SODEVPLAN-I
This is the first five-year development plan, introduced in 1971. It sets indicative targets for agriculture and industry, and specified public investments and policies which would be applied to achieve these targets. Strategic objectives were to phase out foreign control in all sectors of the economy, and to use state funds for investment in productive capacity to achieve self-sufficiency in key industrial products. In agriculture, the three main objectives were: (i) self-sufficiency in essential foodstuffs, (ii) reduced dependence on exporting into the world market (seen as a source of instability in domestic prices, employment and incomes) and (iii) rural development. Economic policy was to be more interventionist, making greater use of import licensing arrangements, import quota, tariffs and the granting of temporary monopolies as incentives to inward investors. Generally, there was an emphasis on the importance of achieving economies of scale and improved co-ordination through building-up unified nation-wide companies and organizations. SODEVPLAN-I received ample support from international development agencies, notably for infrastructure and for integrated rural development programmes (IRDP). SODEVPLAN-I achieved many of its targets for sector growth, and over-achieved a number of targets for public investment in productive capacity. The "integrated rural development programme" was widely considered to have been a success, especially by the international development agencies which had provided support. The "Southland Model" of IRDP was quickly taken up and transferred to other countries. Subsequently, however, experts from the same financing agencies have changed their minds, expressing scepticism about the achievement of IRDP in Southland.
SODEVPLAN-II
This is the second five-year development plan, covering the 1976-1980 period. This was an evolution of the successful approach taken in SODEVPLAN-I. A number of concerns which government felt in the mid-1970s were addressed by this plan. First, was a worry that growth of employment was lagging behind that of output. Second, was a related concern with the high level of rural-urban migration, and with living conditions in the urban informal sector. Third, there was concern that foreign control of productive capacity continued to exist in a number of areas. The first two concerns were addressed by a package of measures: (i) the rural development emphasis represented by IRDP was to be focused more on production of key labour demanding crops, through enhanced spending on credit and input subsidies; (ii) the FSB was to play a more activist role, stimulating agricultural production by offering farmers incentive prices while ensuring that this did not cause a rise in food prices in urban areas (it was accepted that this would require government subventions to the FSB, which had previously been largely self financing). The foreign control issue was tackled by introducing a tighter foreign investment licensing system, reducing the possibility for external remittance of dividends, and setting target dates by which majority shareholdings in particular sectors should be transferred to Southland citizens. Target dates were set for 1978 for farms, and 1980 for banks. SODEVPLAN-II was exceptionally successful in terms of overall growth.
SODEVPLAN-III
This is the third five-year development plan, covering the 1981-1985 period. The thinking underlying this plan was developed during the late 1970s, which saw the most rapid economic growth in the history of Southland. At this time, there was considerable optimism about the prospects for continued economic growth. Thus the plan did not propose much modification of what was regarded as the successful growth formula developed in SODEVPLAN-I and refined in SODEVPLAN-II. To the extent that there was a change in emphasis, this was a strong focus on distributional matters. A number of surveys had revealed that the absolute numbers of rural households below the poverty line had increased during the 1970s, despite a favourable rate of growth in overall agricultural output. Further, the size of the informal sector in major cities had continued to grow at an alarming rate, and it was apparent that the livelihoods of many households in the informal sector were crucially dependent on the FSB's ability to hold down the price of staple foods, and to make adequate quantities available at official prices. In 1980, there had been serious rioting, sparked-off by the inability of the FSB to provide adequate supplies to wholesale markets in the capital city. Paradoxically, this occurred in a year in which there was an exceptionally good grain harvest within Southland, and even a small export surplus! The explanation of the paradox was that the FSB ran into serious financial difficulties, because the purchase of the exceptionally heavy harvest used up the entirety of the FSB's financial reserves and a supplementary CBoS loan, while the FSB had lost its main profit generating mechanism for two consecutive years in 1979 and 1980, which was the importation of produce from the world market at below the domestic wholesale price.
Consequently, SODEVPLAN-III emphasized "basic needs", a theme which linked well with the then philosophy of the international development agencies supporting its development strategy. Major investments were programmed in rural infrastructure: water, medical facilities and schools. For the urban areas, slum-upgrading schemes were planned. The FSB was central to the government's poverty alleviation strategy: in recognition of the food insecurity of many rural households, as revealed by surveys, it was mandated to make available supplies of food at official prices in rural market centres. It was agreed that the FSB would need a capital investment programme in rural storage and transport, and that larger recurrent subsidies would be required.
Unlike its predecessors, SODEVPLAN-III was only partly implemented and was eventually overtaken by the necessity to change policies in response to a deteriorating economy. The first year of the plan, 1981, was the first in which the government was conscious of a situation of economic crisis. The budget deficit rose from 3 to 6 percent of GDP (figure 2[2]), the balance of payments deteriorated sharply (figure 3) and the rate of inflation accelerated (figure 4), the international terms of trade became unfavourable (figure 17). Government recurrent expenditure rose sharply, notable aspects of this being the costs of debt service (figure 7) and of expenditure on food subsidies channelled through the FSB (figure 15). From 1981, the government investment as a share of GDP entered on a long term decline (figures 4 and 5) and consequently, much of the "basic needs" infrastructure anticipated in SODEVPLAN-III was not created. The decline in government investment was partly due to the pressure of recurrent expenditure commitments "crowding-out" investment. Another factor was a change in the policy of international development agencies which, at the request of government, began to provide balance of payments support through policy-based lending mechanisms. In the event, policy-based lending instruments were not additional to the donors’ commitments to investment expenditure: externally funded projects were delayed, rescheduled and, in some cases, cancelled.
IMF RELATIONS UP TO THE 1986 BREAKDOWN
Southland became a member of the IMF in 1962, but the government first found it necessary to draw on IMF facilities in 1982, due to deterioration in the balance of payments (figure 3). A twelve-month "fund facility" (loan) was granted, conditional on a devaluation of 24 percent (figure 6), increases in interest rates designed to restrain private sector demand (figure 8) and reductions in the government budget deficit (figure 2). Subsequently, substantial progress was achieved towards the objectives agreed with the IMF.
Relations with the IMF became more difficult in 1986. Government had found it impossible to keep expenditure within the boundaries agreed with the Fund. Public investment was maintained within the target range, but it was impossible to restrain growth of recurrent expenditure. In agriculture, this was due to the continuous growth of the FSB deficit, subsidies to AGRI-CREDIT, operational deficit of ZOIGMAS and lending to WRVA which has attained the brink of collapse.
INRP
The Interim National Recovery Plan. This "austerity plan" was introduced in 1986, after the breakdown of the support agreement between the government and the International Monetary Fund. The INRP's objectives were increased self-sufficiency in basic industrial and agricultural commodities, control of inflation through price controls and the stabilization of the exchange rate and limitations on salary increases in the public and private sectors, in return for strict limitations on the possibilities of increases in the prices of basic foodstuffs sold via the FSB. Government expenditure was to be cut via the rescheduling of investments, and private sector expenditure limited through tight ceilings on lending by the banking system to all but "essential productive activities".
Initially, the INRP appeared to achieve considerable success. Growth of GNP per caput was positive in 1986, 1987 and 1988, helped, among other factors, by a strong performance in agricultural exports. Regrettably, other developments were adverse. By mid 1988, net foreign exchange reserves stood at "minus one month's imports". It was clear that the balance of payments position was unsustainable, and that a very uncomfortable period of adjustment lay ahead, during which foreign exchange would be extremely scarce. Both the government and the PDM were split in their views as to the way forward. One faction favoured moving to a "siege economy", with further tightening in the rationing of foreign exchange, renewed emphasis on import substitution, a more energetic search for South-South trade links and possible repudiation of international debts. In opposition, there was a "liberal faction" in the PDM, which favoured reopening relations with the IMF, and negotiating the assistance of a range of international development agencies for a programme of economic liberalization. In the event, the arguments of the "liberal faction" prevailed and, in late 1988, negotiations were reopened with the IMF, the World Bank and other donor organizations concerning support for a programme of economic restructuring and liberalization.
When negotiations with the IMF re-opened at the end of 1988, both sides were agreed that the immediate objective was to put in place a "foreign exchange lifeline for the balance of payments", and to follow this up with a programme of far reaching policy reforms, within a time horizon of about five years. In the event, negotiations dragged on throughout 1989 and 1990, without agreement: the proposed IMF package of credit restraint, deep expenditure cuts and devaluation was impossible to sell to sceptical members of the government (even within the "liberal faction"). In 1990 the economic crisis reached a new level of intensity. GDP fell substantially, with capacity under-utilization growing throughout the economy.
AGRICULTURAL ASPECTS OF THE 1990s ECONOMIC CRISES
In agriculture, the1990 harvest was almost as bad as the disastrous 1989 harvest (see figure 10 in the data files distributed with this text). After relatively good years in 1991-1993, the country experienced a severe drought in 1994-1995 which resulted with a grain harvest of 40 percent below normal. Since then, after a relatively good year in 1996, annual grain production progressively decreased to levels achieved in the seventies. A worrying factor is that during most of these recent years, growing conditions were average or above average. Thus the deterioration in agriculture was mainly due to retrogression in the economic environment within which it operated. The FSB, while still in operation with an old fleet of trucks (65 percent of which were now inoperable due to shortages of spares) was failing to meet its obligations to purchase crops in high transport cost areas. Additionally, by 1990, it had run out of liquidity in the middle of the buying season, and had to give farmers redeemable vouchers rather than money. Transformation of FSB into FSA in 1997 was followed in 1998 and successive years by accentuated regression of production.
There is a perception that government services to farmers had deteriorated seriously over time. Input supplies were intermittent and insufficient (and often had to be secured by a bribe). Extension and research workers were demoralized by the cuts in the non-salary costs in their budgets, and were infrequently seen in rural areas. Many good extension workers left to work with NGOs. Although, as noted, supplies of water and power to the irrigated areas improved in the early phase of INRP, these had regressed since 1988.
Food supplies to urban markets were, in general, maintained at an adequate level, although they were very tight for a number of periods in 1989 and 1990. The food supplies were facilitated via increased imports (figure 10). The FSB found that imports (particularly food aid) were an increasingly attractive means of fulfilling its mandate as regards urban areas, the costs and predictability of procurement from imports being more attractive than from domestic agriculture. Voices began to be raised arguing that the FSB was ignoring the rural dimensions of its mandate, both as a purchaser and as a supplier. Studies by non-government research institutes suggested that in rural areas, (particularly NA3) food insecurity was worsening among the poorest 40 percent of households. Finally, with the reform of FSB and the creation of FSA in 1997, and because of the poor response of the private sector in grain marketing, farmers in many areas have seen prices fall and incentives to produce a surplus have vanished. They have tended to revert to subsistence agriculture, particularly smaller farmers for whom high-input agriculture (based on hybrid varieties and fertilizer) is no longer a profitable activity under the prevailing economic conditions. Areas most seriously hit have been those in remote parts of the country where transport costs make marketing of grain an activity where profit is unlikely.
In this bleak context, there are however some positive signals that stress some opportunities. For example, production of tobacco by small farmers has considerably increased since 1995, mainly because the private company who bought TOBACSO engaged in contract farming arrangements with farmers who had organized themselves in small groups, supported by an international NGO. Similar success stories have been observed for sugar cane, and to a more limited extent with cotton.
The FAO-supported Special Programme for Food Security (SPFS) has demonstrated that, provided farmers have the seeds and other inputs required, agricultural production can be boosted. The programme has therefore helped to sharpen the arguments of those who believe that agriculture policy should be revised and the agriculture sector be given a central role in the development strategy of the country, if the objectives of poverty reduction are to be achieved. Lessons from the SPFS should be factored into any new agricultural or food security strategy.
Rural areas, particularly in the peripheries of small towns, have become increasingly industrialised in recent years. Activities tend to be labour-intensive and include textiles, tanning, shoe manufacture, production of clothing and basic assembly operations. A disproportionate share of jobs created is going to males due to their greater mobility and the majority of workers are those who have “migrated” in search of off-farm employment as growing conditions in NAs 3 and 4 have worsened and the scope for agricultural employment in these areas has diminished. Concern has been voiced regarding the need for environmental protection in newly industrialized rural areas. Monitoring is inadequate and water resources are particularly sensitive. Furthermore some environmentalists have been arguing that this process of industrialization on the urban-rural fringe will be to the detriment of the development of the agriculture sector due to the attraction of the labour force to these activities. So far, however, these concerns appear to be unfounded as the growth of rural industry has been and is likely to remain very slow due to limited energy availability.
AGENDA FOR AGRICULTURAL REFORM
IMF support was provided through the mechanism of an ESAF (Enhanced Structural Adjustment Facility) and later the PRGF. The World Bank initially intended to offer a series of facilities: Under its SECAL (Sectoral Adjustment Loan) Programme, a loan was granted to rehabilitate the industrial sector in 1993. This loan was conditional on large reductions in protection afforded to domestic industry. It was envisaged that further SECALs targeting the agriculture and food sectors would follow. Initially, over 1994 to 1995, the World Bank wished to focus on supporting reforms in the agriculture and food sectors, with a second SECAL to be made available subject to World Bank approval of an agricultural PFP due to have been tabled at a second donor round-table in 1994. Since then, the World Bank has introduced a new lending instrument under a Sector Investment Programme (SIP), whereby all main donors contribute to a defined strategy for sectoral reform. This led to the launching of the Agriculture Sector Investment Programme (ASIP) in 1998 in support to the development of the agriculture and food sectors.
The macroeconomic and industrial reform processes were initiated swiftly. The current and capital accounts were liberalized. The exchange rate became market-determined rather than under the control of the central bank, and a series of devaluations began in February 1993. Forex-bureaus were allowed to operate to facilitate exchange of foreign currency.
In industry, reforms appear to have been successful in terms of their objectives: reduced protection means that cheaper imports are available; greater internal competition has been created through a programme of privatizations; a foreign investment code has been established which has removed restrictions to FDI. There remains, however, poor infrastructure and a perception of excessive risk by the private sector which has meant only tentative signs of interest by private investors. Nevertheless, industry does appear to be export-responsive and manufactured exports have increased. Industrial privatization has raised a small amount of revenue for the government but not without problems. Little headway has been made with regards to fiscal objectives, thus bringing into question the viability of the revenue-raising targets agreed with the IMF.
As a founding member of the WTO, the CCM and the SCC, the government has committed itself to trade liberalization. This has involved the removal of import licensing systems and the dismantling of protective trade barriers, with a switch to tariffs on some manufactures which were reduced substantially. Also in agriculture, tariffs were reduced according to WTO schedule of commitments and regional agreements. Trade liberalization has opened the economy to increased competition from abroad and there have been some casualties: some companies have gone under as a result, with the associated problem of increased unemployment, particularly in urban areas. This has convinced the government to sign, along with other countries, a proposal for establishing a Development Box which is being negotiated under the on-going multilateral trade negotiations. Trade liberalization combined with high interest rates have had an inflationary effect on the economy and thereby caused an appreciation of the real exchange rate, despite the series of nominal devaluations.
Spurred on by the apparent success of the privatization of state-owned enterprises in the industrial sector, the government also included in the process the privatization of TEXTCO, FRUITEX, SOSUCO, TOBACSO and some State Farms, with the objective that this would enable the agriculture and food sectors to benefit more fully from the reform process which is taking place in other areas of the economy.
Hand-in-hand with macroeconomic and industrial reforms the government devised an ambitious Poverty Elimination Programme (PEP) with the objective of mitigating adverse social impacts of policies such as fiscal rationalization and privatization, reflecting a move back to the ‘basic needs’ philosophy which featured in SODEVPLAN III. However, the government realizes it cannot feasibly undertake huge subsidization programmes as a means of alleviating poverty. There are considerable domestic political and international pressures to avoid such policies which have proved to be unsustainable. Instead, the Government of Southland has been exploring new, effective and sustainable ways of mitigating socially adverse effects of its policies. Funding has been provided through a Social Development Fund to the sum of $5 million per year over five years. Projects so far have included food-for-work and cash-for-work programmes in rural areas and free school meals in order to attempt to address the basic needs of vulnerable groups, particularly those in urban areas. However, in order for such measures to be effective, it is necessary for the government to ensure greater integration into the wider policy reform programme.
Over 1994-1995, however, the reform process suffered an unanticipated setback in the form of severe drought which had far-reaching effects across the economy, indirectly affecting markets, confidence and the policy environment. Southland received 350,000 metric tonnes of Food Aid and early action meant that substantial potential human suffering was avoided.
As well as being distributed by FSB and PEP units, Food Aid was sold in the market along with domestic food supplies. Weak infrastructure and marketing in rural areas meant that the effectiveness of this support was somewhat dampened, highlighting an inherent weakness in the economy. Despite Food Aid and increased imports, in particular cereals, food prices increased dramatically due to scarcity, leading to the erosion of real incomes and thus creating immense pressure on the government to channel more resources into food subsidies, contrasting with the commitment to fiscal austerity. Migration exacerbated population pressure in urban areas and in NAs 1-3. Shortages and rationing of electricity hit manufactured output. There was an exchange rate devaluation at the height of the crisis, inflation hit a ten-year high of 21 percent and the government became concerned about food prices.
In direct contrast to the outright disaster of the 1994-1995 growing season, cultivation conditions in 1996 were excellent. Whilst agricultural output did not regain its pre-drought level, it improved substantially, reducing food import volumes. However, the slackening of fiscal policy in the run up to the 1995 election has meant a loss of export-competitiveness.
On the whole, a very limited amount of macroeconomic stability has been achieved and regular growth of GDP was observed over the 1992-1999 period. Growth slowed down in 2002 and 2001 despite a relatively good performance of agriculture. The nominal exchange rate devaluations have been eroded by inflation, leading to little improvement in the terms of trade, particularly during the last two years where inflation accelerated by two points to near 10 percent and real exchange rate continued to appreciate. Government expenditure in real terms has not fallen despite the apparent success of the partial reform process, and wishing to avoid a repeat performance of the 1986 fiasco, the government has begun once again in 2001 its programme of fiscal austerity. Government investment expenditure has continued to fall, reaching a historically low 0.7 percent of GDP in 2001. However, the resumption of food subsidies in 2000-2001 and increased debt bills have again put the government in a difficult financial situation.
On the other hand, the progressive - but slow - process of decentralization has not yet led to better designed local projects corresponding to the needs of the local population. In the new phase of decentralization that should be initiated very soon, an increased role of local governments is envisaged, with the risk to see the bulk of resources allocated to infrastructure (health, education and maybe transport) and little to agriculture, as observed in many other countries.
Thus far, agriculture has not responded significantly to trade liberalization and the implementation of the ASIP. Although cheaper inputs are now available, in part attributed to trade liberalization and in part to industrial policy reform, they do not appear to be reaching most of the lower-middle income farmers, despite the Special Programme for Food Security, NGO-sponsored projects and contract farming arrangements. Larger farmers in NAs 1 and 2, on the other hand, have increased input usage. Furthermore, the supply response of rural production to higher prices has been limited. The level of organization of farmers, particularly small farmers, remains low.
Agricultural production, especially for cereals, is not keeping pace with population growth. The weak agricultural supply response to the reform process so far has been directly attributed to the need for reform in the sector. The expectation of policy-makers was that price incentives facing small-holder farmers would be improved, yet in practice this has not been the case. Incomes in rural areas have been falling relative to those of urban and rural industrialized areas. State Farms have been privatized yet very little resettlement has taken place, with male heads of households alone receiving plots. Reforms implemented in the framework of the ASIP have been led to disappointing results: credit has regressed, so has the use of inputs and agricultural services have further deteriorated. The public sector has retreated but neither the private sector, nor professional associations/groups have been in a position to fill the vacuum created. The whole system needs to be redesigned and lessons from the limited success stories need to be drawn and generalized.
|
[2] Refers to the diagrams
found in the data file distributed with this text. |
