 in 1992, Bangladesh is among the poorest countries in the world. Moreover, with approximately 115 million inhabitants and 149 000 km², the country is three times more densely populated than India and seven times more than China. This intense population pressure on a relatively narrow resource base, together with the frequent natural disasters suffered, present formidable challenges to poverty alleviation efforts in Bangladesh.

Over the years, floods, droughts and cyclones have undermined progress and hampered the country's efforts to stimulate growth and reduce poverty. Cyclones and resulting storm surges are particularly destructive. The Bay of Bengal is the most cyclone-prone area in the world, having been hit by 15 cyclones during the past 25 years. These natural disasters cause immeasurable human suffering, devastate large crop areas and destroy property and infrastructure. The government estimates that the cyclone of April 1991 killed approximately 140 000 people. Such disasters impede economic and social progress by diverting attention and resources away from development programmes and towards crisis management.

Despite all these obstacles, Bangladesh has made significant economic progress over the past decade. The country has reduced external and internal deficits, stabilized the inflation rate, promoted non-traditional exports and achieved a modest growth rate. Stabilization policies have helped lower the budget deficit from about 8 percent in 1990 to 5 percent in 1992. The inflation rate fell to around 5 percent in 1992, the lowest rate in more than ten years. Real GDP growth during the period 1990-92 has been in the range of 3.5 to 6.5 percent and is forecast to be 5 percent in 1993.

Bangladesh has also initiated a number of structural reforms in the industrial and financial sectors, public enterprises and trade and exchange rate policy. Financial sector reforms include abolishing credit ceilings and increasing reliance on cash and liquid asset reserve requirements to regulate liquidity. Public enterprises are being given more administrative and managerial autonomy. Trade policy is shifting from import substitution to export promotion; a tariff system is replacing prohibitions and quantitative restrictions on imports.

Perhaps even more important to the overall economy are the agricultural policies, programmes and projects that have expanded the use of high-yielding variety (HYV) rice seeds, fertilizers and shallow tube wells for irrigation. As a result, rice production has increased by more than 40 percent in the past ten years. Today, Bangladesh is close to self-sufficiency in rice and, for the first time in the country's history, the government is discussing the possibility of exporting rice.

In addition to the stabilization programme and economic policy reforms, human resource development and poverty alleviation remain top priorities. Public spending on health care, primary education and family planning increased in real terms in 1992. Food distribution programmes aimed at vulnerable groups and the poor are being overhauled to reduce costs, increase efficiency and improve coverage.

Many human development programmes have proved successful in Bangladesh. For example, family planning efforts have resulted in a lower population growth rate which is currently down to 2.1 percent. At the same time, the country still has a low literacy rate (around 35 percent), a low primary school enrolment rate (72 percent) and a low life expectancy (56 years). Moreover, half of total mortality is due to child death below the age of five years, of which more than half is due directly or indirectly to malnutrition. Household food security is another persistent problem; half the households in Bangladesh cannot afford an adequate diet and an estimated 22 to 30 percent of the population lives in dire poverty (less than 1 805 kcal per caput per day).

The agricultural sector

The agricultural sector is Bangladesh's largest source of income, employment, savings and investment. Agriculture accounts for about 40 percent of GDP and more than 60 percent of employment. Rice not only dominates all other agricultural products, it also dominates all other economic activities. Production, trade, processing and transportation of rice amount to more than 25 percent of the country's GDP. Rice represents 75 percent of the cropped area, 95 percent of foodgrain production, about 80 percent of caloric intake, 60 percent of protein intake and about 30 percent of total household expenditures - the weight of rice in the consumer price index (CPI) is about 60 percent. For these reasons, policies that affect rice production, trade and consumption have a profound impact on Bangladesh's entire population.

Over the past two decades, rice production and distribution policies have adjusted with changing economic circumstances and pressures. The growth in rice production is attributed primarily to policies that encouraged wider use of new irrigation technology, HYVs and mineral fertilizers. The introduction of tube well irrigation, particularly low-cost shallow tube wells, is the main reason for the rapid expansion of total irrigated area and the shift away from traditional irrigation methods.

Rice and foodgrain policies

Rice production. During the 1980s, the area under shallow tube well irrigation expanded annually by nearly 30 percent, increasing from 227 000 ha in 1981 to 1.8 million ha in 1991. Today, tube wells account for 55 percent of the 3.3 million ha under irrigation, compared with 14 percent in 1980. Moreover, tube well irrigation has encouraged more rice production in the dry season and less in the early monsoon season. In 1992, irrigated dry season rice accounted for 37 percent of the record harvest (18.25 million tonnes) compared with 20 percent in the early 1980s. In contrast, the total area planted to rice during the early monsoon season declined from 3.2 million ha in 1982 to 1.9 million ha in 1992.

Initially, government policies encouraged rice production through the direct provision of irrigation equipment. During the 1970s and 1980s, the Bangladesh Agricultural Development Corporation (BADC) monopolized imports and domestic distribution (sales and rentals) of all irrigation equipment. An increasing number of procedural difficulties, however, led to a series of policy changes in 1989. These changes included: restructuring the BADC's tube well sales practices; allowing the private sector to import and market tube wells; and eliminating licensing requirements for shallow tube wells (many restrictions still apply to deep tube wells).

The resulting increase in access to and availability of irrigation equipment, combined with lower prices, contributed to a rapid expansion in tube well irrigation. Half of the 40 000 units sold in 1989 came from the private sector. In the three-year period from 1989 to 1991, the irrigated area expanded by almost 700 000 ha, which is more than the total irrigated area added during the previous eight years.

Other production policies provided a guaranteed floor price as well as subsidized inputs, including HYV seeds, credit, pesticides and fertilizers. In recent years, the government has removed subsidies on fertilizers and allowed private sector imports and sales of mineral fertilizers, even though it remains the sole domestic producer of most types of fertilizers.

Rice and foodgrain distribution. To ensure an affordable food supply for poor consumers, the government manages a variety of food distribution programmes and open market sales operations to help stabilize foodgrain prices. Public food distribution programmes provide approximately 13 percent of all foodgrains consumed in the country.

Past policy measures aimed at foodgrain distribution and prices include: a ban on exports; a monopoly on imports; restrictions on the movement and storage of rice; prohibitions against extending bank credit for rice storage; open market sales of wheat and rice at predetermined ceilings during times of price peaks; and public sector procurement at predetermined floor prices in the postharvest season. The objectives of price stabilization policies are to protect poor consumers from sharp price increases, protect poor farmers from a postharvest price collapse and achieve foodgrain self-sufficiency.

The public food distribution programmes include disaster and famine relief, seasonal food-for-work development projects and year-round rationing. Many food distribution programmes and food policies have recently been restructured, reformed or eliminated. For example, in August 1992, the government allowed private sector imports of foodgrains for the first time. Private traders responded by importing more than 300 000 tonnes of wheat by the end of the year.

The government also abolished the rural rationing programme in May 1992 because of the high costs of maintaining it (an estimated $60 million per year) and large leakages (between 70 and 100 percent).²⁹ The rural rationing programme had provided an outlet for half of all government rice stocks. Its elimination resulted in a large buildup of government stocks and prompted several additional reforms in procurement policies. In November 1992, the government cancelled "millgate contracting" (millgate contracting involves government contracts with the rice mills to support farm prices), introduced tendering operations, lowered procurement prices and raised procurement grades.

²⁹ IFPRI's series, Food Policy in Bangladesh, Working Paper Nos 1-6, contains well-documented analyses of food distribution issues in Bangladesh.

These various policy changes and reforms are under way for a number of reasons. First, the structure of rice markets has evolved substantially over the past two decades. Twenty years ago, farmers marketed only 15 percent of their production; today, they market more than 50 percent. Second, the proportion of privately held rice stocks has been increasing over the years, now accounting for 75 percent of total stocks. Moreover, the share of privately held stocks located on farms has increased while the share held by traders and millers has fallen.

The increasing importance of an irrigated winter rice crop is an additional factor influencing foodgrain policies. By decreasing both the frequency and severity of seasonal price changes, this third annual rice crop reduces the need for price stabilization measures. Finally, today's rice markets are much less fragmented and much more competitive than in the past: more than 20 000 rice mills and 30 000 husking mills now provide services throughout the country.

Rice policies and agriculture: short-term issues. As rice production and productivity continue to increase and as the market structure evolves further, additional policy adjustments and reforms are likely in the future. Achieving rice self-sufficiency has already raised a number of important policy questions. For example, can Bangladesh compete with its Asian neighbours, especially Thailand and Viet Nam, in world rice markets? What kind of trade and exchange rate policy reforms are necessary to enhance the country's ability to export rice? What is the role of the private sector relative to that of the public sector in this new era of rice self-sufficiency and exports?

BOX 4 THE FISHERIES SECTOR IN BANGLADESH Although Bangladesh's fisheries sector is relatively small (around 3 percent of GDP), it contributes to the national economy in a number of significant ways. First, marine and inland fisheries provide full-time jobs for some 1.7 million people and part-time work for more than 11 million. Second, fish consumption represents 80 percent of animal protein intake and 7 percent of total protein supplies. Finally, frozen shrimp and other fish products are among the country's fastest growing exports. Exports of frozen shrimp have increased annually by around 15 percent during the past decade and it has become the fourth most important export after ready-made garments, jute products and leather. Already significant, the sector's current contribution to growth, income, employment and foreign exchange earnings nevertheless remains below its potential. Much of Bangladesh is a vast delta dissected by three major rivers and more than 700 other rivers and streams. The flood plain is rich in fish (as a source of food) and about one-third of the country is under water for six months each year. These freshwater resources explain why inland fisheries account for nearly three-fourths of the country's total fish production. Yet, despite its importance, this resource base is being displaced or disrupted by flood control, drainage, road embankments, irrigation systems, pesticides and fertilizers. Ironically, the same agricultural policies and projects that allowed rice farmers to increase their productivity and helped some landless to find more work have done so often at the expense of open access capture fisheries. Water control projects, intended to create favourable conditions for rice production, frequently decrease flood duration and area. The resulting decline in inland capture is especially threatening for those Bangladeshis who depend on this open access resource as their only source of animal protein. Few water-related projects or policies take the needs of fisheries into account or include the physical structures needed to achieve fisheries objectives. These projects can disrupt fisheries in a number of ways. Embankments and regulators prevent fish from successfully carrying out breeding migrations. Structures to stop bank overtopping and lateral flooding lead to sedimentation further downstream, adversely affecting fish production in river channels. The large-scale clearing of flood plain forests to create agricultural land for rice production is degrading the flood plain and wetland habitats. Inundation-tolerant tree species are gradually being reduced, as are their benefits for fisheries and other flood plain and wetland activities. Fisheries are also harmed by pollution from agricultural activities as well as industrial effluent and raw sewage which are frequently discharged into rivers or enter the aquatic environment during monsoon flooding. At the same time, some fishing practices themselves contaminate water and cause environmental degradation; for instance, the improper disposal of feed, faeces or shrimp shells from intensive aquaculture and the excessive clearing of mangrove forests. Bangladesh is attempting to address many of these environmental problems by improving public awareness, enforcing pollution regulations, strengthening environmental impact assessments and implementing measures to mitigate environmental damage to fisheries. These and many other planned improvements can expand Bangladesh's opportunities for both domestic and export production. To meet this potential, however, more public and private sector investment is needed in harvesting, processing, marketing, extension, research, training and community development. In addition, the sector requires improved inputs, technology, credit, public agency coordination and policy analysis. While there is much to be done, the fisheries sector could contribute much more to the country's social and economic development. Source: FAO. 1993. Fishery Sector Programming Mission to Bangladesh. TSS-1. Rome.

The heavy concentration on rice production and distribution over the past 20 years has often been at the expense of other agricultural products and economic sectors, both financially and environmentally (see Box 4, The fisheries sector in Bangladesh). Policy-makers must now face the challenge of deciding how to reduce rice and foodgrain subsidies while also maintaining secure stocks, stable prices and well-targeted relief programmes.

At the same time, even with the most optimistic benefits from further liberalization, agriculture is unlikely to absorb Bangladesh's rapidly expanding unemployed population. Faster growth in manufacturing, services and commerce, which account for some 60 percent of GDP, is essential to reduce poverty and absorb the one million new entrants into the labour force each year.

Sri Lanka

The agricultural sector
The small farm sector
The estate sector

One of Sri Lanka's most striking features is its enduring commitment to progressive social welfare policies. Even before independence in 1948, Sri Lanka promoted three major social policies: a food subsidy, an entirely free education system and free universal health care. By the 1970s, Sri Lanka had become a unique example of a developing country capable of attaining a high level of social welfare despite a very low average per caput income. Today, the country ranks high among both developed and developing countries in terms of a wide range of human development indicators. Sri Lanka's citizens enjoy a long life expectancy, advanced health standards and one of the highest literacy rates in the world.

These impressive achievements in social and human development were not matched, however, by a similar performance in economic growth. An expanding population and a persistently sluggish economy kept per caput incomes low. In addition, the country's inability to generate budget and trade surpluses limited public and private savings, resulting in a low rate of investment. While enlightened social policies were contributing to human capital development, there was no corresponding growth in capital formation necessary to increase productivity and expand the economy.

Over time, high unemployment, high inflation, balance of payments deficits and economic stagnation made it more and more difficult for successive governments to pay for the country's food, health and education programmes. In an attempt to compensate for deteriorating economic conditions, policy-makers gradually turned the economy inwards, pursuing an industrialization-led development strategy based on import-substitution policies. By the mid-1970s, the government had nationalized the tea estates, established strict controls on foreign exchange and foreign investment and placed tight restrictions on both domestic and international trade.

However, the import-substitution policies failed to generate enough growth in income and employment and, in 1977, a new government introduced fundamental changes to the country's economic policy. Sri Lanka essentially reversed its economic development strategy, shifting from an inward-looking, state-controlled economy to an export- and market-oriented system. Policy-makers eased controls on foreign exchange transactions and foreign investment; unified the multiple exchange rate into a single, floating rate; replaced trade monopolies and quotas with tariffs; and liberalized producer and consumer prices and interest rates.

The economy responded impressively to this new policy environment for nearly a decade. GDP growth, which averaged less than 3 percent per year between 1970 and 1977, grew to more than 6 percent on average between 1978 and 1986. This growth was also well balanced - agriculture, industry, services and international trade all performed well. Nonetheless, the economy was unable to build on or sustain this momentum, with the result that slow economic growth, high unemployment and poor agricultural sector performance recurred during the late 1980s.

The economy faltered for a number of reasons. First, the country's ongoing civil conflict, which escalated after 1983, diverted public resources and discouraged foreign investment. Second, bad weather, including periodic droughts, hampered agricultural production and exports. Third, the stabilization policies, aimed at containing the fiscal deficit and controlling inflation, suppressed demand and slowed economic growth. Finally, because many policy-makers remained focused on key macroeconomic aggregates, important sectoral reforms were neglected.

Since 1989, the government has focused much more attention on sectoral reforms. A number of high-level commissions, comprising public and private sector representatives, have analysed and recommended policy actions to address specific economic issues. At present, reforms are either planned or already under way for taxation, tariffs, public administration, public sector enterprises, the banking system, private sector management of the tea estates and agricultural diversification. The agricultural sector in particular is undergoing noteworthy changes.

In the last several years, the economy has grown at a relatively strong pace. GDP increased by 4.8 percent in 1991 and 4.6 percent in 1992. The industry and services sectors were the main sources of this growth. Industrial output increased by 6.1 percent in 1992, mostly a result of growth in the manufacturing of textiles and garments for export. Demand for tourism, trade, transport, banking and financial services has stimulated growth in the services sector, which increased by 6.1 percent in both 1991 and 1992 and now accounts for half of the country's GDP.

In contrast to the strong growth in the industry and services sectors, agricultural growth was completely flat in 1992, rising by only 0.1 percent. Agricultural performance continues to be affected by bad weather and civil unrest. A severe drought in the first half of the year reduced tea production by approximately 25 percent. Rubber and coconut production were less affected by the drought and output remained close to the levels of 1991.

The rice crop was not seriously affected by the drought, which began in March, because it occurred towards the end of the harvesting season. In Sri Lanka, rice is cultivated in two seasons, corresponding to the two monsoons. The major rice crop is produced during the northeast monsoon from October to February, known as the Maha season. The minor crop is produced during the Yala season - the southwest monsoon from May to September. The drought only slightly delayed the planting of the 1992 Yala crop.

The agricultural sector

In many areas, Sri Lanka's agricultural economy and rural life have changed little over the past three decades. For example, agriculture's contribution to GDP has remained relatively stable - it generated 28 percent of GDP in 1965 and 25 percent in 1992. Agriculture continues to be the main source of income and employment for rural Sri Lankans; today, the sector employs approximately 50 percent of the workforce -the same proportion as in the late 1960s.

Sri Lanka's economy still relies on four crops - tea, rubber, coconut and rice - just as it did 30 years ago. Tea remains the dominant agricultural export; it accounted for 67 percent of agricultural exports in the period 1969-71 and 62 percent in 1989-91. Likewise, agriculture still consists of two distinct sectors: the estate sector, which produces the bulk of tea and rubber; and the small farm sector, which produces rice and most of the coconuts and spices for export.

In other areas, the agricultural sector has undergone major structural changes. The 1977 macroeconomic reforms and subsequent sectoral policy reforms affected the small farm and estate sectors in a number of different ways.

The small farm sector

Sri Lanka's small farm sector produces rice on approximately 40 percent of the agricultural land, while growing fruits, legumes, non-traditional export crops and a few other grains on about 10 percent. Most rice farms are very small and are becoming increasingly fragmented. More than 50 percent of today's rice production comes from parcels of less than 0.5 ha, compared with about 12 percent in the mid-1960s. Crops such as cinnamon, cocoa, coffee, cardamom, chilies, peppers, cloves and citronella are grown on a relatively small scale, but are increasingly important and now account for 4 percent of total exports.

For decades, rice policies have shared the same four objectives: to ensure national food security; to create employment; to enhance farm income and social welfare and to reduce imports. On the other hand, the policy measures used to meet these objectives have varied greatly. Before the 1977 reforms, rice production and distribution were strictly regulated by the government. The Paddy Marketing Board had sole responsibility for domestic procurement and the Food Commissioner's Department controlled distribution at officially fixed prices. Not only were producer and consumer prices controlled, rice could not be freely marketed or transported from one of the island's 25 districts to another.

The 1977 reforms served to: liberalize agricultural prices; replace the rice ration with a discriminatory food stamp programme; transform the guaranteed price scheme for rice producers into a minimum producer price scheme to shelter farmers from large seasonal price fluctuations; and allow private traders to operate throughout the country. The improved markets and increased real producer prices had an impressive impact on rice production, which grew at a rate of well over 10 percent per year between 1977 and 1980.

From 1978 to 1986, rice output rose from 1.7 million to 2.7 million tonnes and yields from 2 500 to 3 500 kg per hectare. This was an important accomplishment for Sri Lanka's economy because the country imported from 40 to 50 percent of its total rice consumption during the 1960s and most of the 1970s. From 1970 to 1977, the country's rice imports averaged 400 000 tonnes per year, then fell to 150 000 tonnes between 1978 and 1985. By the mid-1980s, the country had attained 90 percent self-sufficiency in rice.

Rice producers responded to the 1977 policy changes by expanding area and increasing yields; about one-third of the increased production is attributed to expanded area and the remaining two-thirds to yield improvements. Successes in rice research and extension, HYV seeds, improved irrigation facilities and better management practices have all contributed to higher yields. Today, more than 80 percent of the rice area is irrigated and most farmers use HYV seeds and fertilizers.

In contrast to the rapid output increase of the early 1980s, production slowed and became highly variable towards the end of the decade. The highest level of paddy production was achieved in 1985 with 2.7 million tonnes while yields peaked in the mid-1980s at 3 500 kg per hectare. By 1989, output had declined to a low of 2.1 million tonnes, as civil conflict and adverse weather conditions led to a reduction in cultivated area. In recent years, reduced fertilizer use has also affected yields. Fertilizer subsidies were removed in 1990, doubling prices paid by farmers and causing fertilizer use to drop by approximately 20 percent.

Present small farm sector policies provide incentives for crops with high export potential. Numerous regulatory systems, such as quarantine procedures on imported seed materials, are being re-examined, streamlined, simplified or eliminated. The agrarian regulations that have restricted certain lands to the cultivation of paddy have been relaxed and wider crop choices permitted. The public sector has divested itself of several commercial enterprises in the agricultural sector and reduced its level of intervention.

The estate sector

The estate sector has also undergone significant structural changes over the past two decades. For instance, tea no longer accounts for 80 percent of total exports as it did in the early 1970s. Textiles have overtaken tea as the island's principal export, accounting for some 40 percent of total export earnings. The primary export crops (tea, rubber and coconut) have dropped to below 30 percent of total export earnings.

Two decades of import-substitution policies indicated a relatively strong bias against agriculture, especially export-oriented agriculture. During this time, the government increased tax rates on export crops, controlled producer prices, managed input and product distribution and nationalized the estates.

The 1977 reforms attempted to encourage traditional exports by reducing export taxes on tea, rubber and coconuts. Tax rates declined from 40 to 50 percent in 1977 to 10 to 20 percent by 1987. Nonetheless, the tree crop sector did not benefit as much from the reforms as did the small farm sector. The highest average levels of output in tree crop production today are still below the maximum average levels of the 1950s and 1960s. In 1990 and 1991, tea production improved only marginally on the highest output level since the mid-1960s. There has been a substantial and continuing decline in rubber production, with 1990 output 40 percent below the level of the 1960s and 20 percent of the 1984 level.

Despite these declines in production, the estate sector remains important to Sri Lanka's economy in terms of income, employment, land use and exports - especially processed export products of tea, rubber and coconut. Today, about 20 percent of the rural population is employed in the estate sector where permanent crops occupy about half the agricultural land (40 percent of the area is in tea and rubber and 10 percent is in other perennial crops).

A persistent problem for tea and rubber producers has been declining international prices, which discourage replanting and, in turn, lead to falling productivity and a lower economic capacity to adjust to international price cycles. In coconut production, the absentee ownership structure of medium-sized and large estates has limited replanting and intercropping.

Until 1992, two state corporations owned and operated the tea estates, which occupied more than 200 000 ha and employed 425 000 workers. But the declining yields, large state subsidies and lagging investment in replanting and maintenance forced the government to begin the privatization-of-management programme. In January 1992, 449 state-owned estates were regrouped into 22 independent regional enterprises, each comprising between 15 and 25 estates. The government then put out to tender and selected 22 private sector companies to manage these estates on a profit-sharing basis. Approximately 95 000 ha of tea, 59 000 ha of rubber and 11 000 ha of coconut are now under this private management contract arrangement.

The privatization of plantation management, combined with substantial investment in rehabilitating estates and new planting in recent years, should improve short-term agricultural prospects. Agricultural output is projected to grow by about 3 percent in 1993 and 1994. Nonetheless, Sri Lanka's relatively slow transformation to a more industrialized economy is placing enormous pressure on its agricultural sector and, especially, on its natural resources.

The agricultural sector has a limited capacity to absorb labour and all of the good agricultural land has already been developed. In the long term, Sri Lankan policy-makers face the daunting task of expanding the industrial base and diversifying both export products and markets. Without access to more jobs in agro-industrial and agro-processing enterprises, Sri Lanka's rural population may be forced on to economically marginal and environmentally fragile lands.

LATIN AMERICA AND THE CARIBBEAN

Regional overview
Mexico

Regional overview

The agricultural sector
Agricultural policies

Overall economic activity in the Latin America and Caribbean region rose by an estimated 2.3 percent in 1992, down from 3.1 percent in the previous year. The slow-down in growth mainly reflected the depressed economic situation in Brazil, where GDP declined by 1.5 percent in an economic environment dominated by hyperinflation and pronounced fiscal and external account imbalances. Excluding Brazil, the regional GDP growth in 1992 was 4.3 percent (5 percent in 1991), still a robust performance in the context of earlier trends and especially in view of the depressed state of the OECD economies. Several countries consolidated the stabilization process and some appeared to have entered a long-awaited recovery phase. Stabilization efforts in some cases achieved spectacular reductions in inflation rates: from 1 400 percent in 1991 to 20 percent in 1992 in Nicaragua; and from 173 to 23 percent in Argentina.

In the external sector, an outstanding feature was the reversal in the trade balance, which turned negative in 1992 for the first time since the outbreak of the debt crisis in the early 1980s. Indeed, imports rose to $132 billion (19 percent higher than in 1991) while exports reached $126.1 billion (only 4 percent higher than in 1991). Although the negative trade balance to a large extent reflected the huge trade deficit of Mexico, other countries such as Argentina, Bolivia, Paraguay and a number of Central American countries also recorded significant trade deficits. While much of the increase in imports was in consumption goods - a typical phenomenon in the early phases of economic opening -capital goods imports appear to have also expanded significantly in recent years. The negative net trade balance contributed to a widening in the current account deficit, which represented nearly 19 percent of the region's exports of goods and services compared with about 11 percent in 1991.

A parallel and related process was a sharp increase in capital inflows which more than covered the increase in the current account deficit, allowing an expansion in reserve holdings. This reflected to a large extent the climate of renewed confidence in the region's economic outlook.

Figure 7 LATIN AMERICA AND THE CARIBBEAN - AGRICULTURAL AND PER CAPUT FOOD PRODUCTION

Figure 7 LATIN AMERICA AND THE CARIBBEAN - AGRICULTURAL TRADE

Figure 7 LATIN AMERICA AND THE CARIBBEAN - AGRICULTURAL EXPORTS (Index 1979-81 = 100)

Figure 7 LATIN AMERICA AND THE CARIBBEAN - AGRICULTURAL IMPORTS (Index 1979-81 = 100)

However welcome, the large and sudden increase in capital inflows also introduced a number of new issues. The extent to which they are really contributing to capital formation, rather than being speculative, is a debated question. Furthermore, as in the case of Mexico and several other countries, large capital inflows are associated with a complex set of problems. First, they have contributed to an overvaluation of currencies, running counter to one of the key objectives of current development strategies, i.e. export expansion. Also, capital inflows have introduced risks of inflation and greater stringency in monetary policies. Higher interest rates are in turn dampening growth prospects and accentuating the public debt burden beyond what would be expected from the size of fiscal imbalances. Finally, capital inflows have created greater interdependence with international capital markets and increased vulnerability to changes in external macroeconomic conditions.

Foremost among those problems in the short term is probably currency overvaluation. Indeed, a major challenge for countries that have so far made significant progress in stabilization will be to overcome the exchange rate dilemma in a way that does not lead to renewed instability and inflation. The other major, longer-term challenge remains that of extending the benefits of stabilization and adjustment to the widest possible segments of population, particularly the poorest.

The agricultural sector

As is by now a well-known characteristic of the region, agricultural performances have been largely determined by factors exogenous to the sector, i.e. domestic macroeconomic policies and international market conditions, with the specific sectoral policy playing a relatively subordinate role. Currency overvaluation has been a major influence behind the weakness of the agricultural export sector. To this must be added the dramatic fall of commodity prices, affecting several of the main export products of the region.³⁰ Contrasting these generally depressing influences in the external sector, agriculture benefited from the overall favourable turn of events in the domestic economic situation, to the extent that domestic demand and investment in the sector were stimulated.

³⁰ In 1992 price declines for the main export products of the region were: banana, -10.1 percent; cocoa, -7 percent; coffee, -25 percent; beef meat, -8.8 percent; maize, -3.2 percent; soybean, -0.4 percent; and cotton, -15.8 percent.

In the external sector, several countries succeeded in expanding agricultural export earnings despite the collapse in the prices of some of their main export products. This was the case in Brazil, Chile, Guatemala, Honduras and Uruguay. Other countries experienced declining export earnings from agriculture despite varying degrees of success in expanding their volume of exports. These included the Dominican Republic, Nicaragua and Paraguay. Still others, for example Bolivia, experienced both volume and price declines.

Agricultural policies

The general market-oriented policies now followed throughout the region emphasize a more neutral role of the state as an economic agent. Nevertheless, general tendencies in recent years have been for a broader and more active government involvement in sectoral policies. There are major differences between the current schools of thought and those that determined previous policies, however. The state has abandoned its pervasive presence in agriculture and its top-down approach in transferring subsidized resources. Rather, current policies increasingly emphasize the objectives of helping farmers to help themselves and promoting the agrarian and institutional reforms required for this purpose. Another leitmotif of recent policy statements is integration at two general levels: i) within agriculture, in the context of maximizing interregional and intercrop complementarity while reducing gaps between modern and traditional agriculture; and ii) between agriculture and upstream and downstream activities. These are not new ideas but, in many instances, they have recently been translated into more decisive action than in the past.

Within this general framework, specific country examples include Mexico's deep process of reform involving a revision of its agrarian law, supportive and compensatory measures to facilitate the transition to a fully liberal market regime and commitment to NAFTA. This remarkable experience is reviewed in more detail in the section on Mexico.

In Argentina the implementation of the Convertibility Law,³¹ introduced in March 1991, helped deepen the process of adjustment and economic opening but also introduced a dollar-peso parity regime that resulted in a strong overvaluation of the peso. In order to compensate the tradables sector for the losses involved, the government introduced a number of measures in late 1992. These included reduced taxes on agricultural exports; a softening of agricultural credit conditions; the application of a 10 percent "statistical" tax (previously 3 percent) on imports; and an increase in import duties of up to 20 percent for some products. Furthermore, an important package of farm support measures was introduced in May 1993, particularly directed at non-pampean producers. This included financial support to cooperatives; preferential interest rates for producers facing emergency situations or working in disaster-prone areas; financing facilities for small producers; regional development support; and early payment of the value of shipments to agricultural exporters on the principle of "credit on trust".

³¹ The Convertibility Law established free convertibility of the national currency at a fixed exchange rate.

The measures enacted contributed to a significant recovery of the sector, whose performance rose by 5 percent in 1992. Such a positive performance of agriculture helped, once again, to offset the negative impact of the industrial recession following the failure of the Collor Plan.

Several countries introduced or strengthened measures to reform agricultural institutions with the general objectives of redefining the state's role in agro-economic activities and promoting decentralization. This was done, for instance, in Peru through a new organic law of the Ministry of Agriculture and Food; in Jamaica through the reorganization of the Rural Agricultural Development Authority; and in Bolivia, where the Ministry of Peasant Affairs initiated an important process of institutional decentralization.

A number of countries in Central America also initiated important measures of institutional and legal reform affecting agrarian structures. In Honduras, the Congress approved in March 1992 the Law for Modernization and Development of the Agricultural Sector. This law forms the normative framework for institutional reorganization and creates a Council of Agricultural Development, a Direction of Agricultural Science and Technology and a Land Bank. The new law also introduces major changes to the previous Agrarian Reform Law of 1975.

Land allocated to farmers became their full property, enabling the renting of such land for productive purposes or its use as collateral for credit. Also, the occupation period required before granting full ownership rights was reduced to three years; and women were recognized as beneficiaries of land allocation under agrarian reform. These measures are generally aimed at achieving greater stability in agrarian structures so as to promote investment and capital formation in the sector.

In El Salvador, the peace agreements concluded in 1992 created a favourable environment for strengthening sectoral policy formulation and implementation. Actions included reform of the public sector institutions and the introduction of a new agrarian code.

In both Honduras and El Salvador, new institutional frameworks seek to develop markets and improve efficiency in the existing market channels from the farmgate to industrial processing and external trade. To this end, parastatals have been privatized, basic foodstuff marketing boards abolished and external trade deregulated. At the same time, the state is promoting producer organizations, credit through private and cooperative banks and basic extension services.

Subregional integration schemes have gained further momentum and depth, aiming not only at strengthening commercial complementarity but also at productive or financial integration. NAFTA, the first such scheme involving developed and developing countries, is discussed in Box 6 in the context of its likely impact for Mexico. Preliminary discussions are under way for the purpose of building on NAFTA and achieving a hemisphere-wide free trade area. The MERCOSUR members (Argentina, Brazil, Paraguay and Uruguay) agreed to establish a common external tariff of 20 percent for most products as of June 1993. The Central American Integration System (SICA) entered into function in February 1993, replacing the former Organization of Central American States. The Panama Agricultural Agreement, signed within the SICA framework, aims at eliminating the existing systems of permits, licences and quotas affecting agricultural trade within the subregion. At the same time, it was agreed to harmonize tariffs on maize and sorghum applied within the system of common price bands for imports in El Salvador, Guatemala, Honduras and Nicaragua.

Despite the continuing emphasis on regional integration, there is a wide awareness of the importance of improving trade relationships with countries outside the region. It is felt that, while the existing regional free trade schemes are compatible with GATT principles - to the extent that they lower trade barriers and work towards reducing trade diversion - trade policies should ultimately aim at global integration. Countries in the region have strongly pressed for a successful conclusion to the Uruguay Round of GATT negotiations.

BOX 5 DEBT AND EXTERNAL FINANCING IN LATIN AMERICA AND THE CARIBBEAN In 1992 the region's stock of external debt amounted to $447 billion, about 2 percent above the previous year's level. Only four countries, Argentina, the Dominican Republic, Honduras and Paraguay, experienced a decline in their debt stock. The total debt service-to-exports ratio was estimated to be 30.5 percent in 1992, a slight increase over the previous year. Total debt service on all debt paid by the region was $54.5 billion in 1992 against $50.2 billion in 1991. Recent institutional developments affecting debt include the Paris Club agreement to restructure Argentina's and Brazil's debt for a consolidated $13 billion. This agreement provides for a graduated amortization schedule for restructuring debt so as to reduce the need for further rescheduling. The Paris Club also agreed to consolidate the debts of the Dominican Republic and Ecuador under the Houston terms. Commercial bank debt and debt-service reduction under the Brady Plan continued. In December 1992, Argentina signed an important agreement which should reduce the country's $23 billion commercial debt and $9 billion of interest arrears by an equivalent of $11 billion, i.e. more than one-third of its public debt. Another important agreement, concluded by Brazil, involves $44 billion of eligible bank debt and provides for a parallel agreement to convert 1991 and 1992 interest arrears into bonds. A development of major significance for the region was the strong increase of net capital inflows, primarily from private sources, which reflected the generally improved economic outlook, interest rate differentials and the catalytic effects of commercial debt-reduction agreements for many countries of the region. Private portfolio flows reached $15.3 billion in 1992, four times the level of 1990. Net foreign direct investment amounted to $13.8 billion, the major recipients being Mexico ($6.2 billion), Argentina ($2.5 billion) and Brazil ($2 billion).

Mexico

Overview
Economic setting
The new policy framework and economic performance
The economic role of agriculture
Agricultural reform
Outstanding issues and prospects for agriculture

Overview

The Mexican experience is an important reference in the recent history of development. It was the Mexican moratorium in 1982 that marked the beginning of the debt crisis of the 1980s. Ten years later, Mexico was again attracting worldwide interest, this time as a case-study of bold market-oriented reform and remarkable initial stabilization achievements. It still has a long way to go to full recovery and many uncertainties cloud the mid- and long-term horizon. Nevertheless, the economic improvements achieved over the past three to four years augur well for a consolidation of the stabilization process. The recent decision by the world's major industrial countries to allow Mexico to join the OECD is a manifestation of international confidence in the country's prospects.³²

³² The June 1993 OECD Ministerial Council requested that the dialogue with Dynamic Non-Member Economies be deepened and that consideration be given to an extension of membership to include Argentina, Brazil, Chile and Mexico. Mexico has long been involved in OECD activities and the terms of conditions for its early membership are now under examination.

Agricultural liberalization, possibly the most radical and far-reaching element of the reform package, included the reduction of subsidies on agricultural product and factor prices; privatization of support services; reform of the juridical status of the "ejidos";³³ and exposure to external competition.

³³ The "ejido" is a form of rural communal association which gained importance after the agrarian reform of 1917 but has pre-Columbian roots.

The government is making a major effort to meet the challenges of transition by offering rural support and social welfare schemes as well as financial and agricultural development services.

Economic setting

The major policy reforms carried out since the late 1980s must be considered in the light of the critical economic situation preceding their introduction. After the crisis of 1982-83, when economic activity fell by a cumulative 5 percent, a therapy of orthodox stabilization measures permitted a period of mild recovery. However, this improvement came to an abrupt halt in the mid-1980s when a period of new shocks began: a disastrous earthquake in late 1985 (with damages estimated to be 2 percent of GDP) and a collapse in oil prices caused the GDP to fall by 4 percent in 1986. With growth remaining weak the following year, the economic and financial situation sharply deteriorated.

By 1987 the fiscal deficit had increased to an equivalent of 13 percent of GDP, inflation had soared to 132 percent and debt-service obligations were absorbing 36 percent of total export earnings. Altogether, the period 1983-1988 saw virtually no growth; during that period public consumption rose by 1.6 percent annually, private consumption stagnated and public investment fell by an annual average of more than 11 percent. Exports did expand faster than imports, thereby allowing a trade surplus which rose as a share of GDP from 4.7 percent in 1982 to 8.7 percent in 1988; however, since much of the surplus was absorbed by debt servicing, current accounts failed to improve commensurately -indeed, the balance fell into the red for several years in the 1980s and has worsened dramatically recently.

The new policy framework and economic performance

Confronted with such a difficult situation, the new administration that took office in late 1988 initiated a bold programme of stabilization and structural reform. The new strategy introduced orthodox fiscal, monetary and exchange measures; unorthodox wage and income measures, combining fiscal restraint and price and wage control; and structural reform through privatization, deregulation, a redefinition of the state's role and liberalization of the investment regime. The external sector was also extensively liberalized, accelerating the process that had been under way since the mid-1980s.³⁴ Maximum import duty rates were reduced from 45 percent to 20 percent, their weighted average falling to about 11 percent, while the volume of imports subject to import licensing was reduced to less than 4 percent of the total. Thus, from being heavily restrictive in the early 1980s, Mexico's trade regime became one of the most open in the world. Furthermore, the government actively engaged in NAFTA negotiations which, if ratified, will further enhance liberalization and regional integration (see Box 6).

³⁴ A significant step in this process was Mexico's entry into GATT in 1986.

The stabilization/reform package can be credited with several remarkable achievements so far. Economic growth during the first part of the plan period (1989-1991) exceeded the 2.9 to 3.5 target, although it fell to an estimated 2.7 percent in 1992. The inflation rate fell to an estimated 12 percent in 1992 and may fall further in 1993. From a staggering 13 percent of GDP in 1987, the public sector deficit turned into a surplus equivalent to 1 percent of GDP in 1992.

These achievements were largely due to the stabilization and reform measures introduced by the government, but other factors also played a positive role. In particular, debt-relief operations under the Brady Plan and IMF-World Bank resource transfers helped alleviate financial constraints. Financial inflows were also attracted by interest rate differentials, the regaining of investors' confidence - particularly as a result of bank and parastatal privatization - and hopeful expectations regarding NAFTA.

One area where Mexico did not succeed, however, was in reducing the current account deficit which reached about $20 billion, or more than 6 percent of GDP, in 1992. The difficulty of checking import demand and inflationary concerns prompted a tightening of monetary policies, which had an inhibiting effect on economic growth. Indeed, it now appears unlikely that the 5.3 to 6 percent annual growth rate set for 1992-1994 will be met. Moreover, the steady overvaluation of the peso has helped to accentuate the trade deficit, affecting in particular the agricultural sector which has already been penalized by the removal of most subsidies.

The economic role of agriculture

Agriculture has played an uneven and declining role in Mexico's economy. While the sector contributes 7 percent of GDP, the rural population still accounts for 27.5 percent of the total population while agriculture's economically active population (EAP) represents about 23 percent of the total EAP. Agricultural performances have shown a gradual deterioration since the mid-1960s, except for temporary upsurges (e.g. from the late 1970s to the early 1980s, when a self-sufficiency drive under the Mexican Food System [SAM] helped boost maize production). Overall, agricultural production rose by about 4 percent annually during the 1970s, allowing moderate gains in per caput food production, but by only 2.3 percent annually during the "lost development decade" of the 1980s when per caput food production stagnated altogether. During the latter period, only the most export-oriented crops maintained a strong expansion, helped in particular by the currency devaluation - a process that has reversed in recent years. The 1990s have so far seen a continuation of lacklustre performances. After having shown virtually no growth in 1991, agricultural output expanded only moderately in 1992.

The poor performances of the food sector caused growing food import requirements and a marked deterioration in the agricultural trade balance. From being a net earner of foreign exchange until 1987, agriculture has emerged as a major deficit sector: the agricultural export/import ratio has moved from an average of 130 during the 1970s to barely more than 60 in recent years, while agricultural imports currently absorb about 17 percent of the country's total export earnings.

BOX 6 NORTH AMERICAN FREE TRADE AGREEMENT In June 1990 the Presidents of Mexico and the United States announced their decision to start negotiations for a free trade agreement between the two countries. Soon afterwards, Canada expressed its wish to join the negotiations, which took place from May 1991 to August 1992. At the outset, an agreement text was issued for an expanded NAFTA, and this was signed by the presidents of the three countries on December 17, 1992. The text was then submitted for parliamentary approval by the three countries. Should it be ratified - the main question mark being the decision of the United States Congress - NAFTA would enter into force on 1 January 1994. The expanded NAFTA agreement contains separate bilateral undertakings between Mexico and its United States and Canadian trading partners. It also incorporates the Canada-United States Free Trade Agreement, leaving intact those rules on agricultural tariff and non-tariff barriers and transitional safeguards that went into effect in 1989. Certain trilateral provisions deal with domestic support and export subsidies. Mexico and the United States agreed to negotiate "side agreements" dealing with environmental and labour issues in an attempt to allay concerns of the incoming United States Administration and congressional critics. Under the agreement, both countries would convert all their agricultural non-tariff barriers either to tariff-rate quotas (TRQs) or to ordinary tariffs. During a tenor 15-year transition period, depending on the commodity, no tariff would be charged for commodities within the TRQs. The longer transition periods apply to certain highly sensitive products, such as maize and dry beans for Mexico and orange juice and sugar for the United States. Duties imposed on commodities exceeding the TRQs -initially set to replace the protection provided by the former non-tariff barriers -would decline progressively to zero by the end of the transition period. Existing tariffs on a broad range of agricultural products would be eliminated immediately. Among the United States' major agricultural exports - which include feedgrains, oilseeds, meat and dairy products - grains and oilseeds were expected to benefit most. For Mexico, whose leading exports to the United States are tropical products, horticultural exports such as fruit and vegetables would probably be the most favoured. The agreement also contains special import safeguards for specified products whose trigger levels would be increased progressively over the first ten years of the agreement. The NAFTA countries made only a very general commitment to move towards less trade-distorting domestic agricultural policies, with new policies expected to be in compliance with GATT obligations. As a general principle, the use of agricultural export subsidies within the NAFTA area was considered inappropriate, except as a means to counter subsidized exports from non-NAFTA countries.

What determined the long-term stagnation of agriculture? Multiple natural, infrastructural, political, socio-economic and market factors played a role not covered in this review. One influence of major importance, given the large segments of agricultural population involved, was the low productivity of the large smallholder sector, which was marginalized to a large extent from state support as well as access to markets, credit and public services. Associated factors were the rigidities of the ejido legal framework and distortive state interventions. The removal of these constraints is at the core of the current agricultural reform strategy.

Agricultural reform

While the new policy orientation is having a profound impact on all economic sectors, agriculture will be one of the most affected. The liberalization of agricultural markets has meant breaking with deep structural rigidities and legislative norms dating from the early decades of the century.

The broad orientations of the new policies were defined in the National Programme for Rural Modernization 1990-1994, issued in 1990. The programme's general principles are that commercial agriculture (smallholder) must assert itself as the sector showing the most dynamic growth, while the "social" sector (ejidos and farm communities) must modernize through cooperative arrangements allowing economies of scale, a redefinition of the state role in productive and marketing activities and association contracts with commercial agriculture and agro-industry.

The most far-reaching area of policy reform was in land tenure legislation. The importance of changes in this area must be appraised in a historical context. Under the previous agrarian regime, regulated by Article 27 of the Mexican Constitution of 1917, the government was expected to provide land to any group of citizens requesting it. The objectives were to reduce the gross inequities that characterized landownership at the time and to alleviate rural poverty. Those granted land entitlements entered the ejido system, whose membership expanded to include a large majority of Mexico's rural population. By 1988, the "social" sector (made up of ejidos and communities) was estimated to include about 28 000 units comprising more than three million ejidatario (ejido member) and comunero (community member) heads of household. The sector accounted for 70 percent of the total number of farmers. About 15 million people (19 percent of the country's population) depended totally or partially on production and employment generated by the social sector.

Designed mainly as a political instrument to meet popular demands rather than to create economically viable productive units, the ejido systems became rigid and inefficient. The progressive decline in land area available for redistribution led to the extreme fragmentation of land, with 61 percent of ejido land units falling to an average size of less than 4 ha. Furthermore, under the former provisions of Article 27, ejido land could not be sold, rented or used as collateral for loans.³⁵ This hampered farm investment as well as modernization of the sector and ultimately defeated the ejido's poverty-reduction objective (according to the Economic Commission for Latin America and the Caribbean [ECLAC], 24 percent of Mexico's rural population lives in extreme poverty, compared with 8 percent of the urban population). Ejidos were also subject to distortive and cumbersome state intervention and tutelage mechanisms which regulated the economic life of the ejido while also exerting political control over it.

³⁵ Despite being forbidden by law, the sale and renting of land was a widespread underground practice. For instance, 25 to 30 percent of all productive land was estimated to be rented prior to the amendments to Article 27.

· Ejido members possessing proper land titles may, with the approval of 75 percent of the ejido assembly, gain full rights for selling, renting or otherwise disposing of their land. Communal ejido land, usually forest and pasture land, may not be sold or used as collateral, however.

· Inheritance and succession rights need no longer benefit the family of ejido members on a priority basis. In other words, ejido landowners may freely choose their successors, which is a break with the previous family-based concept of rural society.

· Ejido land can be sold or leased to private enterprises or corporate entities which may exploit the land directly. Nevertheless, the size of the holding controlled by such enterprises may not exceed 25 times the size of a smallholding ("small" meaning up to 100 ha of irrigated land or its equivalent in a non-irrigated area). Ejido holders of special shares (type T) are given preferential rights to recover the land should the enterprise close down. The objective of this regulation is to encourage farmers' association with agricultural entrepreneurs and foster technological and production modernization.

· In line with the general principle of granting the sector autonomy, the legal foundation for government involvement in ejidos was dismantled, thus bringing an end to the much criticized bureaucratic paternalism of the state.

· Trade liberalization, including a reduction in the proportion of agricultural imports subject to import licensing from 57 percent in 1988 to 35 percent in 1991. Products still subject to licensing include maize, beans and wheat. At the same time, average import tariffs for agricultural products fell to a mere 4 percent in 1991.

· Price liberalization, particularly the elimination of price guarantees for all basic foodstuffs excluding maize and beans (about $1.3 billion were earmarked for supporting maize and bean prices in 1993). NAFTA envisages the gradual elimination of price support for maize and beans within a 15-year transition period. For other cereals and soybeans, government procurement at guaranteed prices was replaced by "agreement prices" whereby private dealers must purchase the whole crop at an agreed price before imports are allowed. For animal products, consumer prices and marketing margins continue to be fixed, with beef and pork prices generally below, and those of poultry above, international market prices.

· The reduction or elimination of input subsidies. Agricultural input subsidies, which accounted for more than one-third of the value of agricultural production in the early 1980s, represented only 17 percent of production value in 1989. One consequence was the alignment of fertilizer prices with international market levels. Subsidies on water and electricity supply were also greatly reduced while the parastatal that sold concentrated animal feed was privatized. Imports of agricultural inputs and machinery were liberalized, which partially offset the effects of higher input prices and production costs. Credit subsidies were also reduced and interest rate controls eliminated, the result being a sharp increase in real interest rates from -37 percent in 1987 to 19 percent in 1989.

· The reduction of state intervention with the elimination or drastic downscaling of parastatal market control on sugar, cocoa, maize, tobacco, henequen and cocoa. Specialized institutions previously in charge of credit, insurance, technical assistance and marketing were privatized or foreclosed or had their functions redefined. The number of parastatals depending on the Secretariat of State for Agriculture and Water Resources (SAHR) were reduced from 94 in 1982 to only 20 in 1992, and another 11 were to be eliminated in 1993.

An important new instrument for rural welfare and modernization is the National Solidarity Programme (PRONASOL). Introduced in December 1988, this programme devotes about 60 percent of its budget to social welfare activities and the rest to regional development and financing of production projects. Its main feature is the high degree of decentralization and grassroots participation in its project and activity formulation and implementation. Through its regional branches, and interacting with indigenous coordinating centres, PRONASOL supports programmes originated by the local communities themselves. Represented at the programme's consultative council, the main peasant communities participate at the highest managerial and executive levels.

Since its creation, PRONASOL has expanded and diversified its activities considerably. From an initial $621 million in 1989, federal allocations for the programme increased in real terms by 54 percent in 1990, 36 percent in 1991 and 19 percent in 1992. PRONASOL currently supports more than 150 000 activities and projects, implemented by 82 000 solidarity committees. About one million peasants, working on 3 million ha, are benefiting from PRONASOL funds, while more than 1 100 peasant organizations are supported by regional funds for the development of indigenous populations. A large number of farmers also rely on PRONASOL for loans under the crédito a la palabra (credit on trust) scheme. In 1992, 2.5 million ha of maize were financed under this scheme, i.e. about 500 000 more than in the previous year. Solidarity Enterprises, a body formed more recently under the programme, also provides credit and risk capital for enterprises managed by producers' organizations.

The main sources of agricultural financing, however, remain development and commercial banks. Official credit is provided through three main channels: Fideicomiso Instituido en Relación con la Agricultura (FIRA), Banco Nacional de Crédito Rural (BANRURAL) and Nacional Financiera (NAFINSA). FIRA, now the most important of the three, combines loan operations with programmes of technical assistance, research and technological development. It currently benefits about 50 000 farm units, primarily medium-sized and large farms but also ejido and community farms.

Oriented more specifically towards rural development, BANRURAL was the major source of agricultural and rural financing until the late 1980s. However, large-scale defaulting led to a drastic reduction of its credit disbursements, the transfer to PRONASOL of bad outstanding loans and a revision of lending and management policies. An effort is being made at present to replenish BANRURAL's lending resources (planned to increase by 15 percent in 1993 over the previous year) and to restore viability to rural support operations. The other main source of official credit, NAFINSA, works primarily with agroprocessing and marketing enterprises.

Despite current efforts to strengthen the volume and efficiency of official lending, the basic issue remains access to credit, mainly by the small farm sector, following the decline of subsidies, the sharp increase in interest rates and the reduction of BANRURAL's rural support operations.

Another major constraint to agricultural development is the heavy underinvestment that resulted from former landownership regulations hindering access to credit and private financing. This problem was further accentuated during the years of stabilization from 1982 to 1988, when sharp cuts in public expenditure were effected. While rural reform is expected to create a more favourable environment for private financing, the government is also making a major effort to expand public investment. Between 1988 and 1991, SAHR investment rose by 59 percent in real terms and investment in agricultural development by 61 percent. By comparison, total public investment increased only by 20 percent during the same period. Priority areas for public investment are irrigation, agro-industry and small and medium-sized infrastructure. Another initiative to promote rural investment was the creation of the Fund for Rural Investment and Capitalization (FOCIR). Together with resources from PRONASOL funds, this new investment fund was allocated a total of 400 million pesos for 1993, with an additional 30 million pesos allocated for programmes to strengthen project formulation and implementation capacity.³⁶

³⁶ US$1 was equivalent to approximately 3 pesos during the first half of 1993.

Outstanding issues and prospects for agriculture

The success of future agricultural reform is crucially linked to the sustainability of overall economic recovery. After a period of euphoria over the initial results of the reform, the slow-down in economic activity and the widening current account deficit have generally led to more sober assessments of Mexico's economic prospects. While the current account deficit is largely the counterpart of capital inflows, there is some uncertainty regarding the extent to which such inflows are speculative in nature or stable, long-term investments (for instance, foreign participation in parastatal privatization). In any case, capital inflows contributed to real exchange rate appreciation, thereby raising another set of problems. The overvalued currency is likely to reduce the competitiveness of domestic industry, including export and import-substitution agriculture. On the other hand, devaluation is a difficult policy option at a time when the country needs investors' confidence in its financial stability.

The long-term environment for investment and, more generally, the overall economic outlook also depend to a large extent on NAFTA. While the agreement is expected to result in major gains from trade expansion for Mexico, the main benefits would be in terms of greater economic and political stability and a more favourable climate for foreign investment. More foreign investment would in turn allow a reduction in interest rates and, possibly, an increase in public expenditure, with both factors combining to boost economic activity. The perceived importance of NAFTA for Mexico is shown by the sensitivity of financial markets to opposition voices in the United States, the close scrutiny of its implications by Congress and, more recently, challenges to its compatibility with the constitution.

In the more specific area of agricultural reform, the outlook for the current transition period is also uncertain. In general, the possibility of selling ejido land, and the consequent concentration of landholdings, are likely to create better opportunities for economies of scale, investment and market dynamism. The process also involves risks, however. Although the new legislation contains precautionary clauses against the emergence of neo-latifundia, there are fears that market forces and capital concentration may overturn such regulations in the long term.³⁷ Moreover, even limited land concentration is likely to accentuate inequalities. Along with enhanced income and employment opportunities for many farmers, distress selling, migration and proletarianization are potential threats for many others. This risk is also latent in the closer association that is sought between ejido members and private entrepreneurs. Will the former be able to maintain a fair share of influence and control in such a partnership?

³⁷ Legislation forbids concentrations of more than 2 500 ha of irrigated land and sets a limit of 5 percent on ejido landownership by any one member.

³⁸ Although forbidden by law, land renting was quite common before reform. However, because of their clandestine character, rents were very low, accounting for an estimated 10 to 15 percent of production costs. The legalization of renting is likely to increase these rates significantly.

The other major area of concern for many farmers regards NAFTA. While a minority of competitive farmers would benefit immediately from NAFTA, the large majority, mainly maize producers, would be bound to suffer to varying degrees.

The immediate effects for subsistence farmers, who are largely isolated from market forces, would be relatively minor, although they may lose temporary off-farm employment opportunities. In any case, their marginalization may tend to worsen, although they could still be assisted in modernizing their productive systems and lowering costs of self-consumption.

At the other end of the scale are the reasonably competitive commercial farmers who account for about 10 percent of maize-producing units and for whom subsidies currently account for only 18 percent of their crop. This subsector would probably survive external competition and also has the greatest potential for diversification at little cost to income.

The real problem is posed by the large majority of maize producers who depend on the part of their output that is sold to the market but who cannot possibly remain competitive in an open market regime. How many will abandon maize production is an open question. Much will depend on the impact of compensatory and safeguard measures contemplated under NAFTA. For those pushed out of agriculture, the challenge will be to mobilize welfare programmes such as PRONASOL and to create off-farm employment as well as the conditions for an orderly process of migration. These are daunting tasks to be tackled in the ten- to 15-year period before liberalization is fully enacted.

These problems raise fundamental issues for the long term. What will be the sector's future role as a contributor to income, employment and food security? Can the major transformations under way be achieved without creating massive problems of proletarianization and rural migration? Will the resources available for developmental, compensatory and welfare action be sufficient to ensure an orderly process of diversification and modernization while preventing major political and social disruptions? To what extent can reliance on the determinism of the market be made compatible with the consolidation of a popular democracy?

Beyond the specificity of the Mexican situation, the answer to these questions has a broad relevance. For many countries around the world, similarly committed to the free market paradigm, Mexico's ability to meet the challenges of reform will be a point of reference and, hopefully, an encouragement for their own efforts.

NEAR EAST AND NORTH AFRICA

Regional overview
Egypt
Syrian Arab Republic

Regional overview

Policy developments
Implications of agricultural policy reforms

In 1992, the Near East's recovery from the Persian Gulf conflict was well established. Petroleum export volume increased, although prices declined during 1992 to pre-conflict levels, benefiting oil-importing countries in the region. Reconstruction activity helped energize the region's economy, creating renewed opportunities for migrant employment and raising remittance income. Trade and tourism revenues also rebounded while declining import demand, debt forgiveness and foreign transfers - including support provided by the Gulf Crisis Financial Coordination Group to Egypt, the Syrian Arab Republic and Turkey - helped to improve current account balances.

These positive developments have been clouded by the continued political tensions in the region, however, which have created disincentives for private investment and slowed market reforms in some countries, consequently harming long-term growth prospects.

Agricultural output increased in most countries in 1992. Good weather was the major determinant of increased farm output in countries that have primarily rain-fed agriculture, including Algeria, Cyprus, the Sudan, the Syrian Arab Republic, Tunisia and Turkey. Drought in Morocco caused a sharp decline in its farm output in 1992, with continued drought expected to reduce the 1993 harvest. In Egypt, changing price signals and a lifting of planting controls have resulted in a substantial shift in crop mix since 1986. Wheat area has increased and, combined with the widespread adoption of HYVs, contributed to Egypt's sixth consecutive record crop of wheat in 1992.

Regional agricultural production rose by 40 percent between 1979-81 and 1992. Growth in output has generally enabled regional food production to keep pace with population growth, except in cases of weather-induced shortfalls. Country performances vary: most of the major agricultural producers have achieved substantial gains in per caput food production since 1979-81, including Algeria, Egypt, the Islamic Republic of Iran, Morocco and the Kingdom of Saudi Arabia.

The regional agricultural import volume rose by 40 percent between 1979-81 and 1991, but declining import prices kept the value of imports constant. Regional agricultural exports rose in value between 1979-81 and 1991, as a near doubling in export volume offset declining export prices during that period. Overall, the region's agricultural trade balance remained in heavy deficit. In 1991, regional agricultural imports fell by 8 percent to $21.3 billion. Agricultural exports rose by 11 percent to $7.8 billion.

Figure 7 NEAR EAST AND NORTH AFRICA - AGRICULTURAL AND PER CAPUT FOOD PRODUCTION

Figure 7 NEAR EAST AND NORTH AFRICA - AGRICULTURAL TRADE

Figure 7 NEAR EAST AND NORTH AFRICA - AGRICULTURAL EXPORTS (Index 1979-81 = 100)

Figure 7 NEAR EAST AND NORTH AFRICA - AGRICULTURAL IMPORTS (Index 1979-81 = 100)

Policy developments

Regional economic and agricultural performance in 1992 has occurred in the context of nearly a decade of profound policy change. Many countries in the region, including Algeria, Egypt, Iran, Jordan, the Libyan Arab Jamahiriya, Morocco, Tunisia, Turkey, the Sudan and Yemen, initiated major policy reform programmes during the 1980s to transform themselves from inward-oriented economies, with extensive government intervention, into more market-oriented economies based on outward-oriented growth. Generally, policy reforms were initiated to deal with the economic crises which unfolded during the 1980s and were reflected in large current and fiscal account deficits, unsustainable foreign debt obligations, inflation and high unemployment. The two prongs of their reform programmes were the short-term stabilization of deficits through austerity policies, and long-term economic restructuring. Long-term strategies included reduced or eliminated price distortions, the liberalization of trade and foreign exchange markets and institutional reforms.

Policy reforms have helped stimulate economic activity in these countries, as trade and domestic markets have become more open, thus leading to greater competitiveness and economic growth. Turkey, for example, was the first in the region to implement a comprehensive structural adjustment programme, which it initiated in 1980. The programme contributed to accelerated growth in GDP, averaging 5.1 percent annually during the period 1980-1990. More recently, Iran has recorded impressive economic growth, averaging 9 percent during 1990-91. Since the end of the Iran-Iraq war, Iran has moved to revitalize and liberalize its economy, removing most of the wartime controls on its economy.

Agricultural and food policies in the region differ widely. Most of the countries that have implemented major policy reform programmes are at the same time the region's leading agricultural producers and their farm policies have also undergone a transformation. Until the 1980s, they intervened extensively in agriculture with interrelated producer and consumer policies. Generally, the objectives of consumer food policies were to assure an adequate and affordable food supply, improve diets and maintain political stability in urban areas. Consumer policies included fixed retail prices, food subsidies and, in some countries, rationing systems. Producer policies were intended to stimulate domestic agricultural production in a setting of low market prices. Producer policies included subsidized inputs, controls or quotas on planting and procurement, fixed producer prices and government monopolies in marketing and trade. Generally, these consumer and producer policies were set in a macroeconomic context of overvalued exchange rates and low government investment in agriculture, which created disincentives for domestic farm production.

In agriculture, factors that stimulated policy reform were weak agricultural performances, the unsustainable costs of government intervention and the general shift of the policy paradigm in the region towards market-based economies. Common features of agricultural policy reform in Algeria, Egypt, Jordan, Morocco, Tunisia, Turkey and Yemen have been the elimination of guaranteed prices for all or most crops, the reduction or removal of producer and consumer subsidies, the privatization of input supply and the liberalization of agricultural trade.

Agricultural policy reform has been implemented gradually. In 1992, important developments in agricultural trade liberalization included the privatization of wheat imports in Morocco and Turkey, and of wheat flour imports in Egypt. Morocco's drought in 1992 accelerated its import liberalization plans because of the country's tremendous demand for wheat imports. In Egypt, flour import privatization was linked with the liberalization of consumer prices for flour and high-quality breads. Tunisia lowered its staple food subsidies further in 1992, in combination with an increase in its subsidies for low-income households. Algeria removed its food subsidies in 1992, except for those on milk, bread, flour and semolina.

In contrast, agriculture has been excluded from market liberalization efforts in some countries. Saudi Arabia's Fifth Development Plan (1990-1994) stresses economic diversification and an increased role for the private sector in industry but a continued role for the government in its agricultural sector (see The State of Food and Agriculture 1992). Iran has adopted some market liberalization policy reforms but has maintained a food self-sufficiency policy, with controlled and subsidized inputs and producer prices that exceed world prices.

Implications of agricultural policy reforms

Agricultural policy reforms will have important implications for agricultural development and performance in the region. They will also have important environmental implications: in particular, the need to conserve the region's scarce water and land resources has emerged as one of the most critical issues now facing the region. Water problems are most serious in Jordan, the Libyan Arab Jamahiriya and the Persian Gulf countries, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which face potential water shortages in this decade. In Egypt, increased efficiency in the use of its limited water and land resources forms the core of the country's agricultural strategy for the 1990s.

An excessive consumption of water and the degradation of water quality has partly been a response to agricultural policies in the region. Free irrigation water has led to the overexploitation of groundwater and created salinity and waterlogging problems that have lowered crop yields in Bahrain, Egypt and the Syrian Arab Republic. Subsidized fertilizer and pesticide inputs have contributed to the pollution of available water supplies. Rapid population growth and developing industrial needs have also raised the regional water demand, while the inadequate handling of human and industrial waste has accounted for a significant portion of the region's water pollution.

Many countries in the region are adopting policies that rely on market signals to improve the efficiency of water use and encourage its conservation. These policies include the pricing of irrigation water, the elimination of fertilizer and pesticide subsidies and the provision of incentives for farmers to adopt more efficient irrigation technologies. Egypt, for example, is eliminating pesticide and fertilizer subsidies, except for cotton, and is studying possibilities for the introduction of fees for irrigation water. Jordan has made major technological advances in its use of drip irrigation and sewage treatment. Tunisia has developed a long-term strategy for soil and water conservation, including the construction of more than 1 000 small dams. Saudi Arabia has increased government control over well drilling and instituted stricter regulations on water use.

Many countries of the region are dependent on the same water supply. Assuring adequate water supplies will raise difficult allocation issues while the conservation of such supplies will require regional cooperation. Among the countries that rely on shared water sources are Israel, Jordan and the Syrian Arab Republic, which share the Yarmuk River. Jordan, Saudi Arabia and the Syrian Arab Republic draw jointly from underground aquifers while Egypt and the Sudan are both dependent on the Nile.

Only 4 percent of the land in the Near East and North Africa is arable. Desertification, deforestation and urban encroachment are the region's major challenges in managing and conserving its limited land base. Two elements of agricultural policy reform have implications for improved land management practices. The first is price policy reform. Artificially low agricultural prices in many countries of the region had depressed land prices. In turn, this had removed incentives to invest in sustainable land management practices and made non-agricultural land uses relatively profitable. Higher farm prices, which raise farmland values, should provide farmers with a structure of incentives to improve their management and conservation of land. Second, measures affecting landownership legislation can contribute to improved land management by clarifying proprietary rights to the long-term returns from conservation investments and by providing access to credit to finance the adoption of conservation technologies.

Efforts in the area of landownership have been part of agricultural policy reforms in Algeria, Egypt, the Sudan and Tunisia. In Algeria and Tunisia, state farms have been dismantled and privatized. Egypt has implemented land rental reform. Land rents, formerly fixed at seven times the land tax, will be market-determined by 1997. Egypt's low land rents created disincentives for the efficient use of land and water. The Sudan has moved to delineate grazing rights in an effort to prevent overgrazing on common land.

Policy reform in the region has had major institutional implications. It is transforming the role of government from participation and regulation to one of creating a stable environment in which the private sector can function efficiently and be unhindered. This institutional change is perhaps the most difficult aspect of policy reform to implement. On one hand, the privatization of many government functions is expected to achieve efficiency gains and generate fiscal savings for governments. Yet, privatization also entails a degree of dislocation as public sector employment falls and the profitability of economic activity that was based on government intervention is changed. In agriculture in particular, policy interventions had created a pervasive role for governments in input supply, the procurement and distribution of crops, trade and food manufacturing and retail.

The privatization of agricultural input supply, marketing and trade has been at least partially implemented in many Near East and North African countries, including Algeria, Egypt, Morocco, the Sudan, Tunisia, Turkey and Yemen. Privatization plans are probably most extensive in Egypt. All public enterprises have been consolidated into diversified holding companies as a prelude to selling most of these public assets. However, this component of Egypt's policy reform has moved more slowly than any other.

Agricultural policy reform in the region has increasingly taken on a long-term perspective. For example, Egypt's farm policy reform has been formulated in the context of a strategy for the 1990s. Tunisia's resource conservation plan extends to the year 2000, the Sudan has adopted a ten-year agricultural sector strategy, while the development of a long-term agricultural development strategy for Yemen is in progress. A longer-term perspective in agricultural planning reflects the increased awareness of intersectoral linkages within economies as well as the sectoral implications of macroeconomic policy. Most of the countries that have made major reforms in farm policy have implemented these sectoral policy changes in conjunction with economy-wide policy reforms under structural adjustment programmes. Longer-term planning has also been influenced by the increased urgency of the environmental issues facing the region. These are issues that call for immediate changes in the utilization of natural resources as well as investment in their conservation, which has long-term intergenerational benefits.

Egypt

Agriculture's role in the economy
Economic policy reform
Agricultural strategy in the 1990s
Implications for agricultural performance

Agriculture's role in the economy

Egypt has targeted agriculture, along with tourism and industry, as a sector with strong potential for supporting economy-wide growth under the economic reform and structural adjustment programme (ERSAP) adopted in March of 1990. This is a comprehensive policy reform effort designed to correct structural weaknesses of the economy and achieve macroeconomic stability. Under the ERSAP, Egypt's objective is to restructure economic activity to achieve a decentralized, market-based and outward-oriented economy. This marks a complete break with the centrally planned, inward-oriented economic policies that the country has pursued for more than four decades.

Several factors account for the expectation that agriculture can help support economy-wide reform and stabilization. First, the share of agriculture in the Egyptian economy, while declining, continues to be important. In 1990, agriculture accounted for 17 percent of Egypt's GDP, 41 percent of employment and 20 percent of its export earnings.

Second, the farm sector has potential for additional gains in productivity. Egyptian farmers are already among the most productive in the world, aided by good soils and a mild climate that permits three crops per year. Further productivity gains are expected to come from increased yields in some crops, efficiency gains from crop substitution as remaining price distortions are removed and better management of limited water resources.

Third, the agricultural sector has already achieved considerable progress in implementing market liberalization. Major policy initiatives undertaken since 1986 have removed most sectoral price distortions in agriculture, exposed Egyptian farmers to decision-making in a competitive market and achieved a role for the private sector.

Economic policy reform

The economic difficulties confronting Egypt in the late 1980s necessitated major economic policy reforms. In the 1970s and early 1980s, the country had achieved impressive GDP growth rates, based on high petroleum prices, worker remittances and foreign assistance and borrowing. Economic growth slowed in the second half of the 1980s when oil prices and export earnings fell but Egyptian policies did not adjust to the decline in resources. Continued large government expenditures on food and energy subsidies as well as on support of public sector enterprises helped generate massive fiscal deficits which exceeded 20 percent of GNP annually. Egypt financed its fiscal and current account deficits partly through foreign borrowing, but capital inflows slowed as Egypt's creditworthiness deteriorated and foreign arrears began to accumulate. By 1990, Egypt's total foreign debt had reached $51 billion, equivalent to 144 percent of GDP, with repayment obligations equal to one-half of its export earnings. An expansionary monetary policy was also used to help fund the fiscal deficits and consequently contributed to high inflation.

In response to the deterioration in the Egyptian economy, the government initiated the ERSAP in March of 1990. The three broad principles of an ERSAP are:

· the rapid achievement of a sustainable macroeconomic environment;
· economic restructuring to lay the foundation for medium- and long-term growth;
· improvements in social policies to minimize the negative effects of economic reforms on the poor.

The ERSAP is being implemented with support from the international community. The IMF is supporting the macroeconomic stabilization component of the programme. The World Bank is supporting structural adjustment to improve efficiency as the country shifts towards an export-led growth strategy based on the private sector. The IDA and other donors are supporting a review of social policies to minimize the effects of economic reforms on the poor.

In addition, Egypt received substantial foreign assistance following the Persian Gulf conflict. The Gulf Crisis Financial Coordination Group and United States and Arab donors cancelled nearly $13 billion of Egyptian debt. The Paris Club of lenders also granted debt relief. Combined, these measures reduced Egypt's foreign debt to $38.3 billion at the end of FY 1992. Additional debt relief by the Paris Club in 1994 is contingent on Egypt's performance under its structural adjustment programme.

Egypt made significant progress during the first three years of the ERSAP and, in some areas, moved ahead of schedule in implementing policy reform. It reduced its fiscal deficit to 7 percent of GDP by 1992 while growth in money supply slowed, causing inflation to decline from 27 percent in 1989 to 14 percent in 1992. Exchange rate restrictions were removed and the exchange rate system unified ahead of schedule in November 1991. Egypt's balance of payments improved and a current account surplus was achieved in 1991 and 1992. The surplus partly reflected the effects of foreign debt reduction. It was also due to a recovery in earnings from tourism, worker remittances and Suez Canal revenues, combined with declining imports. Prices were liberalized in the energy, industrial and agricultural sectors.

Only the restructuring and privatization of public sector enterprises have moved behind schedule. Public enterprises were consolidated into a small number of diversified holding companies in preparation for the sale of their assets to the public. The slow pace of privatization illustrates some of the challenges Egypt faces in its economic reform efforts. Privatization has been slowed by both bureaucratic inertia and Egypt's need to maintain economic stability. Slow implementation of privatization places a potential drag on long-term economic growth in Egypt by discouraging foreign in vestment flows. A revival of foreign investment is particularly important given the external economic conditions facing Egypt, including weak oil prices and stagnating growth in the industrial economies.

Agricultural strategy in the 1990s

Until the mid-1980s, Egyptian agricultural policy was characterized by extensive government intervention and an inward orientation. Egypt's objectives were to attain self-sufficiency in basic food products; provide food to consumers at low prices; generate sufficient rural employment to absorb a rapidly growing labour force; and tax agriculture to support industrial growth and generate government revenue. Its policy tools were: controlled producer prices; area and marketing quotas; controlled agricultural trade; and government monopolies in trade and marketing.

Under this policy regime, agricultural GDP growth slowed, increasing by an average 2.5 percent annually in the 1980s. The main reasons for slow growth in agriculture were the disincentives that price distortions created for farmers and declining government investment in the sector.

As agricultural production failed to keep pace with population growth, dependence on food imports increased. Cereal self-sufficiency declined from an average of 65 percent in 1978-80, to 52 percent in 1986, when agricultural policy reforms were initiated. Food imports increased by more than 10 percent annually during that period, reaching $2.6 billion in 1986. Slow growth in agriculture also helped induce urban migration. During the period 1980-1990, Egypt's urban population grew by an average of 3.1 percent annually, compared with a 2.4 percent average annual growth in the national population. By 1990, 47 percent of a population of 52 million lived in Egypt's cities, where population densities are among the highest in the world.

In response to these trends, in 1986 Egypt introduced agricultural policy reforms which were pursued gradually up to 1992. They included:

· the removal of crop area allotments with delivery quotas at fixed procurement prices, except cotton and sugar cane;

· the liberalization of producer prices for all crops except cotton and sugar, with the cotton price raised to 66 percent of the border price equivalent in 1992;

· a reduction of subsidies on fertilizers and pesticides;

· encouragement of the privatization of processing and marketing of agricultural products and inputs;

· the implementation of a programme for divesting land held by public enterprises; and

· lower trade barriers and a shift of agricultural trade to a free foreign exchange market.

The targeted growth rate for agriculture under the plan is 3 to 4 percent annually, which would signify a per caput increase in agricultural output.

Land availability is a key constraint in Egyptian agriculture. Only 3 percent of Egypt's total land mass is cultivable. Farms are small and mostly privately owned and 50 percent of them are less than 1 feddan (0.416 ha). Egypt's water resources are also limited: Egyptian agriculture is almost entirely irrigated, with the Nile being the single source of the country's water supply. Increasingly, agriculture must compete with urban and industrial demand for water.

Land productivity can be increased in several ways. One is to achieve higher yields on "old" lands in the Nile valley. Although yields are already high, additional gains could be achieved for wheat, rice and corn with improved seed quality, greater mechanization, strengthened extension support and better land and soil management. The privatization of input distribution is expected to improve the quality and timeliness of input supplies.

Some of the increase in land productivity is expected to come from increasing productivity on the reclaimed "new" lands. These lands, reclaimed from desert land and from marginal areas near agricultural and some coastal areas, account for about 25 percent of Egypt's total farmland area. Performance on new lands has been below expectation, leaving room for increased productivity through better extension support and selection criteria for settlers.

Measures for improving water efficiency in agriculture include the application of water-saving technologies that are technically and economically feasible. The introduction of water fees is also under consideration. These would provide some cost recovery from farmers to finance the maintenance costs of an increasingly capital-intensive irrigation system. Water fees would also create price incentives to encourage more efficient water use and prevent the degradation of natural resources. In the delta region, for example, yields have been reduced by increased salinization resulting from the overuse of free irrigation water. In the long term, the sustainability of agriculture's reliance on water resources will require more emphasis on reducing pollution, which is partly caused by pesticide use.

Despite the substantial price liberalization that has occurred in Egyptian agriculture since 1986, important price distortions remained in 1992. The most important of these were free irrigation water and regulated land rents. These increase the profitability of irrigated crops such as sugar and rice, while the low producer price for cotton provides insufficient incentives for increased plantings or the adoption of improved inputs.

Additional changes in price signals in input and product markets are expected to provide the right incentives for replacing existing crops with those that are characterized by a high contribution to agricultural value added, compared with their utilization of scarce land and water resources. Wheat, cotton and vegetables make a high contribution to agricultural value added relative to their resource consumption. In contrast, the contribution of sugar, rice and berseem clover is relatively low. Wheat, for example, accounts for 17 percent of land area and 9 percent of water resources and contributes 17 percent of total value added in Egyptian agriculture. Sugar cane, on the other hand, accounts for 4 percent of land area, uses 9 percent of water resources and contributes 4 percent of total value added in agriculture.

Crop and livestock production in Egypt is integrated, and 85 percent of livestock are raised on small farms. Since natural pastures are limited, most animals are confined and fed berseem clover as well as a variety of other crops and by-products. The 1990s' agricultural strategy seeks to increase productivity in the livestock sector through better genetic selection and disease control. Furthermore, the use of fodder crops and crop residues as feed is to be encouraged, since the cultivation of feed crops competes directly with food crop production.

Agricultural production policies are influenced by consumption policies. Until the late 1980s, one objective of Egyptian farm policy was to ensure cheap food for the urban population. Ninety percent of Egypt's population participated in a ration system, which provided those eligible with sugar, vegetable oils, rice, tea and other basic items. Egypt also provided subsidized bread, flour, fish, meat, eggs, cheese and other items through government outlets. During 1991 and 1992, the government moved to reduce and target its food subsidies. Some items were eliminated from the ration programme. Prices for bread and other basic foods were increased in 1991. In December 1992, the government increased the prices of sugar and edible oils and freed the market price of higher-quality wheat flour. The government continues to subsidize baladi bread, a coarse wheat bread which is a dietary staple.

Implications for agricultural performance

Egypt's main crops are wheat, maize, rice, berseem clover and cotton which, combined, account for more than 80 percent of cultivated land area. Other important crops are broad beans, sugar cane, fruits and vegetables. Since 1986, Egyptian agriculture has undergone a substantial modification in crop mix in response to changing price signals and the removal of planting and procurement requirements.

Wheat area expanded by over 75 percent between 1985 and 1992 while output increased by 150 percent as a result of both increased area and rising yields. In 1992, Egypt harvested its sixth consecutive record wheat crop, causing wheat imports to decline by 14 percent to 6 million tonnes during the period 1985-1992. Wheat flour imports were liberalized in 1992 to allow importation by the private sector, and flour prices were to be determined by the market.

The area planted to coarse grains and rice rose by 11 and 16 percent, respectively, while the area planted to cotton and beans declined by 17 and 13 percent, respectively.

Poultry and livestock became less profitable under market liberalization. The government reduced corn imports in 1986 and removed feed subsidies in 1988. Poultry production in particular began to decline as input prices rose. Output had grown at an average annual rate of 16 percent between 1980 and 1988, mainly because of government subsidies on feedgrains and equipment. Between 1988 and 1992, poultry meat production fell by 21 percent as nearly one-half of the producers were forced out of the industry. Currently, chicken imports are banned to protect the remaining producers, with plans to replace the bans with tariffs in 1993. Beef imports were banned in 1989 but liberalized again in 1992. In the long term, livestock and poultry output is expected to recover as efficiency gains in production restore profitability.

Agricultural policy reforms to be implemented in the short term include the removal of fertilizer and pesticide subsidies, except for cotton, by November 1993. Price and area controls on cotton are planned to be removed in 1994. A floor price for cotton will be set, with the market price to be determined in a planned cotton exchange. Wheat imports are to be liberalized in mid-1993 and land rental rates are to be market-determined by 1997.

Syrian Arab Republic

Economic overview
The role of agriculture
Irrigation development

Economic overview

After struggling throughout much of the 1980s, the Syrian economy has performed well in recent years. Real GDP grew by more than 5 percent every year between 1990 and 1992. (Nonetheless, with one of the highest population growth rates in the world - estimated to be 3.5 percent - the country's per caput GDP increased by much less.) Preliminary estimates for 1993 suggest further strong growth in GDP - about 6 percent. This welcome period of solid economic performance follows a decade of stagnating and even declining incomes. Per caput GDP fell from around $1 800 in the mid-1980s to $880 in 1989.

A number of external events and internal policy changes contributed to this performance reversal. One significant external event was the 1990 Persian Gulf conflict, which ended a period of relative isolation and resulted in renewed access to development assistance funds and foreign investment. In 1991 and 1992, Syrian public sector agencies issued a record number of tenders, mostly directed at rehabilitating infrastructure and expanding public sector activities.

Another important external event was the end of a two-year drought, which allowed agriculture and agro-industries to recover in 1991 and 1992. During the drought, the government was forced to import large quantities of wheat and barley, draining foreign exchange reserves. Low water levels meant a reduction in hydropower generation, hampering both manufacturers and agricultural producers using electric pumps for irrigation. Reduced hydropower generation also increased the need for thermal power, thus lowering crude oil exports.

These external forces coincided with a number of economic policy changes designed to take better advantage of private sector activity and improve public sector performance. In 1991, the Syrian Arab Republic established a new investment law, Law No. 10, to promote both foreign and domestic investment in private and domestic sector companies.

This new law, combined with a more favourable official exchange rate set in 1991, led to expanded trade and investment. Private sector exports now account for around 50 percent of total export trade compared with about 10 percent in the mid-1980s. Since 1990, the country has recorded trade surpluses. Law No. 10 is also credited with increased investment: the Syrian Investment Bureau reports that, between May 1991 and December 1992, more than $2 billion of new investment (foreign and domestic) was approved.

Over the last few years, the government has also eased trade restrictions, allowed free internal trade of various commodities and encouraged more mixed and privately owned factories and businesses. These policy changes reflect a gradual transition towards more market-oriented economic activity. In the past, the public sector dominated the economy; even today, the government still owns and manages the mining, large manufacturing, energy, banking and insurance sectors. Moreover, the government controls most prices, credit and international trade. The public sector employs approximately half the labour force.

The government also provides the country's 13 million inhabitants with health care services and education. Nutrition levels are comparable with high-income economies and infant mortality has declined by two-thirds over the past 20 years.

The role of agriculture

Even though rapidly expanding petroleum-based industries generate over one-half of export earnings and account for one-fifth of GDP, agriculture remains the most important sector in the economy. Agriculture employs approximately 30 percent of the labour force, accounts for nearly 30 percent of GDP and contributes over 60 percent of non-oil exports. In addition, fast-growing agro-industries, such as textiles, leather, tobacco and food processing, contribute 25 percent of the country's output and account for an estimated 50 percent of jobs in the manufacturing sector.

The cropped area in the Syrian Arab Republic averages 4.8 million ha and has increased only marginally in the past decade. The principal staple, wheat, and the primary feedgrain, barley, occupy 70 to 75 percent of the cropped area. Cotton is the country's most important export crop, accounting for 20 to 25 percent of agricultural exports. Farmers also raise livestock and produce a wide variety of fruit, vegetables, tree crops and legumes. Livestock production accounts for one-third of agricultural output value and sheep exports have surpassed cotton as the most important agricultural export. Extensive sheep grazing is carried out on marginal rain-fed pasture land and steppe.

Two of the country's major national development objectives are: to achieve food self-sufficiency so as to reduce dependency on imports; and to expand agricultural exports to earn more foreign exchange. Food imports are a significant drain on the country's foreign exchange, accounting for 20 to 30 percent of total imports during the 1980s. To support these objectives, the government has directed a large portion of its spending into agriculture and irrigation. In 1993, public spending on agriculture accounted for approximately 25 percent of total spending.

The government also promotes food self-sufficiency and exports through its trade, production and pricing policies. For example, to influence cropping decisions (and to enhance rural incomes), the government establishes procurement prices for wheat, barley and the major industrial crops - cotton, tobacco and sugar beet. Because interest rates, seeds, fertilizers, pesticides, transport and energy prices are also controlled, the government strongly influences cropping patterns, production levels and input use.

Input and procurement prices are designed to increase total production, to encourage the planting of one crop over another (or, in the case of wheat, to encourage soft wheat over hard wheat varieties) and to increase the amount sold to official purchasing agencies. At times, additional ad hoc measures may be used. For instance, public purchasing agencies offered both a delivery bonus and a bulk delivery bonus to capture additional wheat supplies in 1992.

The government also controls the prices of bread, rice (all rice is imported), sugar and tea. Many other commodity prices are being gradually liberalized. Fruits and vegetables are now market-dependent for both producers and consumers. Likewise, vegetable oils are no longer part of the government's ration card system and private traders are now allowed to import maize and rice. Approximately 200 000 tonnes of maize were imported in 1992, all by private poultry producers and businesses.

Other recent reforms influencing production of agricultural exports include new trade policies which allow private exporters to retain 100 percent of foreign exchange earnings from agricultural exports (75 percent for industrial products). The export earnings are restricted to purchasing agricultural inputs and basic commodities such as tea, sugar and rice. The government maintains its monopoly on wheat and flour imports. As of 1992, agricultural exporters may use up to 75 percent of export earnings to import agricultural trucks.

Irrigation development

Within agriculture, irrigation development is the major area for public investment and spending. Over the past ten years, some 60 to 75 percent of the entire agricultural budget has been invested in irrigation. Several factors explain this focus. First, while the irrigated area comprises only 15 percent of the cultivated land, it produces over 50 percent of the total value of agricultural production. All cotton, sugar beet, tobacco and sesame crops are produced exclusively under irrigation. Cotton and textile products account for 25 percent of total exports and more than 50 percent of all non-oil exports. In recent years, fruits, vegetables and wheat have been brought increasingly under irrigation.

The second reason for focusing on irrigation development is that production on rain-fed area, which represents 85 percent of the total area, varies greatly from year to year. Since 1988, annual production has fluctuated by 35 percent on average. While good rainfall years mean lower agricultural imports, a drought year entails substantial food and animal feed imports.

Syrian public investment in irrigation focuses primarily on relatively large projects, particularly those in the Euphrates River basin. Public sector projects provide water to private farms, state farms and tenant farmers on state lands. The private irrigation sector includes farmers who drill wells to extract groundwater and pump water from lakes, rivers and springs.

Available data suggest that around 1.25 million ha are potentially irrigable from surface water. In 1992, the total irrigated area from surface water and groundwater was approximately 900 000 ha. Farmers irrigated 415 000 ha from wells in 1991.

The Euphrates River, whose waters are shared by Turkey, the Syrian Arab Republic and Iraq, is the country's principal source of irrigation water and, while Syrian water development projects have been designed to irrigate about 650 000 ha in the Euphrates River basin, the area currently irrigated is much less because of salinity, waterlogging and reduced river flows.

At present, efforts are under way to reclaim land damaged from waterlogging and salinity during the 1960s. At the same time, water resource development projects in Turkey during the last decade have reduced the Euphrates' mean flow by about one-third.

While surface irrigation has been expanding slowly over the past five years, pumping groundwater to irrigate has been increasing rapidly. Wells account for 80 percent of the newly irrigated land since 1987. More than 60 percent of the increase in total irrigated area from groundwater has occurred in the northeast of the country.

This rapid expansion in the use of groundwater is a serious concern for the Syrian Government. While the increased irrigated area is making important short-term contributions to economic growth, the current rate of uncontrolled groundwater exploitation is likely to have long-term social, economic and environmental consequences. Significant drops in groundwater levels have already been documented in the Damascus, Aassi and Aleppo basins, among others. This diminishing supply, coupled with growing competition from industrial and domestic water users, is adding urgency to government concern.

Irrigation efficiency is another concern: most studies and observers agree that farm-level irrigation efficiency ranges from 35 to 50 percent. The Ministry of Irrigation, Public Works and Water Resources and the Ministry of Agriculture and Agrarian Reform are searching for appropriate methods to improve and enhance irrigation system efficiency and farm-level water management on farms receiving public sector irrigation.

At present, agriculture accounts for around 85 percent of the country's water consumption, but competition from other users is increasing. During the 1980s, industrial water demand rose by nearly 900 percent. Current projections suggest that domestic water requirements will be two to three times greater by 2010. Moreover, as the population and industrial capacity continue to grow, agriculture is likely to face greater water quality problems from waste water and industrial pollution. Agricultural producers in Damascus, Homs and Aleppo have already experienced pollution-related problems.

With irrigation, farmers obtain higher yields, more stable production and greater profit. Since 1989, farmers have been required to pay set fees per irrigated hectare each year. This flat rate only partially covers operation, maintenance and delivery costs. However, it does not encourage efficient water use since the fee is the same irrespective of the amount of water used by the farmer. Recent estimates suggest that one irrigation per hectare on government projects costs approximately four times the annual fee; some crops require from five to ten irrigations per season.

The only expenses required for irrigating with groundwater are the digging of the well and the pumping gear - a one-time fixed investment cost. Before operating a well, farmers must obtain two licences from the Ministry of Irrigation, Public Works and Water Resources: one to dig the well and the other to withdraw the water. The licences specify the extent of water use and must be renewed every ten years. In practice, a large share of wells, both old and new, are not licensed.

These economic incentives are not the only factor contributing to the increase in wells. A second reason is the large number of farmers with smallholdings. Approximately 80 percent of Syrian farmers have holdings of less than 10 ha; the average farm size ranges from 3 ha in high rainfall areas to 45 ha in low rainfall areas. Moreover, these farms are characterized by fragmentation. An average farm consists of four plots, with even 1 ha holdings averaging three separate parcels. Because most farmers want timely, secure access to water, they drill separate wells on each parcel whenever it is practical. Over time, as holdings are divided among heirs, even more wells may be drilled.

In addition, the Syrian Arab Republic's agrarian reform law establishes maximum sizes for irrigated holdings: 16 ha for holdings under government irrigation and a range of 15 to 45 ha for privately irrigated farms, depending on the location and type of irrigation method. The law provides a strong incentive for larger farms to subdivide below the maximum limit and then drill wells on each new individual property. Over the past several years, the favourable pricing structure for many agricultural crops has also encouraged large landowners to subdivide among family members.

Other economic pressures are also influencing farmers' decisions to dig wells and expand irrigation. For example, as incomes in urban areas increase, consumers are demanding more fruit and vegetables. At the same time, recent changes in trade and exchange rate policies are making Syrian agricultural products more competitive in regional markets. Farmers who initially planned only supplementary irrigation for winter wheat are finding summer vegetables and irrigated fruit production increasingly profitable.

Identifying and implementing policies, programmes, projects and techniques to improve farm-level efficiency and control surface and groundwater exploitation more effectively are two important challenges facing Syrian policy-makers. The growing water scarcity is likely to have important short- and long-term implications for the country's overall social and economic development. Some of the important water-related issues that the government is currently addressing include: better public sector management of irrigation systems; the introduction of water conservation techniques at the system and farm levels; the implementation of water reuse techniques and water harvesting systems; and the reduction of losses in water supply networks in towns.